Do you blame the supply side or the demand side?
In short, it wasn’t the complexity of MBSs or CDOs that led to their meltdown. It was the fact that demand for safety of senior tranches was so strong—and historical data from before 2002 misleading—that the pools were widened beyond warrant.
via Here Is What Really Went Wrong With Mortgage Backed Securities.
Asymmetric information is nothing new. Even its critics concede that most HFT is perfectly legal.
via High-frequency trading: Rise of the machines | The Economist.
I’m inclined to disagree. Undoubtedly the savings rate will fall somewhat as the degree of financial distress declines, but I think there’s a good case to be made that much of the increase is permanent.
For one thing, from the point of view of households, “financial distress” may be extremely slow to lift. If the Japanese experience is any guide, it is a very slow process to get a severely distressed banking system to start lending normally again, and it’s not clear that things are going to be any easier for the US. Meanwhile, most forecasts expect the unemployment rate to remain quite high for several years. It could take 3 years, or 5 years, or 10 years, or 20 years before the financial distress lifts.
* The downward revisions to 2008 should have been expected. They confirm how deep the mild depression was. It started in December 2007, creating a weak economy early in 2008, and only intensified due to the meltdown post-Lehman. Those like Larry Kudlow who were saying well into 2008 that no recession was going to occur were misguided.
* Because inventories have been purged so much in Q1 and Q2, I fully expect much better numbers in Q3 and Q4. Remember, a less negative inventory number translates into a net ADD to GDP. So, we don’t need to build inventories, only purge them less. That’s a guarantee for Q4 if not Q3.
* However, the fly in the ointment is consumer demand. It is still weak. Look at non-durable spending. If we don’t see a significant uptick come Q3, you should be worried.
* My call for Q4 2009 or Q1 2010 end to the recession still stands.
This time he bites hard on the energy transition apple – a favorite topic of mine.
Grantham explains how higher energy prices loom, how they will transform agriculture and transportation, and how oil will increasingly flow only to its first/best uses, like food and aviation. Good (short) reading.
VaR “should be consigned to the dustbin,” he added, supporting his argument by saying the VaR forecast of how much an investor can lose is entirely calculated from historical data. “It’s a mathematical tool that simply reflects what happened to a portfolio of assets during a certain past period,” he writes. And, thus, “The VaR metric has little to do with how a portfolio will fare in the future — and that includes tomorrow. When it comes to the market, the past is definitely not prologue.”
via In Goldman’s Defense: VaR Belongs in the ‘Dustbin’ – DealBook Blog – NYTimes.com.
The US economy continued to shrink in the second quarter making this recession the longest on record, but the more moderate decline lifted hopes that government stimulus measures could be loosening the grip of the downturn.
via FT.com / US / Economy & Fed – US economy shrinks 1% in second quarter.
Exxon’s earnings fell 66 percent from a year earlier, while revenue slid 46 percent. The problem, however, is that the company — so revered in the industry for tight cost control — failed to produce a corresponding reduction in the expense line, which fell just 42 percent.
This is partly explained by Exxon’s capital spending. While down 6 percent in the quarter from a year earlier, so far this year the company has spent about as much as it did in the first half of last year to discover new hydrocarbon sources. That gets to the heart of Exxon’s long-term strategic challenge.
via Breakingviews.com – Price Drop Reveals Big Oil’s Problem – NYTimes.com.
A new study shows that banks run by chief executives with a lot of stock were, if anything, likely to do worse than other banks in the crisis.
“Bank C.E.O. incentives cannot be blamed for the credit crisis or for the performance of banks during the crisis,” states the study, by René Stulz, an Ohio State University finance professor, and Rüdiger Fahlenbrach of the Swiss Federal Institute of Technology.
“A plausible explanation for these findings is that C.E.O.’s focused on the interests of their shareholders in the build-up to the crisis and took actions that they believed the market would welcome,” Mr. Stulz said.
The U.S. government’s $1 billion “cash for clunkers” program to spur new car sales “has been suspended” because it’s running out of money six days after it began, Senator Debbie Stabenow said.
“It is amazing that ‘cash for clunkers’ would be this successful this quickly,” said Stabenow, a Michigan Democrat, in a statement today. “I urge Congress and the administration to provide additional funding.”
Named the Car Allowance Rebate System, the program provides credits of as much as $4,500 for the purchase of a new car when turning in an older vehicle to be scrapped. Lawmakers had expected the program to generate about 250,000 vehicle sales and to have enough money to last until about Nov. 1.
via U.S. ‘Clunkers’ Auto Program Suspended, Senator Says (Update1) – Bloomberg.com.