Five Things You Need to Know: How It's Gonna End
Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Deep Down PBGC Knows How It's Gonna End
If bourbon were dollars his pocket would be full; drunk full and loaded, a pocket full of bills. Sober pockets. The phrase swam by and he stifled a snort. Involuntarily he shifted his weight from his right foot to his left, almost a sway, as if in self defense, one side of his body trying to separate from the other side, the losing side with the near empty pocket. He straightened his Daily Racing Form with one hand and looked harder at the numbers.
Two minutes to post. Decision time. The odds spun around in his head; the three at 8-5, the one at 5-2, seven at 3-1, five at 4-1, $68 in his pocket, 34 times the payoff, anything less than 8-1, $18, pointless. The nine at eight-to-one, 34 times 18, 612; four at 10-1, 34 times 22, 748. Just numbers. What difference does it make? 
He walked to the windows and chose the one with the longest line. One minute to post. Maybe I'll get shut out, he thought, and the act made him realize the inside of his head felt stuffed with steel wool, metallic and dull, the early whisper of the hangover he knew was coming.
And then, there he was at the window, the line now vanished, his money being handed to the clerk, all of it, in exchange for a single ticket. Transaction complete, he turned away from the window and made his way toward the door. No need to watch. He crumpled the ticket in his hand and let it slip through his fingers. He knew how it was going to end.
And that is how good money gets thrown after bad. We know how it's going to end, but that's not good enough, not for the Pension Benefit Guaranty Corporation. What, you thought we were talking about the track? We're talking about both. After all, the track is simply a microcosm of the larger market ecosystem, with its own species of predators and prey playing their necessary roles.
Charles Millard, director of the PBGC, the government-sponsored body that insures the pensions of 44,000,000 Americans, said over the weekend it will nearly double its investment in riskier assets to try and catch up to its $14 billion deficit.
According to the Financial Times, Millard said the plan offered a much higher chance that the insurance fund would be able to earn enough on the riskier investment to meet all its commitments without having to ask employers for higher contributions or taxpayers for a bailout.
Millard made no mention of the fact that the plan would, by definition, also offer a much higher chance that PBGC would ultimately be forced to ask employers for even higher contributions or taxpayers for an even larger bailout, but that's just the downside of risk. The PBGC is focused on the upside. Two minutes post.
2. Speaking of the Race Track...
The problem with the shutdown in the Auction Rate Securities market is not only that it's not yet going away, but that it is spreading from deep inside the bowels of Wall Street to Main Street.
The University of Pittsburgh Medical Center is the latest example of a Main Street institution forced to find a way out of the $330 billion Auction Rate Securities market due to soaring borrowing costs as a result of the failed auctions.
Tal Heppenstall, UPMC's treasurer, told Bloomberg, "It's outrageous. We're a AA-rated
credit. We don't need to get financing from loan sharks.''
3. Why Aren't Rates Lower?
Since the Federal Reserve began cutting the Federal Funds rate back on September 18, credit spreads have widened virtually across the board, the net result being rates for "regular borrowers," both corporate and private, that are simply not coming down in response.
But wait, banks in the U.S. have been borrowing massive amounts of money from the Fed using the Term Auction Facility (TAF), a mechanism that essentially replicates the Fed's Discount Window, but without the stigma. The TAF saw borrowing of almost $50 billion of one-month funds from the Fed as of mid-February, the Financial Times reported. So why is that money not making it into the economy?
Two words: Risk Aversion. Banks need the money to protect their liquidity.
Or, to answer the question another way, as Federal Reserve Bank of Minneapolis President Gary Stern did in a speech this morning, the problem is an ongoing credit crunch. What is a credit crunch? According to Stern, "an environment in which quality borrowers find credit either unavailable or available only on very expensive terms."
More accurately, a "credit crunch" is a general decline in the the supply of, and demand for, credit.
Under ordinary circumstances, the market (and sometimes the Federal Reserve) can induce a decline in the supply of credit by raising interest rates. This makes money more expensive for borrowers, and as a result slows the growth and demand for available credit.
But a "credit crunch" occurs when banks become more risk averse - less willing to lend - even though interest rates may remain the same, and in extreme cases, even though interest rates may go lower.
This risk aversion on the part of lenders makes it more difficult for even the most credit-worthy borrowers to obtain money at reasonable terms. In effect, interest rates - the cost of money - can become infinitely high for many borrowers. As a result, it becomes difficult to fund projects and investments, which can slow economic growth, which can make lenders even more unwilling to lend.
4. But Isn't Government the One Growth Industry We Have Left?
Thanks to Minyan Stephen for noting this in a post on The Exchange: "Due to budgetary constraints, the Economic Indicators service (http://economicindicators.gov/) will be discontinued effective March 1, 2008."
What was EconomicIndicators.gov? Just the U.S. Department of Commerce's web site designed "to provide timely access to the daily releases of key economic indicators from the Bureau of Economic Analysis and the U.S. Census Bureau."
How bad have things gotten when government undergoes its own Dot.Com crash?
5. Social Mood Darkens, Right On Cue
Minyan Scott sent us the following link from an Associated Press article on the growing wave of insecurity and dissatisfaction among Americans. "As economic tide recedes, insecurities grow," the articles headline ominously intones:
"Now the economic tide is receding, and the undertow that was there all along is getting stronger. Take away the easy credit and consumers are left with paychecks that, for most, haven't nearly kept pace with their need and propensity to spend."
According to the article the undertow of dissatisfaction was there already, and now that cheap money is being taken away, it's getting worse; a deep paradox the article cannot unpack by relying on conventional cause and effect.
"Americans' declining confidence in their economy is triggered by a storm of very recent pressures, including plunging home prices, tightening credit, and heavy debt. But it is compounded by anxiety that was there all along, the result of a long, slow drip of worries and vulnerabilities."
It would be nice if the world worked in such a linear fashion, but it does not. Social mood drives social action, not the other way around as the article wants to claim. Cautious people cause home prices to plunge. Cautious businessmen cause credit to tighten. Fearful people suddenly view debt as harmful, not helpful.
"What does the economic future hold? Many Americans feel increasingly unable to answer that question with assurance, and they appraise it with a sense that they are less in control of the outcome."
True enough. The future is uncertain. That certainly sounds reasonable at first blush, but think about whether that statement is really true. Do Americans feel less certain and "in control" now than they did in, say 1880? Or 1940? Or 1980? Why are our feelings of lack of control so much more heightened now? The reality is that never before in the history of mankind have humans had more control over their environment, their lives, their economics, their lifestyles. The difference is how that control is perceived.
During periods of positive social mood, uncertainty is exciting, embraced. During periods where negative social mood is the governing factor, that same degree of uncertainty is feared. The article claims, "As economic tide recedes, insecurities grow." That's backwards. As insecurities grow, economic tide recedes.
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While Rome was not built in a day neither did it suddenly fall. Old age may not be for sissies, but it usually beats the alternative and no one has given a convincing case that living need not end.
Furthermore, just because one has passed one's peak does not mean the ride down is without its pleasures. If that were true, why would anyone ski even when the majority of people do not?
The way up has only the sky as a limit, how sweet it was, but the way down is obviously naturally limited, faster, trickier and therefore it is more frightening on the way down; one best stick to less ephemeral expectations than those which may have crossed our fantasies while on our way up.
It may not be our attitude that has us now avoiding risk, but our awareness of the altitude and the steepness of the slope our ascent has provided.
Rather than look down the slope, look into your turns, keep that down hill edge while traversing and do a little as you make the next turn. Its not the slope stupid, its your skiing. If someone talked you into it, too bad---now you learn to ski or else you is as frozen as d' credit cartel is. No need to howl that the interest rate now is obscenely high. U need da credit den u gonna have less profit and dat is dat and besides what u gonna do about it? Pardon my Uncle Remus interpretation but I loved those stories growing up, please don't take offense.
This to me was the reminder you offered today---mind your skiing and do not worry about the deflating economy, but do not pretend it is not deflating. Like a perceptive skiing ski instructor, you show how any livable slope can be traversed as long as one can look and hop into one's turn while taking a deep when one senses a turn arriving and then keep a relaxed edge while traversing patiently the slope while letting the next turn become evident to your keen informed senses.
If Rome was not built in a day, but one brick at a time, then the demise of Rome was not sudden chaos, even if one now works with decidedly more circumspect steps and turns. To freeze going down having made such a breathtaking assent, is to expose that ascent and your participation as foolish. If a fool on a chairlift is no less a fool on the slope, then best stay out of their way on your way down.
This is my concern with your reminder. I can ski down sensibly and not look down the hill and freak out, but it is those fools further up the hill with their heads still in the clouds that have yet to notice where they are who scare the hell out of me.
It isn't deflation, but how fools react to their natural limitations when they suddenly become aware of them that bothers me. The cause of our assent into the clouds I will leave to the academics or moralists; right now, I have some intense skiing to do.
Kevin, I hope to see ya later in the lodge for a modest toast by the fire. Others may not have had it so good, but we can take pleasure in our immediate circumstance having reached the bottom and some shelter, warmth and sustenance even if it is much less luxurious than we may have wanted.
Times are grim and becoming more so, but they are not necessarily impossible nor are they necessarily terrifying--but if one is not yet somewhat frightened one has one's head in the clouds and is oblivious of the territory and those are the ones that are much more frightening that any terrain since I can avoid a cliff, but I can not avoid being wiped out by a fool coming at me out of the blue when I just by chance am in his all too rapid demise.
Sorry for the verbiage--my editor is at lunch.
Just another happy thought
