[ILECon] ILX's Economic Sentimentiometer

So Fannie and Freddy being bailed in the US and reports sayign as many as 150 US banks could fail; whilst over here in the UK, ailing A & L is being bought up.

I can't help but thinking that the more and more small banks fail the bigger the big banks get making the risks of one of them failing so very much worse leading to a very distorted market with a great potential for moral hazzard if the right sort or regulation is not put in place.

http://www.nytimes.com/2008/07/15/business/15alliance.html?ref=business

Should Santander really be buying themselves deeper into the British market and what was the bung from the BoE to make them do it?

It is very hard to say how fucked we are. I suspect we are very fucked, but not dead in the water.

What the so-called sub-prime crisis has done in the short term is to call into question the value of a huge amount of assets, both real estate and mortgages amounting to trillions upon trillions of dollars. Nobody knows what a house 'should' sell for right now.

It isn't that houses are suddenly worth the same as cardboard boxes, or mortgages are suddenly reduced to worthless pieces of paper. They still have considerable value, but with no exactness. Because real estate and mortgages are such primary assets in both banking and personal finance, not knowing their value also calls into question the exact value of money in relation to all other goods.

Generally speaking, the market is where that value is set, and the bond trading floors, brokerages and interbank transactions are very liquid and very responsive and serve as a proxy for the whole market, giving swift feedback that bankers and brokers rely on.

But the real "market" is the bigger world, where real people buy houses and make mortgage payments and the disparity between this fundamental market and the financial "proxy" markets suddenly was exposed as huge, and all that financial paper in the proxy markets had been trading on a basis of fraud and delusion.

This sort of uncertainty throws markets into a tizzy. Bankers and brokers today are living in a murky haze where shadows and substance are hard to distinguish. They are pretty damn spooked about that.

Until this sorts out, and the markets rediscover what the broad, real economy can deliver, as opposed to what the face value of their paper assets are, there will be a liquidity problem.

In the Great Depression, liquidity got so seized up that it brought 30% of the economy to a screeching halt and a lot of things broke, including large numbers of banks. The panic you hear simmering in the distance is the fear that something similar will happen.

The central banks are working desperately to stave this off by making loans against paper assets that have no known value and hoping that the whole contraption can be kept inflated by trading Fed-backed "cash" for paper the markets won't accept. (Except the Fed-backed "cash" is just as much "paper" as the other is.)

We'll see. There's either going to be a lot of inflation, but an economy that operates with some degree of efficiency, or a liquidity crisis, where cash is suddenly worth the same as your life blood. I would bet on high, stubborn inflation coupled with a recession as the more likely outcome. It'll be ugly, but not fatal.

I should have made clear that the way liquidity gets seized up is when a paper asset, say a bond, is offered for sale on the bond market, and the bond traders think, 'Gee, I know that bond is worth something, but I couldn't say what", their instinct is to offer nothing.

That is a full-on liquidity crisis. The bond market is meant to price the asset, and the feedback the market is giving is the asset is worth nothing. This is like going from 100 kph to 0kph in nothing flat.

Won't it depend which way Governments and Central Banks approach the situation? How much propping up will there be. It seems likely they will do this as much as possible which could draw things out longer. They want to prevent a severe recession but in doing so this will keep things seized up for longer. As Aimless says, it comes down to deflation vs inflation

Wouldn't really want to be in bonds though

As for how much longer, haven't we been in an effective downturn since 2000? Maybe another 8-10 years?

The other thing worth noting on this thread, is the fact that is that this crisis has helped catalyze an epochal shift in economic power relations. The US dollar as the international medium of exchange has lost a lot of trust as its value has sunk. (This will only be totally obvious in hindsight, obviously, so it's mostly personal opinion, but anyway.) This doesn't meant that the US doesn't have one of the most resilient and dynamic economies in the world - I think it does - but exactly how all the pieces fit together in 20 years will be interesting to see.

I know US consuners are focused more on gasoline and house prices, but here in Russia, the increase in food prices is really astounding.

K, it's obvious to me that the Federal Reserve will dilute the dollar as much as necessary in order to maintain liquidity. What will shock most Americans will be how much dilution will be necessary.

If the dollar's decline is too swift, it could lead to another worldwide liquidity crisis, for the same reasons I outlined above: foreign currency traders, brokers and bankers won't know what "a dollar" is worth, and will not want to be long on dollars for even a day. US citizens will also try to convert their dollars into commodities or foreign currency.

We see this dynamic at work already, but not yet at crisis levels.

Agreed. While this has been the case for decades it has sped up since 2000 remarkably.

The US must be hoping that other currencies are forced to do the same, this has worked (mainly) so far, but for how much longer.

will not want to be long on dollars for even a day. US citizens will also try to convert their dollars into commodities or foreign currency

And you can imagine what this would mean for the dollar denominated price of those commodities

Should Santander really be buying themselves deeper into the British market and what was the bung from the BoE to make them do it?

I would imagine they feel that the housing market isn't quite as bad as it's made out to be, therefore now is the time to snap up some mortgage lenders cheap. House prices here (NW), for example, are holding steady and the market's relatively brisk. Naturally when house prices in the south east fall then oh noes surely these are the end times, same way as when it's raining in London the BBC goes blimey what bad weather eh even if the rest of the country's having a heatwave.

This is naturally not be all Panglossian about the situation, things are clearly pretty bad, but this doesn't seem to have quite the apocalyptic feel of the early nineties recession. From my own perspective I've seen a fifty percent growth in gross profit in my business over the last couple of months, various suppliers report solid trading. I keep hearing about it all going horrribly wrong, but I'm just not seeing it.

Freddie Mac and Fannie Mae are banks? What are your doll manufacturers called then?

I don't really think you see the effects on the street for a couple of years later. The Dow in spring 1930 had actually recovered around half its losses and was worth somewhere between 80-90% of its 1929 peak. The real falls occured more gradually from there over the next few years and hit bottom in mid 1932 nearly 3 years later, where it was more like 15% of its 1929 peak. While this scenario isn't exactly the same I wouldn't be expecting things to really come apart for another year or two

As for the 90s recession in the UK I think that affected different regions of the country at different times whereas its more likely that this time around different regions would be affected in unison.

is anyone on this thread actually fucked?

wot, like proper fucked?

Fair enough, there is a time lag on these things.

That's my point about regions. It's not actually a nationwide thing, or doesn't seem to be. If you're looking at the housing market as an indicator some regions are in fairly rude health. Others have been hammered for years but nobody noticed cos it wasn't the south east.

xposts

dunno, i might be if it keeps on for longer than a year or so but it's impossible to say at the moment

The metaphoric question is whether we will see troops of cockroaches scuttling into the light or discover that a colony of termites have eaten the foundation under a load bearing wall?

the actual metric for this, I think, would be how often in a given time period "WE GONNA DIE" gets posted to the shitbin threads

it's funny, this morning I was thinking we may have gotten to the point where deregulation and globalization in the financial industry combined with its huge growth in % of GDP over the past decade have actually made the Federal Reserve obsolete. Barry put up that graph of how no matter what Bernanke does the markets respond weakly and very briefly at best. it's like slapping a parachute.

Soon we shall all be reduced to hawking tie-dyed t-shirts at Dead concerts and living in the back of rusted-out 1982 Ford Econo-Vans.

WE GONNA DYE!

I'm very interested in what Santander's logic might be, given that they have big exposure to the worst two housing markets in europe in terms of how much they appear to have bubbled. Coverage suggests that they will be pumping in money, restricting new lending etc. What do they know? What do they suppose? Are they on to something or are they going to tumble when hit by a big wodge of circumstance.

I suspect that they think that inflation will erode people's liabilities and that they can make money whilst people hang on.

Chap on the radio today saying that demand side still bearing up in the UK housing market but that it is very much a buyers market. Still doesn't think there will be a housing crash in the UK. I have been in that camp for a long time but I am not sure that I can really support that position but I'm still not so sure that there will be a dive on the scale of the 90s.

Housing is not the be all and end all and the current M&A scene does seem to suggest that some companies are seeing, if not the bottom, then opportunities in the downturn. The difference being that acquisitions are being paid for in cash or equity rather than debt as in previous year.

Long term, economic power is gouing to be much more spread and on a personal level I think now is a time to skill up, get to grips with more languages and be ready to move places.

alternatively get a job with the guvmint playing whack-a-mole at problems that show every sign of only getting worse over the next couple of decades

Is tempting, given how much I am being paid at the moment to explain to danish person who calls himself a broadcast engineer HOW TO FIND A DRIVER ON A CD AND INSTALL IT IN WINDOWS X FUCKING P.

he did have the decency to describe himself as a clown

Chap on the radio today saying that demand side still bearing up

Demand is desire backed by money. I suspect what he means is that desire is still bearing up.

No, he was quite specific about there still being some money in the market.

What does 'some money' mean? What percentage of credit is available compared to 1998-2007 levels?

But doesn't the system requires that money supply has to increase by enough each year to pay off the interest on all the previous outstanding money. Can it increase by this amount?

Don't worry, y'all. Doofus is holding a presser today, he'll address/solve all these problems.

Oh wait, they're switching to live coverage now.

alternatively get a job with the guvmint playing whack-a-mole at problems that show every sign of only getting worse over the next couple of decades

-- El Tomboto, 15 July 2008 09:00 (5 hours ago) Bookmark Link

i did this, but given the fact I'm on a temporary contract and they've just targeted wage cuts of about 6% in my department, it doesn't seem to have worked.

Interestingly a recruiter rang me up today and asked me if I wanted a job on the railways. Maybe I should have taken it.

But doesn't the system requires that money supply has to increase by enough each year to pay off the interest on all the previous outstanding money. Can it increase by this amount?

Increase in the money supply is not necessarily inflationary if there is a corresponding increase in output so it is not necessarily doom that people have been borrowing, of course we probably don't have the growth right now to offset the increase in money supply that our recent borrowing has caused so now we have inflation, which is, in theory eroding the principle of the debt long term even if, short term it is harder to pay because of high interest rates.

Date is not accurate but to sum up:
http://www.cartoonstock.com/newscartoons/cartoonists/gfo/lowres/gfon135l.jpg

Increase in the money supply is not necessarily inflationary if there is a corresponding increase in output

And money supply has been running at what for the last 10 years? And what have we been outputting exactly?

now we have inflation, which is, in theory eroding the principle of the debt long term even if, short term it is harder to pay because of high interest rates.

But interest rates are not high.

And the only kind of inflation that can erode debt is wage inflation - commodity inflation doesn't erode debt.

Interest rates are high relative to those at which people over extended themselves during the credit boom. Because people borrowed much more than the had historically much smaller changes in interest rates are a much bigger deal.

Wage inflation is happening, and will continue to happen, but it is not a smooth process and might never happen in some sectors.

UK has been outputing financial services, which , admittedly are some what of a leech on other peoples' more stakanovite productivity but nonetheless is real output.

Smaller percentage changes are unrelated to the size of a number. an increase from 1 to 2% will always be a much larger than an increase than from 5 to 8% regardless of how large or small the amount. Interest rates are historically low across the west and certainly below long term average

Not seen any evidence of wage inflation and even if wage inflation were to occur can't see it being enough to offset unemployment increases. Only way to increase wages is to debase currency further - driving up food/fuel prices

Not sure output has kept pace with money supply growth either

Wage inflation is happening where workers can put the screws on (See the tanker drivers for example), it's not public sector finance or construction but it is happening.

will try and dig some stats up.

http://www.statistics.gov.uk/CCI/nugget.asp?ID=10

Lagging RPI, in line with CPI.

Workers in some sectors doing well:

http://www.statistics.gov.uk/statbase/tsdtables1.asp?vlnk=emp

http://www.nytimes.com/2008/07/16/business/worldbusiness/16jet.html?ref=business

Don't the RBI makes the fed look like amateurs when it comes to printing?

Wage inflation is happening where workers can put the screws on (See the tanker drivers for example), it's not public sector finance or construction but it is happening
So if the wage inflation is not happening in the public sector or in construction arguably places that need it the most then what is the point may I ask?

I don't think need really comes into the argument. I was only trying to illustrate that wage inflation is here and happening for a lot of people.

Remain to be convinced of the above -- unless wage increases are being paid for by cutting staff in which case maybe. Certainly dispute 'a lot of people'. Which people? Which industries?

I don't think its out of realms of possibility, weakening the currency would allow wages to increase and then maybe you get your 'inflate the debt away' scenario. But at what cost to food and fuel prices?

Ireland and Spain don't really have this option do they? They cannot devalue unless they leave the Euro

But at what cost to food and fuel prices?

These would rise causing consumption to fall (as indeed is happening right now, 1.3million people considering selling their cars, decline in discretionary driving etc.)

The big winners are All health and social work, Other Services and the admittedly rather negligible mining and quarrying.

If you fold in bonuses, food processing leaps into the lead with a massive 10.8% year on year wage growth.

feeling anything yet?

Apart from overwhelming glee and joy and the collapse of capitalism?

capitalism seems to be surprisingly resilient

Absolute fucking dread at the thought of 2009.

(xp) Unfortunately

I for one am pleased to be able to hide out in a university for a year.

feeling anything yet?

Surprisingly little. I still haven't got any money.

I for one am pleased to be able to hide out in a university for a year.

was it expensive? will you be working as well?

Absolute fucking dread at the thought of 2009.

Feel relatively likely to remain employed throughout 2009. 2010 is another matter entirely.

It is frighteningly expensive, but it skills me up in very practical ways to dump me either in what should be a growth industry even in a downturn or back to my current one which is, to a certain extent, counter-cyclical.