Moody's Raises Loss Assumptions on CDOs
Submitted by
CalculatedRisk on Mon, 02/04/2008 - 9:32am (89 comments)
Shopping at Amazon?
Wait! If you click on the Amazon banner link at the top of the page first, HCN will get a percentage of anything you purchase for 24 hours!
Open predictions
Our local book authors
User login
Who's online
There are currently 20 members and 149 guests online.
Recent Recommendations
What does Moody's do, again?
Can you downgrade below zero? Can you have a minus debt rating? Like say,
My post got truncated: Like say less than C- or -DDD- or how about less than F-?
"might"....."could"......"should"......
And I _______ win a million bucks too.
Just get it over with already......
MS
Death by a thousand downgrades.
Now, more than ever, we need to know who holds this toxic waste.
Of course, MSM refuses to point fingers at the lucky winners of portfolio destroying property.
I think we are going to see an intense unwinding of leverage on Wall Street due to I-banks calling their loans to hedge funds to raise capital.
Now, what would that mean? Everything hedge funds were short would go up- check the last two weeks of homebuilder rallies.
Everything that was going up- um solar and other momo stocks- went down.
Now, some of dem dar hedgies owned immense amounts of them CDO, CMO tranch thingies. Who is going to buy them? or will ibank capital be returned as in kind investment tranches.
Sewage is coming up under the floorboards still!!!
Someday this war's gonna end...
Too bad their in the business of assumptions.
Never before has the old saying about "never assume" been so widely demonstrated to perfection.
We have too many banks, bankers and investment advisors against too few investment opportunities. These folks have to sell to eat. And sell they will.
Protect your nut, wall street will not.
Allen M @ 1:03pm
Spot on.
Moody's Investors Service raised its loss assumptions to as much as 17.8 percent on 2006 subprime bonds
17.8% on 2006 subprime? Optimists.
Allen M: "Now, more than ever, we need to know who holds this toxic waste."
I honestly think that nobody knows. Heck, if you had experts go over the books of 20 different families facing default, they would all come to different conclusions about who would actualy default, how long they could hang on before doing so, how much the actual losses would be, what percentage of the loss would be fall on the homeowner vs. the lender.
The losses are not static. It's a moving target that only can be determined after it's over.
It's like determining the path of a pachinko ball. You know it will start at the top and end up at the bottom, just their is no way of knowing which path it will take and how long it will take to get there.
If they're saying 17.8% on the 2006s, what's that say about the 2007? 30%+?
Hearing that Goldman are saying losses in commercial real estate will be $300bn + a bit.
OT, but important
is http://tickerforum.org/ down for everyone?
Or just me?
AvJoe,
I want to know who has the CDOs on their books as assets and will take the haircut.
I know the homeowners are going to get pasted.
Their damage is assumed.
next up on the great unwind- HEDGE FUNDS.
Someday this war's gonna end...
daveNYC | 02.04.08 - 1:17 pm |
Dave,
If Florida is the canary in the coal mine(I think it is),I am seeing failures/foreclosures back to 2002 pretty regular on the counties website. Heck,we are hardly a year into this ordeal...
Chris
Correct me if I am wrong here, but their original loss estimate started at 3%. Once it was apparent that the loans they rated were not the same ones they estimated their model with, that went up to 5% but they didn't have to rerate any Aaa's. Yet. That only happened when they raised it to 8%. And then again at 12%. This implied forced sales and pissing bondholderss off. Now they are saying between 14.8-16.8? I admire
the precision. With 60+ delinquency rates on deals in ABX climbing 2-3%
every month, with no end in sight, when is Moodys going to admit that they just do not know how bad losses will be? They lose more cred each time they re-rate bonds.
I am downgrading your bonds, are we clear?
Yaesh.
Since, IIRC, most if not all of CDOs stuff are taken from the non-senior tranches of toxic-crud MBS - it's the main reason to make a CDO in the first place, to "manufacture" more AAA senior tranches - shouldn't these all be DOA already?
I've had it with that Dennis Kneale on CNBC. He is the epitome of a wall street cheer leader. He's also as dumb as a bag of hammers.
His eternal bullishness is NEVER backed up by data or a well reasoned arguments.
"Stocks always go up." Sure, but you can spend a large part of your adult life under water waiting. Too many will learn this the hard way.
There was a fascinating article by that well-respected grizzly bear, James Grant, in his Jan. 25th, 2008 edition of Grant's Interest Rate Observer entitled: "Invest, Then Investigate". In this article, Jim Grant and Associate Editor Dan Gertner attempted to arrive at a well-grounded valuation for a collaterlized debt obligation: to wit a Bear-Stearns contraption called "Parapet". In this article Grant stated: "... Gertner debriefed an investor who spent a whole week kicking the Parapet tires. ... Our source, who prefers to go unnamed (and, if it's Grant, it's probably a heavyweight) ... was put off not only by the complexity of the structure, but also by the evident back-scratching on the parts of the participating promoters... "The message from this (the would-be investor remarked) is that the correlation is significantly higher than anybody thinks it is. Because if so many CLOs and CDOs are all tranches of each other, then it's like a sweater: You pull on a thread- once it starts going, the whole thing goes because one triggers the next. And then we started looking into the trustee reports. It turned out that, if you really wanted to analyze it, you have 15, 20 tranches of potential value here, and each one of them has a dozen or 20 or 50 tranches of other CDOs. How do you value that?"
Maybe we should spring Andy Fastow to run the Federal Goverment Bailout!!!
two points for bobn:
All your AAA are belong to us. You are on the way to destruction.You have no chance to survive make your time.
Did you see mention of CR blog by Fortune today?
Home equity loan defaults soar - Feb. 4, 2008
Now, what would that mean? Everything hedge funds were short would go up- check the last two weeks of homebuilder rallies.
Everything that was going up- um solar and other momo stocks- went down.
I always thought of homebuilder shorts as kind of a momo play even though there are fundamentals justifying it. Once they start going down consistently, everybody jumps on for the ride. Since these momentum plays usually end in some kind of traffic accident, I always assumed that real estate stocks would have some kind of major squeeze at some point.
It could be that initially some of these shorts were squeezed by hedge funds unwinding but then some other funds decided to jump in on the long side to keep the squeeze going and find a more profitable entry point for heading back down.
Remember: SuperPoker
It really is all meaningless numbers. what is meaningful is that the United States is broke. Wall street is broke and the americams who have their life savings in worthless mutual funds will be broke.
wait until the money market funds go below 1 dollar... oh boy
wait until the money market funds go below 1 dollar... oh boy
All those UltraShort funds are going to implode. It's going to be pure carnage.
"I've had it with that Dennis Kneale on CNBC. He is the epitome of a wall street cheer leader. He's also as dumb as a bag of hammers."
I'm with you!
He just said that blogs were too negative and unaccountable, unlike the show he was on.
Yet, blogs are ultimately accountable (anonymous or not). There are usually archives where you can instantly recall past posts and prognostications.
Define "accountable" anyway. Is that idiot Jim Cramer accountable. You'd think accountability would be the loss of the microphone after his disastrous bullish calls at the peak of the dot.com, costing anyone listening 90% of their money. Or his recent bullish calls in the winter of 07, saying buy buy buy and calling for DOW 14500 for the year.
Yeah, we know who he is, so he's not anonymous..but really how accountable is he?
Perhaps Moodys was busy plugging the CUSIP numbers into Ackman's open source model over the weekend instead of watching sports.
ac,
Ultra Short snark or your belief? Are you saying the swaps market is going to lock?
I honestly think that nobody knows. Heck, if you had experts go over the books of 20 different families facing default, they would all come to different conclusions about who would actualy default, how long they could hang on before doing so, how much the actual losses would be, what percentage of the loss would be fall on the homeowner vs. the lender.
Time for somebody to get busy inventing a financial Geiger Counter... wave it over a stack of bonds or drive through a neighborhood and listen for it to go off.
Trouble is there is so much background radiation (bad debt everywhere) you'd have problems find a place solvent enough to calibrate the damned thing...
Most of you probably read this a year ago but it's a good summary of the whole MBS/CDO mess. Take a look at the illustration on page 22 for an idea of how opaque and complex these financial instruments became.
Link
INTERNET RUMOR _
Bailout of AMBAC muni portfolio coming and no bailout of CDO's...
"He just said that blogs were too negative and unaccountable, unlike the show he was on."
I dare CR and Tanta to post a POSITIVE note about some company or segment of the economy. And I dare the rest of you (besides Sebastian, or O-Joe) to do the same. For those of you who are fans of Ultra funds I double and quadruple dare you!
ac,
Ultra Short snark or your belief? Are you saying the swaps market is going to lock?
Honestly, I'm not sure. It just bugs me that they don't give out more information on what kind of money market assets they hold. It's a bit of a red flag IMO.
INTERNET RUMOR _
Bailout of AMBAC muni portfolio coming and no bailout of CDO's...
We've been suggesting that for WEEKs now here in the comment section. Nice to know somebody else on the intertoobs is as tin foil hat as we are.
Personally - I can see it logically, can't see it practically. The CDO folks will try to do a Sampson - take down the temple if they aren't included in the rescue - so no one gets rescued if they don't get rescued.
INTERNET RUMOR _
Bailout of AMBAC muni portfolio coming and no bailout of CDO's...
Could you imagine a congressman not voting for a muni bailout?
HAHAHAHA.
AOTC,
Corporate balance sheets are relatively strong.
Insider buying is still strong.
P/E ratios are relatively low, suggesting that we'll only be dealing with lower E's, not contracting ratios as well.
c&c,
That was on CNBC this morning - not sure why it wasn't more market moving, seems like a big deal to me.
wait until the money market funds go below 1 dollar... oh boy
better yet, when they restrict withdrawals "for time to arrange the orderly sale of assets"...
I missed it on CNBC - nevermind then if they know is probably not true, especially if Charlie G "broke" the story.
Accountable for what? My opinion? I'm not claiming to have specialized knowledge.
Now who's the talk of the town? NY'er on the monolines:
Bonds Unbound : The New Yorker
Favorite apologist quote:
"In that sense, the potential collapse of monoline insurers looks like a classic example of what the sociologist Charles Perrow called a normal accident. In examining disasters like the Challenger explosion and the near-meltdown at Three Mile Island, Perrow argued that while the events were unforeseeable they were also, in some sense, inevitable, because of the complexity and the interconnectedness of the systems involved."
Maybe that's what James calls it in his polite society mag, but I prefer to call this a classic example of "actionable f'up" -- when everyone knows they are assuming a whole lot of risk they don't understand, but they do it anyway out of sheer, junkie-headed greed.
That was on CNBC this morning - not sure why it wasn't more market moving, seems like a big deal to me.
dunham | 02.04.08 - 2:10 pm | #
I don't see how they do it UNTIL AFTER the monos fail. Taking the muni biz out of the monos pre-failure kill's the CDO side that much faster... the monos scream bloody murder.
And just backstopping the munis inside the monos doesn't stop the failures since its the CDOs that's the real problem.
They are all sitting in trees nearby waiting for'em to die. Makes it all all lot easier then.
Oh James...
"In that sense, the potential collapse of monoline insurers looks like a classic example of what the sociologist Charles Perrow called a normal accident. In examining disasters like the Challenger explosion and the near-meltdown at Three Mile Island, Perrow argued that while the events were unforeseeable they were also, in some sense, inevitable, because of the complexity and the interconnectedness of the systems involved."
Unforseeable except by half the blogs on the Internets.
Dryfly wrote: "Trouble is there is so much background radiation"
That really is not the problem. The problem is that reality has be obscured to the point that reality cannot be determined. Of course it was obscured in order to make a sale. But now or soon, no one will buy anything financial, because it might blow up, be it reality or not.
They can try to revive the muni side of bond insurance, but it will be hard. They have permanently blown part of their promise, which was to do "zero loss underwriting."
Here's a description from an industry guide:
"One such standard is what is known as "zero-loss" underwriting. This means confirming that the issuer is so strong -- or is providing such ironclad protections in the bond issue -- that the insurer believes it will sustain no losses. Zero-loss underwriting in the municipal bond industry contrasts with the actuarial approach used by multiline insurers, which assumes a certain level of losses will be sustained."
This is approved sales literature.
The NASD bought it.
http://www.sifma.org/services/publications/pdf/An_Investors_Guide_to_Insured_Munis.pdf
OK-Dunham. I agree with you. How how about our esteemed host and hostess? Hundreds of posts-would it be too much to ask for a few positive one to balance the negativity?
The bears I listen to most carefully, like Doug Kass or Todd Harrison (of Minyanville) see both sides. By the way, I noted here Kass' call about 3 or 4 weeks ago to buy financials. Everyone laughed. Yet, at least in the short term, it was a good call.
What makes people think that the monolines are adequately reinsured for the losses that will be happening in the municipal bond sector?
The happy assumption of ever-rising tax revenue based on steady employment, rising property values and increasing sales is as broken as the CDO model.
What municipality near you is running a sustainable budget and is fiscally conservative?
Aheadofthecurve,
Here's a positive for you.
McDonald's dollar menu will do big business because it's all a lot of senior citizens can afford.
Regarding money market funds "breaking the buck."
This is very possible. Bank of America and Legg Mason have had to inject capital into their money market funds already. Other players might not have the financial strength.
Also, check out ticker SWYSX. This is a Charles Schwab short term yield fund that apparently stretched for yield during the Greenspan 1% era. Its gotten hammered over the last six months. Price is down 7% or so (14% +/- on an annualized basis). Truly awful for a near cash substitute.
First stocks (dot-bomb), then houses, now money funds. No thanks wall street, I really can't afford another "investment."
AOTC,
Another positive is that stocks have managed some degree of stability despite deteriorating economic factors.
I don't expect this to continue, but the market being forward looking and all, it could be considered a positive.
If you were long at the beginning of the year, your only down 5-6% or so - not bad considering the spending/unemployment/GDP #s.
The Fed just released results from its quarterly bank lending officer survey. Oh...my...god... I've never seen numbers like these. Oddly, ISM reported that its members (factory side, anyhow) aren't having any trouble getting credit. Banks certainly intend to give borrowers trouble, based on what they told the Fed.
CR noted in Fortune article on Home Equity
Home equity loan defaults soar - Feb. 4, 2008
Kass, from my reading yesterday and today, is now short (short-term), thinking that the anti-implosion rally is over.
However, he does think that the rogue trader lows a couple of Tuesdays ago will hold.
I personally view the S&P chart as making a retracement from the first leg of a bear market that started in October. 1570 to 1260, 50% retrace would be 1415, which is also about where the 50d EMA would be.
If, however, it goes above 1430, it'd take out a downtrend line and you'd have to be long there.
MBI and ABK specifically, I'd be leery of going back to the well again on these. They seem to be easily rumored around, long and short side.
MBI looks like resistance at 20, then 25. ABK can't seem to fill that gap around 15. Those would be logical places to be short.
Running from mortgages: One of my multifamily mortgage contacts told me spreads have risen for both GNMA and GSE paper because buyers don't want anything with the word mortgage in it.
I haven't verified, but at some point the GSE paper is going to be unpopular.
CR may discuss the latest Senior(?!) Loan Officers Survey by the Fed that came out earlier today:
Senior Loan Officer Opinion Survey: January 2008
Extracts
one-third of domestic institutionsa larger net fraction than in the October surveyreported having tightened their lending standards on C&I loans to small as well as to large and middle-market firms over the past three months...
About 80 percent of domestic banks reported tightening their lending standards on commercial real estate loans over the past three months, a notable increase from the October survey. The net fraction of domestic banks reporting tighter lending standards on these loans was the highest since this question was introduced in 1990....
In the January survey, significant numbers of domestic respondents reported that they had tightened their lending standards on prime, nontraditional, and subprime residential mortgages over the past three months; the remaining respondents noted that their lending standards had remained basically unchanged. About 55 percent of domestic respondents indicated that they had tightened their lending standards on prime mortgages, up from about 40 percent in the October survey.
...
So the Fed can lower rates but here's evidence that the banks won't go overboard in lending - Now will people also not borrow ?
You can lead a horse to water but you can't turn him into a drunkard once he's suffered a hangover.
-K
glad i loaded back up the shorts.
Zack-Last I saw from Kass was an article in which he listed a bunch of positives and negatives, and said the negatives slightly outweigh the positives. But I didn't see a ringing endorsement of either side. Frankly, I'm not strongly on either side right now either.
My point is that the CNBC piece with greenberg and the other fellow (I didn't catch his name) had a valid point that blogs are overwhelmingly negative, whereas the reality is much more mixed.
Aheadofthecurve - I have to agree with you. While I think we're at the front end of a mild recession now, the commentary on this site does tend toward the apocalyptic. Just like 2001 and 1998, the intensity of the fallout is in financial markets, not the real economy, which is an important distinction most people don't seem to be making.
Turbo
Foreclosures are at record highs and increasing. This is most definitely a main street or real economy problem.
By the way, I like bears; when everyone is bullish, I get very nervous. I especially like shorts in stocks I am long in. They are the only one who HAVE to buy shares.
From that New Yorker article linked in a previous post:
This innovation has had all kinds of benefitsmaking cheap capital available to companies and individuals who previously couldnt get it, allowing risk to be more efficiently allocated, and widening the range of potential investments.
Is it just me, or was this the fundamental flaw in thinking that got us where we are? There was a reason that "companies and individuals" could not previously get "cheap capital." It was the risk of non-repayment--this risk that people thought they were "efficiently allocating." Hiding it, more like.
Just like 2001 and 1998, the intensity of the fallout is in financial markets, not the real economy, which is an important distinction most people don't seem to be making.
The 2003-2006 economy was driven by consumers taking on debt, over FOUR TRILLION of it.
Distress in the financials is not a cause, it's an effect. The cause is the consumer becoming tapped out.
I see Debt People.
Turbo,
Eevn if mild I think it will be longer than people expcet. The length of time may turn it into severe.
Turbo,
Unemployment up, inflation up, real wages down, foreclosures up, no more heloc/MEWs, and this isn't affecting main street?
If Florida is the canary in the coal mine(I think it is),I am seeing failures/foreclosures back to 2002 pretty regular on the counties website. Heck,we are hardly a year into this ordeal...
Chris,
Some of those early vintages were already there for the hurricanes of '04 and '05. That means something, exactly what I'm not sure (other than they could have cut and run back then, but didn't).
Ray
Five years ago, daddy-blogger Dave Winer bet NYT president Martin Nisenholtz that by 2007, blogs would be more relevant sources than the Times in Google search results for the year's top news stories.
The Long Now Foundation has handed down its final decision on the bet which was 4 to 1 in favor of blogs.
The Times came out ahead on the mortgage crisis, but blogs won on the other four topics -- the Iraq war, Virgina Tech's shootings, oil prices, and Chinese exports.
Gee it could have been 5 to 0 if people we reading Calculated Risk.
Another positive is that stocks have managed some degree of stability despite deteriorating economic factors.
I don't expect this to continue, but the market being forward looking and all, it could be considered a positive.
If you were long at the beginning of the year, your only down 5-6% or so - not bad considering the spending/unemployment/GDP #s.
Broken markets being seen is "good" may be the root cause of all the financial problems we're having right now.
It's good like giving a scale that always says you weigh 120 pounds to a diabetic who's morbidly overweight.
Sometimes it's beneficial to know that something is wrong so you can do something about it.
FRB: Speech--Kroszner, Protecting Homeowners and Sustaining Home Ownership--February 4, 2008
Kroszner is hilarious:
"These events have highlighted the shared interest of mortgage borrowers, their communities, lenders, and investors in protecting borrowers from abusive practices and preserving their choices. Abusive loans that strip their equity or cause them to lose their homes must not be tolerated. Protecting borrowers with responsible underwriting standards also protects the integrity and proper functioning of the mortgage market by increasing investor confidence. In other words, effective consumer protection can reduce uncertainty about the underwriting standards of, and hence, the value of, loans in mortgage-backed securities, thereby helping to revive and strengthen mortgage securities markets. In this way, effective consumer protection produces a complementary benefit for consumers by making more capital available to meet their needs. Similarly, systematic efforts to keep borrowers who may have trouble meeting their loan obligations in their homes on a sustainable basis, by providing more certainty to the market, can have the complementary benefit of ensuring the flow of capital for potential borrowers."
yeah, sure.
Um, and who allowed banks to strip out that protection?
Someday this war's gonna end...
I'm sorry, but Google searches are not the sole criterion by which to judge accuracy or relevance. If they were, Ron Paul would be the next President. The Times, the Globe and Mail, the BBC, NPR, etc. still give a much more complete and accurate picture of the world than the blogs. Not to say blogs aren't entertaining though...
A mild recession, followed by a prolonged period of weak growth has been my forecast for some time now. Stocks down 20% peak to trough, versus the real economy down 1% peak to trough is what I mean by intensity of fallout. I'm not a raging bull here by any stretch, but I just don't see the world ending either. Some of the short positions in financially healthy companies are crazy large right now, so even though I think we're only about 1/3 of the way through the financial writedowns, I have a hard time being bearish stocks anymore - and I sat out the market in 2007 because I was bearish.
The financial house of cards is falling because of the 'real' economy, not as something off to the side of it. I'd say the financials are the heavy top that the main economy can no longer support. The balance has been lost.
I think also that rampant fraud will be uncovered in finanials, as it's being uncovered in the home-equity-withdrawal sector whereby 'homeowners' were taking out hundreds of thousands of 'equity' in the houses they're now walking away from.
Turbo and Aheadofthecurve -
I can tell you the reality of what I am seeing across several businesses is not encouraging. I also see credit contracting much further from my discussions with the bankers I talk to. The comments in this blog are certainly negative - and at times apocalyptic - so I understand your point. But I am very much in the real world in a very broad way and the prospects have dimmed considerably in the past 6 months. This is both a Wall Street problem and a main street problem - and the continued contraction of credit is just going to continue to make things worse. We're cutting budgets significantly across all of our businesses. I talk to several others doing the same thing.
I think CR and Tanta are very measured in their postings focusing on facts and data without skewing things too negatively and thats why I read this blog. Nonetheless, the comments section is definately incredibly negative and the only reason I read it is for the posters who've I've found to be intelligent and links to news stories and other info. That being said, the mainstream media is certainly very biased to the positive - other than Bloomberg there isnt much news that gets reported in the financial community or on the economy without an immense amount of positive spin or commentary, or even worse complete ignorance.
So I guess where that puts things is that somewhere between what you read in the comments section of this blog and CNBC lies the truth. Based upon what I've read that puts CR and Tanta as the closest thing we have to the truth out there.
G-I-A-N-T-S!! GIANTS!!
Good news huh.
This isn't '98, and '01 didn't hit with ferocity because of 1% interest rates blowing a Real Estate/Financial bubble.
Things that don't show up in unemployment: contract workers.
Here's some:
RE Agents, mortgage brokers, not just hammer swingers.
This one is going to be severe. And it will hit all of a sudden.
Cheers,
I side more with the apocalypticists because where I live there are thousands of people are now trying to sell houses they paid far too much for, thinking they would get rich selling them to Californians some day. The daily RE listings are exploding, which suggests that there is a whole lot of pent-up supply. I don't see any demand.
In the trenches: I don't argue that there are issues in the real economy. The question is how much has been discounted in the market and what impact Fed easing will have. There is certainly room to dispute whether the market is expensive, cheap or in between. I look at it this way-I have a 1 year CD coming due in March that I was getting 5 % on. Assuming rates to renew at that point are 3.5-4%, if I roll it over, I'm getting negative returns after inflation and taxes, with zero upside. T-bill and bonds are worse. So where do I go? RE? No, I agree with the consensus here that no bottom is in sight this year. Gold? Maybe, but I can just as easily see it going down as up and it pays no dividends. On the other hand if I buy solid companies with large overseas businesses (GE, PFE, MMM, etc), I can get yields of 3-5%, with favourable tax treatment and some good upside potential. I suspect, while I may be in the minority on this blog, I am not alone in my thinking over the universe of investors. So, perhaps stocks may diverge from the economy for a while.
So, perhaps stocks may diverge from the economy for a while.
Actually, just a select group of stocks, namely large caps with multinational exposure and good dividends. The other 90% could be in trouble for quite a while.
Yet one can't be certain that the favorable tax treatment will continue even for those that will do well.
I have a hard time coming up with reasons to be bullish. Stocks and bonds are over valued, imo, especially in light of increasing inflation. In the 4th qtr of 2007, inflation increased at a 5.6% rate. Inflation for 2007 was 4.1% yoy, the highest in 17 years. Real wages declined in 2007. The public wage sector is really ugly. Government wage gains mask the extent of public sector real wage losses.
Further, much of our growth during this economic cycle centered around an insane housing boom and foolish lending. Other big growth areas were health care and energy. Keep in mind that the government is far and away the biggest purchaser of health care. Hence, health care growth undoubtedly resulted in increasing budget deficits. Pay now or pay later.
As for high energy prices, they force us to ship (tranfer) our wealth oveseas. Great for a energy companies, but bad for America.
I see REAL reasons to be negative. All the bullish arguments are based on "hope" or "faith in the fed." The same fed that was caught off guard by the the dot com implosion and the housing bust. The same fed that oversaw the great depression and the runaway inflation of the 1970s.
Printing money does not create wealth.
The fed can indeed inflate. This is what I fear most.
Aheadofthecurve,
It is a difficult period. As I see it, its not even easy to preserve wealth now let alone grow wealth.
BTW, your 5% cd appears to be a loser after taxes, just like mine.
$10,0005% = $50040% taxes = $10,300
W/ inflation at 4.1%, I needed $10,410
to maintain purchasing power. Hence, I lost 1% in purchasing ability.
Wake up people! The fed is stealing your savings to bailout foolish lenders and borrowers.
The fed can indeed inflate. This is what I fear most
IF our purchasing power continues to decline, then moving into the S&P500 seems like a reasonable inflation hedge.
But I don't see across-the-board price inflation in the cards.
The real story of inflation is substitution when wages aren't going up.
Gas goes up, something else has to go down, like rent or luxuries.
There can be no across-the-board price inflation without wage increases, and I just don't see how wages are going to increase in this environment, other than tech, medical/pharma, public unions, some export-oriented manufacturing with in-demand skillsets.
Basically if you can successfully strike for higher wages, then your wages will be going up. If not, no.
Troy,
Infation is increasing without increasing wages right now. This could change of course if we have a slow down or recession. But, nothing creates inflation like negative interest rates combined with big government spending. Add in the falling dollar and global demand for commodities and I'm very uncomfortable about our inflation outlook.
FWIW, the S&P 500 was a disastrous inflation hedge from 1965 to 1982. Purchasing power decreased by well over 50%.
MAB-Inflation now is different from the 70s (and I am old enough to remember the 70s). Then, everything went up, across the board. Now, it's much more selective. Gas, of course. Health care and education-certainly, but they've been going up for 30 or 40 years. Food- selected items like milk have gone up in the last year, but many items vary 50% from week to week. We buy what's on sale in any given week, and I really don't find we're spending much more than we did 5 or 10 years ago, overall. Cars-I bought a car last year for the same price as the one I bought in 1996 and it's at least as good a car. Our car insurance actually went down quite a bit. Housing-well of course it inflated hugely and is now deflating. Between lower prices and lower interest rates, someone buying today could easily be paying 25% less than someone who bought in 2005. I bought many years ago with a fixed rate, so the only thing that increases is taxes.
All in all, I'm not sure what my personal CPI is. The picture overall is mixed.
Aheadofthecurve,
Your personal inflation rate sounds fine. Plus, its clear you actually pay attention to prices and sales, etc. Recent data, however, suggest that our recent good fortune with inflation is changing.
Consider: 2007 CPI inflation was 4.1% and increased to 5.6% in the final quarter. Those are monster numbers which spook me.
Also fyi, house price increases or decreases are not a part of CPI. They were phased out in the period from 1983 to 1987 and replaced by "owner's equivalent rent." I have a feeling we might be facing the end of dis-inflationary forces out of China and a beginning of inflationary forces from a profligate U.S. government. Hopefully I am wrong.
WSJ - Moody's to Consider Changes In Structured-Finance Ratings 'replace the familiar triple A to single C rating scale with a 21 point numerical system'
Moody's Weighs Warning Labels For Its Ratings - WSJ.com
I think getting a handle on inflation is pretty easy: how much have a basket of diversified commodities gone up YoY? Something like Jim Roger's ETN or DJP is a pretty good proxy: Energy, industrial metals (low weighting on gold/silver) and ag.
DJP is up 22% YoY. This is systemic inflation... you have eat, drive your car, power your home, etc. It's also the base input for literally every product and service you purchase.
It's amazing to me that people still believe inflation is running at less than double digits in the US. Forget equities: commodities are the only effective inflation hedge.
Equities have operational risk attached to them and can go to zero; basic commodities are always worth something.
I'll know the crisis is over with when Moodys puts their Binomial Expansion Technique model up for sale on craigslist. For those of you not in the bond biz, that was the mudel Moodys originally used to rate CDOs. Its initials: BET
wow - what an exotic place for a finan/econ illiterate like myself -
found this thread when looking up CDO exposure for Berkshire/Hathaway who happen to hold a 17.2% ($2B) share of Moodys
seriously, truly fascinating