Monday, July 28, 2008

Housing by the numbers

Debt has this pesky way of lending itself to detached, critical analysis.

Merrill Lynch just sold $30.6 BILLION worth of CDO's for $6.7 Billion.  That is 22 cents on the dollar.  Congrats guys!  You old son of gun, blue blood, Harvard, chip off the old block!  Boy am I glad you guys didn't bother to recruit that pond scum coming out of the State Colleges.  Egads!  Who knows how much more you would have lost if those commoners were running the bank.

And it gets better.  Merrill had to finance 75% of the $6.7 Billion.  Is that hysterical, or what? 

Hmmmmm.... If Merrill could only get 22 cents on the dollar for their CDO portfolio, what makes the FDIC, Bernake, Paulson, and the rest of the Hair Club For Men running (ruining?) the world's most important currency/economy, think that the Washington Mutual's, Wachovia's, Lehman's etc... will get any more?

I am well aware that it is necessary to compare apples to apples, and that the average mortgage pool is worth more than 22 cents on the dollar.  If that was not true, this internet connection of mine wouldn't be working and I would have had to cook my dinner over a dung fire this evening...  Still, this just isn't a positive metric, if I may employ the use of understatement, for those considering going long the financials.

Let us assume that Merrill just sold the most toxic tranche of their position book.  I think its fair to assume that the other guys have this same toxic tranche on their books.  If the ENTIRE system is just under $12 Trillion, and the most toxic stuff is 20% of the $12T, and you can only get 22 cents on the dollar for it IF you also finance most of it it... Hmmmm..... 20% is something like $2.4 Trillion, that means a nearly $2T write down just on the really, really bad stuff.  And we cannot assume that the 80% remaining will not have some serious write downs of its own...

Holy Sh-t!  Not only is the bottom in housing not in sight, the sight of sight of the bottom is nowhere in sight.  

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This afternoon I was watching CNBC and I heard some guest describe Barak Obama as a "messianic figure" capable of of lifting the markets with his positive energy, or some B.S. like that.  

Look, Barak Obama is the most charismatic politician since Bill Clinton, and he is right there in that department with Ronald Reagan and JFK.  But when I hear folks describe an Ivy League lawyer as "messianic", I start to get peptic.  Folks, I dislike GWB as much as the next guy, but If Obama had been president in 2000, 9/11 would have still taken place.  If Obama had been president in 2004, the price of oil would still have tripled between 2004 and 2008.  He seems like a nice guy, he's got a gorgeous wife, some cute kids, and he gives great speech, but unless he shuts down 1/3 of our Federal Government AND launches a MASSIVE nuclear, windmill, and solar build out on DAY 1 of his presidency the U.S. will have the same, persistent budget, trade, and energy nightmare when he leaves office compounded somewhere between 5 and 10% per year, every year of his presidency.  And the presidency is not vested with that kind of power.  So it just ain't gonna happen.

BTW, I got "outed" by a reader who said that I should get over Hillary.  How insightful - I had never mentioned my preference before.  It is true,  I would have preferred the choice to have been Hillary Clinton versus Mitt Romney.  Both have a great deal more experience than Obama and are more known quantities, and I was disgusted at the way Hillary was treated by the press and the Democratic party... Now I have the "messianic figure" or the - and this is not my moniker for McCain, I got it from one of my readers in an email - the "Cadaver".  How deliciously politically incorrect! 

Still, at this point it would take a miracle for John McCain to defeat Barak Obama in the popular vote.  The electoral vote is something else entirely. Florida, Tennessee, and Ohio will decide the election.  Everybody is else is just window dressing. 

Wouldn't it be something if we had 2 Presidents, elected back to back, that did not win the Popular vote?  Certainly something, but nothing good.

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The next president will inherit the largest increase in the price of food relative to income in several generations.  The price of milk, eggs, meat, and anything derived from corn is going to outpace wage growth for a years to come.  There is no political cure for this issue.  The break even point for farmers growing corn, wheat, and soybeans continues to outstrip ALL contingencies, and inventories continue their decline.  No amount of MONEY creation can make the wheat grow, or the corn harvest to jump into the combine.  The U.S., and the world, needs a Plan B for food even more urgently than for Oil.


Yours for a better world,

Mentatt (at) yahoo (dot) com







11 comments:

Donal Lang said...

Basic food is half the price today (in real terms) as it was in 1973. However in the cost of a loaf of bread, the cost of the flour, yeast, salt, etc. content is only around 5% of the retail price charged in the supermarkets.

You can do this with all foods, and the more processed and packaged the food, the greater the gap between the food-content cost and the customer price.

So the simple answer for cash-strapped customers is to learn to cook! And don't buy shares in the supermarkets, because if real cooking catches on.......

A Quaker in a Strange Land said...

The cost of food stuffs has certainly declined in real terms versus personal income for 40 years IN THE WEST.

Everything is relative. And relative to what folks alive today expect, things are going to get VERY expensive, indeed,

The U.S. has a HUGE, and seemingly permanent poor. I have no policy ideas to share, just the simple application of mathematics to the metric of providing for these folks while the tax base that funds food assistance is under attack.

Folks in government worry about oil shortages/cheap and abundant fuel. They should worry more about cheap and abundant food. While we can easily survive an energy crisis, No society can withstand a food crisis,

Not that this is immediate, although it could be.

If the U.S. experienced a 1936 type drought,(they call it a hundred year drought and since it has been over 80 years...) in the crop region it would be a disaster of BIBLICAL proportion. Not that I am even sure we could make reasonable preparations, but we could put just a little effort into it.

Donal Lang said...

I agree, Greg. Katrina showed the World that the USA cannot adequately cope, even with a relatively moderate disaster (Have the levees been rebuilt yet? The poor homeless rehoused?). Certainly poor people can have little realistic expectation of aid or long-term welfare.

Even WITHOUT the 100-year drought or 101 other possible disaster scenarios, we'll see poor people "falling off the bottom of the ladder"; I'd guess within the next 2 or 3 years we'll see real malnutrition in parts of the U.S., compounded by the lack of education about diet and real cooking.(Why is it poor people anywhere in the World are so often fat? It's almost an identifier!).

I'd say watch in the Rustbelt states, for starters; entrenched areas of poverty, repossessions, high unemployment, no future. With no savings and no access to credit, losing your job can mean almost instant poverty and homelessness. The mobile people will leave, the rest will suffer huge hardships and fast social decline.

It will be children and old people first to show the signs of malnutrition. I wonder how long we'll have to wait before the first shock news articles?

Anonymous said...

(From the bureaucrat non-regulator):

I don't suppose you two would like to explain why the streets of Chicago are teeming with well-fed, decently-clothed happy people (who continue to visit the bars every Friday and Saturday), and you have to look pretty hard to find a bum these days. I'm a peak-oiler and I go along with the food supply being threatened, but then again, my eyes have seen the glory (of America) .... :)

Donal Lang said...

To anon,

People are 'rich' until they're poor, and then they disappear from the social scene, stay at home (if they have one), can't afford to socialise and certainly stay out of the town centres which are our monuments to consumption.

I also logged on to a couple of websites; lists of repossessed houses for sale in Michigan and elsewhere, up for sale for $5-10,000. Where are their previous owners? Damned sure they're not drinking in any town centre, unless its cheap cider in a doorway!

This is the early stages. It'll take years for all this to play out. But if you don't start looking now, then by the time these people ARE visible, the problem will be political and will overwhelm you.

Anonymous said...

Donal, both best selling author Michael Pollen ("The Omnivore's Delimma") and others have analyzed the situation closely, and found the opposite to be true.

A bag of carrots (containing one nearly unprocessed ingredient) easily costs more than a box of twinkie (39 heavily processed, chemically treated, and prepackaged ingredients).
In fact, 'crap' food represents the best bang for the buck, in terms of caloric content per $, which is why poor Americans are typically the least healthy and most overweight.

The five heavily government subsidized agricultural commodities overproduced via western-style "agribusiness" are significantly less expensive and more readily available, whereas the reverse applies for all other products, one reason "organic" and "whole food" products are so expensive by corollary.

In fact, only the affluent can afford to eat healthy.

Final note: If we still ate as our grandparents generation did, you would quickly discover that food prices are more than triple what they were in 1970.

Anonymous said...

We knew about the subprime blowup in early 2007, and the inevitable credit crunch that would quickly follow. How much longer do we have to wait for the end of the world?? I'm getting anxious! :)

A Quaker in a Strange Land said...

Dear Anon Bureaucrat

I harbor no doomsday views.

I have OCD and a fetish for mathematics so I often indulge in a little "what if" game theory.

Without being condescending... do you understand the subtlety between anecdotal and empirical evidence?

Your view of "streets of Chicago teeming with well fed people" is anecdotal. The number of individuals receiving food assistance in Chicago, the volume by weight of food provided at food pantries versus the 5 year average, etc... these empirical data points.

The sun will shine, the surf will roll in, we WILL adjust. But what are we paying taxes for? Clearly, their must be a purpose. And if so, SOMEONE shoul be doing a little cost/benefit analysis, though I have never seen it done in government. Please feel free to correct me if I am wrong.

Anonymous said...

(From the non-regulatory bureaucrat):

The "Blog press" is littered with anecdotal evidence of demise (Shedlock thrives on it), and we can't trust the government numbers, right? So what empirical numbers do you believe? All I can count on is what is happening to me (eating well) and my own "leading economic indicators" (my friends and family). They are not thrilled with my many negative emails on energy and economic issues, cause everyone is doing just fine. The big tragedy today was Bennigans closing, which is not surprising given the number of primo coupons they gave out (they were GIVING the food away!) At any rate, your taxes are going for services that you demand: social security and health care benefits, road building, clean air regulation, and big-ass Coast Guard helicopters (not to mention my ridiculous salary). If you don't want the services, tell Congress!!! I dare you all to do it. I double-dare you! :)

Anonymous said...

(Oh, and by the way, government and business are NOT the same thing. Business is concerned with growth and profit. Government is concerned with equality and fairness.)

A Quaker in a Strange Land said...

Dear Anon:

I am speechless! Not Bennigans!

I have a great deal of respect for Mish and many of the other financial blogs, most of whom called the housing/mortgage crisis and oil shock YEARS before anyone in government or the Wall Street establishment did.

Look, forecasting is inherently failure and error prone, otherwise they would call it sure-thing-casting.