Counterparty of last resort? Yes, but: Steve Waldman on the Bear rescue.
Bush, Vote Buying and the 2004 Elections: Zubin finds another important paper.
A Stormy Decade for Citi Since Travelers Merger
Apfel hat Logistikproblem! (probably): "T-Mobile cut the price [of an iPhone] to 99 Euros with the top rate monthly contract of EUR89/month, and the handset goes up in price by EUR50 for every tariff plan below that." The iPhone is cheap in Europe!
I went to a screening of Ben Stein’s new movie this evening. My favorite bit, unsurprisingly, was when the film quoted Pamela Winnick thusly:
If you give any credence at all to Intelligent Design, you are just finished as a journalist.
Not at the New York Times you’re not, clearly.
Winnick is presented in the film for all the world as a diligent journalist – a Jewish journalist, no less – who just happened to mention Intelligent Design, en passant, in one of her columns, and ended up getting fired.
Omitted from the film: any indication that Winnick is the author of "A Jealous God: Science’s Crusade Against Religion," published in 2005 by Thomas Nelson. Or that in her journalism for the newspaper from which she was fired she talked of Darwin’s influence on eugenics and Hitler, and "the serious people –scientists included — who continue to challenge his theories".
I’m not going to even attempt a fisking of the film as a whole; I’ll leave that to others more qualified than myself. (Update: Once the film is out, the most authoritative debunking site will be this one.) I will note, however, that most of the "movie clips" at this site are not in the cut that I saw (which I believe is the final cut). Those clips actually engage the subject of evolution, which is something the film really doesn’t do, weirdly enough. The closest that the film comes is to attack science on the grounds that scientists don’t know what the origins of life are, which is a bit weird since scientists happily admit that they don’t know what the origins of life are, and in any case the origins of life aren’t part of Darwin’s (or anybody’s) theory of evolution.
In general, the film (to a godless audience of New Yorker media types, at least) seemed to fall somewhere between the pathetic and the self-defeating. (Stein literally segues, at one point, from ridiculing the "directed panspermia" hypothesis to saying that science outright refutes any directed explanation for the origins of life. You can have it one way, but you can’t have it both ways.)
But there’s a large chunk of the film which is downright offensive, too – when Stein talks at length about the Holocaust and blames it directly on Darwin, who is called "a necessary condition" for National Socialism. And then, just to make matters worse, Stein extends that theme to include abortion rights in general, and Planned Parenthood in particular: he’s basically saying that all pro-choicers are Nazis. Ugh.
PZ Myers calls this "the simple falsehood at the heart of Expelled", and his short blog entry should be required reading for anybody who sees the film. Because once you realize how stupid the Nazi bits are, everything else in the film just kind of falls apart.
Even without that insight, however, and even without knowing the details of the lies that the film propagates, Stein manages such a spectacular own goal at the end that only the most committed creationist is likely to come out of the theater having any sympathy for him. He sets up an interview with Richard Dawkins, and then leaves Dawkins sweating it out in the studio, tapping his fingers on the table, until Stein walks in with a fake and smarmy "sorry for keeping you waiting". In voiceover, he tells us he’s going to "confront" Dawkins. And what form does this confrontation take? A grilling on the subject of which gods Dawkins – author of "The God Delusion"- might believe in. Does he believe in Hindu gods? In the Jewish god? In Allah?
Dawkins can hardly believe this line of questioning; all he can do is just giggle, eventually. The proud atheist reiterates over and over again that, yes, he’s an atheist, and no, he doesn’t believe in any god. And Stein just keeps on popping the same question. It’s downright weird.
But the episode does help reveal what I think is the real message of the film, which of course is aimed much more at the Bible Belt than it is the secular blogosphere. The film sets up Dawkins, Myers and other atheists against the likes of Eugenie Scott, of the National Center for Science Education, who sees less of a conflict between science and Christianity. And weirdly the film comes down on the side of the atheists in this debate: Darwinism does lead to atheism, we’re told over and over again, by atheists and believers alike.
At this point it’s worth remembering that atheists are America’s least trusted group – if you want to stir up an irrational response directed against any group of people, one of the best ways of doing that, in America, is to label them atheists. Indeed, as I said two years ago,
Everybody defines himself at least in part in opposition to someone or something else, and "atheist" seems to have become a catch-all term for whatever that something else might be.
If you set out to make a propaganda flick on any subject, then, painting your opponents as atheists would be a pretty good idea. In this case, it’s laughably easy, since so many of Stein’s opponents happily embrace the label.
Stein’s confrontation of Dawkins, then, wasn’t designed to embarrass Dawkins: it was designed to create an association in the public’s mind between Darwinists and atheists – an association which has the power to sway minds when it comes to those crucial school-board elections and whatnot. "Science" is a positive term, still, in America; "atheist" is very much a negative term. And while Expelled naturally can’t do a very good job of persuading its viewers that Darwinism is unscientific, it can do a good job of persuading them that it’s atheistic. It’s cheap, and underhanded, and pretty bloody effective.
The WSJ reports on the market in auction-rate securities today:
Last week, UBS said it was marking down an undisclosed amount of the value of auction-rate securities held by its customers. Other banks, including Merrill, aren’t marking down their values. In both cases, banks are scrambling furiously to fix the frozen market.
Um, scrambling furiously? As far as I can tell, they’re doing Absolutely Nothing. There’s certainly no evidence in the article of any concrete actions the banks are taking to fix this problem.
Indeed, the whole problem with this market is that the banks stopped scrambling furiously to provide a bid in every auction which came along. So long as the banks made a market in these securities, everything worked fine. Then they stopped making a market, and the market, predictably enough, froze up.
Quite clearly the investment banks here were the proximate cause of the problem. The WSJ is being far too polite in suggesting that in fact they’re frantically working towards a solution.
Quite impressive, really, the effect that an unpublished research paper by an unknown analyst can have. After the WSJ’s Bob Davis got his hands on a leaked paper about sovereign wealth funds from the Milken Institute’s Christopher Balding, I expressed great skepticism about the results. And now RGE’s Rachel Ziemba has chimed in with a long and reasonably definitive take on just how big they are. She also notes that the IIE’s Ed Truman has an estimate close to her own. In any case, we seem to be quite solidly in the $2 trillion to $3 trillion range, rather than the much smaller numbers apparently being bandied about by Balding.
In a very nice turn of phrase, Ziemba does say that as far as Balding’s paper is concerned, "the jury will be out until the paper is". Right now the paper’s being peer reviewed, although it seems that the obvious peers to review this paper – the likes of Ziemba, Truman, and Brad Setser – haven’t seen it. So all we have to go on is Davis’s short summary. And, I guess, the picture of Balding on the Milken website, complete with dubious barbichette. I knew I was going to be able to use that "facial hair" category again!
Abnormal Returns rarely criticises the stories it features in its invaluable daily linkfest. But today’s an exception:
Color us skeptical that individual investors should be opening brokerage accounts around the world. (WSJ.com)
Boy are they right to be skeptical. Armed with 1500 words of prime WSJ real estate and a new book to plug, Jeff Opdyke informs us that retail investors can and should buy foreign stocks abroad. "Opening brokerage accounts in places like Hong Kong, Egypt, Australia and even Vietnam is generally no more difficult than ordering a book online," he writes.
Well, yes, and sending money to Sani Abacha’s nephew in Nigeria is pretty easy too, but that doesn’t mean you should do it.
Investors in the US are used to being protected by the SEC. Their investments might sour, but they pretty much always own what their broker tells them that they own. In the US, it’s more or less unheard-of for people to open a brokerage account, fund it, and for the broker to then simply pocket their money while occasionally sending them statements telling them how much money they’re making.
Unfortunately, in the rest of the world consumer protections are very different. And even if your broker isn’t an outright fraud, the chances are you still don’t have anything like the sort of protections offered by the SIPC in the US. Besides, you’re going to be paying large transaction costs every step of the way: when you open your account, when you convert your dollars into local currency, when you send the currency abroad, when you buy the stocks, when you receive the dividends, when you convert the dividends back into dollars, when you remit the dollars back to the US, when you sell the stocks, and so on.
On top of that, I think it’s pretty fair to say that retail investors simply aren’t set up to judge the risks inherent when you layer market risk, counterparty risk, and foreign-exchange risk in the way that Opdyke recommends. The correlations there are complex and dynamic, and even large investment banks have difficulty staying on top of them. Individual investors almost certainly have better things to do than try to judge the relative value of a stock in a country with high exchange-rate volatility to a similarly-priced stock in a country with low exchange-rate volatility – especially when that low volatility is almost certainly the result of an express or implied central bank monetary policy which may or may not change in future.
Opdyke claims to have made good returns by buying a stock in New Zealand in the mid-1990s. He claims that he was "searching for consumer-oriented Pacific Rim companies likely to benefit from Asia’s multidecade economic expansion", but I suspect a large proportion of his returns ended up coming from the fact that he inadvertently got exposure to the New Zealand dollar at the same time. In other words, he was just as lucky as he was smart.
Now there is good advice in Opdyke’s column, it just happens to be the advice he abjures:
For all the years I’ve covered financial markets for The Wall Street Journal, I’ve routinely heard the investment industry counsel that owning individual stocks, much less individual foreign stocks, is not a game small investors like you and I should play. Many pros argue that individual investors should avoid fording the oceans because they haven’t got the necessary skills to analyze unfamiliar companies in unfamiliar lands, operating in unfamiliar industries, according to unfamiliar accounting rules and governmental policies.
While Wall Street experts certainly agree with the need to diversify internationally, it’s best, they insist, to stick your money in a mutual fund or ETF here in America. If you promise not to hurt yourself, they might suggest you deploy some "play money" in big-name ADRs.
I’m no great fan of "the investment industry". But in this case, they’re right.
Chris Nolan is worried about the unintended consequences of investment banks being regulated:
Secretary of the Treasury Hank Paulson was right when he noted on Monday that the reforms he or anyone else envisions will take years to enact. But, don’t worry, there will be legislation. Anyone who thinks that investment banks, hedge funds and their cousins, private equity firms are going to somehow escape federal government scrutiny is flat wrong. Their time has come…
The end result of all this is going to be something that no one – particularly not tech investors here in California – likes to think about. Can you imagine a Netscape public offering – the company’s main product was given away – sponsored by a financial institution supervised by the Federal Deposit Insurance Corp.? Me neither. So get ready for a more cautious and more prudent system of underwriting risk for sale in the public stock market. From now on, the growth curves for the creation, development and sale of companies – in all industries but particularly in the tech business – are going to get longer and more moderate.
So, if you’re a Silicon Valley VC, the time to think about retiring is right about now.
I think this is wrong on two fronts. For one thing, the proposed increase in regulation is in many ways a decrease in regulation, and there’s nothing in Paulson’s proposal to cause hedge-fund or private equity managers to lose any sleep worrying about being regulated in future.
And in fact many technology IPOs have been "sponsored by a financial institution supervised by the Federal Deposit Insurance Corp". Ever since the abolition of Glass-Steagal, the likes of Citigroup and JP Morgan Chase have happily run IPOs while at the same time being supervised by the FDIC.
But even if some new regulatory superagency were to take a stricter line on investment-banking activities, equities would be at the bottom of their list of concerns. If stock-market investors lose most or all of their money, the systemic fallout is minimal, as we saw when the dot-com bubble burst. What Paulson is worried about is not equity, it’s debt, and leverage. And Silicon Valley VCs – indeed, tech companies in general – tend to have very little in the way of debt.
As for companies whose main product is given away, I think that Google has proved once and for all that free can be an extremely compelling business model. Even regulators can see that.
Of all the areas where financial professionals work, then, I think that Silicon Valley probably has the least to worry about in terms of increased regulation – even if that increased regulation were actually going to happen, which it probably isn’t. Investment banks? Yes. Investors? Not so much.
A significant beneficiary of the housing bill being voted on by the Senate today could end up being New York City – and other areas with relatively low property taxes. A part of the bill is a flat $1,000 property-tax deduction for couples who own property. Now in New York property taxes on a $1 million apartment can easily be $250 a month or less – which is $3,000 a year. The property-tax deduction therefore amounts, for some NYC homeowners, to a 33% decrease in property taxes. Given that, and given the plunge in tax revenues which is likely to hit NYC as the financial industry contracts, I should imagine that an increase in property taxes would be entirely doable for a mayor trying to balance the city budget. After all, net of the deduction, most homeowners would still end up paying less overall.
And New York City might well need the money if, as is looking likely, Albany fails to approve congestion pricing by April 7. I’m an optimist by nature, but I have no faith at all in Shelly Silver’s propensity to do the right thing in this instance. With the city in favor and the Federal government offering large subsidies, the state has no business barring this from happening. But it probably will anyway.
Tim Geithner has shed some small amount of light today on exactly what the assets are that the Fed is financing as part of JP Morgan’s acquisition of Bear Stearns. He doesn’t give a detailed breakdown: since BlackRock is in the process of (very) slowly liquidating those assets, it makes sense for the list to be kept reasonably confidential. But this was interesting to me:
The assets were reviewed by the Federal Reserve and its advisor, BlackRock Financial Management. The assets were not individually selected by JPMorgan Chase or Bear Stearns.
In other words, this is not $30 billion of nuclear waste that JP Morgan specifically did not want on its balance sheet. Instead, it was simply a question of there being too much in the way of Bear Stearns assets for JP Morgan to comfortably absorb them all over the course of a single weekend. Here’s Geithner’s Congressional testimony:
On Sunday morning, executives at JPMorgan Chase informed us that they had become significantly more concerned about the scale of the risk that Bear and its many affiliates had assumed. They were also concerned about the ability of JPMorgan Chase to absorb some of Bear’s trading portfolio, particularly given the uncertainty ahead about the ultimate scale of losses facing the financial system.
The key phrase here is "the scale of the risk" – we’re talking quantity of assets, more than level of impairment.
In general, I’m impressed by Geithner’s testimony: while he necessarily elides quite a lot of the nitty-gritty, he makes the big themes clear and reasonably compelling. If this was a bailout, it was a bailout of the entire financial system more than it was of Bear Stearns in particular. And that is precisely what the Federal Reserve in general, and the New York Fed in particular, was designed to do.
I’m a fan of World Bank president Robert Zoellick’s idea yesterday that sovereign wealth funds should invest 1% of their assets in Africa.
For one thing, as Zoellick says, this kind of investment makes sense on a purely financial level. Africa is a promising region for investment, and it becomes even more promising if you know that a lot of other people are going to be investing there as well.
But this is also a smart use of sovereign wealth funds specifically, as opposed to financial investors more generally. The NYT’s Steven Weisman reports that if the funds sign on to the idea, that might assuage "the West’s mistrust of sovereign wealth funds" – something which has been brewing for a while.
Up until now, proposals for assuaging that mistrust have concentrated on codes of conduct and best-practice procedures and the like, most of which try to place the funds at arm’s length from their sovereign owners, and ask that the funds have only financial and not any kind of strategic interest in where their money is invested. That’s simply not realistic. Much better to harness the strategic interests of those sovereigns in a positive-sum game, which is something the Zoellick proposal can do.
Every sovereign nation in the world has a geopolitical interest in a stable and strong Africa. If the sovereigns with excess funds can invest that money in Africa, they will help to stabilize an important region while at the same time making healthy returns. That’s a much more realistic vision than one in which sovereigns renounce any strategic interest in where their monies are invested.
I’m at the Harvard Club today, for a Debtwire conference on distressed debt. The editor of Debtwire, Matt Wirz, just mentioned something very interesting, which he says he’s never seen before: traders and speculators are deciding to buy leveraged loans which were very much a creature of the credit bubble – in the expectation that the loans’ covenants will be busted. Normally, if you expected a technical default on a loan, you would short the loan, or buy credit protection on it. But as we’ve seen over and over again, these are not normal times. And in fact there are reasonably good reasons to go long such debt.
For one thing, the debt’s cheap, of course – but so is debt which you think is going to perform well. More to the point, loans get restructured when covenants get broken. And in exchange for loosening the covenants, investors are likely to get an increase in coupon or some kind of cash payment.
If you’re looking at a company which has reasonably healthy fundamentals but which risks breaking its covenants just because the debt markets have seized up right now, then there’s a good chance you can make money on two fronts with this trade: the price of the bonds will rise in any case as the fundamentals of the company assert themselves and as the current dislocation passes, while at the same time the company will be forced to make extra payments for breaking the covenant.
Are we having the right discussion about the financial crisis? Ricardo Hausmann says that if regulations had been tighter, growth would have been lower, meaning real interest rates would have been lower, leading to just as much bad lending.
Playing the Housing Blame Game: On the idiocy of mortgage-interest tax relief.
Let’s Have a Daniel Hall Day: Why congestion is better than fuel prices at reducing the amount we drive.
And finally:
This probably looks really good on a Bloomberg screen, but the formatting is all screwy online. (Weirdly, the credit-loss league table looks fine.) So as a public service I’ll republish today’s league table here in a slightly easier-to-read format. Suffice to say, this is one league table you really don’t want to top.
| Firm | Total Infusion ($bn) | Breakdown ($bn) | Investor |
| Citigroup | 30.4 | 6.9 | Government of Singapore
Investment Corp. |
| 5.6 | Kuwait Investment Authority, Alwaleed bin Talal, Capital
Research, Capital World, Sandy Weill, public investors |
||
| 7.5 | Abu Dhabi Investment
Authority |
||
| 10.4 | Public investors | ||
| UBS | 27.7 | 10.9 | Government of Singapore
Investment Corp. |
| 2 | Unidentified Middle Eastern
Investor |
||
| 14.8 | Public investors | ||
| IKB Deutsche | 13.2 | German government, Banking associations | |
| Bank of America | 13 | Public investors | |
| Merrill Lynch | 12.2 | 6.6 | Korea Investment Corp.,
Kuwait Investment Authority, Mizuho Financial Group |
| 4.4 | Temasek Holdings | ||
| 1.2 | Davis Selected Advisors | ||
| Societe Generale | 8.7 | Public investors | |
| WestLB | 7.8 | State of North Rhine Westphalia,
savings banks associations, regional governments |
|
| Morgan Stanley | 5 | China Investment Corp. | |
| Barclays | 5 | 3 | China Development Bank |
| 2 | Temasek Holdings | ||
| Lehman Brothers | 4 | Public investors | |
| Wachovia | 3.5 | U.S. investors (unidentified) | |
| Canadian Imperial | 2.9 | 1.5 | Li Ka-Shing, Manulife
Imperial Financial, Caisse de Depot et Placement du Quebec, OMERS |
| 1.4 | Public investors | ||
| Gulf Int’l | 1 | Governments of Bahrain, Kuwait,
Oman, Qatar, Saudi Arabia, UAE |
|
| TOTAL | 135.8 |
(Via CR)
In a Q&A back in March, Mark Thoma proposed that the Fed should simply buy up distressed assets, rather than simply accept them as collateral:
If it were my choice, If I were king of the Fed, I’d do more. First, I’d trade for any financial assets at a price that fully reflects the risk of holding that asset. The Fed should trade a non-risky assets, money or government bonds, for risky private sector assets at a risk adjusted price… Suppose the Fed takes a mortgage backed security off the hands of a bank that wants to reduce its risk profile, and pays the bank 80% of its value, the 20% "haircut" is to compensate for the risk of holding the asset.
What if the Fed loses money on these trades?
That could happen. But these assets could also increase in value as well, precisely because the Fed is holding them and reassuring markets. If the Fed makes a fair trade, e.g. pays 80% in the example above, it is as likely to make money as lose money. The assets could, of course, be mispriced meaning that the Fed has more or less risk than it thinks, but even in the very worst case – every single asset they hold falls to zero – I’m not sure it would be a disaster.
And I’m not sure you aren’t nuts.
Think of the example above. Suppose that the value of the asset the Fed holds falls to zero after the trade. The trade was permanent, so there’s no margin call or anything like that – the Fed owns the asset and it is worth nothing. Then, in the end, it is no different than the Fed simply printing that same amount of money and giving it to the banks as new reserves, it is an increase in the money supply. It is a large increase, and it could surely be inflationary, but inflation is not the main worry when financial markets appear on the verge of a downward spiral that could drag the economy down along with them.
Today, Willem Buiter says something very similar: that central banks can and should be a buyer of last resort when markets fail.
When markets are disorderly and illiquid, it is not just the prices of good or prime assets that fall below their fundamental values. The same holds for the prices of bad, impaired and sub-prime assets. Impaired assets too will have a fair or fundamental value. That fundamental value may well be far below the face value of the security, but it may also be well above the price the impaired asset would fetch in a fire-sale in an illiquid market.
If the central bank, or some other government agency, were to act as Market Maker of Last Resort and buy the impaired asset at a price no greater than its fair value but higher than what it would fetch in the free but unfair illiquid market, such a purchase would not be a bail-out. It would also be welfare-increasing…
This possibility of a capital loss and fiscalisation of this loss does not mean that the transaction ex-ante involved a subsidy by the central bank to the owner of the impaired asset, or a bail-out of the owner.
Both Thoma and Buiter stress that such activity must be combined with more stringent oversight of financial entities, including hedge funds and other leveraged weapons of potential mass destruction. Buiter even gets very specific about the mechanisms that a central bank could use to buy assets: apparently a well-designed reverse auctions "don’t require the government buyer to know much or indeed anything at all about the fundamental value of what it is purchasing". Which sounds rather scary, until Paul Krugman comes along to remind us that the Hong Kong Monetary Authority went one step further in 1998, and started buying up not bonds but stocks. And made a fortune. Then again, Krugman is also comparing the idea of central banks buying securities outright to the idea of the US invading Canada, so it’s not clear how on board he is.
My feeling is that it’s not going to happen, mainly for political reasons. In this particular crisis, the distressed assets the Fed would end up buying would almost certainly be mortgage-backed bonds. But buying up mortgage-backed bonds looks very much like giving money to big banks and investors instead of giving it straight to struggling homeowners: the optics are simply terrible. If the collapse of Bear Stearns is seen as a bailout, this would be much worse. It might be a good idea, but its time has not yet come.
On one’s first trip to Marfa, the tour of Chinati is revelatory enough that you don’t get too annoyed by the restrictions. On one’s second trip to Marfa, the fact that you’re shepherded out of Judd’s masterpiece so that you can spend 15 minutes bored by Ilya Kabakov borders on the criminal.
Also, the steaks at the Gage Hotel are very good — but they’re corn-fed beef from Wisconsin or thereabouts. What happens to the West Texas cattle? Where can I get me some of those steaks?
Equity Private, guest-blogging over at Dealbreaker, has the H2 2007 reports from Pershing Square IV, the Bill Ackman hedge fund devoted to going long Target. Which hasn’t worked out so well. He lost $52,872,231 on Target stock, which is bad – but he also lost $669,510,931 on Target call options, which is just brutal. And that’s just the unrealized losses. There’s $40,811,094 in realized losses on the stock, as well as $93,984,727 in realized losses on the options.
Add it all up, and by the end of the year Ackman’s fund showed a net loss of almost $853 million, which is a lot of money even by his standards. Still, we’re in April now, Target might have recovered a bit since year-end, no? Well, the stock closed the year at $49.87, and it’s now at $53.42. Carry on at that rate, and – oh, never mind. Let’s go back to MBIA. At least that’s still looking good for Ackman.
Update: More from EP.
See here, of course, but also here. Then there’s this, as well as all the commentary on top, in places like this and this and this – all of which apparently has given food stamps Top Buzz.
Over/under on the "28 million Americans on food stamps" meme appearing in Barack Obama’s stump speech? I say by the end of the week.
Does Ben Bernanke know something the rest of us don’t? Here’s a little bit of today’s testimony:
On March 13, Bear Stearns advised the Federal Reserve and other government agencies that its liquidity position had significantly deteriorated and that it would have to file for Chapter 11 bankruptcy the next day unless alternative sources of funds became available.
Now as I understood things, one of the key reasons for the Fed to intervene was precisely that Bear Stearns could not file for Chapter 11, under which it could have continued as a going concern and worked things out over time. Instead (I thought) Bear Stearns would have had to file for Chapter 7 bankruptcy: an immediate liquidation, with all the chaos to markets that implies.
If Chapter 11 was really an option, then I have more sympathy for Bear Stearns shareholders than I did before: there’s a good chance, with a book value of over $80 a share, that they might have received something over $10 for their stock. In a Chapter 7 liquidation, by contrast, they would surely have been left with nothing. So, was Chapter 11 an option after all?
Update: The Deal had a story back on March 18 headined "Bear Stearns: Ch. 11 never an option". It’s possible that Bernanke, an economist and not a bankruptcy lawyer, simply got it wrong. But as Alea notes in the comments, even under Chapter 11 there would have been a lot of pretty disastrous liquidation going on.
This morning I said I’d love to see a chart showing how bond spreads have evolved relative to stock prices, connected chronologically. Next thing I know, this chart arrives in my inbox courtesy of the great Matthew Turner:
You start reading with the blue line (2005), which then becomes the red line (2006) and the black (H1 2007). The green line (H2 2007) actually starts at the top, with the credit crisis of last summer, and ends with slightly lower spreads, but they gap out even more in 2008, which is the purple line. The y-axis is the 10-year CDX, in basis points; the x-axis is the S&P 500.
So it’s pretty clear that the last time stocks were at their present levels, the market was discounting corporate earnings at a much lower interest rate. In other words, expectations of future corporate earnings would seem to have risen since 2006. After all, a stock price is just the discounted value of future earnings, right? All other things being equal, if the discount rate spikes upwards, then stock prices should fall. But of course all other things are not equal: right now we’re in a period of massive credit-market dislocations – much more massive than any losses being suffered in the stock market.
Used to be, Russians loved them their greenbacks. And not any old greenbacks, either: they had to be "new bills with the watermark and large portrait". No longer. Now, they want Chinese renminbi. That’s official policy, that is.
Paul Krugman wonders this morning why food prices in general, and grain prices in particular, have spiked so dramatically:
Demand has been rising for a number of years; bio-fuels is a big thing, but how much bigger is it this year than a year or two ago? It can’t be speculation: that raises prices by inducing stockpiling, and stocks of wheat and rice are at or near record lows.
Meanwhile, commenter alexr points me to an NYT article from Friday, about the way in which grain futures have been expiring at prices well above the cash price.
The futures-expiry conundrum is certainly evidence that Things Are Very Weird in the ag markets right now, and have been for a couple of years. I’m hesitant to even hazard a guess as to what might be going on, but I’d just say that one can no longer with any real certainty talk about "the price" of wheat or corn. People by convention generally mean the futures price, because that’s where the liquidity is, but if you can’t actually get that price in the cash market, it might be worth revisiting that convention, at least until the futures markets return to normal or move to settlement based on some cash price.
Helen Thomas finds this chart in a report from Bank of America:
Basically, the x-axis is stock prices while the y-axis is bond spreads. The red dots are What Was: they’re weekly datapoints from June 2002 to June 2007. The grey dots are What Is: they’re the datapoings from July 2007 onwards. And the black dot is where we are right now: about as far away from normal as we’ve ever been.
Now one can niggle a little with this chart. In an ideal world, stocks are meant to rise in price over time, while spreads are meant to stay roughly constant. So comparing a stock-index level directly to a bond-spread level, as the chart does, ignores the effects of increased corporate profits over time, or something. But that’s a small point, which is overshadowed by the fact that the graph clearly shows something going on.
What I’d really like to see though would be the same chart with a line connecting all the dots in chronological order. It might be a bit harder to read, but it could also give a bit more of an impression of how exactly we got to where we are.
Update: Alea reckons this is the "dumbest graph of the day", and that "whoever wrote this report should be fired on the spot".
The NYT checks in to see how the much-vaunted Hope Now coalition of mortgage lenders is doing, and you probably won’t be surprised at the results:
Kenneth Goodman, a homeowner in Fontana, Calif,. said he did not have a good experience trying to get help through Hope Now.
Mr. Goodman, 53, said he had called Hope Now three times in recent months because he was struggling to pay the mortgage on his two-story tract home. The first time he was referred to a mortgage escrow company. The second time, “I got someone oblivious to everything,” he said. The third time the counselor told Mr. Goodman that he had a choice: Sell his home for less than the value of his mortgage, or face immediate foreclosure.
“It was all unhelpful,” Mr. Goodman said. He worries that he will lose his home.
There are Hope Now success stories, but the group declined to point to any.
If it wasn’t obvious at the time, Hope Now turns out to have been largely a way for politicians and lenders to say that they were doing something, rather than a real attempt to provide a partial solution to the mortgage problem. At the margin, it’s probably done more good than harm. But nothing worthy of Presidential announcements and all the other folderol which accompanied its launch.
Record gas prices equal record Prius sales: They’re now roughly double Ford Explorer sales.
The cautionary tale of Jefferson County Alabama
Going for Broke: Surowiecki on how strict bankruptcy laws hurt the economy.
Economic News: A new econoblog aggregator.
Yet More DeLong Smackdown Watch: Brad DeLong on Yves Smith on Brad DeLong on Larry Summers on Paul Krugman. Or something. In any case, well worth reading if you want a constructive view of what monetary policy can achieve.
This is kinda funny. Some site called SocialPicks seems to have determined that I’m a stock picker, and that this post in particular constituted a sell recommendation on Lehman Brothers. Since Lehman’s gone up since then, my "All-time Return" is -52.23% to date.
Of course, I’m not a stock picker. But even if I were, how could that post be construed as being bearish? The headline is "Lehman Will Survive", and here’s the conclusion:
I’m calling for Lehman to survive this crisis. And that which doesn’t kill Lehman Brothers, as we saw in 1998, has a tendency to make it stronger.
I’m glad that "Nobody is following Felix Salmon" so far. If they were, and they read my posts the same way that SocialPicks does, they’d’ve lost half their money already.
Got some spare cash? Thought about parking it in Iceland? The currency has plunged against the dollar, which means you get more than 77 Icelandic krona to the dollar, up from 65 at the beginning of March. Meanwhile, overnight rates are now at 15%. Between the massive positive carry and the probable bounce-back of the currency, this could be a juicy trade indeed. Just be prepared to lose money if things go wrong: Iceland recovered the last couple of times the carry trade was unwound this brutally, but that was in the context of much friendlier markets globally. This time might be different.
