Professional economists normally have no use for Chartists. The idea that you can predict future price movements based on past behavior of the Chart has not empirical support. Most economists will tell you that there is not much to separate a Chartist from witch doctor.
But one might imagine that Alex Tabarrok has come around Click Here to continue reading.

As a young boy I clashed constantly with my oldest brother. I dislike being told what to do or even the way things are, especially if I am not impressed with the authority and consider myself of comparable sagacity. Without inquiring too closely of recent history, I can admit that even very late in my Click Here to continue reading.

Your boss is the one who tells you what work you must do and who authorizes your paycheck. Many people tell you to do thus and so, of course, but it remains convention that only one person is responsible for the ongoing decision to reimburse you for services rendered.
Your dotted-line boss, within Acme, is a Click Here to continue reading.

We have not been keeping up on the news the last couple of days. Here are some things that you might have missed.

The first link comes from the Financial Times…..

The issue at stake revolves around so-called delinquency rates, the proportion of people who fall behind on their debt repayments. When American households have faced hard times in previous decades, they tended to default on unsecured loans such as credit cards and car loans first – and stopped paying their mortgage only as a last resort. However, in the last couple of years households have become delinquent on their mortgages much faster than trends in the wider economy might suggest. That is particularly true of the less creditworthy subprime borrowers. More­over, consumers have stopped paying mortgages before they halt payments on their credit cards or automotive loans – turning the traditional delinquency pattern on its head. As a result, mortgage lenders have started to face losses at a much earlier stage than in the past.

“In the past, if a household in America experienced financial problems it tended to go delinquent on its credit cards, but kept on paying its mortgage,” says Malcolm Knight, head of the Bank for International Settlements, the central banks’ bank. “Now what seems to be happening is that people who have outstanding mortgages that are greater than the value of their home, or have negative amortisation mortgages, keep paying off their credit card balances but hand in the keys to their house … these reactions to financial stress are not taken into account in the credit scoring models that are used to value residential mortgage-backed securities.”

Anecdotal evidence that this was going on has been piling up for awhile. Now it seems that it may be showing up in broader statistical samples. If this snowballs, housing prices could really drop.

Related to the above is this story from Bloomberg….

Standard & Poor’s said it cut or may reduce ratings on $534 billion of subprime-mortgage securities and collateralized debt obligations, the most sweeping action in response to rising home-loan defaults.

The downgrades may extend bank losses to more than $265 billion and have a “ripple impact” on the broader financial markets, S&P said in a statement today. The securities represent $270.1 billion, or 47 percent, of subprime mortgage bonds rated between January 2006 and June 2007. The New York-based ratings company also said it may cut 572 CDOs valued at $263.9 billion.

The reductions may increase losses at European, Asian and U.S. regional banks, credit unions and government-sponsored enterprises such as Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks, S&P said. Many of those institutions haven’t written down their subprime holdings to reflect a drop in market values and these downgrades may force them to recognize losses, S&P said.

The rating agencies have been downgrading things for awhile now. But doing half a trillion dollars worth in one whack still makes people sit up and take notice.

It is kind of funny that S&P is saying that the rating cut will force banks to recognize losses. The name of the game seems to be avoid having to face up to the facts at all costs. This from Naked Capitalism…..

But it seems that duplicity, um, creativity of various sorts is not only being encouraged but actually endorsed. First we had the Federal Home Loan Banks making massive loans to subprime lenders, particularly Countrywide. Now we have the SEC permitting subprime lenders to engage in what can only be described as misleading accounting.

If a mortgage servicer modifies a loan in a mortgage trust, an off balance sheet entity, in ways not comtemplated by the trust’s charter, the trust dissolves and the loans go back to the lender. But even though loan mods are often the best of the bad choices available when dealing with underwater borrowers, if the servicer does mods in a way that violates the trust charter, that means the poor overstrapped subprime lender has to take more assets onto its already not-so-hot balance sheet.

Enter the SEC with a magic wand. You can have your off balance sheet treatment, meddle with it like it really isn’t off balance sheet, but still keep your preferred accounting treatment.

Large parts of China are getting pounded by major snow storms. From BBC…

Severe winter weather is causing travel chaos in China as tens of millions of people try to return home for the country’s main holiday, Lunar New Year.

At least 170,000 people are stuck at the railway station in Guangzhou, in the southern Guangdong province, where most trains have been canceled.

Many thousands are stranded because of blocked roads, with some areas running out of salt to spread on icy surfaces.

More than 20 people have been killed since the severe weather began.

Part of the problem is simply that China is not equipped to handle snow in any form. If you watch this clip you will see people spreading salt from the back of trucks by hand. But main reason this heavy snow fall is such a crises has to do with China’s economic polices. As the the Financial Times explains….

An acute coal shortage left China suffering its worst power crisis in years as unseasonably large snowfalls saw hundreds of thousands stranded when they tried to travel to their families for the lunar new year holiday.

About half of China’s 31 provinces and regions have been hit by “brownouts”, or voltage reductions, caused by Beijing’s attempt to reimpose and tighten price controls on commodities including coal and oil.

Beijing is using old-fashioned price controls in an effort to stop food inflation, which has pushed the consumer price index to an 11-year high, from spreading to the rest of the economy.

Power companies insist the brownouts are the result solely of coal shortages. But executives admit privately the industry may have exacerbated the situation to drive home to Beijing the unfairness of price controls. Global prices of coal, China’s staple fuel, have surged, causing pressure for the rises to be passed on. Power industry margins have also been cut by higher freight costs.

China has about a trillion dollars invested in US bonds that they are taking heavy losses on, and yet they don’t have an energy infrastructure that is equal to their needs. If they allowed their currency to float against the dollar, they would not be having such a problem with inflation and energy would be cheaper for them.

Their loss is America’s gain, but how long can they continue like this?

I caught up on the claims. I doubled up for three days this week and finished what I had left. But then the local accounting department got involved.
They told me that when I have a claim of short-shipment (right product, but fewer received than billed), I should use the RMA (a “return,” but in this Click Here to continue reading.

The Fed’s actions over that last week need to be mocked in the worst way. Jeff Matthews steps up to the plate and does his best. But we feel he is too kind.

So you all heard about this right? If you have’t you have been living under a rock. But seeing as we cater to all sorts (including those who live under rocks) I will give you the back story. From the Wall Street Journal…..

In one of the banking world’s most unsettling recent disclosures, France’s Société Générale SA said Mr. Kerviel had cost the bank €4.9 billion, equal to $7.2 billion, by making huge unauthorized trades that he hid for months by hacking into computers. The combined trading positions he built up over recent months, say people close to the situation, totaled some €50 billion, or $73 billion.

Okay, here is the joke (from Market Watch)….

The Federal Reserve was not aware that Societe Generale was unwinding trades in Europe on Monday that had been amassed by a rogue trader at the French bank, a Fed source said Thursday.

The bank’s scramble to get out of those trades is now presumed to be a factor behind the panic sell-offs that roiled overseas markets on Monday. And those sharp declines in Europe and Asia were cited by Fed watchers as a central concern that moved the Fed to engineer an unprecedented emergency rate cut only one week before their formal meeting.

In case this needs to be spelled out for you here is Felix Salmon to explain how one little trader at one little bank struck terror into the heart of the Fed……

Firstly, they decided to liquidate as quickly as possible, dumping the overwhelming proportion of their huge long position in one day. And secondly, the day they picked was Martin Luther King Day: a public holiday in the US, which meant that Chicago was closed.

As a result, futures traders across Europe had to scramble to find a huge amount of liquidity in a very short time, and prices predictably plunged.

As Macro Man puts it….

Macro Man also assumes that he’s not alone in scratching his head and thinking “what now?” Next week’s Fed meeting is set up to be an extraordinarily interesting one. It has emerged that despite the Banque de France knowing about SocGen’s travails over the weekend, the Fed had no clue when they hit the panic button on Tuesday.

Grep Ip seems to suggest that the SocGen revelation won’t impact the Fed’s decision next week, but come on! If, before the equity market meltdown, the Fed was planning on doing 50…..why should they cut any more next week, thereby at least doubling the amount of their originally intended easing?

Yet to the market, it’s not a question of whether the Fed eases, but by how much. The OIS market is currently pricing in 40 bps of easing. Of course, if the Fed doesn’t ease, markets could then puke, delivering the kind of price action that prompted the emergency cut in the first place. The problem with allowing the market to lead you, Mr. Bernanke, is that it inevitably leads you into an uncomfortable corner.

What seems evident is that volatility is set to remain pretty high. If the Fed doesn’t cut next week, equities should tank and bonds soar. If they do cut….well, let’s just say that the dollar will be (French) toast.

Lots of markets are crashing to day. From Marco Man….

Later in life, Mr. Eliot repudiated the ending to “The Hollow Men”, quoted above. One would have to presume that if he were alive today and a practitioner of financial poetry, he would be equally averse to claiming that the world would end with a whimper.

Or so we’d have to judge by price action today, wherein all things risky are tracing out an Icarus-like descent, and the only thing preventing a Black Monday-style crash in the US today is that the market is closed. This month has already been a testing one, and on the basis of today’s gruesome start that trend appears set to continue.

He has a graph at his site that demonstrates what he means by “Icarus-like descent.” Naked Capitalism has charts showing the drop of Japan’s stock market.

From SPIEGEL……

A bad day for German banking: WestLB, the latest victim of the subprime credit crisis, has reported a 2007 loss of €1 billion. Meanwhile, stock prices are tanking amid fears of global recession. Banking stocks are among the worst hit.

From The Economist…..

IT APPEARS to be an old-fashioned case of risk aversion. Stockmarkets are plunging (the FTSE 100 was down more than 300 points, or 5% just after noon in London, on Monday January 21st), commodity prices are dropping and investors are flocking to the safety of government bonds and currencies like the Swiss franc and yen. Speculative bonds now yield seven percentage points more than US Treasuries, the highest spread since April 2003.

The day after I wrote my last post–that is, the Monday after I clocked a fourteen hour day to get this documentation for our new software done on schedule–they canceled the project. As suddenly as we began this new software implementation we ended it. Evidently when someone actually looked around at the different software in Click Here to continue reading.