Sunday, April 12, 2009

Your Lyin' Eyes

The extent of the dichotomy between the ordinary world in which ordinary people make decisions about their financial savings, and the financial world in which current, former or wannabe Masters of the Universe live came home to me today by considering the juxtaposition of some the following blogs I viewed.

First, Mike (Mish) Shedlock's post on mall closures, America's Love Affair With Malls Ends; Toxic Drywall; Halted Projects; and Vacant Dealerships:

Four hundred of the 2,000 largest shopping malls have closed; construction is halted on hi-rise construction projects; and no one knows what to do with the increasing number of vacant auto dealership lots.Let's take a look at each of those commercial real estate disasters starting with The Vanishing Shopping Mall.

For much, much more please go to the source articles hyperlinked above.

Next, from CR, an example or two of commercial real estate halts. First, from Stalled CRE Projects in D.C (which links to a Wash-Post article).:

"Everybody is building these big buildings, and they're empty. It is sad. I live in a ghost town."

Robert Siegel, an advisory neighborhood commissioner;

and CRE Bust: A Hole in the Ground:

From The Oregonian: Construction of downtown Portland high-rise is halted by tight credit (ht Shawn, Justin, Neil)

Tom Moyer, one of Portland's most successful real estate developers, will halt work Monday on his 32-floor tower now under construction in downtown Portland.

Moyer's decision to pull 350 workers off the Park Avenue West is a stunning sign that no city, no person and no block is spared from this recession.

... The building, originally scheduled to open in 2011, already was more than half leased by a law firm and a Nike store.

OK. I get the above. It's easy to summarize. The fact that 20% of the country's largest malls have closed entirely is almost impossible to believe. After all, the 80% that remain are seeing surging vacancies. It is said that from a boom peak to the bust trough in the Great Depression, industrial output dropped 25% in volume and (say) 45% in dollar terms. Given that the U. S. has outsourced a great deal of its production to Asia (much which has seen Great D levels of production and export drop-offs), then is not the closure of 20% of the largest malls a modern
Depression equivalent? What does one think about the cessation of construction of a large office building that is already more than half leased, 2 years before completion?

Then one reads the well-regarded markets blog Zero Hedge and comes across this in today's post, Quantology Revisited: The Negative Convexity Implications of Delta-Hedging:

I thank readers who provided tremendous insights on the market illiquidity post. However, one point that nobody mentioned, which may very well be at the heart of the problem, has to do with the issue of negative convexity from a delta-hedging perspective. Zero Hedge had previously discussed the implications of this very peculiar phenomenon two months ago in the context of CDO trend chasing in the CDS market and how negative convexity (especially in illiquid markets) leads to explosive and self-fulfilling rallies on either side.

I thank an anonymous reader for presenting the missing piece of the puzzle, and taking the convexity argument one step further from merely structured finance to the entire market. I welcome responses and apologize for the thematic wonkiness, however there is only so much simplification that can be presented. But a simplified attempt: we have crossed into territory where the negative convexity consequences of delta hedging will keep on pushing the market in a straight line in whatever direction it is moving until we see a violent reversal and the delta hedge breaks due to lack of vol to "feed it", which will be, in the parlance of our times, the market's epic fail.

Note: The link to the "market illiquidity" post on Zero Hedge is worth a look, in the context of this commentary because of its further opacity.

The bottom line at EBR from Zero Hedge is that individuals cannot/should not be involved with this stock market, because obscure trading strategies dominate what goes where and how long and strong the trend is. If a non-professional market veteran such as I cannot even understand what a blog such as Zero Hedge is talking about with consulting Investopedia, what is going on the financial markets?

Bottom bottom line at EBR involves the following thoughts.

When the Government performs a bogus stress test on large financial institutions and delays announcing the results until these institutions put out carefully massaged earnings releases that are "better than expected" due to refinancings created by massive Government purchases of bonds and generally low interest rates due to the ongoing economic collapse as well as due to understating loan losses; and when the Government will only provide general summaries of the findings; when Paul Volcker is (semi)-officially revealed to have been used only to get Barack Obama nominated and elected; when China "stimulates" more and more fixed construction on top of the unoccupied Beijing real estate recently built which exceeds the entire office space of Manhattan; when our Government keeps asking us to believe its current economic numbers while continually revising numbers downward 1-2 months earlier; but the most accurate analysts on the financial and economic meltdown continue to not like the fundamentals of the economy vs. the official and consensus view:

Who and what do you believe, the Government, or your lyin' eyes?

Copyright (C) Long Lake LLC 2009

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