Recession States

orange = recession
yellow = at risk
green = expansion

Per ABC News October 21, 2008

Credit Default Swaps

A credit default swap is a contract, generally between banks, that acts as insurance on debt. Under the contract, the seller, for a fee, agrees to make a payment to the buyer if something bad happens to the debt the buyer has insured with the swaps.

For instance, a bank that holds another bank's bonds could insure those bonds against loss by buying swaps. If a bond held by an investor lost so much value that it was worth only 8¢ on the dollar, the holder of that investor's credit default swap would owe him 92¢ for each dollar covered by the swaps.

The chairman of the Securities and Exchange Commission has estimated there are $55 trillion in credit default swaps outstanding.

Is It Time To Worry?

Headlines from the A section of today's Wall Street Journal:

U.K. Plans To Buy Into Large Banks In Bold Move

Fed Will Lend Directly to Corporations

Losses on Bad U.S. Assets Could Top $1.4 Trillion

Iceland Seeks an Emergency Loan From Moscow

Spain Sets Bank Bailout Fund

Russia Promises More Cash to Its Banks

Housing Pain Gauge: Nearly 1 in 6 Owners 'Under Water'

And that's only through page 5.

Here's what Mark Cuban is doing.

Mark Cuban update #1.

Mark Cuban update #2.

Frightening Economic Numbers

China holds more than $502 billion (½ trillion) in U.S. treasuries.

Japan holds more than $592 billion.

More than 25% of our national debt is owed to international lenders.

If Congress, as expected, raises the debt ceiling to $11.3 trillion, it will be 79% of our $14.3 trillion economy.

Remember when we were children and we used the term trillion as some astronomical figure? Now we use the word frequently. Will our children or grandchildren start using the term quadtillion? And not be surprised when they use it as adults?

Naked Short-Selling & Yo 11

Casino craps is the only mainstream gambling game where a wager can be placed to lose, thereby winning. You have to place your bet that the person tossing the dice will lose. (Yo 11 is part of the craps jargon where a six-five is rolled on the first throw and is an automatic winner to all except those making the aforementioned contrarian bet).

Short-selling is a quite simple yet arcane method of placing a "bet" that the price of a particular stock will fall. While most analysts are looking for the vitamin D fortified, the short-seller is looking for the clabber. Short-sellers are often seen as the National Enquirer of the investment world. But while the mainstream media was "going long" on John Edwards, the National Enquirer was doing their research and ended up pocketing some major Ben Franklins.

Short-selling 101: shares of ABC Corp. are currently trading at $100 per, but Abel believes they are valued at $50 each and that the share price will soon drop. So Abel "borrows" 500 shares of ABC from Baker and immediately sells them for $50000. A full moon later the shares are indeedtrading for $50 apiece so Abel spends $25000 to buy 500 shares and pay Baker back. You do the math.

BVDs are allowed while playing the naked short-selling game. The difference is that the "borrowing" is never done. There are regulations against doing that. There are also loopholes. The clifford BIG red DOGS play naked with loaded dice. They are also buying a form of insurance derivative that bets that companies will default on their loans. The term is "credit-default swaps" and the number of people who fully understand them approximate the number of people who know the secret handshake at Wally's Barber Shop. Swaps remain unregulated for institutional investors, insurance companies and individuals with a net worth above eight figures. Warren Buffett prefers to play bridge. There becomes so much downward pressure placed on a company or sector that they are in effect throwing banana peels in front of someone on crutches.

The SEC has temporarily (until Oct. 2) halted short-selling on 799 financial stocks.

Help Is On The Way

for the stock market.

Economic Confidence?

History: In the 1980s there was land flipping, nefarious real estate appraisals, Danny Faulkner condo construction and easy credit at the corner savings & loan. The bubble burst and the Resolution Trust Corp. was created in 1989, closing or reorganizing 747 institutions holding assets of nearly $400 billion.

Fool me once, shame on you. Fool me twice...

In the 1950s a 20% down payment was generally required to purchase a house. Lending institutions, obviously in the business of making loans, came to the realization that more people could qualify for loans if the down payment was lowered to 10%. Uncle Sam came out of the Great Depression hangover and started promoting home ownership as an economic force. Regulations of financial institutions became myopic (ex: Freddie Mac & Fannie Mae) and the downpayment threshold fell to 5%, then 3%, then 1%. Credit score requirements fell as well. The condo buying spree of the 1980s became the single family house buying spree of recent memory. Values rose so fast that it became almost de rigueur to get a mortgage is excess of what was paid for the house and buyers could walk out of closing with a check to buy new furniture.

Then the bough broke and the baby fell. Homeowners walked away when they couldn't sell their house for the amount of their loan. Lending institutions became laden with illiquid assets. Unable to sell this "paper," money dried up to make new loans. America, indeed the world, found itself in a credit crisis. Treasury Secretary Henry Paulson: "...the root cause of the stress in the capital market is the real estate correction."

Bear Stearns had to be adopted by JP Morgan Chase (with the Federal Reserve's help) in March. It's involvement in the world credit market was too great to ignore. Earlier this month Fannie Mar and Freddie Mac had to be "purchased" by the government. Their tentacles in the country's mortgage necessities are entrenched too deeply to ignore and the only sane thing to do with them is to break them up into regional units. The other evening the Fed gave a two-year, $85 billion loan to AIG in exchange for a near 80% ownership. AIG's massive billions dollars losses in bond default insurance could not be ignored. Also not to be ignored was the agreement among Secretary Paulson, current Fed Chairman Ben Bernanke and former Fed Chairmen Alan Greenspan and Paul Volcker that these bailouts were needed.

Would these actions have been necessary had there been adequate regulations in place? And is asking that question anathema to my free market beliefs? I think not. On both counts.

Further worries: Panic has set in so much that yesterday before dawn the Fed injected $300 billion into global credit markets. Sensing other measures necessary, the Fed tossed in another $50 billion followed by another $50 billion to maintain a 2% federal funds rate.

And emergency legislation is now being discussed for more government intervention by buying distressed mortgages. Details are being worked out but time is of the essence in that Congress is scheduled to adjourn Sept. 26. Elections are Nov. 4 and Iraq will draw little attention.

Short selling, and today's DJIA:

They've Got Us Over An Oil Barrel

April 4 is generally recognized as the date of oil's short march to the $147/barrel level. Yesterday oil dropped to as low as $105.46 before settling at $109.71. The consumer price of gasoline fluctuates with oil. Prices of consumer goods made with ingrediants derived from oil also rose during the summer, but hold onto your dipstick if you think they're now dropping like prices at Wal-Mart. Proctor & Gamble is keeping prices up "to recover costs already incurred." Aha! That means a short term profit gain. That should result in a short term stock price increase. So let's do some short term investing and buy 100 shares of P&G, which yesterday closed at $70.47 each. We'll check back in a few months.

Residential Up, Retail Down

The desire of urban planners is for close-in development to consist of multi-level residential units placed on top of retail stores, thus making neighborhoods "walkable" and reducing vehicular traffic. Nice pipe dream. While the apartments fill up, the vacancy rates on the ground floor remain high. The problem cannot be placed solely on the shoulders of the idealists that often require this type of design. Property owners still ask for exorbitant rents from businesses, often twice per square foot than the residences. And with no anchor stores as a drawing power, these stores must rely on fewer customers to help pay the rent. But the owners have forgotten Business 101. Rent is the highest fixed expense of most retail operations. Reduce the commercial rent and entice the retail establishments. Offset this with slightly higher residential rates. Apartment dwellers are more likely to pay the higher rent given the convenience of a nearby cleaners, ice cream parlor, coffee shop, sandwich shop, pizza parlor and perhaps a bar. But property owners, geniuses all, would prefer to ask for higher commercial rates and collect zero rent from vacant stores than reduce rates and actually produce income.

Economists 101

•Adam Smith (1723-1790) He was a champion of the free market and wrote the masterpiece "The Wealth of Nations". When Great Britain dominated the world, he argued that it couldn't afford to hold its rebellious American colonies.

•John Maynard Keynes (1883-1946) The Great Depression convinced Keynes that the government had to engage in deficit spending to combat unemployment. Keynesianism focused on total spending by consumers, industry and government, and when there's a recession consumers and industry aren't spending enough. Therefore government should spend more to take up the slack. Stagflation in the 1970s put a big dent in the theory, though not big enough.

•John Kenneth Galbraith (1908-2006) The left love this guy because of his anti big business views. He argued that big companies have little to fear from competitors and exercise lots of influence over consumers.

•Milton Friedman (1912-2006) GENIUS. He challenged Keynesian ideas, advocated free-floating exchange rates, school vouchers, the shift from a draft to a volunteer military and for doctors to be allowed to practice medicine without a license. He put an emphasis on the role of money in the economy, though it has always been difficult to agree as to how the money supply is calculated.

•Arthur Laffer (1940- ) is the man behind supply-side economics. Supply-siders put their emphasis on tax cuts, and especially marginal tax rates (the high rates at which income above a certain level is taxed). This boosts economic growth but also boosts government deficits.

This movie is good on content but apparently boring.

The Dollar Coin And Austin

Have they ever thought about going back to the Eisenhower dollar? Maybe that would be more popular.

Freakonomics

A very good blog.

Mrs. Alan Greenspan

Andrea Mitchell