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

Banksters of the World Unite: Set Our Bonuses Free

I woke up truly intending to comment on markets and hardly at all on the Treasury banking scheme, but there is simply enough good new stuff on it that for all intents and purposes proves that the "rip-off" characterization used in my quick take on the plan mid-day yesterday is correct, that one more post appears appropriate. 

One of the deans of financial/economic blogging is "Calculated Risk" (www.calculatedriskblog.com).  "CR" is as fair-minded as any financial blogger I have seen.  Here is his post from late last night.  ("Tanta" is his now-deceased former partner in the blog, and a mortgage specialist, as you will guess when you see the part relating to her.)  It would appear that CR has turned against the Treasury proposal.  CR's post from 10:19 PM March 23:

Austan Goolsbee, of the White House Council of Economic Advisers responds to Paul Krugman on Hardball. (ht (= hat tip) David)

A couple of comments: Goolsbee claims "if the private guy makes money, the government makes money. If the private guy loses money, the government loses money." Goolsbee is correct on an individual pool, but investors can buy multiple pools and Nemo has an excellent example of how the investors can make money, and the government lose money. 

Goolsbee should read that example.

At 4:40 Goolsbee essentially agrees with Krugman's column:

[T]he Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.

It's not a complete one-way bet on any individual pool because the investors do put a small amount of money down - and that small amount is at risk. But Krugman was referring to the non-recourse debt and he is correct.

BTW, Tanta once ripped Goolsbee - very funny: Dr. Goolsbee: I’ll Stop Impersonating an Economist If You Quit Underwriting Mortgage Loans 

DoctoRx again.  CR's post references Nemo's "Self-Evident" blog, which, in two parts, dissects the math of the giveaway.  It's readable, for those with real interest in the details.

Note that the giveaway is both to the financial institutions and the buyers of their garbage.  The losers are everyone else.

The Wall Street Journal also has a telling article today, "Obama Dials Down Wall Street Criticism".  Here are some quotes.  I especially like the mention of Rahm Emanuel's recent career choice (NOT community organizer!).

WASHINGTON -- The Obama administration, after months of criticizing Wall Street, has been scrambling to woo top bankers and financiers to back its latest bailout plan.

 (Ed:  "Woo" = "bribe", money being the only language banksters respond to.)

The administration's initial approach contrasted with those of the last two White Houses. Robert Rubin left Goldman Sachs Group to become one of Bill Clinton's top economic advisers, and convinced the new president that what was good for Wall Street was good for America. Under President George W. Bush, the administration "looked up to and admired Wall Street," says one banker. "The Obama folks don't even like us."

(DoctoRx here.:  But that's all over now.  Hundreds of billions in Federal money is much better than "like".  It's true love.)

Goldman Sachs President Gary Cohn saw the contrast in person when he visited Chief of Staff Rahm Emanuel in early March. Goldman executives wanted to be part of the dialogue reshaping their industry, according to one Goldman executive. Instead, Mr. Emanuel lectured about how Wall Street "mispriced risk" and then expected Uncle Sam to pay the price for it. "My shareholders are called taxpayers," said Mr. Emanuel, who had previously worked for about two years as an investment banker.

The article concludes:

The banks' message: If you want our help to get credit flowing again to consumers and businesses, stop the rush to penalize our bonuses.

(DoctoRx here.:  That's why they call them banksters!)

The Administration has put lipstick on the TARP pig.  This pig is worse in many ways more porcine than the initial Paulson-Senate "TARP I" bailout pig, in which at least in theory the Government had as much chance of making money as losing it but where Wall Street had only a minor middleman role, and from which Congress and Paulson quickly ran away.  But to be a bankster means never having to say you're sorry and never ever stop working to take other people's money.

Once again the Government is siding with the giant financial companies rather than ordinary citizens. In the people vs. the powerful battle, the powerful win again.  We are getting Hoover when we need FDR.  

Any surprise why Wall Street voted "Aye" yesterday?

But for taxpayers, the correct word is . . .

"Oy!".

Copyright (C) Long Lake LLC 2009