Elizabeth Warren on the collapse of the middle class in June, 2007 (long but worth it)

Some Quotes

"Ambac Financial Group Inc. is in discussions to effectively split itself up ... A halving of Ambac would create one unit that insures municipal debt and one that would cover rapidly diminishing securities tied to the mortgages in a structure that effectively creates a so-called "good bank" and "bad bank."" -source

"Regulators' plans to break up bond insurers into "good'' businesses covering municipal debt and "bad'' businesses liable to subprime-related losses may trigger "years of litigation,'' Bank of America Corp. analysts said.

"It is the equivalent of going to a casino and trying to keep only the winning bets,'' said Tim Mercer, chief investment officer at Hong Kong-based hedge fund Musashi Capital Ltd. "This would be a straightforward case of fraudulent conveyance and everyone involved would be liable for damages from deprived creditors.''" -source

"Australia & New Zealand Banking Group Ltd. fell to a 2 1/2-year low in Sydney trading after Chief Executive Officer Michael Smith said the "bloodbath'' in debt markets will erase profit growth this year.

"Credit costs are going up, well above underlying earnings growth,'' said Smith, who joined ANZ from HSBC Holdings Plc last year, in a webcast briefing. The Melbourne-based bank, Australia's third largest, will also take a $200 million charge for derivatives linked to U.S. debt insurer ACA Capital Holdings Inc." -source

"Chancellor of the Exchequer Alistair Darling said the U.K. government will nationalize Northern Rock Plc (Bank) because bids from private companies didn't ensure taxpayer loans to the struggling lender would be repaid quickly enough." -source

This clip is from last September:


"Bank of America Corp. will join the Dow on Feburary 19th... Coincidently, analysts at investment researcher Morningstar Inc. made a bold prediction for the Dow to rise 50% by this time in 2011 -- more than 6,000 points -- just as Dow Jones & Co., publisher of MarketWatch, announced the index changes." -source (lol)

"The housing market continues to fall deeper into recession,'' said Michelle Meyer, economist at Lehman Brothers Holdings Inc. in New York. -source

"I don't see a housing market recovery right now,'' said Mason, 43, who predicts Treasury yields will fall as investors continue to buy the debt as a haven from losses in higher risk markets. "People can't get a mortgage'' because "banks are restricting access to credit,'' he said.

Declining property values are also making it harder for a growing number of homeowners to refinance. By year-end as many as 15 million households may owe more on their mortgages than their homes are worth, according to an estimate from Jan Hatzius, chief U.S. economist of New York-based Goldman Sachs Group Inc."-source

"Guy de Blonay, Philip Gibbs and Kokkie Kooyman, the managers of Europe's three best-performing funds focused on financial companies, say they're buying bank shares after an 11 percent decline in a benchmark index in 2007.

"We never saw the collapse in subprime happening to the extent it did,'' said Kooyman, who's based in Cape Town and whose fund is registered in Dublin. "But we'll always find shares somewhere that we think are cheap.''" -source (lol)

"Former Federal Reserve Chairman Alan Greenspan said the U.S. economy is on the verge of its first recession in six years as falling home values hurt consumer spending. "We are clearly on the edge,'' he said.

"Home prices will continue to weaken,'' the 81-year-old former Fed chief said. "When a bubble breaks, you go to primordial fear.''"-source

Feel free to add quotes xerxes, btb and indigo.

And now the lawsuits start

You knew this was only a matter of time...

Merrill hit with shareholder lawsuit over subprime

I'm sure this won't be the only one.

EURUSD at 1.42 has become a resistance point

EURUSD at 1.42 has become a resistance point on the charts. Whenever the dollar has gotten to this point lately, buyers have stepped in. I certainly did. I bought a small number of US dollars in order to buy a leveraged options position against the dollar. Here is my thinking on the issues.

Interest rates here in Europe will have to rise in order to combat inflation.

Europe's September Inflation Rate Rises Above ECB's 2% Ceiling

Energy costs in particular have spiked here in Germany. Eon and RWE, two of the biggest gas and electricity distributors have just announced price increases of 8.8% and 9.9% respectively. Don't even get me started about the price of gas for the car. (EU1.399/liter, approx. 4 liters to the gallon, 1.42 euros to the dollar. You can do the math.)

The members of the European Central Bank have been preparing the way for a rate increase in regular comments to the press, "ECB president Jean-Claude Trichet reiterated that economic growth in the eurozone remained robust and that inflation was subject to upside risks."

And from ECB board member Axel Weber, "...the bank may need to raise interest rates to a level that restricts economic growth in order to keep price increases under control." The Wall Street Journal sums it all up nicely, in one article. Interest rates have been held steady for now, but don't expect that to continue. The next meeting of the ECB will be on the 25th of this month.


While in the US there is a completely different situation going on. The problem of the subprime mortgages isn't going to go away any time soon. Over just the next 3 months there is something like 150 Billion dollars worth of adjustable rate mortgages to be reset to current interest rates. There is a superb chart floating around the internet apparently from Credit Suisse, who've had their own problems the with subprime market.

Foreclosure rates are already at twice the 2006 rate, and by the looks of that Credit Suisse graphic this tidal wave is only just starting. Mortgage rate resets will continue well into 2008. US interest rates will have to come down in order to protect both the borrowers and the lenders. It's only a matter of time.

Treasury Secretary Henry Paulson may be saying that he "has no interest in bailing out lenders or property speculators", but he may not have any choice. In fact, a certain level of bailout may be exactly what he's planning, in co-ordination with several of the largest banks in America.

The idea floating around is to build an 80 Billion dollar fund to be used to purchase the credit worthy mortgages, but the problem is not the credit worthy mortgages. Besides the problematic subprime mortgages total more than 80 Billion dollars worth.

What we have here is in fact a risk to the capital base of several large banks, should they have to sell off risky mortgages at fire sale prices. I guess it would be a good idea to have cash on hand, in order to cherry pick the portfolio when the selling really gets going. Apparently Hank Paulson thinks so too.

Let the Crash begin! (or the Fed can lower interest rates, save the financial system, and devalue the dollar).


A devalued dollar will have plenty of side-effects, all over the world. Exporting nations (Germany and the rest of the EU) will be badly affected, as will those who depend on US tourists. Those nations who peg their currency to the dollar (China, Saudi, and other oil producing nations) will have to do some hard thinking too.

With a devalued dollar, European economic expansion will have to come from lower government debt, and corporate cost controls and careful investment. New markets will have to be found for exports because the USA cannot be "the customer to the world" any longer. It won't be easy.

The USA has already overspent and those countries who's currencies are pegged to the dollar will either have to give up that peg, or be willing to import US-related inflation to their own markets.

Some of those countries are already moving away from their currency peg, The Chinese have held steady so far, but even the Chinese know that they cannot afford hyperinflation. They need to be able to buy resources that they don't already own, and they will need a balanced, tradeable currency to buy what they need. So far, they've been buying those resources with US dollars, earned from trade with the USA.

With the dollar in decline, how long do you think they will maintain their own currency peg, when the dollars they own are buying less and less product every day? I'm not expecting that soon, by the way. Just sooner, or later.

In the mean time all the world will continue to play the biggest game of "pass the buck" that has ever been seen. It is a game that is attracting fewer and fewer players every day, as the value of the dollar drips slowly away.

The container is still leaking....

You hardly have to blog these things anymore. Just get up in the morning, scan the headlines, pick one, post it, and wait for the meltdown. You know it's coming.

JPM and BAC to write down $3 billion in loans

The container is still leaking

It was a couple of months ago now that Hank Paulson, Secretary of the US Treasury made that famous quote telling us that the subprime problem was "largely contained", or something to that effect. I blogged it on 8/3, right here on StockGeometry, and while the I article I linked to at the time has gone dead, I've found the exact quote again on an MSNBC.com page. Specifically, he said;

"...that the market impact of the U.S. subprime mortgage fallout is largely contained and that the global economy is as strong as it has been in decades."

I bring this up today because of new reports from Switzerland where banks are now coming clean about their exposure to the problem, and the losses they're experiencing. On a combined basis UBS and Credit Suisse are going to be writing down close to 5 Billion dollars worth of assets. For UBS this will be the first quarterly loss in 9 years.

But this doesn't affect real people, right? The problem is contained? Tell that to my mother-in-law, who has about 25 thousand euros invested in a Credit Suisse bond fund. That's about 1 years worth of retirement income for her, and she's madder than a wet hen right now because she can't get even an account manager on the phone. Those guys were probably cleaning out their desks last Friday and while sympathy may be difficult, those are real people too.

The container is still leaking.

Slowing Consumer Spending

In another sign of the slowdown in consumer spending, orders for durable goods declined by almost 5% in August, the biggest decline in several months.

To me this is just confirms what I've been thinking and reporting on this blog recently.

In combination with that report on problematic credit card debt from two weeks ago, we seem almost certain to be coming to the end of "consumer spending as the basis for the American economy".

In the mean time, the vast majority of adjustable rate mortgages have yet to be reset, and foreclosures are accelerating. The Fed may have reassured the markets that they are attending to the situation, but continued "attention to the situation" can only result in reduced interest rates, and dollar exchange rates.

It's an interesting decision. Which is more important? The American consumer led economy, or the value of the dollar?

The Next Risk?

This excellent article from the Associated Press describes what could be the next stage in the on-going credit crunch.

In a nutshell, large numbers of people are having to choose what bills to pay off, and for now they are paying off the high interest rate credit cards, rather than paying their mortgages. The old trick of borrowing against equity to pay bills is no longer an option. One excellent quote?

"The appraised value (of the house) didn't come high enough to consolidate our bills..."

Ouch.

The credit related problems are not just in the mortgage backed securities any more. The riskier class of "asset backed commercial paper" often consists of securitized credit card debt, and any defaults could cause yet another wave of restricted credit.

And while I'm posting today let me offers kudos to Pythagoruz for his August 30 call and chart on the US Dollar. We're not quite in free fall, but it won't be long, in my opinion.

It's not all about the housing and credit markets

Just a selection of headlines from the overnight market showing that it's not all doom and gloom out there.

Cisco quarterly profit, outlook top expectations

Adidas Q2 net income rises, shares indicated up

Carlsberg soars on higher profit

ING profit climbs 27%, sees no credit-market impact

Swisscom profit climbs on mobile stake, FastWeb buy

Australian shares soar after interest-rate hike

CRAMER nlod (new low of the day)

Jim Cramer was in panic mode Friday on CNBC as the market continued its dramatic downtrend in the late afternoon. He said things like "we have Armageddon" and "Bernake has no idea what its like out there." He seemed to contradict himself more than a few times and was clearly not thinking clearly. Certainly Cramer is frustrated with the market, or rather, frustrated with how poor his calls have been about the market (see NYX, his growth stock of the year). So this latest episode may not be such a surprise in that context. It makes one wonder how much longer he will remain on the air. If you don't know what Cramer is talking about in this clip, then you might want to take a look at this article he wrote Friday morning. We've all known that Cramer was a clown, but this is a new low for him.