This from Bloomberg…

The Bush administration is urging China’s central bank to buy more government-backed mortgage bonds in an effort to sustain financing for U.S. home loans.

U.S. Department of Housing and Urban Development Secretary Alphonso Jackson is in Beijing to persuade the Chinese central bank to buy more securities from Ginnie Mae, a corporation under HUD that guarantees $417 billion in federally insured, fixed-rate mortgages.

What more is there to say? (Hat tip: Macro Man).

It seems that there is a trend sweeping the world. People want to see how many historical accepted economical principles can be broken before you have a disaster. China and the US are the trend setters in this regards, but Zimbawe is in a class all by itself.

This is how Mugabe is fighting inflation (this from Letters)…..

Dear Family and Friends,

Zimbabwe has been engulfed in a macabre and tragic frenzy this week and frankly, it beggars belief. Across the country what has been called a “Taskforce” has been unleashed by the government to force shop owners and businesses to cut their prices by 50%. The price cut enforcers are army men in camouflage clothes, police in uniform and large numbers of youth militia.They go from shop to shop and simply pick on items they want reduced : SLASH THAT PRICE, is the phrase we are hearing again and again and then products have to be sold for less than they were purchased for. Shop owners who refuse to cut the prices face arrest and having their goods seized. Some have been assaulted, others had their premises trashed and windows smashed.

The result of it all, inevitably, is rapid collapse and many goods and foods have now become completely unavailable including all the staples which were already difficult to find such as flour, oil, sugar, salt and maize meal. Joining the list now are most other normal household products in daily use such as soap, candles, matches, milk, eggs, margarine, rice, bread and the list grows longer by the hour and day. As the prices are ordered down hordes of people with bagfuls of money swarm behind and buy up all the stocks. Shops are displaying signs announcing that only one of each item may be purchased but entire gangs are moving around in dozens and just cleaning everything out.

I feel sorry for the people of Zimbabwe. But I can’t help find Mugabe’s rule to be an interesting experiment in how many stupid things it is possible to do before you lose power.

I hope the farm regulations in this country never become like those in Europe. To be required to keep a passport on every cow would be horrible. To be required to argue with some stupid bureaucrat about whether a particular cow was alive or dead would be unbearable. This from The Economist’s Correspondent Diary….

On top, for Mr Webb, come the grain-dryer for the contractors’ wheat and barley, (“no rapeseed this year, thank God—in a dry spring it bolts like lettuce”) and bringing in the big bales of straw. And the computer. And the ever-mounting documentation—including a 14-page passport for every beast in the herd—required by DEFRA, the former Ministry of Agriculture. Not to say its bureaucracy:

“Send us details of cow X.”

“It died years ago, we sent you its passport.”

“Still alive in our records.”

Mr Webb e-mailed them a picture of a cow being carried off by a UFO.

People in America just don’t want to have to deal with risk anymore. Nowadays every single asset under the sun is “hedged” in an effort to make sure there is no possibility of loss. Now a man has started up a company called Rex & Co to “hedge” people’s equity risk in their houses.

As best as I can figure out, Rex & Co does this by buying shares in a house. Only, these shares do not give Rex & Co any control over the house. All they give is the right to some money when the house is sold. This is way that the San Francisco Chronicle describes it…..

Bill and Elaine Nolan paid top dollar when they bought their Tiburon house a few years ago at the height of real estate frenzy. Now, of course, the market is cooling rapidly.

So Bill Nolan, who deals with money all day long as a partner in an investment management firm, wanted to diversify. He turned to a startup based on a new concept: Let homeowners tap their equity without taking on debt.

Nolan contracted with Rex & Co. to receive $100,000 cash in exchange for a 10 percent stake of the home’s future appreciation. When the Nolans sell their home, they’ll pay Rex the $100,000 plus 10 percent of their home’s appreciation above its current value of $2 million. For example, if the home sells for $2.5 million, the Nolans would pay Rex $150,000 — the original $100,000, plus 10 percent of the $500,000 gain in value, or $50,000. If the home were to depreciate, Rex would share in that loss as well

.
(The Nolan house is atypical because of its high value; more typically, a $100,000 Rex payment would be in exchange for a larger share of a house’s appreciation.)

“It was an interesting opportunity to take some cash out of the house and hedge against any decline in home value,” said Bill Nolan, who plans to invest the money in his business. “It was a way to hedge against the (real estate) market being flat or not performing as well as the equity market; to pull money and put it into something else I felt had a reasonable chance of outperforming the real estate market.”

I can understand why Mr. Nolan might be feeling a little nervous about how the value of his house might hold up. What I can’t see is why Rex & Co would make this kind offer at this particular time.

Sure, Rex & Co are taking a hefty share of the valuation gains (on most houses it is about 50%) for taking only a small share of the house’s equity . But they have no control over when the house is sold, what kind of condition it is kept in, or anything like that. It seems to me that by taking a large portion of the valuation gains they are removing a lot of incentive from the owners to seek the best possible price. That don’t seem so smart to me.

Mr. Nolan seems to be perfectly awere of that fact. According to the San Francisco Chronicle story….

Nolan said he might consider ending his Rex deal if Tiburon houses go down in value, so that Rex would share in the loss on his home. “The beauty of it is that no one else can ‘call’ me on the option; I own the trigger point,” he said. “No one else decides, ‘This is an opportune time, home prices have risen, we’ll call Mr. Nolan on our option to give us our 10 percent.’ ”

To be sure, there are some safe guards in place. The main safe guard seems is that if you sell your home within 10 years after the deal is made you have to pay an early sale penalty of some kind. Rex seems to be relying on this to insulate itself from short term fluctuations in the real estate market. After all, the long term trend in the real estate market is always up right?

Well, in the past the long term trend was always up. But in the past the US population was growing at a far faster rate then it is projected to do in the future. If Rex is basing his plans around the idea that the historical trend will continue I think he will find that he is sadly mistaken.

That is not to say that Rex’s idea could never be made to work under any circumstance. If he had come up with his idea 10 years ago he would a very rich man by now. But as it stands right now, I would bet that you would be better off putting your money in short term T-bills then in investing with Rex.

Why start something like this at the height of a housing boom? These things can easily take a decade to wind themselves out? It is not unheard of for a real estate market to stagnate in real terms over a 10 year period.

In another words, Rex’s biggest problem is that he is coming late to the party.

Hat tip: The comments section on this Calculated Risk post.

People with money have a tendency to go insane. We all know this.

But sometimes I hear of deals being done that must have been done under the influence of illegal drugs. I don’t know how else to explain this story in Winter (Economic & Market) Watch…..

Like a bad Arnold Schwarzenegger movie, the LBO crowd is right back in the game with another very large takeover, this time Hilton Hotels by Blackstone. The total purchase including the balance sheet and debt looks to be about $29 billion. Typifying just how loonie these transactions have become, HLT has operating income of about $1.2 billion, or a mere 4.1% of the take out price. Assuming $25 billion in debt, that would place debt service at about $2 billion a year. Blackstone plans no divestitures, so the math is straightforward, and the presumption is as well, just borrow the balance. This is definitely the Terminator roulette school of business economics, with now alarming amounts of debt playing the same all or none formula.

For those that did not understand the above, Blackstone took on so much debt to buy Hilton Hotels that the interest payments exceed the income that Hilton Hotels is likely to bring in for the foreseeable future. Granted, Blackstone might have some kind of deal with China, but this is still nuts.

As Felix Salmon says…..

Lenders, in this situation, are essentially taking equity-like risk. They’re looking at Blackstone’s track record, which is stellar, and counting on Steve Schwarzman being able to raise the value of the Hilton brand so much that he can sell it off in five years’ time and repay the loans in full. This is dangerously close to the “greater fool” theory of investing: my loan might not make any sense on its own, but somewhere down the line someone with an even bigger credit line will take me out. As far as I can make out, no one has the slightest intention of actually paying down any of the principal.

Thankfully, not everyone is nuts. The bigger (smarter?) bond market participants are putting their foot down as this Bloomberg story shows….

The world’s biggest bondholders have had their fill of leveraged buyouts, convinced that increasing mortgage delinquencies will drag down the U.S. economy and drive debt-laden companies into default.

TIAA-CREF, which oversees $414 billion in retirement funds for teachers and college professors, is boycotting some debt offerings used to finance LBOs. Fidelity International, a unit of the world’s largest mutual fund company, and Lehman Brothers Asset Management LLC, the money-management arm of the third- biggest bond underwriter, say they’re avoiding debt from buyouts.

Investors are getting skittish just as private-equity firms led by Kohlberg Kravis Roberts & Co. and Blackstone Group Inc. prepare to sell $300 billion of bonds and loans to finance LBOs, according to Bear Stearns Cos. In the past two weeks alone, more than a dozen companies were forced to postpone or restructure debt sales.

The dollar has been dropping over the last couple of days and no one really knows why. You can see some news stories on the subject here and here.
Macro Man has a post on the subject here. He runs through a list of possible explanations but I would be willing to bet that this Click Here to continue reading.