(week of July 11, 2008)
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Is this Election Just More 'Bread and Circuses'?
(July 16, 2008)
Today's post is outstanding. You place the role of leadership in a democratic republic
where it belongs -- with we, the people. Or should I say you delineate who is master,
the people, and who is servant, those we elect. We act as if this relationship is
reversed. The distractions are many, my pet peeve being the gladiatorial cage matches.
I find the parallel with Rome's gladiator games disturbing. Regardless of what
century it is we as a species seem to be fascinated with blood sport.
We (human beings) see ourselves as separate from everything. I hear people begin with
phrases like, "In nature...", we are a part of nature; there is no way to separate
man and nature or man and the universe for that matter. There is no way to separate
a nations government and its people. Whether tyrannical democracy or tyrannical
dictatorship it is a reflection of the collective mindset of the population of that
Your putting responsibility where it belongs will be resisted because it has become
habitual to deny and disown responsibility but stay the course. When we are ready
to defend to the death our birthright to freedom, and when any suggested or implied
compromise is intuitively and violently repelled by our mind and spirit (Give me
Liberty or Give me Death -- Patrick Henry (
Patrick Henry speech)
is when we will deserve and have such freedom.
Why Fannie and Freddie Have Doomed Housing Prices, Regardless of Bailouts
(July 14, 2008):
via analyst Enrico Orlandini
Here is a report from a very knowledgeable mortgage banker/broker in the
Washington, D.C. metro area:
Here are my thoughts on the mortgage market and some observations.
We continue to see tight lending practices and full doc loans are all that are out
there. Days of low or no doc loans are gone. We continue to see deteriorating
conditions in housing with home prices continuing to fall each and every month along
with poor pending and actual home sales. Foreclosures are just foiling any market
attempt to stabilize and that will continue to be the case in my view over the next
12 months. This will delay any type of stable of bottom until the 2nd half of 2009.
People can not afford their payments right now and I continue to see people hold
off refinancing their ARMS with less than 16 months left on them because they can't
take the higher payment. We are going to see Prime A borrowers falter next year
with a failing economy, much higher loan rates, and lower housing prices.
will become very difficult with equity almost non existent in homes bought 2004
or later, purchases have already been low and I don't see that changing especially
if rates hit 7% which I believe they will possibly by year end with no signs of
inflation letting up and then income just won't support many of these purchases.
FHA has been the "savior" of the market and there is so much legislature coming
down to figure out how to save the market that I think is in a real bind. FHA will
post some huge losses in the coming year and this will be more bail out money from
the Fed and at what point does the government stop just bailing every failed
The Indy mac situation is a real problem as we will see more banks fail and put even more pressure on housing as conduits get tougher to find for people and commercial real estate. I was speaking with a friend who runs a commercial real estate fund and says they are definitely having a hard time finding properties that make sense and financing has also gotten very tough. He said there many regional banks he works with could be in real trouble in Chicago area. I think this is what we'll see a lot more of in the coming months with regional banks failing and under pressure. Nat city I believe is in trouble along with Wachovia.
All in all not a really cheery outlook and mostly this is due to what we see in the way of "hope" rates will be lower next year and lack of affordability by many A borrowers will be a big issue next year.
Msnbc.com is reporting that the Fannie bailout means other institutions won't get
bailed out. Do you feel this is a valid
statement? If so, are you scared out of your mind?
I have recently befriended a mathamatician who is a Credit Default Swap dealer.
He tells me that the pay off for a bank failure is increasing rapidly, especially
around a few specific banks. If these banks are now allowed to fail, it seems the
CDS traders have more incentive to destroy Lehman, et al.
Imagine you're recently divorced and your ex-wife is still the beneficiary of a
$1,000,000 life insurance policy. Suddenly the local police chief says, "Murders
are way up this year. Due to limited resources, we will now only investigate cop
killings. Have a good day." You would really have to hope your ex-wife is an
honorable lady, wouldn't you?
Well, if this is true then what does it do to
Washington Mutual or Lehman? Aren't we now in a position where a bank failing
will come with significantly more pay outs to the 'real' money than allowing it
to flounder for a decade? I think so and I'm a little nervous.
Here come the bank failures...
Why is our 'democracy' looking more and more like a game of Calvinball?
My earnest hope is for Fannie and Freddie to be taken over by the
gov't and decomissioned.
With their loans sold off to other institutions and the business of
selling implicit gov't guarantees
for mortgages. So that if banks want to lend people they suffer the
losses/gains without tax payer
insurance. This will bring mortgage rates up faster and bring the
housing market closer to reality
somewhat of a shock therapy. I would also like all community
re-investment requirments to be scrapped
because all it is basically a scam where by the municipality provides
credits(subsidies) for the bank
ergo social insurance for the loan going bad boosting their yeild
artificially, same with Hud credits for
multi-family housing where they set aside 20% for low income but in
reality its 2% or 0% after all the
"FBI holds 406 for mortgage fraud":
Once the numbers break above a thousand there might be an avalanche
effect with them becoming the scapegoats of universal greed.
Turning a Profit on Abandoned McMansions and SUVs
(July 11, 2008):
Had to take the time to tell you, ABSOLUTELY HILARIOUS!!!!!
I love Ron Dump! Fan belts for the rear end/drive train, but a SUV seat!! Classic!!!!!!!!!!!
Correspondent Mike D. has lived in China for many years. I asked him for
feedback on this week's entry
China's Challenges: U.S. Meltdown and Peak Oil (July 9, 2008).
Here is his thoughtful, informed response:
I have to wipe some egg off my face for going with the accepted wisdom of "no oil price increase until after the Olympics". On June 20, there was an 18% increase in gas and diesel prices which was predictable really. For weeks, we had been seeing reports of long lines of semis stuck for up to 24 hours in the southern provinces waiting for diesel fuel.
Sinopec and PetroChina enjoy a duopoly in wholesale and retail supply of fuel in China and both companies are more than 50% owned by the government. This didn't seem to stop the two, however, from dragging their feet by reducing refining, and consequently supply. Both companies are listed on the NYSE, Hong Kong and Shanghai exchanges, so I reckon the CCP discovered that it is not a good business move to sell your product at a loss when you have investors to answer to.
Now, I'd like to make a couple of comments about Susan Shirk's book. She appears to
get all hyperbolic about Mainland/Taiwan relations but then seeks to soothe our
fears by describing the CCP as being under extreme pressure from many directions
and essentially less than effective at responding.
The work force is aging. True, but so is the workforce of America and Europe.
The internet plays a factor. The English internet is open to anyone with a computer who can speak English. The Chinese language internet (blogs, etc.) is closely monitored by the cyber-police. No one seems overly concerned.
Privatization of the economy. This, to me, is the last thing the CCP worries about. This is the engine of change.
The gap between urban rich and rural poor. It certainly exists, but the "urban rich" are firmly in the pocket of the CCP (not surprisingly), leaving the "rural poor" little option but to wait for their turn.
A population fed up with corruption. Guan Xi (connections, pull) has long been a part of Chinese culture. Everyone pays lip service to the elimination of corruption, but it is accepted as being part of China and not likely to change in the medium term.
The CCP is half Mafia, half corporate board. Well, Mafia aspersion aside, with all its flaws, one does not rise very high in the CCP without having some intelligence. Sons and wives of previous leaders don't get on some fast track to Beijing.
I would suggest that, in the very unlikely event that Beijing were to attack Taiwan, it would be a lightning strike and over before it started. There would be some contrived "Gulf of Tonkin - like" reason (perhaps a request to prevent a "coup") which the U.S. would loudly condemn for a few weeks before settling down to accept the fait accompli. An extended, even for a few days, campaign is just too unlikely to contemplate.
Mike later added these comments on Purchasing Power Parity in China:
I want you to understand that I'm playing Devil's Advocate here to a great extent. I am trying to provide a balance but don't want you or your other readers to get the impression that I am a flag-waver for the Chinese Communist Party. I'm a Canadian who just happens to have lived in China for the last 5 years.
Let's take a look at Purchasing Power Parity of GDP and compare the RMB with the $U.S. The Development Indicators of the World Bank for 2003 showed that their $US1,500 basket of goods, when purchased in China, indicated the exchange rate should be 1.8 RMB to $U.S.1, while the official rate at the time was 7.6:1. No westerner living in China that I know thinks that these figures have changed significantly in the last 5 years.
What does this mean? Well, for one thing, it means that my salary of over 10,000 RMB per month allows me to live pretty darn well (PP of $5,600 after tax with a free house wouldn't be too shabby in L.A.!). Now, if we look at the "poor" factory workers on the east coast who average around 1,200 RMB (PP of $670 after tax with free dormitory) a month, you would have to say that throwing around terms like "slave labor" and "sweat shop" is far from accurate.
That purchasing power looks even better when you factor out cars. Chinese consider a personal car to be a luxury and a status symbol, not a necessity. There is no need for a vehicle in any city in China because they are all like Manhattan -- people live on top of, not beside, each other and public transportation is cheap and plentiful. If you compare the city I live in, Harbin, with the city I was born in, Toronto, you find similar population size, but the Canadian city covers more than 10 times the area of Harbin city proper. Having to commute to work even 10 miles is unheard of in Harbin.
Let me be clear. China is not a country of down-trodden masses struggling from one meager pay check to the next, constantly subject to the whims of heavily-armed gestapo-like police, and living in fear of being "disappeared" for the slightest infraction of nonsensical laws. While it is true that China has no elections and criticism of the ruling party is frowned upon, life does go on...and is not dissimilar to the Free World.
You often link to supporting articles (P.J. O'Rourke springs to mind) which present a sneering analysis of China more intended to stroke the egos of North Americans struggling with three jobs, in danger of losing their house, and drowning in debt. I don't think these articles contribute to the debate.
Of Onions and Oil: Don't Blame Speculators for Supply and Demand
(July 10, 2008)
I sent Harun a copy of the letter airline CEOs have been sending out demanding
restrictions on oil trading. here is his response:
Twenty years ago, 21 percent of oil contracts were purchased by speculators who trade oil on paper with no intention of ever taking delivery. Today, oil speculators purchase 66 percent of all oil futures contracts, and that reflects just the transactions that are known.
This is not possible. There always must be as many longs as shorts. In other words the net positions of all traders in the market must equal 100%. Commercials were on the other side of those bets hedging their interests. The number of open contracts cannot be shown to have any consistently proportionate correlation to price movement. Only 3% of futures contracts are ever delivered. This is partly due to the high cost of delivery through an exchange. The highest OI ever recorded in 10-year Notes was at the bottom in 2007 when they were trading around 105. (See chart below) Note the price peaks and OI; there is no correlation.
Speculators buy up large amounts of oil and then sell it to each other again and again. A barrel of oil may trade 20-plus times before it is delivered and used;
This is called "volume". By the way Open Interest and Volume can expand in a bear market as well.
the price goes up with each trade and consumers pick up the final tab.
Price can go down with each trade as well and then producers and manufacturers pick
up the tab because margins are diminished. As prices fall to or below production
costs output is decreased to protect margins. If demand remains constant or
increases then the reduced supply will drive prices up. It is a virtuous cycle.
Some market experts estimate that current prices reflect as much as $30 to $60 per barrel in unnecessary speculative costs.
If "experts" knew what the price of oil or anything else should be then there would be no risk and no need for a futures market. Taking a position based on market fundamentals is doing nothing more than speculating that the market should conform to an individual's logic. If it were this easy everyone would be rich. The phrase "unnecessary speculative costs" implies once again that all risks are known and are quantifiable and are agreed upon by all participants. If this were possible then there would be no need for a futures or any other market (central planning anyone?).
That CEO's, some of whom presumably are MBA's from the Ivy League, either wrote or signed their name to this document is rather remarkable. The futures market is an economic tool that is there for anyone to use to their benefit. Laws and regulations prevent everyone from being categorized as "bona fide hedgers" but as I have shown (most recently with the unleaded gas hedge I sent to you) anyone can insulate themselves from increasing or decreasing prices. That Delta and many other airlines failed to do so is an indictment of their management, not the futures market participants.
Thank you, readers, for such thoughtful contributions.
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