Thoughts on a Thursday

Hmmm ... Asia markets down big [3%+], Europe opening down 2%-, US futures down about 1.5% early.
US Dollar drops to 100 yen, first since 1995 as the yen carry trade is dead. The yen is strong in a period that the Japanese government can't agree on a BoJ head. Wierd. But beefers do wierd things.
Carlyle Capital being liquidated. They had leveraged to about 25x. Who told me in 2006 that LTCM type risks won't happen again and that "no one" gets hurt from hedge funds ?
Caterpillar raised its outlook ... whither recession ?
Big UK hedge funds offers to invest own capital in a WM recapitalization ... guess they think it's OK..

Oil up on higher US inventories. My opinion is that US inventories don't matter ... the big oils choose how much they want to keep in US inventory based on the forward curve, etc. With imports flexible and demand weakening, that probably temporarily affects inventories. But the price of oil is set nowaways in the world, not the US although it's priced in dollars. The marginal demand is from China, India, etc. Supply is roughly fixed. So the value of the marginal barrel of oil to a business in CHINA sets the price THEY will pay for that barrel. And nowadays that marginal barrel comes from US usage reductions via conservation, etc. So the microeconomic decision is this: what price will a business in China have to pay to get a US consumer/business to cut back one barrel of usage ?

Let's think about the new Fed policy. Did you notice that it actaully takes effect March 27 ? That's an interesting date, being a few days before the end of the first quarter. So the Street can liquidate all those hedge funds speculating in mortgage-backed securities, position the paper as they sell it and then have the certainly they can give the remainder to the Fed in the TSLF program before the end of the quarter when they'd have to show it on their books. Nice fit, no ?

How can this all end ?

I have always thought about the macroscopic future using Richard Feynman's path integral approach to quantum mechanics which does form the basis for the fundamental understanding of elementary particles. In my gedanken thinking [ hmm, that's redundant ;-) ], all possible future paths are added up in a giant integral where their amplitudes and phases interfere and amplify. The most likely path is the one where the phases correlate to create a peak "probabilty". Now since humans really do have free will in my belief, this is a true "most probable" future path, not a certain, determined one. Humans can mess it up.

The apocalyptic crowd sees a future financial armageddon. Mort Zuckerman, Jimmy Rogers, and many others on Babblevision and Bloomberg can tell you their thinking, but when examined one sees logical inconsistencies. That's for a later blog.

Here is my "vision" of the path of the future:

The housing bubble was mostly caused by speculators and liars, not real homeowners except for the marginal buyers put into poorly crafted mortgage loans. The large early wave of defaults is surprisingly large due to the early washout of the specualtors and liars and the worst part of the marginal buyers. Soon ... perhaps in the spring ... that defaults will peak. Home prices will cease falling late spring, likely ending at a level comparable to a few years ago. So most homeowners will NOT be underwater on either their first mortgage or their home equity loan.

Hedge fund liquidations will be mostly done by the end of March. Normal tax refunds hit in April. The Federal stimulus money hits in May. People will restart buying homes this spring. Consumer demand will be OK as the US consumer always spends every dollar available. US jobs will roughly stabilize without much further decline. Q1 GDP growth will be zero. Q2 GDP will be positive. No formal recession will occur.

US oil consumption declines - summer driving will be cut back - will help stop the oil price declines.

The Fed, though the TSLF and perhaps outright purchases upon expiration in late April of the inital TSLF auction, will stabilize the mortgage markets. Real lenders - pension funds and insurance companies, not hedge funds - will be buying these record spreads and yields to meet their long term liabilities.

The Fed will cut overnight rates to the range of 2 or 2.5% and then stop, and direct further efforts in the TAF, TSLF and outright purchases of mortgages. This will stop the decline of the dollar and the price of oil will stabilize around $100. The dollar will begin a major rally that will be prolonged as the US current deficit will continue to narrow through export strength. Inflation will be less than expeced this year as oil will cease going up. Most commodity prices will fall or stabilize this spring and summer after the wave of insitutional "investment" in that sector will be done by end of Q1.

The US stock market will begin to explode up this spring when this future path is recognized by thoughtful investors. Gains for the year will be 20%.

Hey, I admit I'm an optimist on humanity.

I'm still selling gold & silver and looking for good buys. I'll post any I make.

Words of the Day

"Credulity" - noun [$100] and "credulous" - adjective [$10]
Credulity means a willingness to believe or trust too readily without adequate or proper evidence; gullibility. Credulous means 1. too ready to believe, gullible; 2. showing such gullibility.
Sentence: The credulity of Obama's supporters is vexing Hillary as she tries to raise questions delicately about his competence. Can Obama expand his support beyond his credulous current support enough to defeat McCain ?

"Retradition" - noun (rare) [$1000]
Retradition means the action of handing back.
Sentences: A. [from OED 1875 example of usage] "The retransfer of dominion follows without any retradition or reconveyance by the interim proprietor." B. Some title problems in real estate are cured by retradition through a quitclaim deed and then reconveyance with a corrected deed or survey. C. Is this morning's decline in stock futures prices just overnight volatility or a portent of retradition of Tuesday's large gains ?