Thursday, April 12, 2007

Links of the day

'Resource Utilization' - The Root of the Fed's Motivation...has some good historical charts...

A Demographic Perspective on ETFs..."China's one-child policy has resulted in a slow-growing population with an unintended consequence of too many boys"...I disagree...The Chinese problem of too many boys can certainly not be referred to as an "unintended consequence." Chinese family culture revolves around the idea that boys are more desirable than girls, and I seriously doubt that Chinese leaders failed to take this into account when they implemented the one child policy. I think they just didn't care, because they bought into the "boys are better than girls" mentality. The real unintended consequence of a huge excess of men vs women in Chinese society is likely to be social and political destabilization. A large number of these men will be from the lower end of the economic spectrum, and sociologists agree that a group of under- or un-employed single men is a recipe for crime and rebellion...

Utah farmer needs a lesson in the website of the Deseret News, there is a story today titled "
Immigrant needs, woes: Cannon meets in Utah about the AgJobs bill"...a farmer is quoted as follows:

""For about five years now, we've been short on labor every single day," said Scott Patton, who runs Delta Egg Farm. "You can't hire anybody for $10 an hour."
Patton said companies in his industry have worked for years to keep egg prices low, but facing a shortage of legal, willing labor, many companies like his are now forced to replace people with expensive machines. "We're going to have to mechanize some positions," he said. "We don't want to; it's going to cost a lot more, and that price is going to be passed on to the consumer."

For starters, in the long run, automating any part of the work that can be automated will result in lower costs eventually as the producer realizes economies of scale. Plus, this guy just doesn't want to cough up for the cost of the machine when you can just pay illegals under the table. The gist of the Cannon bill is that its supporters are admitting they've been employing illegals...

Planned obsolescence...Tyler Cowen at Marginal Revolution makes a list of "
coherent microeconomic theories of planned obsolescence"...worth a read...

Fannie Mae on 2007 ARM Resets...Calculated Risk has some good charts on upcoming ARM chart shows $60 billion in subprime ARMS where the borrower had a FICO greater than 700...that begged the question by Tanta of "
how that big chunk of loans with a FICO over 700 and a CLTV of 80% or less found its way into a subprime security." Here is a comment on that post that explains the answer:

"As a borrower with a 700+ FICO, I'll tell you exactly how I ended up in Alt-A, in early 2002.

The median home price in Palo Alto, where I live was (and still is), well in excess of one million dollars. (My home is way, way below the median--it was one of the least expensive houses in the entire city.)

But you can't stay prime for super-jumbos, no matter how much you put down nor how much your income is, nor how good your credit score is.

I had 20% down and plenty of income to cover, but none of that matters if the size of the loan is too big. I would have been an easy prime borrower if I had been looking 75 miles from my office, but I'm alt-a because near my office is so expensive.

Now, how people got into ARMs is a different matter. But Alt-A doesn't necessarily mean "relatively bad credit", it can also mean, "large loan"."

Another good comment from the same CR post:

Doing a bit of number crunching from chart #2, there is a total of $273 of subprime MBS with 2007 resets. Of that, worthless garbage almost sure to default, namely FICO less than 660 and LTV of 97%+ is about $65 billion.

Given the costs of foreclosure and reselling a very weak market I would guess wipes out 50% on average's claimed "value," then this means about $15 billion of losses if we conservatively guess that less than half of borrowers with low ficos, high interest rates, loans resetting to higher rates AND negative equity default.

I wouldn't be surprised if 75%+ of these worst of the worst subprimes go into default in 2007. After all, the overall rate which includes many low LTV and high FICOs is about 15% and rapidly rising. In that case just this small chuck of mortgage results in losses of $24.3 billion.

For the $65 billion in garbage loans, we're talking about people with a history of not paying bills on time, who are in way over their heads, who have less than 0 equity, and who of course were either not told about resets, or were told "you can just refinance before it happens."

This $15-25 billion of losses of course is just from one small part of the MBS subprime pool. Overall losses of $100-150 billion in 2007 are not far fetched. Yet where are the write-offs for these seriously impaired assets? The only really big write-offs I remember have been the brokers who have gone bust (big write-offs for shareholders), ML writing off a few hundred million from Ownit, and HSBC's big write-off of about $10 billion.

We are *so* headed into a credit crunch. The strong employment numbers last month, plus the increasing interest rate and appreciation of the yen, mean that neither the Fed nor the BoJ can help.

I also think the fed govs feel bad for getting Bush reelected by dropping rates to 1% and starting the whole bubble, and they don't want to repeat their mistake by getting another Republican in 2008 by priming the pump and heading off the needed 1982-type credit crunch deflationary recession that should start around Q1 2008. Listening to some of their remarks, it is clear that a big chunk of them, if not a majority, are extreme inflation hawks.

I do think we will stay on autopilot with moderate growth until consumers finally surrender and cut back spending this Xmas.

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