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Bailout Money - Still in the shrink-wrap

From Bloomberg. While posted LIBOR spreads are their lowest this year, the lowest to highest range is at an all-time high. What does this mean - credit is cheap for those who can afford it, very expensive for those who cannot. Banks are charging a wide range of rates depending on the counter-party. If you are backed by TARP funds, then effectively this is a TARP-TARP transaction, and about as riskless as you could hope for. If this is for a struggling low margin, capital intensive industrial concern, HA! me when you have 6 months float in the bank. I'm still new to wordpress, so you'll have to take my word for this (I tried to upload the chart, but no luck). I usually look at yield curve spreads in terms of ratios, to give a better idea of *relative* costs of funding. The ratio of the 10yr/3month Treasury yield... Continue reading
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Risk takers avoid risk at precisely the wrong time

A story on CNN details an academic study of blackjack players and their reactions to betting situations.  In short, they discovered the following: "...omission bias; that is, players being more conservative in their bets than the level which would have optimized winnings..." The cost of omission bias is 4 times that of over-confidence. In other words, while being over confident can cost you $100, omission bias - the failure to bet an appropriate amount given the level of risk - would cost you $400. Titled, "Fear and Loathing in Las Vegas: Evidence from Blackjack Tables", the study concluded that risk takers display loss aversion, and this is reflected in their bet sizes. What does this mean about the current situation w/ Wall Street and mortgages? It means that while extending risky mortgages was perhaps foolish, the greater calamity resulted when all buyers of CDOs and other repackaged mortgages securities backed away... Continue reading
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VIX confirms, "Sell in May and go away"

A Bloomberg story about the fall in the Volatility Index shows investors (at least in the US) are becoming slightly less fearful of the imminent demise of the financial system. This is probably true - much as I would like to believe that we will be living in caves, trying to figure out if rocks are edible, we know nothing other than a disintermediated financial world. The division of labor implies credit - the line worker in Adam Smith's day, making the head of pins, did not demand payment for every pinhead, "Oi! Gee us another penny fer them last 50 pins!". No business could function this way. So the worker is implicitly floating his labor until he gets his paycheck. Landlords collect rent monthly (or quarterly, or weekly), and vendors expect payment sometime after delivery. So there is "float" built into the most primitive of financial systems. Take away this... Continue reading
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California - Arnold Playing with Fire?

...bankrupt. So says Ed @ And after reading the article in the Economist, and the mess that is the upcoming vote on the budget, I am inclined to believe things could get very ugly. California has the lowest bond rating of any state. The shortfall will be $21.3bn if the current raft of measures does not pass (and it is unlikely they will) The Governor is on TV saying, "If this budget does not pass, I will have to start releasing prisoners and cutting teachers". Scary stuff in a state w/ scary gangs and scary schools. So what the hell is the Gubernator doing? Rolling the political dice. If it passes, he looks like a rain maker, and pulls the Republican Party towards the center, and away from Rush Limbaugh. He could form a party with Mike Bloomberg and Mitt Romney, and present himself as a real political heavy-weight. If... Continue reading
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The US Peso - going down like free beer

Current spending - $3trn Total Commitments - $12trn Total Unfunded Liabilities - $53trn The hole that the US government finds itself in is MASSIVE. It boggles the mind. Everybody has been calling for the demise of the dollar, some for +10yrs. But against what? Europe is in a bad way too, and several economies - UK, Ireland, Spain, have seen reckless borrowing as well. Japan (and to a lesser extent Germany) bet all its growth on exports, and that is gone. Japan faces the added burden of population decline. Currently 127mm Japanese walk the earth, and that will shrink to 100mm by 2050. Their policy response? Bribe foreigners to leave. The point - while the US is a basketcase, the rest of the developed world is not much better, and arguably worse. I believe the carry trade is far from dead, and rising interest rates in the US relative to Euro... Continue reading
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