Tuesday, April 24, 2012

Fed Funds Rate history

It has been very low before:
When will the Fed raise this rate?

Sunday, April 15, 2012

Japanese company Olympus's $1.7 billion fraud

How Do You Hide A Multibillion Dollar Loss? Accounting For The Olympus Fraud

"What is the amount of the fraud and time frame?

According to the report, the company had incurred substantial losses on financial investments by 1990. The report indicates that through 1998 very large losses were incurred, but the investments were never written down.

The whole project got started as 2000 approached and new accounting rules would require writing down the investments from book value to market value.

Olympus indirectly loaned money to an off-the-books subsidiary and then sold the investments that had the huge losses to the subsidiary at historical cost, eventually paying a huge premium to buy some other small companies and writing off the underwater investments as if they were goodwill impairments.

A few thoughts here on the auditors’ actions:

How do you perform an audit for a global investor audience in a local economy where intentionally hiding losses is legal? How do you function in a business environment where that is acceptable and normative?

Worth a full read.

Harder to qualify for a home loan

Qualifying for a mortgage has gotten much tougher, analysis shows - latimes.com

To fit the profile of just the average successful applicant for a conventional home purchase mortgage in February, the latest month for which data are available, here's what you would have needed:

•A FICO credit score of 764. Not only is this higher than the average score for approved loans as recently as November, it's far beyond the 620-640 FICOs that Fannie Mae and Freddie Mac once considered the minimum for a conventional prime mortgage. It's also well above the median FICO score nationwide, which is currently 711, according to a spokesman for Fair Isaac Corp, developer of the score.

•A loan-to-value (LTV) ratio of 78%, signifying a down payment of 22%. This is higher than even the controversial minimum of 20% proposed last year by Obama administration financial regulatory officials who were seeking a standard for "safe" loans offering the lowest available rates and best terms.

•Debt-to-income ratios of 21% for housing expenses, 34% for total household monthly debt.
How about the profiles of people who applied for conventional loans to buy a house but were rejected or didn't get to closing? By historical standards, they were a fairly impressive group on average as well, with 732 FICO scores, 19% down payments and debt-to-income ratios of 24% (housing costs) and 41% (total debt).

Homeowners who refinanced existing conventional loans had the best profiles of all: average 770 FICOs, 65% LTVs indicating 35% equity stakes, and debt-to-income ratios of 22% housing and 32% total debt..

It doesn't matter what the house price is, if you can't qualify (20% down!!), no sale.

Tuesday, April 10, 2012

Floating value federal reserve notes

A few thoughts on the prospects of floating rate Treasuries (re Money and Collateral):

The key from that paper is this:

"This discussion was conditioned by the similar situation faced by the U.S. Treasury in 1919 after it promised to stabilize bond prices during and after WWI. This policy caused conflict with certain Fed policymakers and the eventual losses on Liberty bonds were still remembered by Congress and the Treasury in 1951, 30 years later."

Per Wikipedia the Treasury defaulted on these bonds and:

"The Act of Congress which authorized the Liberty Bonds is still used today as the authority under which all U.S. Treasury bonds are issued."

So the FRN's would be designed to make good on losses to T-holders when the Fed exits ZIRP.

Hedge funds toxic

...we have this huge hedge fund industry. This means we have a huge amount of ponzi finance in the economy which always results in a major financial crisis.

Until the hedge fund is reduced to rubble a crash is coming.

That's just how it always is.

In the Great Depression we got rid of this industry (though they were called investment pools and other names at the time).

The tragedy of the Great Recession is that hedge funds survived and thrived...

Monday, April 02, 2012

Troubling health trend-diabetes

The concentration in the Southeast is notable; the Ohio River and the Mississippi are roughly the boundary of the concentration. Diagnosed diabetes seems like a better indicator of obesity than BMI because of variations in body types.

2008 Age-Adjusted Estimates of the Percentage of Adults with Diagnosed Diabetes

Debt grows exponentially while physical economy grows logistically

I found this concept described at George Washington’s Blog in The Elephant In The Room: Debt Grows Exponentially, While Economies Only Grow In An S-Curve. During the dot com era the concept was referred to as “trees don’t grow to the sky”. Hubbert of Peak Oil fame demonstrated that given a finite amount of a resource (oil, in his case), production of a resource can temporarily grow exponentially but peters out as the resource is depleted to zero. The graphical representation of this is the logistic curve or “S-Curve”:

The article linked above quotes economist Michael Hudson:

"Every economist who has looked at the mathematics of compound interest has pointed out that in the end, debts cannot be paid. Every rate of interest can be viewed in terms of the time that it takes for a debt to double.

At 5%, a debt doubles in 14½ years; at 7 percent, in 10 years; at 10 percent, in 7 years. As early as 2000 BC in Babylonia, scribal accountants were trained to calculate how loans principal doubled in five years at the then-current equivalent of 20% annually (1/60th per month for 60 months). “How long does it take a debt to multiply 64 times?” a student exercise asked. The answer is, 30 years – 6 doubling times.

No economy ever has been able to keep on doubling on a steady basis. Debts grow by purely mathematical principles, but “real” economies taper off in S-curves. This too was known in Babylonia, whose economic models calculated the growth of herds, which normally taper off. A major reason why national economic growth slows in today’s economies is that more and more income must be paid to carry the debt burden that mounts up. By leaving less revenue available for direct investment in capital formation and to fuel rising living standards, interest payments end up plunging economies into recession. For the past century or so, it usually has taken 18 years for the typical real estate cycle to run its course."

The logistic curve is a description of exponential increase and decline in growth rates. The inflection point where the trend shifts from increase to decrease is the commonly referred to "peak", reference with respect to oil production, for example.