Just some nice (horrible) tidbits. The other thread about companies' charges due to Obamacare drove me to post this. I read all that stuff, but realize a lot of posters here might not. Here ya go:
Leeds on Finance
What a Difference a Year Makes!
Posted: 25 Mar 2010 08:54 PM PDT
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As I mentioned several days ago, McCombs has started “Lingo” to introduce some simple finance terminology. I taped three or four of them for the school. The first one they posted was “sovereign debt.” Now, there’s a new one – on “risk premium.” Again, this is too simple for most of you, but I think that they did a really nice job with it.
Risk Premium Lingo Link
Now, on to what I read and what I’m thinking about…
What a difference a year makes. Imagine that it was March 2009 and some of the following news came out:
Interest rates were headed higher as foreign investors seemed reluctant to buy our debt
Credit default swaps were pricing Treasuries as riskier than some AAA European bonds
Social Security announced that they would pay out more than they took in this year – something that wasn’t supposed to happen until 2016
Half of all modified mortgages were in default one year later
I’d argue that if these things had happened a year ago, we would be talking about financial Armageddon. They happened this week and the equity market doesn’t seem phased. We’ve had a huge rally going. Of course, the market was up close to 120 points today but closed just slightly positive. Maybe these fears are starting to be discussed. Below, I’ll take you through each of the four stories.
Story 1: Interest Rates Rising
The ten-year Treasury bond is yielding 3.90%, the highest level since June. There are a series of factors at play:
weak bond auctions this week (particularly Tuesday’s two year note auction and Thursday’s seven year note auction), with weak foreign demand
fear that the end of the Fed’s purchase of $1.25 trillion of MBS will hurt rates
concerns about the budget deficit
concerns about our unfunded liabilities
recent discussion about some corporate bonds (Berkshire) being considered less risky than Treasuries
Of course, higher rates will result in:
an even slower recovery of housing (the 30 year mortgage has increased from 5.06% to 5.13% this week)
higher interest on the deficit
I’m always fascinated by the fact that the market’s opinion can change so quickly. In the past few weeks, the common talk was that the end of the Fed purchases wouldn’t affect rates. It seemed strange, but everyone was saying it. Now, people are starting to say that there might be a negative effect.
We’re also seeing the bond market diverge from the stock market. You could argue that rates are increasing because of growth. But, I don’t think many people believe that’s what’s driving higher rates. Rates are increasing due to fear…fear of our budget deficits, fear about our long-term problems and fear that foreign investors are starting to flee our markets. For some time, I’ve been comparing the US to GM. There were plenty of times when the markets started to express fear about GM. Things always calmed down…until the time they didn’t.
Story 2: Social Security Paying Out More Than They Are Taking In
The New York Times reported that Social Security is going to pay out more in benefits than it receives in payroll taxes this year. This wasn’t supposed to happen until 2016. Payments have risen quicker than expected because jobs have been reduced and more people had applied for benefits. At the same time, there are fewer employees to tax.
Unless we get a quick recovery, we’re going to be on a quicker track to insolvency than we had expected – last year, the government forecast insolvency in 2037. Alan Greenspan says the obvious: we can raise taxes, lower benefits or bail out the program by tapping general revenue. This is just another reminder of the upcoming disaster. Don’t forget that 68% of retirees consider social security to have major importance to their retirement and that 67% of retirees have less than $50K in retirement savings.
Story 3: Credit Default Swaps Indicate UST Higher Than European AAA Bonds
Credit default swaps (think of these as insurance on a bond default) became more expensive for US Treasuries than for an equivalent benchmark of AAA-rated euro-zone countries. This first happened on March 12th and it is still that way. In other words, the chance of a US default is greater than the euro-denominated sovereign debt.
WSJ writer Michael Casey made clear that this is still very confusing. Credit default swaps can be relatively illiquid and can be impacted by different users hedging certain positions. In addition, we’re comparing the US to a basket of countries (Germany, France, Austria, Finland, the Netherlands and Luxembourg). Regardless, if this relationship stays this way for some time, it has to make you stop and think. It would be strange to start to think that the US Treasury is not the risk free rate. Apparently, S&P has a “market derived signal” and this would now put the US Treasury at AA+.
Story #4: Half of US Home Loan Modifications Default Again (Bloomberg)
More than half (51.5%) of US borrowers who had their delinquent mortgage loan modified in Q1 of 2009 have already defaulted again! It’s hard to buy into the idea that the housing market is bottoming when many of these people still need to lose their home.
Modified loans in bank portfolios (rather than Fannie and Freddie) had the best record of avoiding re-default. This is likely evidence that the banks have flexibility in their system to design the modification, while the government has bureaucratic rules.
There are still loads of ugly housing numbers out there. Approximately 24% of homes were currently underwater in Q4. The median home price is $165,100 – down 28% from the July 2006 peak. Approximately 2.39 million borrowers are at least 60 days behind. (This is up 13.1% from the prior quarter and 49.6% higher YOY.)
One of the viral videos making the rounds right now is of a student getting arrested in class at UW-Milwaukee. I’ve put the link below. This rivals the video from The University of Florida (a couple of years ago), known as “don’t tase me bro…” Ah, stodgy academia.
You Tube Liink — Student Arrested in Class
Have a good weekend. (If you are going to school this weekend, try to not get arrested.)
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