Category Archive

We’re entering literally a vicious circle where economies are spinning down, financial markets are spinning lower, and the policy makers in my view — and that’s my biggest fear — have lost control of what’s going on in financial markets. If we don’t do that fiscal stimulus today, three months from now, six months from now the collapse of the real economy is going to be so severe that anything we’re doing today to recapitalize the financial system is going to be undone

—Nouriel Roubini

Case Shiller Index Reports 16.6% year over year home price declines in August for the Composite 20

• From all-time-highs
  • Composite 10 is down 22%, and was down 20% as of May 2008
    • Declines persist in PHXR, LXXR, SDXR, SFXR, and MIXR
  • Composite 20 is down 20%, as of August 2008
• MoM: NY Metro reads -.2% and the composite 10 reads -1%
• NY Metro came in higher than futures for August in September
• YoY: NY Metro is down 7%, vs -16.6% for the Composite 20 and 17.7% for the Composite 10
• Last trade on November 2008 futures is up .5% from 10/24

And, earlier this week…

• Foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 265,968 properties in September, a 12 percent decrease from the previous month but still a 21 percent increase from September 2007. One in every 475 U.S. housing units received a foreclosure filing in September.
• Foreclosure filings were reported on 765,558 U.S. properties during the third quarter, up more than 3 percent from the second quarter and up 71 percent from the third quarter of 2007.
• New Jersey Foreclosures –
  • Monthly Data – September: outpaced the national average, with a 48% YoY increaase and an 18% MoM increase. It would appear that foreclosures started late and now are growing just above pace with the national average, month over month
  • Quarterly Data
    • 3Q over 2Q: 3.5% increase
    • 3Q08 over 3Q07: 95% increase, which could be attributed to a slower start in New Jersey and the East Coast
    • Majority of filings in Lis Pedens for Q3 (11873 out of 17893)
  • Zero notices of Default
  • Essex county is heavily influenced by a higher rate in Newark
    • 38th in the country, with 5000+ filings, on a quarterly basis

—RealtyTrac – 24 October

October 26, 2008
HP-1235

Statement of the G7 Finance Ministers and Central Bank Governors

We reaffirm our shared interest in a strong and stable international financial system. We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability. We continue to monitor markets closely, and cooperate as appropriate.

A response to a presentation by the Kauffman Foundation’s Carl Schramm at the Manhattan Institute.

Carl Schramm sees threats lurking on the horizon and increasing in strength. Schramm begins with broad applause for the American spirit, innovation and productivity and names it entrepreneurial capitalism. He builds it up in his book Good Capitalism, Bad Capitalism. Much of it rests on Schumpeter’s idea of creative destruction. Today, he submits “four ways to save Entrepreneurial Capitalism.”

1. Congress changed the market’s view on risk. It has to change back.
2. Regulation is not the answer
3. Prohibit GSEs
4. Do not respond with protectionism

At face value, these may appear reasonable. Blame politicians while cautioning against the same mistakes might be made in attempting to re-regulate. Count on a populist reaction to an acronym that has become infamous. And go back to the old standard of free trade. While these are phrased without controversy, they should not be taken without question.

First, to say that Congress changed the market’s view on risk is an error and reduction of the problem. To the extent that the market would increase increase its appetite for risk by way of Congress’ suggestion seems far from the truth. Congress asks as much of the market today but with little reward.

The implicit guarantee of the GSEs would appear to be a target, but the punishing losses have been by way of poorly understood, poorly performing and non-agency securities. This doesn’t point to Congress’s influence on the market’s view on risk. Instead, it indicates a combination of financial innovation and a healthy appetite for an investment.

Schramm might be better served looking at the problem through the lens of Brad Setser and Nouriel Roubini’s analysis of the concept of Bretton Woods II. They outline the process by which countries such as China have financed trade with the US through the accumulation of reserves in an effort to maintain a diminished exchange rate. The arrangement has two consequences. First, it provides a healthy appetite for investment in currency, treasury and GSEs, which lowers the yield on these securities. Second, the lower yield makes financing generally less expensive. Indeed, these policies have provided a healthy appetite for investment —Bernanke’s savings glut— that has driven so much financial innovation. The market has been desperately recycling investment dollars in search of yield, and it has been this recycling that has shaped the market’s appetite for risk more than Washington.

Regulation is not the answer, but it is a tool. In a telling quote on financial industry regulation from 2003, Republican Jim Bunning said, “It seems to me in most cases that self-regulation does not work.” A recent article illuminated this in stark detail. Changes to the net capital rule in 2004 shifted the SEC policy on capital requirements of brokerages from one with explicit capital requirements to one with none, in favor of monitoring the system for systemic risk and self-regulation. Unfortunately, the SEC’s monitoring team had limited support and leadership, and the industry did not see the need to limit the amount of leverage it took on. In the cases that the agency did find issues, they did not have the clout to mandate changes.

Schramm’s final two points alternately point to a knee-jerk don’t-go-down-that-road-again response and a plug for free trade. Neither point stands out not for their clarity and insight. Instead, they appear more as a shibboleth – a message intended to resonate with and compel like-minded individuals rather than to further a discussion about these subjects. At face value, both appear innocuous, but they are equally unexamined, and unexamined claims, especially following the previous two points, should give us pause.

It’s not clear from Schramm’s talk that entrepreneurial capitalism is under attack or that the remedy he proposes applies to our current situation. His four ways, instead, look more like the product of a mistaken analysis. On reflection, taken together, it leaves the impression that it was engineered to breath life into policy positions around regulation and trade rather than advance a response to the current circumstances.

Schramm started his presentation with an homage to Schumpeter. He suggested that Schumpeter’s creative destruction is the engine that drives innovation and will not fail us. The buggy-whip industry, as he was obliged to point out, stood no chance against the age of the automobile. Buggy-whip manufacturers went out of business, and people lost their jobs, but automobiles filled the void and enlarged economic prosperity. We are better for it, we would all agree, and Schramm intends to protect it. He has four ways to do so, that he has presumably re-hashed for countless presentations. Unfortunately, as Jagdish Bhagwati recently pointed out in the FT, faith in creative destruction has rested on the assumption “that financial innovation was like non-financial innovation…But with financial innovation, the downside can be lethal – it is “destructive creation”.”

….

Lawrence Summers’ recent editorial in the FT speaks to some of these issues:

The crisis has also reminded us of the lessons of the technology bubble, Japan’s experience in the 1990s and of the US Great Depression – that finance-led growth is problematic….Therefore we need to reform tax incentives that encourage financial risk taking, regulate leverage and prevent government policies that give rise to a toxic combination of privatised gains and socialised losses.

Lawrence Summers: FT

Coming Two weeks

• FOMC meets Wednesday, and the market has priced in a 50 basis point ease. That they will reference the sad state of affairs goes without saying
• Treasury will announce refunding for November, during which they will also seek new sales and provide guidance on raising new funds.
• The Election will be settled (hopefully) on November 4th.
• Economic data: consumer confidence, durable goods, Q3 GDP, Chicago PMI, Personal Income annd Spending, ISM

                         Bloomberg Survey



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                        Release    Period    Prior     Median

Indicator                 Date               Value    Forecast

============================================================

New Home Sales ,000's    10/27     Sept.      460       450

New Home Sales MOM%      10/27     Sept.     -11.5%    -2.2%

Case Shiller Monthly YO  10/28      Aug.     -16.4%    -16.6%

Case Shiller Monthly In  10/28      Aug.     166.2     165.0

Consumer Conf Index      10/28      Oct.      59.8      52.0

Durables Orders MOM%     10/29     Sept.     -4.8%     -1.2%

Durables Ex-Trans MOM%   10/29     Sept.     -3.3%     -1.5%

GDP Annual QOQ%          10/30      3Q A      2.8%     -0.5%

Personal Consump. QOQ%   10/30      3Q A      1.2%     -2.4%

GDP Prices QOQ%          10/30      3Q A      1.1%      4.0%

Core PCE Prices QOQ%     10/30      3Q A      2.2%      2.5%

Initial Claims ,000's    10/30    Oct. 25     478       475

Cont. Claims ,000's      10/30    Oct. 18     3720      3720

============================================================

As much as I would prefer it otherwise, in this financial environment I see no choice but to require that all securitizers retain a meaningful part of the securities they issue

—Alan Greenspan

In a fairly Darwinian manner, many hedge funds will simply disappear

—Emmanuel Roman, co-chief executive officer at GLG Partners

There is now no safe haven globally other than a deeply indebted U.S. government. The events of the last few days are categorical evidence of the globalization of the credit crunch and its subsequent problems.

—Jim Reid, head of fundamental credit strategy at Deutsche Bank AG in London.

We’ve reached a situation of sheer panic. There will be massive dumping of assets…hundreds of hedge funds are going to go bust. Systemic risk has become bigger and bigger. We’re seeing the beginning of a run on a big chunk of the hedge funds…don’t be surprised if policy makers need to close down markets for a week or two in coming days.

Things are getting very ugly also in the emerging markets. We used to say when the U.S. catches a cold, the rest of the world sneezes. Well, the U.S. now has chronic and persistent pneumonia. It’s becoming a mess in emerging markets. There are about a dozen emerging markets that are now in severe financial trouble. Even a small country can have a systemic effect on the global economy. There is not going to be enough IMF money to support them.

—Nouriel Roubini

Three stages of a Bull Market

1. the first, when a few forward-looking people begin to believe things will get better,
2. the second, when most investors realize improvement is actually underway, and
3. the third, when everyone’s sure things will get better forever.

Three Stages of a Bear Market

1. the first, when just a few prudent investors recognize that, despite the prevailing bullishness, things won’t always be rosy,
2. the second, when most investors recognize things are deteriorating, and
3. the third, when everyone’s convinced things can only get worse.

–Howard Marks, Oaktree

There’s no doubt in my mind that the bear market reached the third stage last week.  That doesn’t mean it can’t decline further, or that a bull market’s about to start.  But it does mean the negatives are on the table, optimism is thoroughly lacking, and the greater long-term risk probably lies in not investing. 

–Latest Letter

The economic and financial crisis will have long-lasting effects on the consumer. The personal-savings rate is going to increase over the next five to 10 years.

Consumers are starting to realize that they’ve been living in a fantasy world. They will have to begin salting away money for retirement, their children’s education and other reasons.

—Lyle Gramley, former Fed governor

India is still not going to get capital flows when the global liquidity conditions begin to ease

—Ajay Seth, chief general manager of finance at New Delhi-based Maruti Suzuki

There’s a funding problem in dollars worldwide

—Rajeev De Mello, head of Asian bonds in Singapore for Western Asset, $600b.

The redemptions that I have seen could be at least 50 per cent for the average fund. You can discount two-thirds of assets for the funds of hedge funds that have performed poorly, and there are many of them. Everybody is running for cash now, even family offices are redeeming big time. There is no sticky money any more. The impact on the market will be very big. It’s not a trillion dollars that will disappear from the markets, it’s more, and people do not realise this. The market will have a very hard time for the rest of this year and even next year

—Geneva-based hedge fund consultant: FT 

HFs lose through redemption and erosion $210b from 2Q08 to 3Q08, exceeding total 2007 inflows. Some suggest that the industry will halve to $1t

• 2007 Inflows — $194b
• 3Q08 Withdrawals — Investors withdrew over $31 billion, the largest net redemption in the industry’s history, which offset all capital inflows into hedge funds in 1H08
• 3Q08 Capital — total capital stood at $1.72 trillion at the end of the third quarter, down from $210mm from $1.93 trillion at the end of Q2

—Hedge Fund Research