I've moved my blog

Note: I've moved to http://bloggersbubble.blogspot.com/
I will no longer be updating this blog page, but will leave it up for the time being.
Thanks, Vern

Falling lumber prices

I'm back from a two week absence and hope to be catching up with current events.

Here is something interesting for anyone who built a house last year as I did. Lumber has dropped to about half it's value from a year ago.
Prices were about $460 L.B.F. last September to $230 Linear board feet this September.

This means that most of the materials that went into my house last year would cost me half as much now. Oh-me Oh-my!

As we haven't yet seen the real effect of a implode speculator R/E market, I expect that building materials across the board will soon follow suit, heading downward.
Vern

Derivatives; The Monster That Ate The Future Part II

The whole article can be read at http://globaleconomicanalysis.blogspot.com/

Derivatives Trading
Bloomberg is reporting Derivatives Trading Soars to $370 Trillion.
Nov. 17 (Bloomberg) -- The use of derivatives grew at the fastest pace in eight years during the first half of 2006, boosting earnings at securities firms and reducing costs for investors.

The face value of derivatives based on corporate bonds, currencies, interest rates, commodities and stocks jumped 24 percent to $370 trillion, according to the Bank for International Settlements. It was the biggest percentage rise since the bank began keeping records in 1998.

Trading in credit-default swaps, the fastest-growing derivatives market, helped spur record earnings for banks including New York-based Morgan Stanley and Goldman Sachs Group Inc. At London-based Barclays Capital derivatives accounted for more than 60 percent of revenue and profit, Chief Executive Officer Bob Diamond said in May."

The pace of growth is going to have continued unabated in the second half of the year," said Kit Juckes, head of fixed-income research in London at Royal Bank of Scotland Group Plc.

The amount of outstanding credit-default swap contracts jumped to $20.3 trillion from $13.9 trillion at the end of last year, the Basel, Switzerland-based bank said on its Web site today. The securities are financial instruments based on bonds and loans that are used to bet on an increase or decrease in indebtedness.

Alan Greenspan, the former chairman of the Federal Reserve, has been saying since 2002 that derivatives reduce risks by making financial markets resilient to shocks. In May he told a Bond Market Association gathering in New York that derivatives are the most significant change on Wall Street "in decades."

Modern Financial Wizardry
In other news, a spokesman claiming to represent Greenspan reported that the entire risk of all derivatives trading to date has now officially been offloaded to Mars. A Martian spokesman verified that claim and went on to state that Martian risk has been offloaded to France. France in turn claims to have offloaded the risk to the MMMM corporation better known as Madame Merriweather's Mudhut Malaysia, the ultimate guarantor of $370 trillion in derivatives.

Leverage on the trade has not yet been calculated but Madame Tandalayo Merriweather of Kuala Lumpur has emailed me personally stating " Don't Worry, My Mudhut is Priceless". The key point here is the priceless nature of the Malaysia Mudhut which is a good thing given that it has taken two years and counting to straighten out the derivatives mess at Fannie Mae alone. In a miracle of modern financial wizardry, no one it seems has any risk associated with these derivatives, given they are all backed by something priceless.

Derivatives and Ramen Noodles

From CNN Money. “Late payments on subprime loans have surged, The Wall Street Journal reported on its Web site on Tuesday, and while economists don’t expect major harm, a continued rise could hurt investors in mortgage-backed securities.”
“Based on current performance, 2006 is on track to be one of the worst ever for subprime loans, the report said. It cited the bank saying that roughly 80,000 subprime borrowers who took out mortgages packaged into securities this year are behind on their payments.”


Note the line ‘Mortgage backed securities’ These are among the instruments that end up in derivatives funds, a market that now steers $370 trillion. As I mentioned in an earlier blog, defaults in sub-prime loans could be the straw that causes a domino style collapse of this highly geared ‘funny-money’ market.

$370 trillion. You need a computer to count that high. It nears four times world GDP. Anyone not alarmed by this is not paying attention in class.
A collapse of the housing market will surely have world wide implications, but the havoc it will raise in the derivatives market could have us drawing parallels to 1929 or worse, we could all be eating ramen noodle for the next decade!
Vern

Derivatives; The Monster That Ate The Future

"We are also frightened by the massive speculation in the financial markets with stock buybacks, mergers, leveraged buyouts, and trillions of dollars in derivatives floating around some of which we do not even know who the ultimate guarantor is. We are hoping but do not know that the ultimate guarantor of these derivatives is not Madame Merriweather's Mud Hut in Malaysia."

Ya, derivatives, somebody please explain these to me! The more I try to understand them, the less I understand. As near as I can come to it, they start with a private equity group, (Joe money bags and some of his cronies). They buy funds cobbled together with mortgage dept which was previously packaged and sold in a fund by the banks who first sold the loans. They then use the future value of these mortgages to obtain loans to fund corporate buyouts.

Now I admit this is the most basic of explanations.

The companies that are bought up are most probably further borrowed against or cut up and liquidated for assets which can be placed in the derivatives, further pumping their book values. Others are simply taken private, why I don't know.

As near as I can tell I am close to how they function. I welcome any schooling offered on the subject however.

Now the major problem I detect is the chain of financial liability. If Joe six-pack defaults on his loan or negotiates with the lender to short the mortgage, there goes the book value on that loan and its future interest profits. This presents a problem in the daisy-chain of borrowing these derivative funds engage in.

Another looming problem I detect is the economy. These funds have fueled an orgy of buyouts recently of major companies. Where will the profits come from to either make holding the newly acquired company worthwhile or make it attractive to another buyer? The short answer is, it doesn't. This looks like a ponzi scheme. If an economic downturn looks likely the private equity groups take out what equals an equity loan on the book values and then they disappear into the either. They are private groups, outside of SEC scrutiny. (You can see where I'm going with this).

With an estimated $29 trillion leveragedged in these funds I think this may be the largest threat to the world economy in modern history!

Here is what the National Bank of Australia has to say about the international phenomena of derivatives. http://www.news.com.au/heraldsun/story/0,21985,20832000-664,00.html#

Vern

An analysis of a coming recession

Here is a good analysis of how a 2007 recession might play out from Itulip.com, written by Dean Baker. It’s a little longer than most of my posts so I will place the link and invite you to go there and read it. Good stuff.
http://www.itulip.com/forums/showthread.php?t=663
Vern