Friday, January 30, 2009

SAR #9030

None of this could have happened in a rational world.

Words of One Syllable: Only 23,000 Americans bought a new house last month, orders for durable goods fell for a fifth month (don't need those new appliances... ) and a record number were collecting jobless benefits. Now connect the dots.

Next! Avis, Hertz and the local pizza parlor's delivery guy have applied for federal bailout funds. They all use cars in their business.

One Day We'll All Be Rich: The French are pretty sure things are going to pot and they are pretty sure they will pay for the greed of the elite. So they have taken to the streets to protest. How un-American of them. Don't they know they are supposed to submit two photographs, one of their face and one of their right retina, and their fingerprints, get a permit, then go to a designated free speech area?

Match, Set: Melbourne is facing four days of temperatures above 40ºC (104ºF), the longest stretch of above 40ºC weather in a century. Just in time for the Australian Open .

Outlook Stable: In 2008, Pemex's production dropped 9.7%, after a 5.5% decline in 2007. Production is not expected to increase despite three years of $16.3 billion a year in investment in new production. Fitch Rating Service says Pemex's outlook is 'stable'. Steadily downhill.

Flying Leap: The IATA reports that December's international air cargo traffic dropped 22.6% from the prior year. Back in September 2001, when much of the world's air fleet was grounded for 10 days, air cargo only dropped 13%.

Known Unknowns: As the entire Federal apparatus flails aimlessly in the dark, a few things become clear: No one knows what to do. No one knows how bad it will become. No one knows how much money it will take. No one knows how much the banks bad assets are worth. And the folks in Washington do not want the taxpayers to know how little they know.

Put A Stake In Its Heart: The demise of the efficient market hypothesis is once again being reported. This time let's make sure the Republicans know.

Bystanders: After interviewing economists who failed to see this disaster coming, the AP concluded that no one in America objects to their tax money going to Bankers, Brokers or Detroit.

Veneer: In the wake of the ice storm across the Appalachians, folks are looking at 30 - 60 days without electricity. If you can't quite imagine what an energy-starved future would be like, go read this one. There won't even be FEMA in the future. Why should there be, there doesn't seem to be one now.

Tuning Up: The House passed a "Buy American" provision to boost the steel industry as part of the "Kiss It and Make It Better" plan. Ah, I love the smell of protectionism in the morning.

Strawiest Man Ever: Look at the chart on Net Borrowed Reserves (I've shown it to you before) and then understand that it is not scary because it represents increases in government debt. Granted the overall increase in government debt is scary, but this is even more scary because it means that banks don't have any reserves.

Chicken Feed: We keep being assured that the notional $175 trillion in derivatives is really much less because it is well hedged. But if only 1% of that goes south, it is $1.75 trillion that our too-big-to-bail-out banks will lose. If it's a modest 3%, it'll be women and children first.

If Not One, Then Two: The Fed's most recent obfuscation is a long way of saying "We have two and only two ways to influence the market (1) we can lower interest rates and (2) we can print currency. Except (1) we can't lower interest rates and (2) we're printing paper as fast as we can, so (3) we're pretty much irrelevant."

Again: Republicans (in Ohio this time) alleged widespread voter fraud in last fall's election. A special prosecutor reports found none. One man, from Connecticut did turn himself in, but he voted GOP. Print this out and put it on your refrigerator door for the next time the GOP says voting Democratic is illegal.

Hidden Message: Some say the age of growth is over, and the age of sustainability has begun. I agree that the age of growth is overing, but have no idea what comes next. Sustainability is just happy talk, unless we have sudden population decline to about 1.5 or 2 billion. And I don't see how we get there with any civilization left. Nor do I see a happy ending to the climate crisis. That last sentence is four words too long.

Porn O'Graph: If you can't sell houses, why build houses?


Graydon said...

Question about the $175T notional outstanding in derivatives, if one party suffers a 1% loss doesn't the other party gain 1%? I know that some counter parties are international entities, but it seems to me that this is a net of net situation. So creates winners and losers but has no net effect on the system.

Perhaps your concerned not about the bet per se, but rather counter-party risk. I am not particularly educated on this matter so please let me know.

fajensen said...

if one party suffers a 1% loss doesn't the other party gain 1%?

Not quite the expert either but I gather that the problem is this:

What happens if the losing party cannot pay? He goes bankrupt, of course. Which triggers a cascade of other Wins and Losses ... e.t.c.

This would not be a problem in the exchange traded derivatives market because the exchange automatically adjusts the price of the open PUT's with open CALL's so the total value of all posistions always cancel out to zero.

Option traders have to put up margin too - because it is hard hit *exactly* zero and there will be deadbeats who blow themselves out so the exchange has to cover e.t.c.

In the Over The Counter derivatives market there are no such rules.

Any OTC trade is basically a contract between two private businesses and completely unregulated - anything that is not illegal can be in there (and probably is).

Does anyone bother to balance out the CALL's with the PUT's in the OTC market? Absolutely not - they cannot because that would require standard contracts.

Instead people buy insurance on their end of the trade; that insurance is probably just another OTC derivative contract (repackaged and sold off to some widows and pensioners as a AAA bond).

So, I.O.W. *any* counter-party default can trigger an unknown quantity of other defaults and huge margin calls all over the place.

Nobody knows *who* are liable for *what* because the OTC-derivative market never had the "machine god" that the exchange traded options have!

The reason for the amount of outstanding OTC-derivatives is of course the fat margins (and probably fraud too) one can get (away with) because of the lack of transparent contracts, transparent pricing and the ability for outsiders to take advantage of blatant mis pricing.

It's a huge festering pile of shite that will be left to rot quietly on Level-3 asset sheets for decades to come - or rather that is The Plan. Murphy will disapprove and throw a spanner in it, IMO.

CKMichaelson said...

Graydon - fanjensen's view is mine, too. Like a poker game where the bets are made with IOUs. Sooner or later someone can't cover a marker, words are exchanged, the table tipped over, the lights go out and the shooting starts.
After that things could go badly. Like after Lehman's folded.