Monday, March 31, 2008

Who is Regulating the Federal Reserve?

Treasury Swap Auctions have begun where the U.S. treasury department has agreed to buy (or trade) highly liquid T-Bills for Mortgage Backed Securities from "Primary Dealers". What has been hailed as the economic move of the millenium that saved the country from the 2nd Great Depression is legally questionable? Bernanke's extension of U.S. backed credit in exchange for "non-agency" AAA and Aaa rated Mortgage Backed Securities has greatly extended the government's role in America's free market. It is shocking that the news headline of the day was that JPMorgan and the Federal Reserved bailed out Bear Stearns, when a massive political action was truly in progress. In times of crisis we seem to be blinded by our patriotism, and often open doors that should not be opened. The Fed has seriously violated its seemingly Laissez-faire economic policy and set in stone its monetarist fundamental as the economic auctioneer (i.e. lender of last resort).

Housing Declines of 50%

Some have estimated the severity of the housing decline to include drops as much as 50% from peak to trough in certain markets. People don't just expect it. The markets are betting on it. Below are values of where the Case Shiller futures markets are trading.

S&P/Case-Shiller Index - January 2008 v Highs

High High Jan 2008 High v Nov 2012 High v

Month Index Index Jan 2008 Futures* Nov 2012
Atl Jul 07 136.47 127.08 -6.88%

Bos Sep 05 182.48 162.59 -10.90% -11.80% -22.70%
Char Aug 07 135.88 131.70 -3.08%

Chi Sep 06 168.60 156.47 -7.19% -7.10% -14.29%
Clev Jul 06 123.49 108.49 -12.15%

Dal Jun 07 126.47 118.56 -6.25%

Den Aug 06 140.27 128.98 -8.05% -13.90% -21.95%
Det Dec 05 127.05 100.17 -21.16%

LA Sep 06 273.94 224.41 -18.08% -27.70% -47.78%
LV Aug 06 234.78 186.05 -20.76% -16.80% -37.56%
Mia Dec 06 280.87 225.40 -19.75% -30.80% -50.55%
Min Sep 06 171.12 151.16 -11.66%

NY Jun 06 215.83 200.49 -7.11% -19.00% -26.11%
Pho Jun 06 227.42 180.06 -20.82%

Port Jul 07 186.51 178.81 -4.13%

SD Nov 05 250.34 197.45 -21.13% -21.80% -42.93%
Sea Jul 07 192.30 181.62 -5.55%

SF May 06 218.37 183.81 -15.83% -15.70% -31.53%
Tamp Jul 06 238.09 194.64 -18.25%

WDC May 06 251.07 212.83 -15.23% -22.00% -35.23%
10-C Jun 06 226.29 196.06 -13.36% -21.50% -34.86%
20-C Jul 06 206.52 180.65 -12.53%

* based on CME Settlements March 18, 2008
Source: S&P, Bloomberg, TFS

Saturday, March 29, 2008


I think that this link is telling of a few things. First the fact that asset backed security issuance was 83% lower the first quarter of 2008 compared to 2007, means the effects of the credit contraction are huge, but haven't been felt by the average consumer. A change of issuance from $702 Billion in Q1 of 2007 to $120 Billion in Q1 of 2008 means we are trending to a yearly credit issuance that is 1/5 of the approximate $2 Trillion issued last year. Those are big numbers. It also leaves you wondering who is lending all of the money (i.e. buying the securitized debt)? One source is leveraged money management funds, another Sovereign Wealth Funds (including the Middle East, China, India, etc. / after all one cannot both lend and borrow to oneself). Those countries have reserves instead of deficits. The dollar crunch is making paying back all this debt even harder (as we all know). So what happens next? The lagged consumption (the largest percentage of US GDP) contraction tsunami has got to hit (I think the stock market has priced in the pain, but John Doe hasn't felt it...yet). Surprisingly, recent consumption numbers only remained even. It is coming, don't worry. I think this will be the dampening effect from run away inflation (and the cause of the recent retraction of commodity prices), and I think the fed knows it. I think we are in for a massive asset price contraction (most of which we've already had). I think we are also in for a significant reshaping of the American Economy because of the dollar crash. I think America will become perceived as the cheap getaway and an influx of European and Asian travelers / opportunists will arrive. The potential recovery will be what is interesting. When I get to pessimistic, I remind myself of how many cars are packed on the 405 going to work every morning. There are a lot of educated ambitious people going to work everyday. The question is, what kind of demand will their be for their services? Likely to shift to foreign, currency strong preferences.