Counterpointer(Excellent) writes:
This has got to be a joke. CRE???

The part where gaming the system replaces doing actual things because the per-dollar payout on political corruption is much higher is very real.

Put differently, in an evolving crisis in a marketplace where some firms are state-sponsored and some are not, and if it's a given that the state is weak and easily made captive by vested interests, where does the comparative advantage lie?

TARP is the new business model.

If we follow the residential model, we'll try to preserve the mountain of countless trillions of JPMorgan and Citigroup derivative positions from any losses as well.

Far out. Maybe a combo of cap gains and tobin tax would start to right the ship. This is insane.

We are all Market Leninists now.

C

OT

Sunday, December 28, 2008
Deflationary shock
First a personal disclaimer: It is not that I was so smart to get out of the market, just that I was too stupid to get in. Couldn't figure out why the McMansions offered 'captivating value', why stocks were just going to keep going up, why oil would go to $200 ... so I opted out. Took a Chauncey Gardener approach and learned a lot by watching. My belief is that Chauncey will be wearing toothpicks under his eyelids in 2009.
'The mendacity of hope and the urgency of not', should be the investors' mantra in this new Year of our Lord but unfortunately the lure of easy money doesn't fade easily - it literally has to be beaten out of a fella. Folks need to appreciate that fortunes weren't lost in 1929, they were lost by buying all the way down. Stocks bottom when no one cares.
Much has been made of looking at history to predict today's woes. B.S. Bernakke, a student of history, seems determined to make his own mistakes. The best he can do, in this humble blogger's opinion is to concentrate the timeline by truncating the misery.
Since we are too timid to drop the banks in the acid bath of price discovery as Sweden did, our alternative is too accelerate the Japanese process by flooding the insolvent banks with liquidity, removing all incentives to being risk-adverse by threatening to monetize cows, and ultimately bridging the output gap by stimulating anything that moves.
Try as we might though, the creative destruction of Mr. Market will continue, albeit in a much more temporally compressed form then the historical slideshow of our eastern friends.
As I sit on a Scrooge McDuck pile of powder, certainly I would like to be an investing smartypants too. Armed with the knowledge that the moment to deploy funds is when every emotional neuron is screaming 'oh hell no!' here is what I am looking for - with the admonition that if I am wrong I lose only opportunity.
Simply put, I am waiting for gold to crash.
What I am looking for is a deflationary shock marked by gold dropping 30-40% from current levels. If gold crouches all else will be in a fetal position save the dollar and treasuries (and maybe just maybe the UK pound). I'm putting my mental chips down on Rosenberg's 1.5% prediction for the 10 year.
What to do then? Why that which I've waited for. Become a long-term investor.
First in the 'hards' and select bonds - then in the 'softs', then equities. then housing.
Someday I will short the long bond into dust. But today is not that day.

Every day is talk like a pirate day now.

[Cruise] Missile-fitted planes shifted to Karachi.

>

The growing list of problems Barack faces in his first day of office.

Counterpointer(Excellent) writes:
We are all Market Leninists now.

Isn't it awesome? A stampede of companies demanding effective nationalization.

Maggie Knowles(Unrated) writes:
12/22 UPDATE: Stimulus spending skeptics speak out on the GOP Leader Blog.

Is there anyone else who finds the GOP suddenly trying to cast themselves as the party of fiscal responsibility hilarious?

I mean, didn't Bush just have a stimulus measure of exactly the same size, strictly for connected banks?

Of course Obama is gonna spend himself into oblivion. Of course he claims everybody loves his plans.

Nothing we can say is going to stop it, just like nothing stopped the TARP -- because this is a political crisis with economic overtones, not an economic one. This is about looting the US state.

Why would anyone give the GOP a fig leaf when they're at last as guilty as the Dems?

Byz - it's like someone's found a biz hearts govt pill and chucked it in the water supply.

Otherwise unfathomable.

Unless it has something to do with gross and pathological mismanagement and irresponsibility.

Surely not?

C

Was that a 'paid' piece in the NYT?

If the Obama team is dumb enough to touch this, we are done.

Where's that old politically incorrect (but real-world wise) Uncle Remus book?

Dawg:

Does you new institution of higher learning give advanced placement credit for Casey Haterz?

NW

P.S. Whatever happened to Casey?  Did he get his share of TARP or is it only available to "native born" skanks?

Factoid of the day:
"State and local public employees comprise approximately 12 percent of the U.S. workforce and have an estimated $800 billion or more of unfunded pension liabilities (not counting other post-employment benefits). By comparison, employees in the private or corporate sector make up about 78 percent of the U.S. workforce with an estimated $450 billion of unfunded liabilities."
Vallejo Bankruptcy Filing Garners Attention in Municipal Finance Circles

Assuming this is true (I cannot independently check), can we handle this truth?

Counterpointer(Excellent) writes:
Unless it has something to do with gross and pathological mismanagement and irresponsibility.

Lack of appreciation of the downside of administrative fiat decisionmaking, from my thumbnail analysis.

I think it's tied up in our twin vices -- the illusion of "progress" in all affairs, and the way history is simultaneously smudging into an eternal "now" as America as a nation loses its ability to impart a complex cartoon of history on its citizens.

It comes as an outgrowth of not appreciating long-term / second order consequences because you've never had any education in them. Compound this with framing any novel idea you personally conceive of as progress because progress is what is always happening. It never occurs to you you have a superficial understanding of the world that fails to inform you that you are walking down the path of intuitive misfortune.

This, I think, lies the road to our woe.

Timmy: "By next spring US Treasury markets will be in total chaos...."

I give them 18 months at the outside but don't think it'll take that long.
Comrade Byzantine_Ruins | Homepage | 12.28.08 - 10:21 am | #
I think that the Treasury market is already there.  The repo market, which acts as the lubricant for day-to-day trading, is becoming comatose.   

These bailouts won't end until we're officially bankrupt as a nation. And that may be sooner than people think.

Make not mistake, none of these bailouts are designed to help the average person but are designed soleley to bailout out the rich and connected. They're too big to fail and the rest of us are too small to succeed.

there's no knowing when the too-many shot of Jaeger will come

Bears' Chat - Message Detail

I'd say 2009 is a good bet. Imagine an environment of rising interest rates.

Look if CRE doesn't get the bucks, the bigger ones will convert to banks. There is no moral hazard, it's all about who you know. Eventually anyone who has connections will get bailed out. Throw in the fiscal stupidity and bake.

I am not aware of any company that used free money it got from the government to expand its business or to invest into new projects. All companies that got government money use it for two purposes:
- Beef up their capital base to protect their credit ratings

- Satisfy their liquidity in case capital markets shut down

Yeah, but developers are not banks - completely different set of incentives. I think they are more likely to just see this as a big economic development grant. Which judging by the lack of logic and accountability, it sort of is.

Big fish, little fish, swimming in the water...

YouTube - PJ Harvey - Down By The Water

C

Not sure if this has been posted, apologies if it has, I've been working the past two days. It appears Lehman's BK is still causing fallout via swaps
Lehman Roils Muni Swaps as Collapse Forces Payments (Update2) - Bloomberg.com

I don't think the companies want nationalization so much as free money.
Bond Girl | Homepage | 12.28.08 - 10:31 am | #

Agreed - that's whatthey want. I'd maybe give them money but then make them all part of some obscure gov't dept. and rigidly adhere to the 'GS' pay scales. So would a CEOs of a REIT be worthy of a GS15?

I give them 18 months at the outside but don't think it'll take that long.
Comrade Byzantine_Ruins | Homepage | 12.28.08 - 10:21 am | #
I think that the Treasury market is already there.  The repo market, which acts as the lubricant for day-to-day trading, is becoming comatose.   
NorkaWest | 12.28.08 - 10:41 am | #

I think that is very possible too - that we are 'there' - just waiting for one brave soul to yell 'fire' and they all stampede out simultaneously. Treasuries at these prices were never 'safe'.

I am not aware of any company that used free money it got from the government to expand its business or to invest into new projects. All

That's exactly why we're headed for big inflation.

Government is crowding out the private side and credit spreads, even for good businesses, are in the stratosphere.

Government is supporting a dead sector (real estate) instead of focusing on sectors that could save the economy.

When the rule of law goes out the window so does productivity. Speculation takes over and companies focus more on preserving capital and wealth than expanding production.

You think corruption has been bad up to now, just you watch what will be coming up! How can you even expect honest arms' length transactions in an environment where everyone feels cheated out of their entitlements?

During the Great Depression, government took a long time to give handouts. Today, they are set up to distribute money like candy at a candy shop.

During the GD, the capacity for staples and other stuff was HUGE. Europe had managed to rebuild itself and th US ended up with twice the needed capacity. Where is the capacity today? Certainly not in the staples, it's in the non-essentials. On top of it, it's in emerging markets which have hundreds of billions in reserves!

All they need now is to buy up the mines and oil patches with their billions in US dollars, focus on their own people and we're screwed. Why do you think they've beren kicking tires in South America and Canada?

To add insult to injury, they don't even need to buy our production, they have nearly everything they need, including their own car assembly lines!

China is probably going through a recession, during which time they will retool their plants to produce for themselves instead of shipping to us. We're going through a depression... When they take off, we're screwed.

Unfortunately, our system is built for growth and our huge corporations want the emerging markets to take off. The only way for the middle class to not get screwed in the whole process is for them to participate in the profits that will be generated by the sales to emerging markets.

Look at how our economy is structured now. Is it set up for profit sharing across all segments of the population? With CEOs making hundreds of millions, I think the answer is clear.

I am not aware of any company that used free money it got from the government to expand its business or to invest into new projects.

What about Citi?

Bailed out Citigroup buys Spanish Company for 10Bn

MADRID, Spain — Debt-laden Spanish construction company Sacyr Vallehermoso said Monday it has agreed to sell its highway-operating unit, Itinere, to a Citigroup Inc. fund in a deal valued at nearly euro7.9 billion ($10 billion).

Bailed out Citigroup buys Spanish Company for 10Bn - Democratic Underground

Treasuries at these prices were never 'safe'.

Maybe. But Treasuries yields were below 3% for ~ two decades after 1929. Same thing in Japan for the past 18 years.

Consider: according to Birinyi Assoc., the average mutual fund investor has realized annual returns of just 0.5% since 1961. Not only less than inflation, but less than the yearly fees!

Can you believe they still call it investing? Can you believe they still call it the financial "services" industry?

Most would be better served with government guaranteed 2 or 3% returns.

Bondgirl, I saw that but wouldn't similiar things occur with another BK of Lehman's size?

I can.  It's called Jubilee.  Make it easier for J6P to go bankrupt and keep his house.  Make it easier to wipe out debts generally.  Get the system-wide leverage down.  Get the cost of debt service down.  Use TARP money to recapitalize critical, but insolvent, financial intermediaries.  Let the rest die.  We don't have the resources to save everyone.  It's triage time.
NorkaWest | 12.28.08 - 11:04 am | #

I'm there - that's where we are heading. So far it's been 'A Jubilee For Bankers' - there is going to be one helluva a public backlash if these guys stay wealthy courtesy of Uncle and the rest go down the toilet. Serious payback will result.

Are you talking combustion or firing squad here?
Broward Horne | Homepage | 12.28.08 - 11:22 am | #

Well said.

Lionel - Point taken, I missed this deal. Still, in this deal Citi did not use the money it got from the US taxpayers to grow its US business. I even doubt they will use this money to fund any new infrastructure development in Spain. It looks like a distressed sale, which resulted only in the change of ownership.

Jesse at Cafe Americain looks to be early, but accurate.
Citizen AllenM | 12.28.08 - 11:36 am | #

Linkie, please.

there is going to be one helluva a public backlash if these guys stay wealthy courtesy of Uncle and the rest go down the toilet. Serious payback will result.

dryfly, I wonder if the word backlash is a little too measured for what Paulson has set in motion with TARP. Blowback maybe? Blind rage? Once the real economy starts churning out unemployed by the millions, the anger and hatred directed at the Treasury, Congress and the Fed will be something we haven't seen in our lifetimes. There is still a modicum of belief in the promises made by Paulson and Bernanke (and now Obama) that TARP and the coming stimulus will mitigate the recession; when these efforts fail, the anger will grow and grow. Politically and socially, the coming years will be horrid.

Comrade Kristina,

That article addresses some of the bond issuers that paid to terminate the swaps once Lehman filed BK and how much that totally sucked for them since their revenues have been disappointing.

But it was precedent-setting in the swap market in other ways, that you are right, could potentially affect other market participants if something similar happens. You see, for the state and local govs that did not terminate their swaps, what happens? Most of the parties in that market have relied on standardized contracts put out by the Intl Swaps and Derivatives Assn, which give the non-defaulting party more rights as to how to resolve the situation that the BK party will no longer be able to make payments as required under the contract. But BK law apparently gives Lehman more rights as to what to do with its assets (the swap contracts). Well, Lehman was in-the-money on many of the swap agreements and could make money from selling them to third parties (which goes to its creditors), and that is exactly what it asked the court to do. Many state and local governments were furious about this, because now they are going to have a contract with a third party that may not be all that great. (I'd imagine that many were just hoping the contracts would go away with the BK, since they were losing money on them.)

Prior to the meltdown, most of this risk discussion was viewed as borderline academic, in my opinion. What? Lehman Brothers fail? Yeah, right.

Mr. T., well said. I'm in the same state of flux. I've given up, ridicule all you want but between the sheeple, and the corruption, it's not worth getting in the way.
I'm taking my chips and going home. At one point there was a game, and it had rules.

You are on a roll this morning.

The Feds are on a roll..
I just report the facts.

It's hard to take it seriously now. I burst into laughter when I read that "future retrospective of 2009" and practically the first phrase is "global comparative advantage".

What an amazing joke that future generations won't really understand.

Make it easier for J6P to go bankrupt and keep his house.

No, let's not. You're not letting the guy keep his house (as compassionate as that may sound), you're letting him keep his debt. He owns no house. The bank owns the house.

"...to press their case. And they say they have a compelling one."
Let's distill that "compelling argument."  What the CRE investors are saying is that the commercial real estate market is currently working and market forces are acting rationally making effective changes in their industry.  It is from that which the CRE needs protection. 

There are several lessons to take from reading between the lines.  First this is a white flag of surrender acknowledging that the TARP has failed.  One of the, if not THE reason for the first $700b was to relubricate the day to day lending mechanisms that the economy needs to operate.  Those reasons include formerly routine rolling of CRE debt and extending rational consumer credit.  Result; EPIC FAIL.  Second, the Fed has gone retail with their efforts.  Wholesale lender of last resort didn't work so try going straight to the customers.  And this too shall FAIL.  The problem with their entire thesis is in assuming that filling the buckets fixes the holes. 

I guess I have the post Christmas blues or something.

Mr. T. | 12.28.08 - 11:53 am | #

I get this feeling in April.

Mr. T,

FWIW, I'm short vanity and long free time.

If time is money, I've become quite wealthy.

As you can imagine, I now have lots of extra time for heckling. Great fun.

The face of whocoodanode

OMG, that was funny.

I was kind of hoping for a mariachi troupe, though.

Anonymous writes:
Rob Dawg writes:
Is there an ETF that shorts Muni's?
Anonymous | 12.28.08 - 12:01 pm | #
JPY

I prefer this one:http://finance.google.com/finance? q=swiss+franc
Anonymous | 12.28.08 - 12:09 pm | #

I prefer this one:

Buy Gold and Silver at GoldMoney - Best Way to Buy Gold and Silver

Why work and accumulate when the faith is not there that your savings will be worth anything.
Mr. T. | 12.28.08 - 11:53 am | #

I've heard that somewhere before - something like:

They pretend to pay us. We pretend to work.

Maybe. But when I think about likely scapegoats, I expect that we will round up the usual suspects. In the NYT WaMu article, for example, you have a drug-using loan processor and you have borrowers either wearing mariachi costumes or driving landscaping trucks. Guess what sorts of stereotypes those images support...
j marston | 12.28.08 - 11:52 am | #

Good point. I think what you are expressing is not exclusive of my point, it's merely an addition to it. The resentment will be bidirectional. The middle class and poor will resent the rich (magnified immensely by Paulson's plan) and the rich will respond by blaming the mariachi player (I personally could never be angry at a mariachi player). It's basic class warfare. I sense the housing bubble kept this under wraps for the last decade or so, as everyone suddenly believed that they could become rich merely by owning real estate. Now that this belief has been obliterated, what will be left are very angry, disillusioned people who have zero chance of ever becoming rich. Meanwhile, our esteemed leaders feed MORE money to the rich, exacerbating an already incendiary problem. Chaos ensues.

Wow, you guys are starting to sound like me. I have a ton of time now but instead of foolishly investing in "skills" like I did from 1985-2004, now I'm investing it in wanton sex and kibbitzing.

Broward, that's one of the best plans I've ever heard of.

The face of whocoodanode
Anonymous | 12.28.08 - 11:58 am | #

I gotta go with Paulson before the senate finance committie or Greenspan's "I found a flaw," on that one.  Perhaps some McMansion owner getting the final notice would top that but I have not seen a pic.

Municipalities are next. Just watch.
bearly | 12.28.08 - 11:56 am | #

States too.
dryfly | 12.28.08 - 12:15 pm | #

We'll get a new federal agency modeled on the FDIC.  They'll start off small with Minnesota and work their way up to the Golden State. 

Mr T - quite. I'm in cash and will probably do another currency play in February. Otherwise nothing. I don't genuinely understand any equity or futures market movements and frankly I have no real idea what the policymakers are doing, have done, or are about to do. I am not playing in a no-trust environment. But I'm perfectly content to carp about it and inject a bit of satire here and there.

What's the rule of law?

C

CR writes: Default rates are low - but starting to rise. However the balance between supply and demand is poor and vacancy rates are rising rapidly.

Like a boil on a sensitive body part.

The best currency is a...

Best for who?
.

"Deflation will be a very temporary phenomena."

The deflationary spiral, however, is very unlikely to be very temporary.
rent_to_own | 12.28.08 - 12:26 pm | #

Again - Allen is trying to divorce deflationary pressure (asset price values collapsing) from inflationary stimulus (gov't creating money). It is wholly possible if not likely BOTH can occur simultaneously - at least for a while.

Many developers that I know personally, though, have gone all-in on large mixed use projects and while still operating under the construction note, are staring into the abyss as leasing reserves and lack of perm financing sink their hopes for profit. They are screwed and deserve it.
MoonT | 12.28.08 - 12:21 pm | #
Mixed-use has never been a viable transect.  It has always required public subsidies of some sort not least being a commitment of transit provision.  The theory is live/work/play but the reality is quite different.  Your developer friends are victims of planner fantasies.  Anything other than the ordinary SFR pattern is going to suffer more in a contraction.  Last to be considered, first to be abandonded. 

I prefer this one:http://finance.google.com/finance? q=swiss+franc
Anonymous | 12.28.08 - 12:09 pm | #
Problem is the Switzerland could be a BIG Iceland.  It has an economy dominated by big international banks, who have been doing all the stupid stuff that all the other big banks have been doing, and not enough resources to save their banks when their banks get into trouble.

The human being, BH.

Major flaw. You've got zero political appeal there.

We'll get a new federal agency modeled on the FDIC. They'll start off small with Minnesota and work their way up to the Golden State

Thanks, Dawg, you've given me hope for the future. They'll obviously need a convoluted and complex IT system which can only be built with American labor!
.

Munis are not like stocks. They are not especially liquid investments - many investors want them purely for the income and tax advantages, so most bonds trade rarely. Any "short" strategy you take is going to have problems.

FWIW, my personal opinion is that the federal government has no incentive to let a state fail. States are not like companies - they do not just go away. If a state cannot borrow in the bond market to cash flow or to maintain its infrastructure, who do you think is going to pay for it? The federal government has every incentive in the world to help a state out. There is a reason states have not gone bankrupt in the past. During hard times, the federal government gives them money.

Local governments, on the other hand... different story.

"Serious payback will result."

Yeah, right... you and what army? This whole thing, before it is through, will teach a lot of Americans what their country is really like and where their place really is. Some smokescreens like 'middle class' and 'equality' and 'government working for you' and 'no royalty' will be gone.

Every unit is numbered, like Federal Reserve Notes, except the system tracks exactly where each is, and millions share the data. Madoffs can not hide

An interesting idea, it's one reason I used Dejanews for mining, it's such a large dataset that it's hard to spoof and many anomalies disappear in the sheer size.

It's probably spoofable, though.

Who assigns and tracks the numbers? How do you account for turnover? How do you enforce it? How do you deal with the national censorship wave which now includes China, Australia, Italy and... now England?

Just read that this morning.

possible secondary consequences of his financial plan?

Secondary effects are subject to a time horizon.

Something needs to be done.
NoVA CRE | 12.28.08 - 12:57 pm | #

Jubilee and then reset.

It will give us a few generations to pile up new debt.

Then wash, repeat.

Bond Girl writes: There is a reason states have not gone bankrupt in the past. During hard times, the federal government gives them money.

I believe there is simply no law governing state bankruptcy. Municipalities can file for Ch9, which allows them to restructure debt (both principal and interest) and to reject existing contracts (see my post above about unfunded municipal obligations). Municipal bankruptcy law was written, not surprisingly, during GDI, in 1934.

U.S. Courts | Bankruptcy | Basics | Chapter 9 

wuzzup writes:
"yogi, broward: David Chaum. Thank me later."

See prior post. Cybercash and Digicash went nowhere. Chaum's patents expired "out-of-the-money".

[NoVA CRE writes:
CR - the risk to the economy if these owners/developers default is very real.]

LMAO! CRE failures are a benefit to society. The vultures will take the carcasses and lease them out at better terms freeing society from untenable debt and cost burdens.

A Policy on Geometric Design of Highways and Streets, 5th Edition...
I'm fairly certain that this is a text that doesn't even deign to notice any considerations beyond those involving motor vehicles living the American Dream, a dream which much of the rest of the world appears incapable of following into the paradise of exurbia...
-rent_to_own

That is nothing more than a design standard from what I can tell. I downloaded the TOC and scanned through it. It doesn't tell an architect that he can't design something that is more pedestrian friendly, i.e. It simply is a reference that you use in the design process so that you don't screw something up that's already been done before.

I am thinking of just quitting and living off savings for the forseeable future. Why work and accumulate when the faith is not there that your savings will be worth anything. I have been accumulating for as long as I have been working but why not just drop out and spend my time with the family instead of chasing even more little pieces of paper backed by a system that is in the process of dying.

I guess I have the post Christmas blues or something.
Mr. T. | 12.28.08 - 11:53 am | #

No, Mr. T., you're just ahead of the curve.