Ponzi Economy

this is an article i tried to link to in march of 2007. but i was lazy blogger.

http://www.iimagazine.com/article.aspx?articleID=1234345

at this point all i can say is that, for now, we skipped 1929 - 1939. what's next?

China to enter aircraft market

Very cool article from FT about how China intends to compete with Boeing and Airbus in the market for large passenger jets. This is big news because the Chinese market, at ~$350 billion, is likely to be the second largest market (behind the US) over the next 20+ years. The international market as a whole is valued at $2.6 trillion over that same time span.

What really interests me is that the people quoted in this article see China as a really credible threat. It has forced Boeing and Airbus to manufacture parts in China as well as do a lot of tech-transfer, in the hopes of building up a domestic base of technical expertise. It now looks as though China feels it has the expertise to begin the launch of a full-fledged domestic aviation/aerospace industry, thanks in part to knowledge gained from those Western companies. This just demonstrates how China is using its market size (and consequent market power) to further its own long-term ambitions. And of course, the fledgling industry is going to be supported by a lot of government money [though no mention of how much, as of yet].

See quote below:
- "Steven Udvar-Hazy, chairman and chief executive of International Lease Finance Corporation, one of the world’s top two aircraft leasing companies and one of the most influential purchasers of new aircraft, said last week that both China and Russia could develop aircraft capable of competing with the Boeing 737 and Airbus A320 families of single aisle jets within 15 years with government backing and technology gained from both companies."

Business Community Changes Course on Climate Change

This has been brewing for sometime, but the business community here in the US is finally getting behind the idea of national regulation of greenhouse gas emissions, including carbon dioxide. The latest group to come out in favor represents the big Wall St players.

The specifics of what they are calling for:
- “size-able, sensible long-term cuts” to US carbon emissions.
- It said Congress should also establish an economy-wide carbon price to stimulate the creation of a US cap-and-trade regime.

The reason why is simple - they are afraid of the regulatory risk that comes about through inaction. They don't want to face a patchwork of state-by-state regulation and they know national policy will eventually be drafted on this issue :

- “In the absence of strong federal leadership there is a risk that US businesses may get left behind, losing ground against competitors in the rapidly growing global market for low-carbon solutions,” it said in the statement.

- “By establishing a national policy rather than leaving leadership to the courts and state governments, it would remove unnecessary risk in asset management and corporate governance and help to regularise an increasingly complex regulatory environment.”

With big business on-board, passage of nationwide caps combined with cap-and-trade (thereby using market incentives to figure out the most efficient methods of reduction) are inevitable. It would seem to me that the real remaining questions are:

1) Will the business lobby support truly meaningful reductions, or will they aim for a cap that isn't agressive enough/efficacious?

The recent moves we are seeing by the business community are intended to give them a seat at the table when the policy gets made. To whatever extent they can, they will attempt to get a system which is less stringent, with higher caps than what are truly required. The hope is that the policy eventually gets made around the science, but that seems like a duboius proposition.

2) Will the Bush Administration work with the other parties to move this kind of policy forward, or will we have to wait until the next president's term to see action?

I don't think I need to spell out my view on this one.

Airbus A380

It's arrived in America (somewhere in here is a link to a youtube video of the plane).

Airbus will probably lose out on this to Boeing (see here). But it's still pretty cool. And huge.

SXSW

South by Southwest music festival is the event in the music industry. Here's a short article from the Times covering the event and its metamorphosis into a large music industry networking event (perhaps in some ways eclipsing its status as a musical/cultural event). I just had a friend return from SXSW and some of the bands he noted as really mind-blowing were:

Illinois (mentioned in the article)
the Lemurs
La Mita
AM Syndicate

Key Quote:
- If the festival has an overall message, it’s that musicians need to build their own support systems and hustle for themselves.

Ultimately, I think this idea dovetails nicely with the concept of "The Long Tail". I'm not going to get into it here, but check out the wikipedia article and resulting links. More and more, economic (and cultural) activity will focus on filling and marketing to niches, with much of this activity undertaken by individual entrepreneurs (or in this case, musicians).

Housing Market Meltdown redux

Lacking time to post but here's the rundown:

The WSJ reports:
- "Mounting troubles in the market for risky home loans, together with weak economic data, rekindled investors' fears of a broader malaise..."
- "We're kind of back to panic mode," said Stephen Stanley, chief economist for RBS Greenwich Capital in Greenwich, Conn. "It definitely reflects concerns about the mortgage area and the possibility that it would feed more broadly into the financial system as well as the economy."

And in line what I suggested in my last post:
- "But some noted that problems among certain types of "prime" borrowers -- specifically those who had taken out loans with adjustable interest rates -- were an ominous sign. The data "show that mortgage credit-quality problems go well beyond the subprime sector," wrote Jan Hatzius, chief U.S. economist at Goldman Sachs in New York, in a research note."

This problem looks like it truly goes beyond sub-prime borrowers and includes the many prime borrowers who were sold/convinced/conned into taking out exotic mortgages that they couldn't afford. As they roll-over to higher rates, they find themselves less able to maintaint payments and more likely to default.

It's not just individual borrowers who are getting squeezed however. It's also the big players on Wall Street who facillitated this borrowing binge. New Century, a leader in sub-prime lending, owes billions around the Street (It leaves one wondering what the Banks' exposure to other players is):
- New Century said yesterday that, starting last Wednesday, it had received a wave of default notices from its major Wall Street creditors, and may owe creditors a combined $8.4 billion for mortgage repurchases. [$2.5 billion is owed to Morgan Stanley alone].

The Banks are now trying to get money bank from the sub-prime lenders who they financed. But as in any traditional "run on the bank"scenario, the aggressiveness with which they are trying to recoup their losses in only further hastening the downfall of many of the sub-prime lenders. As such the Banks are likely going to have to right off a large number of these loans - taking a significant hit to their own bottom line:
- When it is unable to claim its money or believes it will be unable to, HSBC must write off the loans. In 2006, the bank said the loan-impairment cost totaled $6.68 billion for its main U.S. consumer finance business. That was 34% higher than in 2005. The bank has said it may take two to three years to work through its problem loans.

Housing Market Meltdown

The NY Times just put out the most cogent analysis of the current housing meltdown I have seen from any news outlet. The reporter, Gretchen Morgenson, asked all the right questions and got a set of very scary answers.

I think all signs point to the conclusion that we aren't anywhere near the bottom of the mortgage shakeout. The short version of the story is that the mortgage industry, bankrolled by Wall Steer, made a lot of loans to a lot of people who didn't have the capability to play. Now as their borrowers default, they stand to lose a lot of money, so much that many specualte it could trigger a recession.

The things that jumped out at me are below:

- Some banks have reported rising problems among borrowers that were deemed more creditworthy as well.

The story currently being covered by the media is focused exclusively on so-called sub-prime mortgages, those to people with a <660 size="2"> - Traders and investors who watch this world say the major participants — Wall Street firms, credit rating agencies, lenders and investors — are holding their collective breath and hoping that the spring season for home sales will reinstate what had been a go-go market for mortgage securities.

These guys know its going to get even worse. Their only hope is a sudden up-turn in the housing market - and they need it this spring. Good luck - there isn't any data out there to justify that kind of fantastical thinking.

I thought the chart below shows just how dependent the US economy of the last few years has been on the low-interest mortgage. 6% of all economic activity hear was funded through home-equity refinance. Americans have literally borrowed against their houses to finance the growth of the last few years. The sharp (50% drop) seen over the last 2 years presages even tougher times ahead, as there is no more equity left to withdraw.

- Owners of mortgage securities that have been pooled, for example, do not have to reflect the prevailing market prices of those securities each day, as stockholders do. Only when a security is downgraded by a rating agency do investors have to mark their holdings to the market value. As a result, traders say, many investors are reporting the values of their holdings at inflated prices.

Finally, it appears that the traders in these mortgage markets, themselves don't know or have yet to disclose the actual value of their holdings. The likely truth is that losses are significantly worse than what is being reported currently. My guess is siginifcantly larger losses across a borader range of players will be announced as time passes.