Strategic default

Home prices have to go down, banks need to reduce prices they ask for foreclosures until market accepts the new level, only then will people be willing to risk both their capital, future income, and be willing to subject themselves to the rigorous underwriting process.

This is a deflationary trend. These are underutilized assets. Bank assets, fnma, freddie mac, and any mortgage assets held by gov't overvalued. Bofa's zombie bank creation should reflect this deflationary trend through write-offs going forward.

Gov't is trying to inflate away debt problems and show a USD based profit on the mortgage assets (or break-even) all the while the dollar is losing it's value, and inflation is rearing it's ugly head elsewhere. The Bernank sees inflation is already out of control but is too scared to raise interest rates too quickly. Sadly this divergence between home prices declining and food/fuel costs increasing will net a weird CPI that will vary based on two conflicting trends.

Optimistically at some point economies recover from defaults (which is what printing money amounts to) jobs return at a lower salary base but at least people are employed. Banks must write-off losses and reduce home prices. Local governments have to figure out where else to obtain tax revenue other than property taxes.

“At this point new homes are likely to continue to lose to existing homes because distressed properties pose a better bargain for buyers,” said Millan Mulraine, senior U.S. strategist at TD Securities in New York. “We’re not seeing a strong rebound in the horizon because permit approval is just marginally above starts.”

“Many potential home buyers are finding mortgages difficult to obtain and are also worried about additional declines in house prices,” Bernanke told lawmakers March 2.

For housing, employment “is the most important part today or biggest impediment,” said Larry T. Nicholson, chief executive officer of Ryland Group Inc. (RYL), a Calabasas, California-based homebuilder catering to first-time buyers.

Whether potential buyers “have a job and they’re going to keep their job or whether their hopes of employment are out there is still the biggest challenge for us today,” Nicholson said at an investor conference March 8 in Orlando, Florida.

BP needs to be able to borrow...very bad until they can easily

There are already signs that trading partners are becoming wary of BP’s financial outlook; one market participant, Bank of America Merrill Lynch, is halting long-term contracts with BP. The company’s deteriorating credit rating — on June 15, it was downgraded byFitch to one notch above junk bonds — makes it harder for traders to cheaply deploy vast amounts of cash. And with its stock down by more than half since the blowout in the gulf, BP can only watch as rival firms try to poach its best traders.

“A lot of the swagger comes from the amount of money they have to trade with,” said Craig Pirrong, a director at the University of Houston’s Global Energy Management Institute. “And traders realize they don’t have the capital they had just a couple of weeks ago.”

It is a humbling moment for a secretive unit that earns the company $2 billion to $3 billion annually and has long inspired fear and envy among rival traders.

BP declined to comment for this article.

this could be the 1st sign of a huge shift in financials...

The FDIC, with its long history of resolving failed banks, would act as receiver, selling off the assets.

Ms. Bair said the existence of this new authority would prompt investors to shift capital away from the biggest financial firms toward smaller ones, strengthening them after a wave of consolidation in the financial industry created some competitive disparities. She predicted that investors would favor smaller firms whose risks are more transparent, raising capital costs for bigger ones.

Ms. Bair, who often clashed with other key officials over how to keep the financial system afloat during the crisis, said uninsured bank depositors got a raw deal compared with the bondholders and derivatives counterparties of bailed-out firms who came out whole.

"I think that was a terrible inequity," Ms. Bair said. A provision of the financial-overhaul bill would retroactively apply the now higher limits on federally insured deposits at six banks that failed before Congress raised the limits in 2008.

Exxon please frack our away out of foreign oil dependency

Over the past decade, a wave of drilling around the world has uncovered giant supplies of natural gas in shale rock. By some estimates, there's 1,000 trillion cubic feet recoverable in North America alone—enough to supply the nation's natural-gas needs for the next 45 years. Europe may have nearly 200 trillion cubic feet of its own.

We've always known the potential of shale; we just didn't have the technology to get to it at a low enough cost. Now new techniques have driven down the price tag—and set the stage for shale gas to become what will be the game-changing resource of the decade.

I have been studying the energy markets for 30 years, and I am convinced that shale gas will revolutionize the industry—and change the world—in the coming decades. It will prevent the rise of any new cartels. It will alter geopolitics. And it will slow the transition to renewable energy.


But the shale discoveries complicate the issue, making it harder for wind, solar and biomass energy, as well as nuclear, to compete on economic grounds. Subsidies that made renewables competitive with shale gas would get more expensive, as would loan guarantees and incentives for new nuclear plants. Shale gas also hurts the energy-independence argument for renewables: Shale gas is domestic, just like wind and solar, so we won't be shipping those dollars to the Middle East.


Still, I don't believe we should set national mandates—which would get prohibitively expensive in states without abundant renewable resources. Instead of pouring money into subsidies to make such a plan work, the federal government should invest in R&D to make renewables competitive down the road without big subsidies.

The trade deficit has crippled our economy and shows no signs of abating as long as we remain tethered to imported energy. Why ship dollars abroad where they can destabilize global financial markets—and then hit us back in lost jobs and savings—when we can develop the resources we have here in our own country? Shall we pay Vladimir Putin and Mahmoud Ahmadinejad to develop our natural gas—or the citizens of Pennsylvania and Louisiana?


Indeed. Why? I always thought we kept our shale as a matter of national security. So that if oil producing nations formed an AXIS against the USA, we would have enough energy to fight a LONG battle. So while I agree with most of this article, from a military perspective alternative energy would HAVE to be ramped up so that it would be viable 10 years or so before we run out of shale--this date will probably be much longer than the 45 years the article states because we will continue to use other energy sources as competition and diversification makes energy cheaper. So this could be 70 - 100 years out and by then, who knows what the energy landscape will look like then? Let's get fracking!

All of the quoted/italicized text is from Jaffe, WSJ.

Ms. Jaffe is the Wallace S. Wilson Fellow for Energy Studies at the James A. Baker III Institute for Public Policy at Rice University and co-author of "Oil, Dollars, Debt and Crises: The Global Curse of Black Gold."

shareholder's lack of power is a political problem?

The Global Crisis of Legitimacy

May 4, 2010 | 0856 GMT By George Friedman

In the modern public corporation, shareholders - the corporation's owners - rarely control management. A board of directors technically oversees management on behalf of the shareholders. In the crisis of 2008, we saw behavior that devastated shareholder value while appearing to enrich the management - the corporation's employees. In this case, the protections given to shareholders of corporations were turned against them when they were forced to pay for the imprudence of their employees - the managers, whose interests did not align with those of the shareholders. The managers in many cases profited personally through their compensation system for actions inimical to shareholder interests. We now have a political, not an economic, crisis for two reasons. First, the crisis qualitatively has moved beyond the boundaries of a cyclical event. Second, the crisis is rooted in the political-legal definitions of the distribution of corporate risk and the legally defined relations between management and shareholder. In leaving the shareholder liable for actions by management, but without giving shareholders controls to limit managerial risk taking, the problem lies not with the market but with the political system that invented and presides over the limited liability corporation.


The symbol of Goldman Sachs profiting from actions that devastate national wealth, or of the management of Lehman wiping out shareholder value while they themselves did well, creates a crisis of confidence in the political and financial systems. With the crisis of legitimacy still not settling down after nearly two years, the reaction of the political system is predictable. It will both anoint symbolic miscreants, and redefine the structure of risk and liability in financial corporations. The goal is not so much to achieve something as to create the impression that it is achieving something, in other words, to demonstrate that the political system is prepared to control the entities it created.


But the most important point is that almost two years since a normal financial panic, the polity has still not managed to absorb the consequences of that event. The politically contrived corporation, and particularly the financial corporations, stands accused of undermining the wealth of nations. As Adam Smith understood, markets are not natural entities but the result of political decisions, as is the political system that creates the allocation of risk that allows markets to function. When that system appears to fail, the consequences go far beyond the particular financials of that event. They have political consequences and, in due course, geopolitical consequences.

nonfarm payrolls 290k

The Labor Department said nonfarm payrolls rose by a higher than expected 290,000 jobs last month -- the largest gain since March 2006. That followed an upwardly revised 230,000 increase in March.

For an explanation about what each indicator means see the table below the graph.

u6 - u3 gives an idea of how bad things got during the crisis as people stopped even trying to look for jobs or were stuck with part-time jobs. Note how little this indicator moved during the last crisis (Sep. 2001 ish). As soon as u6 - u3 stabilized near March 2009, the S&P 500 went on a bull market tear; this is not necessarily cause & effect but certainly there's a relation.

dollar carry trade unwinding? market microstructure vulnerability exposed?

Did the Greek crisis finally trigger another flight to safety, margin requirement liquidity spiral today (05/06/2010)?

This WSJ poster seems to work on the floor and his post sounds plausible and if so quite interesting:
* Chris Georgandellis replied:

How about we propose something shockingly simple. Bear with me; this is an eyewitness account.

The market had been going one way all day...in fact, really for well into the week. Fixed income products, stocks, foreign exchange, commodities. Today, it appeared at first to be a capitulation day in all sorts of asset classes.

I noticed the moves first in foreign exchange. After an entire day of successive losses, I began to see bids disappear as new lows were made in contra-dollar rates. Markets began to thin out. As I watched other markets, the same thing was occurring...new lows, fewer bids.

Imagine yourself - with your money - and watching a declining market. Would you want to jump in? Is 1150 in the S&P a good price? How about 1125? Maybe 1120? Who cares what you think - what does everybody else think? Better to pull your bids and wait and see...

This is exactly what happened, folks. Fear feeding on fear. Fat finger? Please - erroneous trades in Proctor and Gamble would not cause the Japanese Yen to advance 4 big figures. I've seen erroneous trades many times...this was not it.

Systemic risk still exists. This is a market driven by people and their emotions. It's fueled by computers programmed by people and their emotions. Fundamentals mean nothing when a margin call can come in the form of a bad trade within 30 seconds.

It's a simple explanation. Mind-blowing? Yes. Inexplicable? No.

I didn't realize the Yen had moved so much? Maybe now the carry trade is being carried out in Yen and Dollars? or maybe it's still the same old Yen carry trade at work?

Update WSJ 05/07/2010:

"This was a massive liquidation panic," said Bill Strazzullo, chief market strategist for Bell Curve Trading, a Freehold, N.J., technical-research firm.

As the losses accelerated, there were little to no "buy" orders left in many stocks and other assets, causing a plunge that saw some securities spiral to near zero. "You just blew through everything," he said.

Really, thanks for the obvious...

Market Glitch! WSJ reports this may have been because high frequency trading groups shut down their programs. I had initially thought high frequency programs could make a killing if they knew the citigroup trader would enter an erronous 16 billion sale. I mean would anyone other than a high frequency trader be able to navigate a day like that? I imagine only a lucky day trader would have made money. 

Thursday's downdraft suggests how important that liquidity-providing role has become. Market participants say some high-frequency firms pulled back as the speed and extent of the decline went outside their models, which are generally based on the market behaving in a normal fashion. To avoid the risk of big losses, the firms essentially turned off their trading programs.

Chart above is the 10 year treasury (Graph from WSJ)

(From WSJ)