regulating the mortgage brokers would hardly have mattered
the following is a series of good read written by my good friend, a good old Tennessee Mac who is personal guru to HK moolah family. Read and weep or laugh.
Dramatic progression towards TeoTwawKi; we will learn about the Depression up close and personal, by one way or another path, Zimbabwe Outcome and/or Argentine Solution
Weekly Summary – 25 August 2007
Investment Recommendations:
Japanese Yen: Overweight
US Dollar: Neutral
Euro: Underweight
US Equities: Underweight
China / HK Equities: Underweight
Japanese Equities: Neutral
European Equities: Underweight
Volatility: Neutral
Gold: Overweight
Oil: Underweight
US Long Bonds: Underweight
US Short Notes: Overweight
Corporate Debt: Neutral
Emerging Debt: Zero Weight
What others are saying:
Bill Gross – PIMCO
Even cuts of 200-300 basis points by the Fed would not avert a built-in upward adjustment of adjustable-rate-mortgage interest rates,’ Gross said. ‘Nor would it guarantee that the private mortgage market, flush with fears of depreciating collateral, would follow the Fed down in terms of 15-30 year mortgage yields and relaxed lending standards. Granted a certain dose of market discipline in the form of lower prices might be healthy, but market forecasters currently project over two million defaults before this current cycle is complete. The resultant impact on housing prices is likely to be close to -10%, an asset deflation in the U.S. never seen since the Great Depression
Nouriel Roubini - Professor – Stern School, New York University
The current market turmoil is much worse than the liquidity crisis experienced by the US and the global economy in the 1998 LTCM episode. Economists distinguish between liquidity crises and insolvency/debt crises. An agent (household, firm, financial corporation, country) can experience distress either because it is illiquid or because it is insolvent; of course insolvent agents are – in most cases - also illiquid, i.e. they cannot roll over their debts. Illiquidity occurs when the agent is solvent – i.e. it could pay its debts over time as long as such debts can be refinanced or rolled over - but he/she experiences a sudden liquidity crisis, i.e. its creditors are unwilling to roll over or refinance its claims. An insolvent debtor does not only face a liquidity problem (large amounts of debts coming to maturity, little stock of liquid reserves and no ability to refinance). It is also insolvent as it could not pay its claim over time even if there was no liquidity problem; thus, debt crises are more severe than illiquidity crises as they imply that the debtor is insolvent, i.e. bankrupt, and its debt claims will be defaulted and reduced. Today we do not have only a liquidity crisis like in 1998; we also have a insolvency/debt crisis among a variety of borrowers that overborrowed excessively during the boom phase of the latest Minsky credit bubble.
IT’S NOT JUST U.S. REAL ESTATE, BUT REAL ESTATE FINANCED WITH YEN
According to a report in the International Herald Tribune, real estate accounted for almost 18 percent of the Spanish GDP last year. Subsequently, Spain is overbuilt and it is beginning to show as Spanish mortgage delinquency index increased to 1.75 percent in the first quarter from 0.7 percent three years earlier, since interest rates have risen 175 basis points in the past 2 years. In addition, about 700,000 new housing units are for sale this year versus 300,000 more than projected demand,
But it will get worse. According to Dr. Jim Walker, he has been told that one-third of all mortgages are based in Japanese Yen. So why would that be a problem? It wouldn’t be, unless the Yen begin to rise, just like it has in the past two weeks. Note this anecdote from CLSA this week:
"An associate took a yen loan to buy an Australian property on 20 July. Yesterday, the first margin call came - a substantial 17% of the original loan. He ponied up 90% of the amount and the bank was happy, saying 'that's 90% more than anyone else'."
As I understand it, consumers not only in Spain and Italy, but across Eastern Europe and apparently many in Australia have funded consumption and home purchases via the “cheap” yen. Apparently many of the yen carry trades were not put on hedge funds, by by Ms. Watanabe (Japanese retail) lending to European and other global consumers! So it could be retail as much or more than “hedge funds” that have been doing the “carry trade.”
CLSA further enlightens us on how much leverage the Japanese consumer has been putting on in regards to this trade, apparently much more than hedge funds would be allowed to put on!
We called several online currency trading houses, including market-leading Gaitame.com, which is a subsidiary of Sawada Holdings and has a 34% market share. Gaitame's average client leverage was a little over 10x; however, it offers leverage of 10-30x and will soon introduce 100x. We also contacted listed Money Partners, the ninth largest by number of accounts and which offers 40-100x leverage, and its average client is leveraged 50x. The most extreme case is PantaRhei, a subsidiary of listed Jaleco Holdings, which offers 100-300x leverage. However, most of those we contacted said that their clients were leveraged an average of 10x and that most were facing margin calls.
Currency trading only became popular in Japan after the 2006 small-cap crash. The number of foreign exchange trading accounts has increased 3.5-fold in the past two years. At the end of 2006, there were 330,000 accounts and this is on track to reach 650,000 by the end of 2007; the forecast prior to recent events was for the number of accounts to reach 1.05mn next year, or just under 1% of the population.
Although the recent currency moves have thinned out a lot of the speculators, it seems likely that Japanese savers will not be as easily deterred. Many households are simply looking for a better return from their savings. The yield spread between the yen and many currencies remains well over 400bps, and as long as this remains the case, more of Japan's savings will head overseas. On Friday, we called several local individual investment advisory firms asking for advice on what to do with a fictitious ¥30mn inheritance: nearly 70% suggested we invest our money in foreign bonds. Only when global rates start to decline or rates in Japan head sharply up, which appears unlikely, will the flow of savings overseas stop.
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