Economic Despair

It is only a matter of time before the men in white coat come for Bernanke....

Britney Spears has been taken to hospital by ambulance for the second time in a month, according to the Associated Press. An anonymous Los Angeles police source reportedly said the pop star was being taken to "get help", but did not say where the ambulance was taking her. The celebrity gossip website TMZ said Spears was being taken from her Beverley Hills mansion to UCLA medical centre where she would be placed under California's Code 5150, which means she is considered to pose a danger to herself and others.

It looks like the recession is already here. From the New York Times.

Consumer spending slowed in December and inflation continued to rise, the government said Thursday, leaving the Federal Reserve little leeway as it ponders policy decisions in the months ahead.

Spending by consumers, which accounts for more than two-thirds of the nation’s economic growth, rose by an anemic 0.2 percent in December after jumping 1 percent in November. Adjusted for inflation, spending was flat for the month.

Economists have predicted a significant downturn in spending as consumers grapple with record-high oil and food prices. The report from the Commerce Department reinforces the disappointing holiday sales figures that leading retail chains released in the last few weeks.

“With the labor market weakening and housing remaining a huge weight, the pace of consumer spending growth ought to remain painfully slow in the months ahead,” wrote Joshua Shapiro, an economist at MFR, a research firm.

As spending slows, prices continue to rise, a combination that has some economists suggesting the United States could face a period of stagflation. A closely watched gauge of inflation ticked up last month, to a 2.2 percent annual rate; that figure, the core personal consumption expenditures deflator, excludes prices of food and energy.

Over all, prices in December were 3.5 percent higher than they were a year ago, far above the Fed’s so-called “comfort zone” of 1 percent to 2 percent.

Over the last week, I have been watching mortgage rates. I have seen few signs that they have come down, despite the interest rate cuts from the Fed. In fact, those cuts have done nothing to rescue America's devastated housing markets.

WASHINGTON (MarketWatch) -- Consumers inspired by Wednesday's rate cuts in overnight lending rates shouldn't count on consumer interest rates falling in response, said Bob Walters, chief economist for Quicken Loans. "If you are looking to purchase a home or to refinance, I'm not so sure you'll see mortgage rates fall," he said Wednesday. "Mortgage rates don't have that much room to fall."

Last week, the average rate for a 30-year fixed mortgage was 5.48%, one of the lowest rates since 2004, according to Freddie Mac's survey. On Wednesday, the Federal Reserve's Open Market Committee lowered the target for the federal funds rate by 50 basis points to 3%. In eight days the Fed has cut rates by 1.25 percentage points, the fastest pace in 20 years.

House prices have still a long way to fall.....

A new study conducted by Morris Davis, a former staff economist at the Fed, and Andreas Lehnert and Robert F. Martin, two current Fed economists, shows there is an unprecedented divergence between rents and home prices. Between 1960 and 1995, rents and house prices rose at relatively the same rate. Rents fluctuated between 5 percent and 5.5 percent of home prices during this period.

In 1996, the market started to change. House prices climbed rapidly--much faster than rents. Within ten years, the cost of buying had more than doubled. The cost of renting did not. By 2006, the rent-price ratio fell to the historically low level of 3.5 percent--approximately 30 percent less than its long-term average.

We intuitively knew this already, but it is good to see that someone did the numbers and proved it.

Overvaluation continues to be the norm in Pacific Coast states, Florida and the Washington D.C. area, according to data from Global Insight. Out of the 330 metro areas examined in its most recent quarterly study, 208 U.S. metros were marked as overvalued--117 documented an increase in overvaluation during the third quarter compared to the second quarter. To determine what house prices should be, Global Insight considered interest rates, household income, population density, current and former house prices and historical data.

If these guys sink, then say hello to the deep freeze. Fixed income will be shut for years...

Jan. 29 (Bloomberg) -- New York Insurance Superintendent Eric Dinallo's attempt to bail out bond insurers is ``coming too late in the game'' to stave off ratings downgrades, CreditSights Inc. analysts said in a report.

Bond insurers including MBIA Inc. and Ambac Financial Group Inc., the two largest, have guaranteed about $2.4 trillion of securities issued by U.S. cities and states and bonds backed by mortgages, credit cards and other assets. The industry has been seeking capital since November when Fitch Ratings and Moody's Investors Service began reviewing the effect of rising defaults on subprime mortgage securities guaranteed by the insurers.

Dinallo's department hired investment bank Perella Weinberg Partners to advise it on the financial stability of bond insurers and how to protect their customers, the Wall Street Journal reported today, citing people familiar with the matter.

Fitch Ratings cut the AAA ranking on the financial guarantee units of Ambac in New York and Bermuda-based Security Capital Assurance Ltd. earlier this month. The ratings company is due to rule on whether Financial Guaranty Insurance Co., the fourth- largest bond insurer, has raised enough capital to preserve its AAA rating.

FGIC in Stamford, Connecticut may have its ratings cut by as many as four levels to A+, according to Michael Cox, an analyst at Royal Bank of Scotland Group Plc, wrote in a report published today. The insurer's rankings may be reduced today, he wrote.

The bond insurers, which began by guaranteeing the notes sold by U.S. municipalities to fund roads and schools, stumbled as they expanded into structured finance such as collateralized debt obligations. CDOs repackage pools of bonds, loans and credit-default swaps and slice them into separate pieces of varying risk and return.

Lower ratings for the insurers may cause a new round of writedowns on debt holdings at the world's financial companies, potentially forcing banks to raise another $143 billion to bolster capital, analysts at Barclays Capital said last week.

This story is just too crazy.....

Spanish banks are issuing mortgage securities and asset-backed bonds on a massive scale to park at the European Central Bank, using them as collateral to raise money at favourable rates from the official credit window in Frankfurt.

The rating agency Moody's said lenders had issued a record E53 billion (L39 billion) in the fourth quarter, yet almost none of the securities have actually been placed on the open market. Most have been sent directly to the ECB for use in "repo" operations.

"Few, if any, of the transactions in the RBMS market [mortgage securities] have been placed since September. Some of the banks are hoping that the market will open up again, but most are just preparing these deals to use as repos, which they can do since the ECB accepts AAA-rated securities," she said.

The total volume of securities issued since the credit crunch began to bite in July has reached E63 billion

When will it end? Housing just keeps on sliding into a black hole. The December numbers top off a truly terrible year:

WASHINGTON (MarketWatch) -- Capping the worst year for the housing market in 25 years, resales of U.S. homes and condos fell 2.2% in December to a seasonally adjusted annual rate of 4.89 million, the National Association of Realtors reported Thursday.

For all of 2007, sales of single-family homes fell 13%, the biggest decline since 1982. The median sales price of an existing single-family home fell for the first time in the 40-year history of the survey, dropping 1.8%. Although no hard data are available, most economists believe median home prices hadn't fallen since the Great Depression of the 1930s. December resales at 4.89 million were weaker than the 4.98 million pace expected by economists surveyed by MarketWatch.

With the Fed, we are looking at a repeat offender; one mistake begets another

WASHINGTON — Even as the Federal Reserve grapples with the collapse of a speculative bubble in housing — the second speculative bust in less than a decade — is it at risk of repeating recent mistakes?

One day after the Fed slashed its benchmark interest rate to head off a possible recession, a small minority of economists warned on Wednesday that the central bank was in danger of invoking the same remedies that it did after the bubble in dot-com stocks burst seven years ago.

Though most experts agree that the economy is on the brink of a recession, and some even contend the recession has already begun, critics say the Fed’s attempted rescue looks uncomfortably similar to the aggressive rate reductions that aggravated the speculative bubble in housing.

Will the collapse of bond insurers usher in the next stage of financial collapse? It certainly looks like it.....from the New York Times....

Even as stocks ended five days of losses with a surprising recovery on Wednesday, officials began moving to defuse another potential time bomb in the markets: the weakened condition of two large insurance companies that have guaranteed buyers against losses on more than $1 trillion of bonds.

Regulators fear a possible chain of events in which the troubled bond insurers, MBIA and Ambac, might be unable to keep their promise to pay investors if borrowers default on their debt.

That could leave the buyers of the bonds — including many banks and pension funds — on the hook for untold billions of dollars in losses, shaking confidence in the financial system.

To avoid a possible crisis, insurance regulators met with representatives of about a dozen banks on Wednesday to discuss ways to shore up the insurers by injecting fresh capital, much as Wall Street firms have turned to outside investors recently after suffering steep losses related to subprime mortgages.

While it is unclear what steps, if any, the banks and regulators may ultimately take, the talks focused on raising as much as $15 billion for the companies, according to several people briefed on the discussion who asked not to be identified because of the sensitive nature of the discussions.

The notion that the failure of even one big bond insurer might touch off a chain reaction of losses across the financial world has unnerved Wall Street and Washington. It was a factor in the Federal Reserve’s decision on Tuesday to calm investors by reducing interest rates by three-quarters of a point, to 3.5 percent

Last year was the worst year for housing in 25 years. Resales of U.S. homes and condos crashed 2.2% in December to a seasonally adjusted annual rate of 4.89 million. Not even the National Association of Realtors could spin their way out of these numbers.

For the year as a whole, sales of single-family homes fell 13 percent, while the median sales price of a single-family home dropped for the first time in the 40 years.

It just keeps getting worse....

Bloomberg - Defaults on privately insured U.S. mortgages rose 35 percent in November to a record, an industry report today showed, adding to evidence the U.S. housing slump is deepening.

The number of insured borrowers falling more than 60 days late on payments jumped to 61,033 last month from 45,325 in November 2006, according to data from members of the Washington- based Mortgage Insurance Companies of America. The missed payments, often a prelude to foreclosure, represented a 2.9 percent increase from October.

More evidence that US consumer demand is waning.

Ford Motor Co posted a 9 percent decline in U.S. sales for December. The struggling No. 2 U.S. automaker said it sold 212,094 vehicles in the United States in December, compared with 233,621 vehicles a year earlier. Sales results for Ford included its import brands Volvo, Jaguar and Land Rover and some medium- and heavy-duty trucks.


When Citigroup warned in early November that it was likely to write down its portfolio by $8 billion to $11 billion in the fourth quarter because of exposure to bad loans, investors recoiled at the size of the losses. Some now say those early estimates appear drastically understated.

Citigroup Inc. could write off as much as $18.7 billion in the fourth quarter, wrote Goldman analysts William F. Tanona, Betsy Miller and Neil C. Sanyal in a note to investors late Wednesday. If it does, they say, the bank may be forced to lower its dividend by 40 percent.

Citi has about $55 billion in exposure to subprime mortgages, about $43 billion of which are collateralized debt obligations, or CDOs, that have mortgages underlying them.