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Monthly Archives: March 2009

The dollar is expected to weaken. This is great news, because if it does not result in high inflation, we can expect manufacturing jobs to return to the US. This is indirect job creation when this economy really needs new jobs.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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Felix Salmon’s blog How Much Worse Can AIG Get? got me wondering.

If AIG believes that it must pay $165 million in bonuses to retain it key people at the severe risk of public rath, and government displeasure, don’t you think that the problems we have seen at AIG are only the tip of the iceberg?

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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Steven Chu, Nobel Laureate, has expressed similar concerns about the effect of oil prices on the economy as I have in Watch the Pump Prices. That is really great.

I believe if we hasten the development and commercialization of non-fossil fuel energy sources, we can create a tremendous number of new skilled and white collar jobs while solving the fossil fuel addiction problem.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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Bankers Say Rules Are The Problem. Bankers can’t serious about changing mark-to-market accounting rules can they? This must be a joke, right?

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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My neighborhood’s cheapest gas price at the pump, jumped from $1.66 about 10 days ago to $1.82 today. That is too close to the $2.00 mark.  

My earlier analysis showed that the US economy slows down if pump prices exceeds $2.00 a gallon. So don’t expect an early recovery, this year. At this rate we are looking at a recovery in 2010 at earliest.

Here, Oil prices slump below $44 on inventory report, we have confirmation that consumers are conserving cash for really important things like potentially expensive commutes to work and back, for those who still have jobs. That has caused reductions in consumption purchases and resulting reduction of trucking of goods.

Disclosure: In a previous life I examined 330,000 residential mortgages and 220,000 CMBS assets, and was surprised to find substantial unusable data in these assets.

I read Pandit memo: Citi profitable in 2009, and it got me thinking about my own work and findings in loss modeling. I have no doubt that Citi would be profitable some day, given the amount of bailout funds it has received.

What concerns me is that the stress test was completed in a matter of weeks. This suggest that Citi and other banks are using the same risk models and stress testing that got them into this mess to redo their stressing.

That the assumption these banks are making is that their models are still correct but they need to increase the severity of their stress factors. For example if you originally expected an average default rate of 1.96% you now use say 2x or 3.92%. Maybe some additional combinations such as also increasing average loss severity from 35% to 55%.

Sorry this does not fly with me. My work with CMBS loss models shows:

1. That the more popular loss models are significantly biased. The problem with statistical bias is that stressing them more does not give a better understanding of future losses.

2. Some of the model factors don’t even work or don’t work correctly.

3. Nassim Nicholas Taleb’s Black Swan hypothesis suggests that the CMBS Black Swan’s are on the order of 20% to 80%.

4. To do real stress testing you have to know 3 numbers, VaR, CVaR and Black Swan.

5. It takes at least a year to develop new stress models, not days or weeks.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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Forbes’ article, General Motors Crash Warning, pointed out that the auditors, Deloitte & Touche, had “substantial doubt” that the automaker can stay in business.

First a disclosure: I own a GM SUV but do not own any GM shares. I know that my GM dealer/servicer, Burt GMC, does an excellent job; and I used to work for GMAC.

The real problem with the GM management is that GM has been losing market share for the last 50 years and has not done anything to stop this loss.

This is a very poor reflection of the management culture at GM. I have seen this type of behavior at other manufacturing companies, that many times when bright, highly skilled managers come together as a team at the senior level they do strange irrational things.

My first assessment is that GM will continue asking for more bailout funds and the government will have to Give More.

I would recommend that GM be split into several companies and that would give breathing room for new management cultures to take root.

Yes, I can hear the ‘experts’ saying that GM requires scale economies to compete. This is false.

First, Toyota started out as a tiny company that has now surpassed GM. The other Japanese automakers, Honda, Nissan & Subaru all came out of tiny or previously non-existent companies while GM was ‘king’.

Second, inspite of GM’s existing scale economies it has continued to lose market share for the last fifty years.

My second assessment is that GM’s management culture put a premium on profits at the expense of cashflow. An onerous profit focus leads to gaming the system, profits today at the expense of future losses. 

If GM was cashflow-focused first, and only then profit-focused, this would have lead to management objectives that included market share growth, and real business strategies.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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There was this article in CNNMoney, Consumer credit: Surprise $1.8 billion jump, that suggested that consumer’s credit card borrowings increased by an annualized rate of 1.2% or $1.8 billion, however, economist were expecting a fall of $5 billion, signaling that households may have started to loosen their purse strings.

Yes, this would be the correct intrepretation in a normal healthy economy, but our economy is shrinking and has been throwing off 100,000s of jobs every month for more than a year. Current unemployment now stands at 8.1% or about 11 million.

The correct intrepretation is that consumers are hoarding cash and switching to credit cards to make their payments. Why? Because of the zero income survival strategy.

First, at the household level, in a zero income household, the survival strategy is you use your cash to make your mortgage and car payments first, and eliminate all unnecessary purchases.

Second, consumers shift down their credit card payments from full outstanding balance to minimum payments to conserve more cash.

Third, at the regional/national level, as the consumers’ period of unemployment increases and as the numbers of unemployed increases, this household level behavior translates to more spending moving to credit cards to conserve cash combined with less credit card payments.

There are two key measures to the health of the credit card industry that the industry should be watching in a downturn,
1. The change in the proportion of card holders making minimum payments.
2. The change in the proportion of outstanding debt to card payments.

If both have increased then my intrepretation is correct, if not then this is a good early signal that a recovery is in sight.

Of course if the increase in consumer credit is due to the zero-income survival strategy,  that means that when your cash runs out you default on your card debt. And that is not good news for the banks.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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