Why Worry?

Those wacky Fed governors are at it again — Bullard going on about how housing won’t recover for years, and Williams pounding the table for aggressive stimulation (QE.)  Big surprise, but the dollar is plunging — even as a House bill is introduced to strip the Fed of half its mandate (the stimulation half) and transform it into an inflation fighter/dollar protector only.

In Williams’ back yard, Stockton, CA is mulling bankruptcy.  This city of 300,000 souls is California’s 13th largest and a hub of the Central Valley’s agricultural activity.  From 1998 to 2005, real estate values tripled.  Since then, they’ve crashed so badly that Forbes considers Stockton America’s “most miserable city.” Official unemployment stands at 18.4%, and the crime rate (2009) earned Stockton the distinction of being America’s 5th most dangerous city.  Oddly enough, an $18 million cut to the police department budget hasn’t helped.

If Williams has his way, the Fed will buy up even more MBS than it already has in Operation Twist.  It will drive down mortgage rates to the point where buyers will show up in droves, bidding up real estate and saving the economy.  The fly in the ointment, of course, is that lower interest rates mean a lower dollar.  A lower dollar means higher prices for such luxuries as gas for the Family Truckster (CL topped 109 a few minutes ago.)

Will the thousands of foreclosed-on families in Stockton (the highest foreclosure rate in the US) jump back in the market if mortgage rates come down 50 bps?  100 bps?  Will banks suddenly relax their underwriting criteria?  Will cities like Stockton, operating at huge budget deficits thanks, in part, to a mismatch between property taxes and profligate spending, suddenly wake from their financial comas?

As Bullard himself said: “central bankers are having difficulty crafting policy in this recession and subsequent recovery because this is the first in which debt levels were too high.”  Do ya’ think?  These bozos are caught between a rock and a hard place that they, themselves, erected.  Once the debt genie is out of the bottle, he’s very difficult to stuff back in.  The only solution, as Stockton is learning the hard way, is to reduce the debt to the point where it’s consistent with the ability of the underlying asset (the city) to service it.

Whether you’re Stockton, Vallejo, Greece, Portugal or the good ol’ US of A, taking on more debt won’t fix the problem of too much debt.  At some point, the lenders who made all those stupid loans are going to have to face the fact that they made some very bad decisions.  They’ll have to accept the inevitable and book the losses that are already hiding in their phoney baloney balance sheets.

It will be hard.  It will be painful.  Most banks, thanks to their servants at the Fed, will survive.  Homeowners, taxpayers and investors will get slammed.  But, hey, with the Dow over 13,000, why should we worry?


Why Worry? — 14 Comments

  1.  Bahearn,  So sorry to hear of your loss.  I just spent a few minutes reading about your cousin — obviously an amazing woman who showed how much a dedicated individual can accomplish.  We will keep you and her in our prayers.

  2.  thanks for checking in, Dillzs.  I agree 1381 is a decent target.  It's the Gartley .786 retracement of the Oct 2007 – Mar 2009 decline.  I've been tempted re CL, just couldn't stomach the event risk, so am waiting it out for now.  If they go for another SPR sale, that'd get me off the sidelines — as the price impact would last for 2-3 days if it's anything like last time.  One of these days, the pols and CBs will discover their limitations — and it won't be pretty.  In fact, I think that's what's really holding back another QE round…what if they do it and the markets don't respond?  What stimulative threat would they have left?  No more talking up the market…and that would be worse than a modest downturn IMHO.

  3.  *I should note, I don't actually play TVIX directly, I only meddle in options, but we're still on effectively the same train, just different carriages.

    The TVIX vol' looks incredible from a distance. You can see they are loading up – and have indeed maxed out the shares available for this – although I am certain Credit-Swisse will double or tripple the allocation limit within 2-3 weeks. That change might knock back the premium a touch, but in scheme of things, don't even worry a bit about that.

  4. You are absolutely correct. It takes guts to hold TVIX. I truly think in the coming days, up days of 50% will not be uncommon. The fact that CS stops issuing new shares had brought the volume on TVIX down, but volume has moved to UVXY in the last 2 days. The market now is more stretched than it was in July. It will be freaking crazy if the volume of TVIX hit even 100 M. The one regret I had about TVIX was that I chickened out and sold when it just started to move up explosively. Taking profit at the right time is always the hardest part. But I am glad that at least now I can find some good TA analysis from PW's blog. finding a fellow TVIX "bagholder" is certainly another plus. We can discuss our strategy in the future.

  5. OT, but I haven't had much interest in the market this week. My 2nd cousin was killed in Syria this week. Her name was Marie Colvin. If anyone is interested, a memorial fund has been started for charitable works in her honor: The Marie Colvin Fund- Long Island Community Foundation, 1864 Muttontown Rd, Syosset,  NY 11791. Newsday.com has several articles about her. She spent her life working for what she thought was right. Please keep her immediate family in your prayers,

  6. The premium on the TVIX is seemingly one of the most unstable things in market land lately. I've been watching the trades fly through on level'2 on TVIX every day this week, its crazy. The lunatics remain either in a 'must buy buy buy' or 'omg, its crashing' mood.

    Whats clear is that across this year we are likely going to see a number of 35/40% up days. Maybe even a 50% up day (with of course corresponding down severe retracements).

    TVIX holders will need to be both bold and swift in how they trade this monster.

    The scary thing is just how fast this moves. To me, it even acts like a 4x leveraged instrument at times.

    One prediction I hold to, within the next few months – certainly by mid summer, we'll see a 150, even 200m volumn day for TVIX.

  7.  I'd not too excited though, VIX probably will max out around 23/25 – next week..and thats the 'very best case' for bears.

    Quite likely, VIX gets stuck around 19/21 again, and the flatlines for a week again.

    regardless….at least TVIX closed up today 🙂

  8. PW hope this finds you and your family doing well.  Have not posted much lately as this market has been a dud.  Sitting mostly cash at this point waiting for any uptick in volatility.   I'm watching for SPX 1381 as it would be the 1.61 of butterfly (1292-1158).

    I put out a small short in crude today, albeit with a very tight stop.   RW in CL within 33 cents of the .886 of a bat (114-75).  Also within that bat pattern, CL came within 31 cents of completing a pseudo crab (103.37-92.77) @ the 1.61.  Will see how it goes, but I wouldn't be surprised if I'm stopped out before the market opens on Monday.

    Also, couldn't help but note that the price of oil/gas is getting national attention, and constant coverage on CNBS.   It seems whenever this starts occurring a correction occurs in short order.

    Thanks again for your continued insight and updates. 

  9. Just curious, is the VIX inverse HS pattern busted? I know today we haven't gone lower than the head yet. But being the shoulder, it is awfully "even" with the head..