Sunday, July 01, 2007
The Australian housing market suffers, too
It's not just the US and UK that suffer from home lending problems. The Contrarian Investors' Journal commented yesterday on housing-related debt and reduced property valuations in Australia.
Subprime lending in the US housing market rocking the boat
The Bloomberg financial site is following the subprime mortgage story, and quotes Peter Schiff (see my review of his book) as predicting that the majority of such loans will default.
In the US as in the UK, inflation has made house prices rise fast, and in turn this has encouraged lenders to offer mortgages almost recklessly: high loan to valuation (sometimes even more than 100%), borrowers with a less than perfect track record of honouring their commitments.
Also, and unlike in the UK, the US mortgage has traditionally been a long-term, fixed rate deal, but more recently, many homeowners have taken out loans with a short-term, very low initial interest rate, and now they are coming out of the initial period into higher, variable rates. This would be a challenge anyway, but the variable rates are rising as the government seeks to rein in inflation.
You would expect that the lenders have most to worry about, but there has been a trend towards putting blocks of these debts together and selling them on to third parties as income-yielding investments. Since this gets risky debt off the lenders' hands, the lenders don't mind doing more of the same, so there is a temptation to become careless about quality.
But that risk has been transferred to the investment market, so a wave of defaults will hit returns on investments. And the investor isn't always quite aware of the degree of risk involved. The worst-risk packages are known as "equity tranches" and some have been sold to pension funds - see Michael Panzner's submission to Seeking Alpha. Some would see this hawking of bad risk as looking for suckers, and even with knowledge of his fiduciary obligation, the buyer may sometimes be a bit more gullible if it's not his own money he's investing.
In the US as in the UK, inflation has made house prices rise fast, and in turn this has encouraged lenders to offer mortgages almost recklessly: high loan to valuation (sometimes even more than 100%), borrowers with a less than perfect track record of honouring their commitments.
Also, and unlike in the UK, the US mortgage has traditionally been a long-term, fixed rate deal, but more recently, many homeowners have taken out loans with a short-term, very low initial interest rate, and now they are coming out of the initial period into higher, variable rates. This would be a challenge anyway, but the variable rates are rising as the government seeks to rein in inflation.
You would expect that the lenders have most to worry about, but there has been a trend towards putting blocks of these debts together and selling them on to third parties as income-yielding investments. Since this gets risky debt off the lenders' hands, the lenders don't mind doing more of the same, so there is a temptation to become careless about quality.
But that risk has been transferred to the investment market, so a wave of defaults will hit returns on investments. And the investor isn't always quite aware of the degree of risk involved. The worst-risk packages are known as "equity tranches" and some have been sold to pension funds - see Michael Panzner's submission to Seeking Alpha. Some would see this hawking of bad risk as looking for suckers, and even with knowledge of his fiduciary obligation, the buyer may sometimes be a bit more gullible if it's not his own money he's investing.
Saturday, June 30, 2007
Panzner: data opacity - fear of the financial truth?
The Federal Reserve stopped publishing its M3 data (the widest definition of the money supply) from 23 March 2006, and this occasioned much suspicious comment.
Now, in two posts on his Financial Armageddon website (27 and 29 June), Michael Panzner writes about the lack of transparency in the Bear Stearns sub-prime mortgage debacle, and the failure of credit rating agencies to downgrade Bear Stearns bonds.
It always looks bad if the doctor won't tell you how you're doing.
Now, in two posts on his Financial Armageddon website (27 and 29 June), Michael Panzner writes about the lack of transparency in the Bear Stearns sub-prime mortgage debacle, and the failure of credit rating agencies to downgrade Bear Stearns bonds.
It always looks bad if the doctor won't tell you how you're doing.
A weakening dollar means lower US living standards
Addison Wiggin in yesterday's The Daily Reckoning Australia spells out how the dollar, US debt and declining American living standards are related. Some will contest this proposition fiercely - have a look at the recent globalization thread on Cafe Hayek, for example.
For those who read the bruising commentaries (this seems to be typical of blog-related correspondence), I did look at the articles to which LowCountryJoe referred me, but the first only makes clear what a fiat currency is, and the second theorized that all currencies must originally have had some intrinsic value. Neither of these articles disproves the bears' contention that there is a horrible temptation to inflate fiat currencies for temporary advantage, and that the end result is a flight from those currencies. We shall have to see.
For those who read the bruising commentaries (this seems to be typical of blog-related correspondence), I did look at the articles to which LowCountryJoe referred me, but the first only makes clear what a fiat currency is, and the second theorized that all currencies must originally have had some intrinsic value. Neither of these articles disproves the bears' contention that there is a horrible temptation to inflate fiat currencies for temporary advantage, and that the end result is a flight from those currencies. We shall have to see.
It's an ill wind...
A funny piece by Tim Hanson in The Motley Fool for June 26. He makes the point that travelling to a place may not change the facts, but can change your perspective, and he is bullish on some sectors of China stocks.
As you might expect, given that the outgoing tide of wealth from the West is rising in the East and floating Chinese boats. They will bob up and down, and some may tip over, but that seems to be the trend.
Richard Duncan's worry is that the ever-inflating dollar is causing the markets to operate inefficiently, so that China's rise may be preceded by a crisis that creates a long and deep global slump. I really must post a summary of his book soon.
As you might expect, given that the outgoing tide of wealth from the West is rising in the East and floating Chinese boats. They will bob up and down, and some may tip over, but that seems to be the trend.
Richard Duncan's worry is that the ever-inflating dollar is causing the markets to operate inefficiently, so that China's rise may be preceded by a crisis that creates a long and deep global slump. I really must post a summary of his book soon.
Thursday, June 28, 2007
Richard Daughty becomes spotty
Another entertaining rant from Richard Daughty, aka The Mogambo Guru. He passes on to us a sighting of Hindenburg Omens (see Investopedia definition here), raves about credit creation, and finally breaks out in sunspots...
Apparently several different sunspot cycles can be correlated with variations in marine life productivity, and the biggest threat to the environment since 200 years ago is a predicted global cooling, starting in 2020. Read the Financial Post article here and Melanie Phillips' related eco-contrarian article here.
Apparently several different sunspot cycles can be correlated with variations in marine life productivity, and the biggest threat to the environment since 200 years ago is a predicted global cooling, starting in 2020. Read the Financial Post article here and Melanie Phillips' related eco-contrarian article here.
More on railroads, Buffett, Soros
Further to the last post, the Santa Fe railway is now owned by Burlington Northern (BNI), in which Warren Buffett's Berkshire Hathaway has recently increased its stake to over 10%; and this 2002 article in the Observer reveals that George Soros worked as a railway porter. I expect Soros has his hard-headed reasons for his own investment, but it's hard to rid yourself of the love of choo-choos.
Soros' views as summarised in the Observer article resonate today:
His basic arguments remain the same - that centralised institutions need strengthening as a political counterweight to economic globalisation; financial markets are inherently unstable; and there is an inbuilt inequity, or centre-periphery, problem.
...he is examining the minutiae of the workings of the World Trade Organisation, and statistics on capital flows to developing countries.
...there is no level playing field in the world economy. The rules of the game favour the rich, or 'centre', countries. 'Within the well-developed global markets, the centre has a considerable advantage over the periphery because the centre is in charge. And contrary to the false ideology of market fundamentalism, financial markets do not tend towards equilibrium, they need to be managed. So whoever is in charge has a distinct advantage,' he says.
He says conditions set by the IMF during financial crises tend to reinforce boom-and-bust cycles. 'They push countries into recessions by forcing them to raise interest rates and cut budgets - exactly the opposite of what the US is doing in similar circumstances,' he writes in the new book. [i.e. "On Globalization"]
He is also critical of the US obsession with 'moral hazard' - that intervening in financial crises rewards incompetent investors. Bailing-in private investors has replaced bailing-out crisis-ridden countries, he argues. Such policies are building a 'new Maginot line', fighting yesterday's war against credit crises rather than focusing on the real problem of the calamitous collapse in investment flows to developing countries.
Soros' views as summarised in the Observer article resonate today:
His basic arguments remain the same - that centralised institutions need strengthening as a political counterweight to economic globalisation; financial markets are inherently unstable; and there is an inbuilt inequity, or centre-periphery, problem.
...he is examining the minutiae of the workings of the World Trade Organisation, and statistics on capital flows to developing countries.
...there is no level playing field in the world economy. The rules of the game favour the rich, or 'centre', countries. 'Within the well-developed global markets, the centre has a considerable advantage over the periphery because the centre is in charge. And contrary to the false ideology of market fundamentalism, financial markets do not tend towards equilibrium, they need to be managed. So whoever is in charge has a distinct advantage,' he says.
He says conditions set by the IMF during financial crises tend to reinforce boom-and-bust cycles. 'They push countries into recessions by forcing them to raise interest rates and cut budgets - exactly the opposite of what the US is doing in similar circumstances,' he writes in the new book. [i.e. "On Globalization"]
He is also critical of the US obsession with 'moral hazard' - that intervening in financial crises rewards incompetent investors. Bailing-in private investors has replaced bailing-out crisis-ridden countries, he argues. Such policies are building a 'new Maginot line', fighting yesterday's war against credit crises rather than focusing on the real problem of the calamitous collapse in investment flows to developing countries.
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