Freddie Mac issued its quarterly “report” and gave clues as to how to paint lipstick on pigs and actually get away with it. The trick is to put $157 billion (from $32 billion before) over to Level 3, where absolutely no haircut is then reported. Readers may recall that Level 3 essentially allows the reporter to make up their own prices separate from market prices. In the case of Freddie, management has determined that “market prices don’t make any sense”, hence the move. This writer would argue that the quasi-official institutions like the GSE and foreign central banks themselves are creating massively distorted Soviet Union style prices that if anything makes even the market prices that Freddie dismisses too high.
From Macro Man (Click on link for graphs)……
Regular readers will recall that when the Fed cut 50 bps in September, Macro Man opined that the dollar was toast. When BB and co. slashed rates by 75bps when the stock market got Kerviel’ed, it seemed like they were hitting the panic button. And what’s happened since then? Median one year inflation expectations have rocketed from 3.1% to 5.2%. Sadly, Bloomberg doesn’t have historical data for average 12 month inflation expectations; those are now a resounding 7%!!! It seems as if not everyone is living in the Fed’s hedonically and seasonally adjusted, core goods world.
The rise in inflation expectations is all the more remarkable when put into historical context; they are now the highest since February 1982. Now, just because you expect higher inflation and demand higher wages doesn’t mean you’ll get ’em, especially in the context of an incipient recession. But with the balance of probability favouring a Democratic sweep come November, what odds that there emerges a legislative response to the juxtaposition of near-record corporate profits as a % of GDP along with stagnant/negative real wage growth?
From the Daily Rap via Calculated Risk……
The truth is their data is wrong. The market has, obviously, taken the view that the worst of the writedowns are behind us, and if anything it’s now just a macroeconomic problem we face. I think that’s dead wrong. We’re now entering the phase where the macro impacts earnings, but also the stage where real cash losses start to hit the banks (subprime and Alt-A is primarily a mark-to-market issue, but HELOCs are going to be large, outright losses). Once WAMU, WFC, BAC and JPM start to get data through on how rapidly their HELOC portfolios are deteriorating, watch the losses pile up. I’m talking realised losses, not mark-to-market writedowns.”