Global financial meltdown #2

[The_BlauerDragon]

And not all US states are non-recourse. Ones that were full recourse didn't have their housing markets saved, so it's not really an arguement that holds water IMO.

I've always seen it as being like the average American is wagering against the bank on a coin toss. Heads you lose, Tails the bank wins.

ETA: and if the coin lands on the edge, you go again double or double!

[The_BlauerDragon]

I think I might have just gained some insight into why things are so bad in the U.S.

We've skipped over lazy and gone to STUPID Lazy!

Here's the deal. I'm up doing stuff at this insane hour for who knows what lunatic reason... and I decided that I needed to make a quick trip down to the convenience store. I got there at 2:40 AM and there was a crowd of about 15 people outside (split between 5 cars). As I got to the door, I noticed that it was locked and there was a sign hanging at eye level that said "Store closed nightly from 2:00 AM to 3:30 AM" in large, bold letters... I said "Ah, that bites." and several of the people in the parking lot chimed off with remarks such as, "Yeah, we been waitin' here for 'bout half an hour for these fools to open the damn store back up." I shrugged, walked to the convenience store across the street, made my purchase, chitchatted with the clerk for a few minutes, shook my head as I walked back by the people in the parking lot (3 of whom were staring through the windows to try and locate the clerk, and one of whom was angrily banging on the front door), and then I returned to my apartment. I can see the convenience store from my bedroom. I just looked out my bedroom window (It is now almost 3:00 AM) and that same group of people is still there, waiting for the store to open up. At what point did they decide that they would rather sit in a parking lot in Phoenix Arizona (where it is still like 110 degrees at this time) for an hour and a half than drive across the street and be done with it? Where is the logic in that?

Sadly, I'd be willing to bet that at least one of those people used to be a home owner. I'd also be willing to bet that all 15 of them are going to be voting for the same people that they previously helped elect when the time comes around for another vote.

[Jeor]

And not all US states are non-recourse. Ones that were full recourse didn't have their housing markets saved, so it's not really an arguement that holds water IMO.

Logic (which may not always work in real life!) seems to tell me that even if those states had a downturn, it wouldn't have been as bad as the other states - it'd be interesting to see if there were any numbers on that sort of stuff. I'm not saying the Australian market won't suffer - I'm pretty sure it will at some point in the future, since the cost of living is astronomically (and artifically) high thanks to the first homeowner's grant among other things. But I don't think we're going to see the same dramatic drops in valuation in the US, where the nonrecourse debt business encourages sellers to flood the market with foreclosures in a downturn. Another difference worth mentioning, although I doubt the Reserve Bank would do it (since it's more concerned with inflation than the housing market), but with the cash rate still 4.5% there's plenty of room to cut to stimulate the housing market if it gets really bad, whereas the US Fed doesn't really have that option.

[Skyrazer]

Actually, I'd say the market is already suffering. National prices peaked early-mid last year and have actually began to slide these past couple of quarters (in the case of WA and Qld, they've been sliding for over a year!). This IMHO explains the woeful retail numbers we're seeing (not the lame online shopping excuse you hear everywhere) and falling confidence in the non-mining sector as the "wealth effect" begins to hit reverse. If this continues, we are likely to start seeing recession take its bite as too much of this county's wealth has been built on real estate. If the housing market goes, our economy goes.

The only thing I can see that will keep our bubble at its current size is more govt stimulus. But if that were to happen, then it's basically proof that our economy is not healthy at all and really, we'll be back to square one when the stimulus ends as we're seeing now.

But as I said before, I agree that things will happen here differently to how they did in the US.

[Skyrazer]

re: the RBA

No, they will drop rates sooner than later IMO. If they cared so much about inflation, they would have raised it last week when the CPI came in at 3.2% YoY. But a drop in rates alone would act more as a relief to current borrowers IMO than as a stimuli to the housing sector. When they dropped in '08, it came in combination with the doubling of the FHOG and the guarenteeing of offshore loans. Dropping rates has not saved the US or Japanese markets, I would not bet it would work here which is why I say there needs to be govt stimulus to turn around a housing downturn.

[Shryke]

The US debt downgrading doesn't come out of nowhere. The chinese notation agency Dagong had already downgraded it, and the other agencies had given a negative outlook for some time now. More intersting and potentially problematic is the quasi essentially political nature of the downgrade as it is principally a strong political comment on the US's policymaking and political crisis. This is IMO one of the problems withs the actual role of the rating agencies and the pressure put on governements to conform to their standards.

Dagong are a bunch of idiots and have pulled stunts like that tons of times.

As, frankly, have S&P, who along with Moody's downgraded Japanese debt in 2002 to ... no reaction what so ever.

S&P's move is overtly political. Which isn't surprising since the major rating agencies, when it comes to government debt, are both not very accurate and generally overtly "fiscally conservative" in the "slash government, debt is always bad" sense of that word.

[ThinkerX]

CBS news tonight had a blurb about S&P threatening to lower the credit rating of the US *again* in six months if headway is not made.

On the one hand, the rating outfits come across as a bunch of crooks. During the buildup to the blowup of 2008 they were slapping AAA ratings on stuff they *KNEW* was garbage. And it wasn't just a few times, it was systemic.

On the other hand...for the US to have to borrow 40% of the money it *needs* just for day to day operations...that is downright insanity. That is a dang big slice of the wealth generated by the world on a daily basis, and given all the turmoil, all it would take is for things to get out of hand in Greece or Italy or somewhere else to put us in an even worse bind than would have been caused by the default.

And then there are these reports of the stock market loosing 2.5 trillion in wealth last week - about equivilent to the entire economy of France. Thing I find myself wondering about here is:

just how much of this wealth was actually *REAL* in the first place? The stock market these days is completely dominated by supercomputers trading back and forth at lightning speed, with no real regard for outside info - a sort of 'closed loop'. I would almost be willing to bet that something like 95% of this 'lost wealth' never existed in the first place, so why treat it as 'real money'.

[Dinsdale!]

Dagong are a bunch of idiots and have pulled stunts like that tons of times.

As, frankly, have S&P, who along with Moody's downgraded Japanese debt in 2002 to ... no reaction what so ever.

S&P's move is overtly political. Which isn't surprising since the major rating agencies, when it comes to government debt, are both not very accurate and generally overtly "fiscally conservative" in the "slash government, debt is always bad" sense of that word.

Yeah, Dagong is a China Communist Party loudspeaker.

As for S&P, I quote Felix Salmon:

Secondly, the US does not deserve a triple-A rating, and the reason has nothing whatsoever to do with its debt ratios. America’s ability to pay is neither here nor there: the problem is its willingness to pay. And there’s a serious constituency of powerful people in Congress who are perfectly willing and even eager to drive the US into default. The Tea Party is fully cognizant that it has been given a bazooka, and it’s just itching to pull the trigger. There’s no good reason to believe that won’t happen at some point.

A year ago, I would have laughed at the idea of the US nearly defaulting on its debts. And I would have said that it was because that behavior was anathema to the Republican party. How very wrong I was... for the S&P decision, "in your heart you know they're right"

Will their decision have any affect? Why speculate? Tomorrow the bond markets will tell us the truth.

[Coyotes Daughter]

CBS news tonight had a blurb about S&P threatening to lower the credit rating of the US *again* in six months if headway is not made.

On the one hand, the rating outfits come across as a bunch of crooks. During the buildup to the blowup of 2008 they were slapping AAA ratings on stuff they *KNEW* was garbage. And it wasn't just a few times, it was systemic.

On the other hand...for the US to have to borrow 40% of the money it *needs* just for day to day operations...that is downright insanity. That is a dang big slice of the wealth generated by the world on a daily basis, and given all the turmoil, all it would take is for things to get out of hand in Greece or Italy or somewhere else to put us in an even worse bind than would have been caused by the default.

And then there are these reports of the stock market loosing 2.5 trillion in wealth last week - about equivilent to the entire economy of France. Thing I find myself wondering about here is:

just how much of this wealth was actually *REAL* in the first place? The stock market these days is completely dominated by supercomputers trading back and forth at lightning speed, with no real regard for outside info - a sort of 'closed loop'. I would almost be willing to bet that something like 95% of this 'lost wealth' never existed in the first place, so why treat it as 'real money'.

Yes, along with the downgrade, S&P retained our negative outlook, indicating they may downgrade again in the near future.

There is nothing real about the concept of wealth. Any traditional form of wealth, be it paper money, gold coins, stock valuation or the hoard of gems in a dragon's lair, has value only because of a social agreement that enough people have entered into. Food, shelter and clothing have intrinsic value, but only to a point. Anything beyond the subsistence line is priced at what people are willing to pay for niceties, and that price is only stable so long as no one questions the mass delusion of wealth.

[Andriy Czarchenko]

I'd like to start paying a little more in return for lifetime guarantees on the stuff. Enough of the "buy an appliance that lasts for 3 years and then craps out on you". Time to grow the fuck up and buy grown up things for ourselves.

It´s called planned obsolescence Coco. Producing stuff that lasts just isn´t profitable in the long run.

[Shryke]

Oh please. It's nothing to do with "planned obsolescence". The simple fact is, people will not pay for quality.

What people want is cheaper stuff. When it comes to cheaper vs longer lasting, the majority of people chose cheaper. And thus, we all get what most of us pay for. If people were willing to pay more for better made stuff, this wouldn't be an issue and Wal-Mart wouldn't exist.

[Shryke]

As per the economy, it seems to have gone like this:

1) S&P say "OMG, we are gonna downgrade your rating USA!"

2) People point out S&P figures are off by $2 trillion

3) S&P does it anyway

4) Other rating agencies ignore it. Moody's even issues a statement against S&P.

5) Come monday, US bond rate goes down, stocks go down, no one gives a shit about the chucklefucks at S&P.

That's it so far anyway.

[Spring Bass]

Pretty much. I think most of the mutual funds and the like only have to have AAA ratings from two of the three rating agencies in order to buy those bonds, which means that nothing will change unless Moody's or Fitch moves.

This is an interesting view from a somewhat-insider (he's a finance lawyer in New York) about Standard & Poor's:

link

This is not going to be one of those posts that laments S&P’s decision to downgrade the US, but then says that S&P was probably right about our oh-so-dysfunctional political system.

No, S&P was flat-out wrong — no caveats. They are, to put it very bluntly, idiots, and they deserve every bit of opprobrium coming their way. They were embarrassingly wrong on the basic budget numbers, as everyone knows now, so they were forced to remove that section from their report, and change their rationale for the downgrade. (Always a sign that you’re dealing with hacks.)

S&P’s rationale for the downgrade now is based entirely on their subjective political judgement — and their political judgement is wrong. The brilliant political minds over at S&P said that “the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.”

That sounds like a Very Serious and Sober assessment, but it’s really not. It’s true that the debt limit debate was ridiculous, and that a large contingent of Tea Party freshmen in the House were threatening to not raise the debt ceiling. But here’s the thing: we still raised the debt ceiling, and in such a way that this Congress won’t have the opportunity to use the debt ceiling as a political bargaining chip again.

S&P’s assessment is only remotely serious if you assume that this particular Congress, with its huge contingent of crazy Tea Partiers, is going to serve in perpetuity. But this Congress isn’t going to serve in perpetuity — there are elections next year, and many of the Tea Party freshmen are likely to lose. They won in 2010 because it was a “wave election” in the middle of a very severe economic slump. But 2012 is a presidential election cycle with an incumbent Democratic president. A lot of these Tea Partiers who won in traditionally Democratic districts (and swing districts) are going to lose. In fact, it’s probably even odds that the Dems take back the House.

The simple fact is that the Tea Partiers are almost certainly at the height of their power in this Congress. And no, the debt ceiling debate doesn’t reflect some sort of secular change in US policymaking — the next time there’s a Republican president, House Republicans will be all about raising the debt ceiling, and Democrats won’t engage in the same kind of political brinksmanship. You’d have to be stunningly naïve not to believe this.

There have also been plenty of political de-escalations over the years — Republicans didn’t shut down the government every year after 1995, for instance. After Tom DeLay won the Medicare Part D vote by holding the vote open for 3 hours, everyone claimed that this would be the new normal on all controversial votes. Didn’t happen. There are plenty of one-off political confrontations. Simply assuming that every political confrontation represents a secular change in US politics and policymaking is ridiculous.

(S&P tries to side-step this obvious weakness in their so-called “argument” by claiming that by the time the 2012 elections roll around, it will be too late. Please. The idea that we have to act in the next 18 months in order to meaningfully affect our long-term solvency is patently absurd.)

Look, I know these S&P guys. Not these particular guys — I don’t know John Chambers or David Beers personally. But I know the rating agencies intimately. Back when I was an in-house lawyer for an investment bank, I had extensive interactions with all three rating agencies. We needed to get a lot of deals rated, and I was almost always involved in that process in the deals I worked on. To say that S&P analysts aren’t the sharpest tools in the drawer is a massive understatement.

Naturally, before meeting with a rating agency, we would plan out our arguments — you want to make sure you’re making your strongest arguments, that everyone is on the same page about the deal’s positive attributes, etc. With S&P, it got to the point where we were constantly saying, “that’s a good point, but is S&P smart enough to understand that argument?” I kid you not, that was a hard-constraint in our game-plan. With Moody’s and Fitch, we at least were able to assume that the analysts on our deals would have a minimum level of financial competence.

I’ve seen S&P make far more basic mistakes than the one they made in miscalculating the US’s debt-to-GDP ratio. I’ve seen an S&P managing director who didn’t know the order of operations, and when we pointed it out to him, stopped taking our calls. Despite impressive-sounding titles, these guys personify “amateur hour.” (And my opinion of S&P isn’t just based on a few deals; it’s based on countless deals, meetings, and phone calls over 20 years. It’s also the opinion of practically everyone else who deals with the rating agencies on a semi-regular basis.)

Treasury has every right to be outraged. S&P mangled the economic argument so badly that they had to abandon it entirely, and then fell back on a political argument which they are in no position to make, and which isn’t even correct.

So to S&P, I say: you should be ashamed of yourselves, and I truly hope this is your downfall.

[Dinsdale!]

In other news, the ECB decided to go on a QE spree over the weekend, and Italy is stabilized for, what, another week? Month? Have we proven that QE does nothing yet, or continue to avoid the inevitable?

It's all a delaying action to let those who believe in the European project to marshal their forces and make a push for a fiscal union. Either that or they're idiots. I think we should anyway separate Italy from Greece in our minds. The former might, with low interest rates, reduce its debts. The latter simply cannot. Italy can be thought of realistically as a confidence crisis and central banks have an ok record in such interventions.

[Shryke]

It's all a delaying action to let those who believe in the European project to marshal their forces and make a push for a fiscal union. Either that or they're idiots. I think we should anyway separate Italy from Greece in our minds. The former might, with low interest rates, reduce its debts. The latter simply cannot. Italy can be thought of realistically as a confidence crisis and central banks have an ok record in such interventions.

Yeah, Italy doesn't seem to be, in some senses, that big a deal. As long as their interest rates can be kept low enough, they'll be fine.

[Tormund Ukrainesbane]

So is the Dow headed back below 10,000 this week? Place your bets!

I bet no. If it gets to 10,500 Bernanke and Geithner will do something stupid and counter-productive that will nonetheless calm the markets for a few days.

[Shryke]

Funny story:

Warren Buffet calls S&P a bunch of morons who are trying to strongarm the US with threats of a downgrade.

Berkshire Hathaway, Warren Buffet's holding company, then has it's debt downgraded from "stable" to "negative" by S&P.

The other rating agencies say B-H is rock solid.

Hmm....

[Kosciuszko]

Nate Silver did a take-down of S&P as well. Can be found here.

[Former Lord of Winterfell]

So is the Dow headed back below 10,000 this week? Place your bets!

I bet no. If it gets to 10,500 Bernanke and Geithner will do something stupid and counter-productive that will nonetheless calm the markets for a few days.

Well, you know what they say. Never let a crisis go to waste!

[Relic]

Obama already tried patting the market on the head and saying, "There, there. There, there. Everything will be fine."

I guess teleprompting "the American people" every other day doesn't engender confidence.

His speech had zero positive effect on the market. In fact a little after 2pm the market dropped sharply. Weak weak speech.