"Keynesian Endpoint" and "The Least Dirty Shirt"

Bloomberg:

Nations have reached a “Keynesian endpoint” as exhausted balance sheets leave policy makers with few options to bolster economic growth, according to Anthony Crescenzi, an investor at Pacific Investment Management Co., the world’s largest bond-fund manager.

“Time, devaluations, and debt restructurings might be the only way out for many nations,” Crescenzi wrote in an e-mailed note titled “Keynesian Endpoint” that referenced the Great Depression era economist John Maynard Keynes. Debt-fueled spending programs aimed at combating the global financial crisis of 2008 are among policy tools now “being seen as a magic elixir that has morphed into poison.” 

And Bill Gross chimes in too, emphasis mine:

"“The world is full of dirty shirts in terms of excessive debt, and the United States is one of those countries, but it still remains the reserve currency and still remains the flight- to-quality haven,” said Bill Gross, who runs the world’s biggest bond fund at Newport Beach, California-based Pimco. “The U.S. is the least dirty shirt,” 

 Backhanded complement I guess!  At least we're not the dirtiest shirt...

-KD

The "Recovery"

From the Associated Press:

"My best guess is we will have a continued recovery, but it won't feel terrific," Bernanke said."

"Asked when the Fed will start raising interest rates, Bernanke quipped "in the future.""

If a recovery doesn't make people feel good, is it still a recovery?

-KD

Jeff Suppan - Human Asset Bubble

Are we still debating if there is an asset bubble being inflated right now?  Because there should be no argument - we are deep into a sick asset price bubble.  My proof?  Jeff Suppan. 

"The Milwaukee Brewers released struggling pitcher Jeff Suppan on Monday during the final year of what was the richest contract in team history when he signed it.

The Brewers signed Suppan to a $42 million, four-year deal before the 2007 season, but he never pitched as strongly as he did in his three previous seasons in St. Louis. 

With the Cardinals, he won a World Series and was picked the NLCS MVP in 2006."

Now come on.  Jeff Suppan had a 4 year $42MM contract?  Seriously?  From a poor team like the Brewers?  Who the f*ck is in charge of the Brewers?   Jeff Suppan gets the richest contract in your team's history?  Yeah - I'm a little late on this one (like THREE YEARS late) - but I still can't believe it happened.  At no point was Jeff Suppan ever the kind of pitcher who you would build a franchise around at age 31.  You can look at the numbers yourself.  135-137 career win-loss record.  4.72 career ERA.  

But I guess I should lay off Suppan a bit, after all, as Brewer's general manager Doug Melvin explained:

"Melvin said that Suppan's contract after the 2006 season was in line with the big pitching deals of Barry Zito ($126 million, seven years), Gil Meche ($55 million, five years) and Ted Lilly ($40 million, four years).

"When you enter into free-agent contracts, guys, it's one of the riskiest things to do," Melvin said. 

"We all get excited about the free-agent people that are out there, but there are not a lot of free-agent contracts with pitchers that you do get the full length of performance.""

EXCITED??!  You got excited about Jeff Suppan?  WTF!  "Full length of performance???"  You could have at least gotten one year of performance...  AIYAHH. Anyway - let's look at the other guys mentioned.

Gil Meche 5 years $55MM?  I just threw up in my mouth.  Who knew a .500 pitcher with an ERA around 4.50 is now worth in excess of $10MM a year!  Amazingly, Meche also went ot a small-market team - the KC Royals, who must have been swooning over his 11-8 4.48 ERA season the prior year in Seattle. Jeezus.  What happened to sports?

Barry Zito was a big bust for San Fran - but at least 1) they're a big market team, who spends money like a big market team 2) he had some flashes of legitimate dominance in the years before they signed him (see: 2002) and 3) he's finally having a good year now in 2010. 

It sounds like the Cubs struck gold with Ted Lilly, who has put up some solid numbers for them in the last 4 seasons.  How the Cubbies foresaw this from Lilly's 2003-2006 ('03: 12-10 4.34, '04 12-10 4.06, '05 10-11 5.56  '06 15-13 4.31) numbers is beyond me though.  Chalk it up to good scouting!

I'm going to go back to my ignorant little world of NOT looking at sports salaries - lest I get fired up again...

-KD

Closing the Gap

John Hussman: 

"The fundamental problem is that we have not, as a global economy, accepted the word "restructuring" into our dialogue. Instead, we have allowed our policy makers to borrow and print extraordinarily large band-aids to temporarily cover an open wound that will not heal until we close the gap. That gap is the difference between the face value of debt securities and the actual cash flows available to service them. The way to close the gap is to restructure the debt. This will require those who made the bad loans to accept the associated losses. By failing to do that, we have failed to address the essential problem faced by the world, which is that we have created more debt than we are able to service."

Of course, Hussman isn't the only one who's been saying that for the past 18 months. 

"I remain convinced that the other shoe to drop is not Greece or Spain or Hungary, but rather a second wave of major credit strains here in the U.S. related to fresh delinquencies from exotic adjustable rate mortgages.  "

On this note I'm somewhat skeptical, but only because of a single anecdotal data point I have from a friend of mine who has a negative amortizing ARM which will reset soon.  The reset rate will actually be lower than the current rate, since the treasury index which the reset is based off of is trading with such a low yield.  It's been established that there will be a crap-ton (technical term) of adjustable rate mortgage resets in the coming 2 or three years, but I don't have data on what the relevant reset rates look like.   It's entirely possible that my friend has a more benign structure, despite all the buzzword boxes being ticked (neg-am, I/O) - and that other borrowers have much higher reset structures.

EDIT:  a commenter pointed out that Hussman was probably referring to mortgage recasts.  In interest only ARMs, like the one my friend has, a bigger problem is that in addition to the interest rate reset, you also have to actually start paying back the principal. In other words, the "interest only" stipulation goes away, which results in much higher payments, even at low interest rates.

"At best, what people call "stimulus" can only occur if the dollars spent by government are more productive than they would have been if they were allocated privately. I cannot imagine how allocating public funds to the same reckless stewards of capital that made the bad loans in the first place can possibly be a productive use of capital."

I took this quote slightly out of context (emphasis mine), for fear of inciting the MMT'ers with the paragraph that precedes it in Hussman's piece. I encourage readers to read the whole piece.

-KD

"He's Arguably The Greatest Con of All Time"

Presented without comment, from NY Mag, via Clusterstock:

Madoff was accustomed to hearing other inmates call his name. From July 14, the day he arrived, he’d been an object of fascination. Prisoners had assiduously followed his criminal career on the prison TVs. “Hey, Bernie,” an inmate would yell to him admiringly while he was at his job sweeping up the cafeteria, “I seen you on TV.” In return, Madoff nodded and waved, smiling that sphinxlike half-smile. “What did he say?” Madoff sometimes asked.

But that evening an inmate badgered Madoff about the victims of his $65 billion scheme, and kept at it. According to K. C. White, a bank robber and prison artist who escorted a sick friend that evening, Madoff stopped smiling and got angry. “Fuck my victims,” he said, loud enough for other inmates to hear. “I carried them for twenty years, and now I’m doing 150 years.”

-KD

Articles I Tweeted Recently

Here are some of the things I Tweeted last week:

Singapore charges people to go into its casinos. I had no idea.

"To discourage locals from gambling, the government collects casino entrance fees -- $70 for a 24-hour period or $1,400 for a year -- from all Singaporeans and permanent residents.  Almost 30,000 people, mostly recipients of public assistance or those who have filed for bankruptcy, are automatically barred from entering."

Jon Lajoie Beatles Satire:  Previously unreleased version of Blackbird.  Funny, unless you really love Yoko Ono.

Obama Warns BP on Paying Big Dividends Amid Oil Spill.  This article is a great example of how you have to actually read the story before passing judgment.  I read the headline and thought "wtf is Obama talking about?  BP's dividends and their cleanup of the oil spill are two totally different issues." They can pay all the dividends they want as long as they don't run out of money to clean up the oil and pay the claims for all the people they hurt.  Of course, when you read the story, you figure out that Obama is not an idiot and he knows this - and his point was that BP shouldn't pay out billions in dividends and tens of millions in image control publicity ads, and then end up "nickel-and-diming fisherman or small businesses."  (disclosure:  long BP stock)

Half A Dozen States Delay Tax Refunds

Florida Marlins sell tickets to Roy Halladay's perfect game at face value.  The game already happened. 

-KD

From the Horse's Mouth - FNM on Home Prices

Thanks to CR for pointing out this BusinessWeek article with quotes from Fannie Mae's chief economist:

"The federal homebuyer tax credit shifted demand in the U.S. housing market without having a lasting impact on prices, according to Douglas Duncan, chief economist of Fannie Mae, the largest mortgage financier.

“Temporary tax credits change behavior temporarily,” Duncan said today at a National Association of Real Estate Editors conference in Austin, Texas. “It’s simply shifted demand forward...”

“It actually created some price appreciation that’s not supportable long term,” Duncan said of the tax credit."

-KD

Someone Will Always Have the Data First

I'm going to keep this short and sweet.  Scott Patterson writes in the Wall Street Journal:

"Some fast-moving computer-driven investment firms are getting an edge by trading on market data before it gets to other investors, according to market players and researchers who have studied the trading.

The firms gain that advantage by buying data from stock exchanges and feeding it into supercomputers that calculate stock prices a fraction of a second before most other investors see the numbers."

Listen up now - someone will always have the data first, and someone will always have the data before you.  It's a fact of, well, data transmission.  The guy in San Fran will get the data a little later than the guy in Chicago.  The guy in midtown Manhattan will get the data a little later than the guy in downtown Manhattan.  The guy on a DSL connection will get the data a little later than the guy on the fiber connection.  The guy next door to the stock exchange will get the data a little later than the guy who is co-located at the data center.  The guy using the internet will get the data a lot later than all of them.

Again, the important fact is that this data is open to anyone who is willing to make the investment in it  - not just a secret cool kids club that requires you to work for a specific blue blooded Wall Street firm.  Anyone can do it - if they are willing to invest in the business.  

The "Hey - it's not fair - he's getting the data first and reacting to it faster than I can" argument is total baloney.  

EDIT - as I mentioned in the comments: also notice that 15 years ago the sophisticated market participants had real time pricing information, while retail schmucks were left calling an automated phone system and punching in their tickers to get 20 minute delayed quotes (come on - I know I'm not the only one who remembers that).  Today, less sophisticated investors have easy ample access to "real time" quotes which are in fact seen 100 MILLISECONDS after they are published, and thus 100 ms after the fastest market participants. So the retail data availability time lag has been decreased from 20 minutes to a number of milliseconds.  Sounds like improvement to me. 

-KD

The Garden

I finished planting my garden this weekend.   Here's the broad view:

About 10 weeks ago, I started some Brussels sprouts, cucumbers, Anaheim peppers, and eggplants indoors from seed.  I didn't have enough light on them, and the project pretty much failed, save for a few hot pepper transplants which I got into the garden this weekend.  A month ago I planted broccoli and Brussels sprouts seedlings (bought from the nursery in 6 packs) - and they are looking good right now (that's Catnip in the bottom left corner - a perennial which was there already):

I haven't yet had to deal with large predators eating my plants - so far it's just small predators, as you can see by the holes in these Brussels sprout leaves:

But check this out - BROCCOLI! (baby broccoli, at least) :

Can you see the little crown down in the middle?  Hopefully I'll get to eat it before the worms, badgers, rabbits, or porcupines do.  Regarding insects:  I've been pondering using some sort of insecticide, but I decided that I'll probably wait and try to use nothing this year.  If my crop gets ravaged, I'll proceed to chemicals next year, but I'm going to try to avoid it for now.    The herbivorous animals will be another issue to deal with soon.

I also planted, from left to right below, cucumbers, eggplants, and green peppers from seedlings.  Yep - I put paper cups around the base to try to ward off cutworms:

And between the Brussels sprouts/broccoli patch and the cuke/eggplant/green pepper patch, I have peas:

It's kinda hard to distinguish the peas from the weeds I have in there.  There is a surface weed that is abundant in my garden.  It's tough to remove because it has very shallow roots, so if you try to pull it out, it just rips off and regrows.  On the other hand, perhaps this will mean that the weed won't be competing as much for nutrients and water since the plant roots are much deeper.  Who knows... Here is a picture of the weeds (it's not clover, although it may look like it in this picture):

Then, of course, we planted tomatoes.  Mrs. Dynamite read that asparagus and tomatoes have a symbiotic relationship where they keep each other's insect predators away, so we planted asparagus (which we eat a ton of) around the tomato patch.  If we're lucky, we'll be able to harvest asparagus next year - it's a perennial, but you can't eat it the first year (the stalks are too thin.)  Asparagus is amazing to watch grow though. It literally grows 3 inches or more per day.  I know this, because you plant it (root crowns) in a trench, and cover it with about an inch of dirt. As the stalks break through the surface, you cover them with more dirt until your trench is filled in.  It's easy to see that you can come out in the morning, cover a sprouting stalk with dirt, and then after lunch it's 3 inches higher.

The asparagus is on the top and right borders in the picture above. It looks like this:

I also planted basil and cilantro from seed, to compliment the basil seedlings I planted several weeks ago, which got thrashed by the cool weather. Basil is a total pussy - it can't take temps much below 50 degrees.  I planted one pot of sage, and some arugula, along with the hot pepper seedlings, in the same patch as the perennial lavendar and May Night Meadow Sage that was already in the garden when we arrived.  The Night Meadow Sage doesn't taste like regular sage - although it's supposedly edible - but it has big purple flowers, and attracts a ton of big furry bumblebees.  The arugula is immediately to the left of the purple sage, in the middle, with the traditional sage immediately further left of the arugula.  The pepper seedlings are below the traditional sage.  The big green patch above the plot, behind the metal sap bucket, is mint, which is also a perennial.

Finally, of course, there's the king of the garden - protector of the veggies, and He Who Pees on the herbs:  Oscar:

Oscar will make sure that there are no bunnies out munching on my stuff while he's out there.

-KD

Wednesday Links

Some good reads today:

1) The Reformed Broker Josh Brown continues his hot streak with the witty "Zagat Sovereign Risk Reviews."

"UNITED STATES:  Locals claim to have "lost their taste" for this "mega-dining palace" but when rumors about the "cleanliness of certain European eateries" bubble up, the "bridge-and-tunnel crowd" flocks to US bonds and currency "like there's no tomorrow".  "Prices have gotten cheaper" here for most entrees, but many diners are "waiting on the sidelines" for "even better values".

BRAZIL:  The "wait-staff" can be finicky about "both tips and government bond auctions", but the "raw materials that come out of this kitchen" are "popular with diners" around the world.  The scene is made up of a burgeoning middle class - all grabbing a bite in between" buying homes and shopping for cell phones".  The bar scene is "youthful and ambitious" with a "taste for capitalism" not seen elsewhere on the Latin continent.  The place is "highly reliant on its homemade sugar", so "bring your sweet tooth"!

read the rest at his site.  If you're not familiar with Zagat's, you won't get the joke. If you are familiar, you should enjoy Josh Brown's take very much.

2) James Bianco at The Big Picture: "How Much Economic Growth is "Artificial?"  I would guess that  Bianco put "artificial" in quotes because he meant "Government generated," which may not be synonymous with "artificial," but anyway...

3) MISH: Students Get Buried In Debt, Who's to Blame?  I could probably write 5000 words on this subject, but I'm not sure I want to open that can of worms.  I'll just give you Mish's unsympathetic assessment of the situation:

"Supposedly "Ms. Munna and her mother, Cathryn, have spent the years since her graduation trying to understand where they went wrong."

It should take seconds. Going $100,000 in debt to get an interdisciplinary degree in religious and women's studies seem rather foolish to say the least. Exactly what kind of job did Ms. Munna expect to get with that degree?

Now she is working for a photographer and it is plain to see her degree is totally useless.

Ms. Munna and her mom should look in a mirror to see who to blame."

4) An interesting chart from McKinsey via Barry Ritholtz, regarding overoptimistic equity analyst estimates.

5) Big Setback for AIG in Repaying Taxpayers

The American International Group scuttled the deal to sell its huge Asian life insurance arm to Prudential of Britain for about $35 billion, in a major setback to repaying the government for its 2008 rescue. 

Trying to appease its angry shareholders, Prudential had tried to keep the faltering transaction alive by lowering its price for the unit to $30.37 billion at the last minute. But A.I.G. rejected that proposal, issuing a terse statement on Tuesday that it would “not consider revisions” of the original terms.  

I've written about this one before...

-KD

Reader Input - Delinquent Property Taxes?

I've banged out quite a few quick posts in the last 36 hours - in case you missed them:

- I've Got a Bad Feeling About This: Lamenting about Chinese generic herbicides

-ZipCars IPO  good feedback from commenters on both sides of this one

- The Foreclosure Freeroll.  I got a lot of intelligent feedback on this one on the SeekingAlpha version of my post - which inspired a barrage of comments - unusual for an article not about Goldman Sachs, gold, or HFT.  I especially liked BennyProfane's summary of the situation in my comment thread there:

"It's actually pretty simple. These people are house sitting for the banks, who have no desire and are not capable of dealing with the inventory that would flood the market if foreclosures occurred at a normal rate. Just think of the cost to the banks to maintain and pay the taxes of all of these homes for the five to ten years they will be vacant."

Now a question for readers who may know:  The people in the NY Times article I referenced who stop paying their mortgages only to have the banks NOT foreclose on them - they obviously still owe property taxes.  Is it commonly expected that people continue to pay their property taxes (assuming they can afford to, even though they are strategically defaulting on their mortgages) - and do the municipalities take any sort of action on delinquent property tax payments, like  accelerating eviction?  Or do they just attach liens to the property?  Basically, what I'm getting at is that I would expect that there are more consequences (with respect to RECOURSE) for not paying property taxes than there are for not paying mortgages.  Here's a good answer from commenter "Conventional Wisdumb" on my Seeking Alpha thread:

"In FL, Back taxes are senior liens against the property which means they get paid before anyone else gets a dime including the mortgagee. Generally when a back tax is unpaid the county sells the liability as a "tax certificate" to private investors. This allows the county to continue to get paid the taxes they are owed while creating a new senior lien against the property.

The "tax certificate" is auctioned at a publicly advertised location for bidders. The rate of return starts at 18% and is bid down to the lowest rate to clear the certificate. The property owner is on the hook to pay this interest cost plus the principal to the owner of the certificate - if the bank owns it they must pay it. If the property owner does not redeem the certificate within 2 years from the date of sale of the certificate, the holder can apply for a tax deed and force a public auction sale of the property - the county can be the owner of the certificate if there is no private investor. The holder of the certificate at minimum will get title to the property if the proceeds of the sale are less than the amount owed.

They seem to be an interesting investment vehicle for people that understand them. Bottom-line is that taxes always get paid first."

-Shadow Inventory : three more failed projects

and two low content posts:

- Where White Man Went Wrong

- Overheating Economies and Terroirs

-KD

"I've Got a Bad Feeling About This"

China has been in the news several times during the past few years with respect to  goods tainted with dangerous chemicals.  Food, milk, toys, drywall. 

I mention this because recently the stock of Monsanto (MON) has been decimated, due in no small part to the fact that their dominant Roundup herbicide franchise is feeling the effects of severe competition from generic Chinese competitors.

Let that sink in.

Generic Chinese herbicides... How can this not end badly?  I've got a bad feeling about this...

Yet I haven't seen any discussion of the possible side effects of the use of generic glyphosphate (the chemical in Roundup) by farmers in America's heartland.  Look - I love made-in-China when it comes to stereo systems and electronics, but generic Chinese herbicide on my crops?  Not so much. Ugggh.

-KD

disclosures:  no positions in MON

ZipCar Files for an IPO

ZipCar, the metropolitan car sharing service, has filed for an IPO.  I've never used ZipCar, but as a former NYC resident, I've seen them frequently, and I get the impression that their user base loves the product.  In case you're unaware, from the filing:

"Zipcar operates the world’s leading car sharing network. Founded in 2000, Zipcar provides the freedom of “wheels when you want them” to members in major metropolitan areas and on university campuses. We provide over 400,000 members, also known as “Zipsters”, with self-service vehicles that are conveniently located in reserved parking spaces throughout the neighborhoods where they live and work. Our vehicles are available for use by the hour or by the day through our easy-to-use reservation system, which is available by phone, internet or wireless mobile devices. Once the vehicle is reserved, a Zipster simply unlocks the vehicle with his or her keyless entry card (called a “Zipcard”), and drives away. Our all-inclusive rates include gas and insurance so Zipsters can easily estimate the total cost of their trips. Zipsters choose the make, model, type and even the color of the Zipcar they want based on their specific needs and desires for each trip. Upon returning the Zipcar, the member locks the vehicle and walks away, free from the costs and hassles of car ownership. Zipcar provides its members a convenient, cost-effective and enjoyable alternative to car ownership."

I found it interesting that Zipcar later says, ">We target large, densely populated markets with high parking costs and strong public transportation systems."

Now, large densely populated markets: that I understand.  Why strong public transportation systems?  If you have a strong public transportation system, don't you need cars less?   The filing mentions many times how public transportation is not suited to many uses that suit the Zipcar well, but then why target markets with strong public transportation? Similarly, they target high cost of parking markets, because those markets make it harder for individuals to justify buying a car, and thus easier to justify Zipcar.  However, it makes it difficult to park your Zipcar somewhere while you're using it (Zipcars have reserved parking spaces, but if you want to drive to a friend's house in the city, obviously, you still need to find a space to park when you get there). I am guessing that Zipcar's target market in these tough parking areas is "errand-runners,"  ie, people who don't need to park the Zipcar in front of their apartment when they get back, but rather just need to unload the bounty they just picked up at Costco in the Zipcar.

This brings me to the part of Zipcar's business model I never understood, and couldn't gain much insight into from reading their IPO filing:  THEIR parking costs.  In NYC, it can easily cost $400/month or more to park a car.  Does Zipcar get discounts from the parking lots?  Or do they just rely on the assumption that they'll bring in revenue that will allow them to shell out massive parking costs?

Anyway, it's an interesting company, with what I think is a fanatical, loyal user base.  Of course, the company cautions in a disclaimer:

"We have experienced net losses in each year since our inception, and we expect to incur net losses in 2010. We do not know if our business operations will become profitable or if we will continue to incur net losses in 2011 and beyond. We expect to incur significant future expenses as we develop and expand our business, which will make it harder for us to achieve and maintain future profitability. We may incur significant losses in the future for a number of reasons, including the other risks described in this prospectus, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown events. Accordingly, we may not be able to achieve or maintain profitability."

-KD 

note: in case it's not obvious, this post is not a recommendation to buy or sell shares in Zipcar

The Foreclosure Freeroll

From the NY Times: "For Some Owners In Foreclosure, a Rent-Free Approach."

For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life — something they did not want but are in no hurry to get out of. 

Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.

“Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.” 

Freeroll!  "It's really been a BLESSING!"  Of course, the blessing is that the banks have so many houses to foreclose on, that it takes them even longer than usual to evict delinquent mortgage holders, as we find out later in the article: 

"The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics."

I wonder what happens to this "blessing" when the banks finally get around to these folks... I'm guessing it won't be such a blessing then.

"A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by."

Ok - but again, like most of our other "solutions," this is no solution!

"The couple owe $280,000 on the house, where they live with Ms. Reboyras’s two daughters, their two dogs and a very round pet raccoon named Roxanne. The house is worth less than half that amount — which they say would be their starting point in future negotiations with their lender. 

“If they took the house from us, that’s all they would end up getting for it anyway,” said Ms. Reboyras, 46. 

One reason the house is worth so much less than the debt is because of the real estate crash. But the couple also refinanced at the height of the market, taking out cash to buy a truck they used as a contest prize for their hired animal trappers. 

It was a stupid move by their lender, according to Mr. Pemberton. “They went outside their own guidelines on debt to income,” he said. “And when they did, they put themselves in jeopardy.”"

Now, ignoring the bizarre sentence about taking equity out of their home to buy a truck for a prize for hired animal trappers, this situation reminds me of the old adage:

If you owe the bank $10,000, you have a problem.  If you owe the banks $100,000, the bank has a problem.  

Mr. Pemberton has turned this right back on the banks, and, quite frankly, seems to have them by the balls.  The logic of "Eff you, we're not paying the $280k because, basically, the lender no longer has collateral for a loan of that amount - the house is only worth half of that," puts the banks in a brutal spot to negotiate from.  Obviously, his situation is not unique, and the bigger problem for the banks is that once more people realize this, the effect will multiply and expand.

It's the ultimate financial game of chicken, and the delinquent borrowers may be starting to gain the upper hand.

-KD

Shadow Inventory

Via Calculated Risk, 3 more stories about shadow inventory:

Chicago:

"The 35-story Lexington Park, near Michigan Avenue and Cermak Road, was surrendered last week by its Irish developer through a deed-in-lieu of foreclosure. The private-equity venture that now owns the property acquired Corus Bank’s the distressed condo loans after the Chicago-based lender failed last fall. 

Just three buyers have closed on Lexington Park’s 333 units, according to property records. The tower, 2138 S. Indiana Ave., was supposed to be ready for occupancy in 2008."

and then:

"About 55% of Lexington Park’s 333 units are under contract, according to data from Appraisal Research Counselors. But some of those units were bought by speculators when sales kicked off in 2006. The speculators are sure to walk away now rather than close, given the dramatic fall in condo values. Others buyers probably will no longer qualify for mortgages."

Las Vegas: 

"Through the end of April, MGM Mirage and Dubai World, the owners of the project, have closed on 78 of 1,543 units at the Vdara condo-hotel, according to SalesTraq. Closings started in March at Vdara but CityCenter had announced earlier this year it had sold 698 units there.

At the ultra-luxury condominium tower Mandarin Oriental, where 205 of 227 condos were reported sold as of earlier this year, 32 units closed between January and the end of April, according to SalesTraq.

CityCenter just started closing units in the two Veer Towers in mid-May so those numbers won’t be available until the end of June. MGM had reported that 480 of the 670 units had been sold earlier this year.

Through Thursday, MGM counted 110 closings at Vdara, 38 at Mandarin Oriental and 16 at Veer."

Raleigh:

"Hue, the multicolor building that is the largest condo project ever attempted in downtown Raleigh, closed its sales office without ever selling a unit.

Signs posted on the building's doors, as well as a message left on the sales office's answering machine, say Hue will be closed until further notice."

Again, this is why housing inventory data needs to be taken with a grain of salt.  As Calculated Risk puts it (talking specifically about the Chicago article above), "Unless listed for sale, these units are not included in the new or existing home inventory reports - real shadow inventory!"

-KD

Where White Man Went Wrong

Thanks to The Reformed Broker for this gem:

I don't know if that's a real clipping (I'd guess NOT,) but it still rings true.

"Indian Chief "Two Eagles was asked by a white U.S. government official, "You have observed the white mand for 90 years.  You've seen his wars and his technological advances.  You've seen his progess, and the damage he's done."

The Chief nodded in agreement.

The official continued, "Considering all these events, in your opinion, where did the white man go wrong?"

The Chief stared at the government official then replied,

"When white man find land, Indians running it, not taxes, no debt, plenty buffalo, plenty beaver, clean water.  Women do all the work, medicine man free, Indian man spend all day hunting and fishing all night having sex."

Then the Chief leaned back and smiled, "Only white man dumb enough to think he could improve system like that."

-KD

Overheating Economies and Terroirs?

My friend Ted sent me two data points today:  Canada GDP + 6.1% and India GDP + 8.6%.

Wow. Steamy.  I immediately realized that I'd recently read a story about not the overheating economy, but ACTUAL overheating in India (temperatures in excess of 120 degrees!), and out of control forest fires in Canada.  Talk about bringing the metaphor of the "overheating economy" to the real world...

Related:  MISH "Housing in Canada; Housing Crash Is a Given"

"Canadians are spending more and more of their disposable income on housing. In Toronto, 44% of disposable income goes to housing and in Vancouver the figure is a whopping 68%. The trend is likely not sustainable."

"The trend is likely not sustainable...."  Understatement?

-KD

Northeast Haze? Blame Canada!

I woke up this morning to the smell of smoke - like one of my neighbors was burning a brush pile.  There was a haze over the entire neighborhood, and we wondered what was going on.  Later, Mrs. Dynamite got the answer from a neighbor:  forest fires in Montreal!  Insane:  we live 250 miles from there, and it smelled and looked like someone was burning something next door to me.  Blame Canada.

Apparently, the haze extends all the way down to Cape Cod, and throughout Maine.

-KD

Sports: Sigmas and Bad Beats

Sigmas:  Wild night in baseball:  Roy Halladay threw the second perfect game this season in MLB, the 20th of all time, and also the second in Phillies history.  The first perfect game in Phillies history was thrown back in 1964, by now Senator Jim Bunning.  2010 is now the second MLB season with two perfect games thrown - the first being in 1880!

Sigmas AND bad beats in one:  Kendry Morales broke his leg hopping onto home plate as his teammates mobbed him after his walk-off grand slam against the Mariners.  Ouch.

Sigmas:  The Blackhawks beat the Flyers 6-5 in game one of the Stanley Cup Finals.  Wow - this one was tied 5-5 after two periods.  Sounds like I missed a good game.

-KD

Friday Thoughts

Calculated Risk can't believe there is actually legislation in motion to provide credit to "help alleviate the severe lack of credit for acquisition, development and construction (AD&C) financing that threatens to end the budding housing recovery before it has time to take root."   Felix Salmon wrote a follow up on the same subject, getting input from the author of the bill, Brad Miller.  As I noted in Felix's comments, I think there is a massive flaw, and that's Miller's claim: "The bill requires that the loans only be in “viable” markets, which means not comically overbuilt markets. Treasury should be able to tell the difference, and banks need to as well."   I think we've already proven that neither the Treasury nor the banks adequately altered their behavior during the housing bubble, so why should we expect them to be able to self-medicate this time?

Michael Panzner quotes the Of Two Minds blog at length.  My favorite snippet (emphasis NOT mine):

"The key phrase here is "borrowing," not "home ownership." The key feature of State support of housing is not legitimate "home ownership," it is the enabling of massive new sources of income and transactional churn for lenders and Wall Street loan and derivatives packagers. 

Home "ownership" when there is no equity in the purchase and no equity being built via principal payments is a simulacrum of ownership.

 

If a buyer puts almost no money into the purchase--even now, FHA and VA loans can be had with a mere 3% down payment--and the loan is of the interest-only or adustable-rate (ARM) variety favored during the housing bubble's heyday, then there is no principal payment being made and thus no equity being built. 

These "buyers" don't "own" anything; all they're doing is renting the money in the hopes that rising home prices will create equity for them out of thin air. What they "own" is essentially an option on a property which they "rent" monthly. If the government manages to reinflate the housing bubble (it won't, but hope and greed spring eternal), then the option will pay off handsomely. The "owner" put no money into the speculative bet, but they can then sell their option for a huge profit. 

If housing plummets, then the "bet" was lost. But since "renting" the mortgage didn't cost much more than renting a real house, and there was no capital at risk, then the downside is modest indeed. 

In other words, heavily subsidized mortgages at low rates with little money down incentivizes not home "ownership" but speculation in credit-based bubbles.

 

In the "old days" (circa 1994), the expectation was that equity would be built by paying off the mortgage principal over time. Equity was a result of reducing the mortgage due, not the result of speculative gambling on future asset bubbles."

Some humor from the Reformed Broker, Josh Brown: "Free Advice to the Stars RE: Ponzi Schemes"

1.  Anyone who refers to himself as a "Financier" is full of sh*t.

2.  Your financial advisor is not supposed to play polo or wear designer sunglasses, nor should he ever have a popped up collar under any circumstances.  He must never wear shoes without socks or wear a watch with a diamond bezel.

click through for the full list.

And in case you missed any of my posts from the last week, focus on these:

Morgenson Misses the Mark

Vegas: Resort Fees?

Senator Bunning's Office Responds

Finally, two rebuttals to David Einhorn's NY Times Op-ed.  First, I want to explain one thing:  the WSJ sniped that Einhorn was "talking his book."  Look - you should assume that everything you read anywhere is someone talking his book.  The great thing about Einhorn is that he makes no secrets about what his positions are.  He lays them out there, and explains his view.  If you're going to critique his thoughts, you have to do it on the basis of his arguments, not on the irrelevant fact that he's talking his book - OF COURSE HE"S TALKING HIS BOOK!  The Times Op-ED was very much related to a speech he gave the night before at the Ira Sohn Conference, a hedge fund charity dinner where the primary purpose is to give smart people the opportunity to share ideas - aka - talk their book.

Now, back to the point: Einhorn's actual argument - which is what these two posts take aim at:

1) The Pragmatic Capitalist

2) Billy Blog

Since I've already been hazed by the MMT crowd, you'll notice that I deliberately avoided quoting the parts of the op-ed that TPC and Bill Mitchell are most critical of.  I agree very much with all of the sections that I quoted in my previous post, and the one thing I'd mention about TPC and Bilbo is that they both specifically pick on Einhorn's claim  "If we wait until the markets force action, as they have in Greece, we might find ourselves negotiating austerity programs with foreign creditors."  As I've said many times, the analogy of Greece doesn't translate to the US as a whole - the two links above explain repeatedly how we are different.  But it DOES apply to our states.  I've written this analogy before:  Greece : European Union :: Troubled States (CA, NJ, MI, NY) : United States.   Greece is a model for the pending budgetary crises in our respective municipalities, who cannot print their own currencies.

-KD

Vegas: Resort Fees?

I went to Chicago a few months ago, and noticed on the hotel bill that I had the option to refuse the free daily USA Today newspaper and get a 75c refund on my nightly rate.  Since I'm a huge hitter, I didn't go for this freeroll, but it's nice that they at least give you the option.  I mention this because I just booked another trip to Vegas, and was annoyed by the growing phenomenon of "resort fees."  

I get complimentary room offers from The Venetian all the time, on account of my persistent green chip play,  and I called to accept one of them for this trip at the end of June.   "Sir, we have a mandatory resort fee of $17 a night plus tax,"  the operator told me.  

I literally laughed at her, "Oh yeah?  What's that for?"  She seemed slightly surprised that I asked, but continued, "It's just a new fee that we're imposing this year."  I was at the Venetian in January, and wasn't charged this fee, but I didn't want to argue with this woman at this time, and explain to her that if it was a mandatory fee then the room wasn't really complimentary.  She proceeded to check availability, and told me that they had no comp offers for me for the days I'd chosen.  (See, I'm not that big a hitter...)

"What's the rate you can offer me?"  I inquired, forgetting to add in, "DYKWTFIA?"  after all, she must have known already, as I had the comp offer on my account.  

"$229 sir," she replied, but I cut her off, "AND the $17 resort fee, right?"  "Yes sir, that's correct."

I laughed out loud again, thanked her, and hung up the phone.  I dialed the Mirage, where I also had an offer.  "The rate is $45 and $55 for the two nights, sir, plus a $15 resort fee,"  the operator told me.

"No - I want the rate for the FREE offer you sent me," I explained, having already given her my account number.  "Oh yes sir, that would be just the $15 resort fee per night, can I go ahead and book that for you?"  I sighed and confirmed that would be fine, thank you.

So, first, the channel checks:  Venetian quoted me $229 a night, and Mirage quoted me around $50 a night.  These are two hotels, immediately across the street from each other, both of which would be considered high end.  They have both just undergone extensive room reservations.

NOW - wtf is up with this "resort fee" bullshit?  Look - if it's a fee you can't waive, it should just be quoted as part of the room rate!  According to Vegas.com, the Mirage's resort fee covers:

• Daily in-room internet access
• Daily newspaper available for pick-up at the Impulse Store and the Bell Desk
• Daily bottled water delivery (two bottles per day)
• Daily admission to the cardio room (does not include spa or fitness center)
• Two robes provided during stay
• Complimentary printing of boarding passes at the business center or concierge
• Complimentary notary services at business center
• Unlimited local and toll-free calls
• Free copies and faxes (up to the first 5 pages) at the business center (excluding color and large print jobs)

Obviously, this is a load of crap - they've taken fees which used to be charged for a la carte, and bundled them into a mandatory package that you have to pay for.  ROBES?  You're f'ng charging me for robes now?  You can bet that I'm going to wear that friggin robe down to the Pai Gow table, light up a cigar and drink a glass of port while I put my feet up on the nearest vacant stool.   Fortunately, complimentary printing of boarding passes is still complementary - I guess, if you ignore the fact that I have to pay a $15 fee to get it.  And unlimited toll free calls!  Wow! Thanks guys! (SARCASM ALERT!)

Kudos to the Harrah's empire, who thus far has avoided "resort fees."

If you're traveling to Vegas, or anywhere else for that matter,  just make sure that you incorporate mandatory resort fees into any room quote you're given, to make sure you're comparing apples to apples. 

-KD

Hey NY TImes - How About a SPOILER ALERT?

Warning - AMERICAN IDOL SPOILER ALERT!

In the DVR age, I watch almost nothing in real time.  At the least, I'll start a show 30 minutes late, speed through commercials, and finish shortly after the real time ending. if I start watching the DVR recording too soon, I catch up to real time, and have to watch commercials like a commoner.  It's a lot like this:

Internet sources have gotten much better at recognizing the fact that many viewers don't even watch the shows until a day or two later, and they no longer post spoiler headlines, even the next morning.  "LEE DEWYZE WINS AMERICAN IDOL," usually gets transformed into the non-spoiler "American Idol Crowns New Champ,"  letting you click the story if you want to know who won, and avoid ruining the surprise if you haven't yet watched.

The NY Times though, last night, had Lee Dewyze's victory splattered front and center on their main page last night less than an hour after he won.   Thanks for the spoiler alert, goofballs.

-KD

David Einhorn's NY Times Op-ed

Like Steve Wynn's quarterly conference calls, Greenlight Capital's David Einhorn's missives are not to be missed.  Today, he pens a lengthy op-ed in the NY Times, well worth reading.   Extended snippet:

"Government statistics are about the last place one should look to find inflation, as they are designed to not show much. Over the last 35 years the government has changed the way it calculates inflation several times. According to the Web site Shadow Government Statistics, using the pre-1980 method, the Consumer Price Index would be over 9 percent, compared with about 2 percent in the official statistics today. 

While the truth probably lies somewhere in the middle, this doesn’t even take into account inflation we ignore by using a basket of goods that don’t match the real-world cost of living. (For example, health care costs are one-sixth of G.D.P. but only one-sixteenth of the price index, and rising income and payroll taxes do not count as inflation at all.) 

Why does the government understate rising costs? Low official inflation benefits the government by reducing inflation-indexed payments, including Social Security. Lower official inflation means higher reported real G.D.P., higher reported real income and higher reported productivity. 

Subdued reported inflation also enables the Fed to rationalize easy money. The Fed wants to have low interest rates to fight unemployment, which, in a new version of the trickle-down theory, it believes can be addressed through higher stock prices. The Fed hopes that by denying savers an adequate return in risk-free assets like savings deposits, it will force them to speculate in stocks and other “risky assets.” This speculation drives stock prices higher, which creates a “wealth effect” when the lucky speculators spend some of their gains on goods and services. The purchases increase aggregate demand and lead to job creation. 

Easy money also aids the banks, helping them earn back their still unacknowledged losses. This has the perverse effect of discouraging banks from making new loans. If banks can lend to the government, with no capital charge and no perceived risk and earn an adequate spread, then they have little incentive to lend to small businesses or consumers. (For this reason, higher short-term rates could very well stimulate additional lending to the private sector.) 

Easy money also helps the fiscal position of the government. Lower borrowing costs mean lower deficits. In effect, negative real interest rates are indirect debt monetization. Allowing borrowers, including the government, to get addicted to unsustainably low rates creates enormous solvency risks when rates eventually rise."

and then, this:

"EASY money has negative consequences in addition to the risk of inflation and devaluing the dollar. It can also feed asset bubbles. In recent years, we have gone from one bubble and bailout to the next. Each bailout has rewarded those who acted imprudently. This has encouraged additional risky behavior, feeding the creation of new, larger bubbles. 

The Fed bailed out the equity markets after the crash of 1987, which fed a boom ending with the Mexican crisis and bailout. That Treasury-financed bailout started a bubble in emerging market debt, which ended with the Asian currency crisis and Russian default. The resulting organized rescue of Long-Term Capital Management’s counterparties spurred the Internet bubble. After that popped, the rescue led to the housing and credit bubble. The deflationary aspects of that bubble popping created a bubble in sovereign debt, despite the fiscal strains created by the bailouts. The Greek crisis may be the first sign of the sovereign debt bubble bursting."

-KD

Morgenson Misses the Mark

I read Gretchen Morgenson's recent NY Times piece : "Principal-Protected Notes Aren't as Safe As They Sound," and something about it has been bugging me ever since.  Morgenson writes:

"Questions about how Wall Street marketed yet another complex product, sold as solid and secure, are now emerging in investor arbitration cases. The instrument is named, inaptly as it turns out, “100 percent principal protected absolute return barrier notes.” 

These securities are essentially zero-coupon notes sweetened by tying the return, in part, to the performance of an equity index, like the Standard & Poor’s 500 or the Russell 2000. The securities promise to return an investor’s principal, typically at the end of 18 months, with the added gain from the index’s performance if that index trades within a certain range. Brokerage firms often issued these securities. 

For an investor in one of these notes to earn the return of the index as well as get the principal back, the index cannot fall 25.5 percent or more from its level at the date of issuance. Neither can it rise more than 27.5 percent above that level. If the index exceeds those levels during the holding period, the investors receive only their principal back.

Convoluted enough for you?"

Well, no, Gretchen, it's not convoluted enough for me, and by talking about the "complexity" of the product, you're dragging a massive red herring through your own story.  Morgenson continues, talking about the investors who bought this product:

"Yet, these securities appear to have been sold to conservative individuals whose financial market forays were usually limited to certificates of deposit. Many of these investors, to their great misfortune, bought principal-protected notes issued by Lehman Brothers. They are now worth pennies on the dollar."

She goes on to recount a sad story of an unsophisticated couple who lost a lot of money buying these notes.

There's a major point of clarification that's needed here, though, and which Morgenson ignores:  The losses suffered by investors on these notes have absolutely NOTHING to do with the notes being "convoluted" or unsuitable for unsophisticated investors.  I'll make it really clear:  The reason investors suffered losses on these notes is because Lehman Brothers went bankrupt.  That's it. It's not because of confusing derivatives, complex structures, or anything of the sort - it's because the notes were obligations of Lehman Brothers.  Is it possible that the UBS brokers selling the product failed to explain this, and to stress that Lehman Brothers' credit was not quite as good as that of the U.S. Government?  Absolutely.  In fact, it's likely - but that's a very different issue from the complexity of the product.

To put this another way, the unsophisticated couple in the article may very well have been interested in a very simple hypothetical product that stipulated "As long as the sun rises in the East and sets in the West, this note will return 6% per year."  That's pretty simple.  They'd probably understand that.  And you know what?   Those hypothetical Sunrise Notes would also be worth "pennies on the dollar" if they were issued by Lehman Brothers.  THAT is the point.  Sophistication has nothing to do with it. 

-KD

The Worst Proposed Solution To Pension Problems

Last week I mentioned a NY Times article about problems with underfunded public pensions.  The Times did a follow up article/discussion with a variety of "experts" proposing ways to fix this difficult problem.  There is no magic bullet, but it's still terrifying to hear Alicia Munnell, "a former member of the Council of Economic Advisors,"  suggest:

"The only real option is to wait for the market and the economy to recover."

Gulp. * Shaking my head slowly with my lips pursed *  She didn't really say that, did she?  I'm not going to even do it... Nope... You expect me to, but I'm not going to...  OK - I can't resist:

PONZIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII

-KD

Lots of Good Stuff to Read

NY Times:  "When Passengers Spit, Bus Drivers Take Months Off."

"And the encounters, while distressing, appeared to take a surprisingly severe toll: the 51 drivers who went on paid leave after a spitting incident took, on average, 64 days off work — the equivalent of three months with pay. One driver, who was not identified by the authority, spent 191 days on paid leave.

Transit officials, facing a budget shortfall of $400 million, called the numbers troubling."

Barry Ritholtz linked to another brilliant effort from The Onion: "New Law Requires CEOs to Humbly Shrug Before Receiving Huge Bonuses."

"The crackdown comes on the heels of Wall Street's 2010 bonus season, during which not one executive was observed to look at the floor meekly, sink his hands into his pockets, or dig his right toe awkwardly into the ground before taking his cut of the estimated $55 billion in payouts.

The SEC rule stipulates that CEOs set to receive bonuses between $1 and $5 million will be required to raise their eyebrows in feigned surprise. Those who make between $5 and $10 million will have to smile uncomfortably and say, "Yikes, that's a whole lot of simoleons," while executives receiving more than seven figures must now audibly stammer, "It's, you know, I mean, ha! What are you gonna do, you know?" before having the funds wired directly to an offshore bank account."

The graphic table in the article is pure genius too:

Bond Girl writes a very interesting meme about the ratings agencies, and the relative absurdity of people trying to sue them.  Now, I think the ratings agencies were probably more guilty of gross negligence than any other single cog in the wheel of the asset bubble, and probably resulted in more damage, but BondGirl's points are spot on (and I don't think she's defending ratings agencies, by the way):

"Segal notes in his article that a couple of judges have dismissed the rating agencies’ arguments that their analysis is protected by the First Amendment.  OK, if the rating agencies’ grades are not opinions, what are they?  Investors like Mr. Grassi – even more sophisticated investors – seem to treat ratings like they are offering investment advice.  But surely a court would not choose to endorse that kind of silly expectation.  Mr. Grassi did not pay S&P for the ratings.  S&P did not recommend that Grassi buy the bonds (presumably, his broker did that).  S&P did not make an effort to get to know Grassi’s investment objectives, his financial position, his risk tolerance, or anything that would traditionally be associated with the process of providing advice.  So how can Mr. Grassi claim that S&P is responsible for his losses?  How can anyone present this guy as a hero?"

Paul Kedrosky presents a NY Times graphic: "Heavy Load Ahead."

MISH:  "Insanity Down Under."  MISH highlights the insanity of an article which explains:

"ING Direct, Australia's fifth largest lender, is preparing to sell loans that have no fixed term and no requirement to repay any capital along the way.

At current rates, the interest-only loans would cut repayments on a $300,000 mortgage by $5000 a year.

"People are needlessly being denied the chance to buy a property while prices spiral rapidly out of their reach" ING Direct CEO Don Koch said. "There is an urgent need to provide more affordable options and borrowers should be able to choose whether they want to repay the capital, or not.""

I don't know - maybe it's from the Australian version of The Onion.

VegasRex's latest piece, "The High Cost of Self Esteem," has so many quotable passages, I had trouble picking one out...

"Regardless of what you look like, I have nailed way hotter women than you.  I promise.  Yes, even if you are the prettiest woman in your Jazzercise class back home.  Regardless of how cute you are, or have been told you are, there is nothing you have that I haven’t seen before, and the chances of me being smitten by your beauty are damn-near non-existent."

Rex's piece reminds me of the one I penned earlier this year, titled "March of the Penguins."

File under "They actually said this:"  Bank Of America: "We believe the best way to feel better during a correction is to buy some shares."

Marty up!

Don't get sore - buy some more!

-KD