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Five Things You Need to Know: The Damage Isn't Spreading, The Damage Isn't Spreading If You Ignore the Damage; Getting Carried Away; Why Do the Super Rich Need So Much Money?; Things We Can't Live Without


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. The Damage Isn't Spreading

According to a piece on Bloomberg by noted Fed-watcher John Berry, the Fed doesn't see subprime mortgages as a threat.

  • "Federal Reserve officials don't expect mounting losses on subprime adjustable-rate mortgages to lead to a credit crunch that could significantly harm the U.S. economy," writes Bloomberg columnist John Berry this morning.
  • Moreover, there's no concern at the Fed that losses in the subprime segment will threaten any financial institutions.
  • Berry cites Fed Chairman Ben Bernanke's recent testimony before the Senate Banking Committee as well as Fed Governor Susan Bies' Feb. 20 comments on subprime mortgages.
  • In a talk to students at Duke University, Fed Governor Bies noted that subprime ARMs represent only about seven to eight percent of all outstanding mortgages and that the delinquencies are largely concentrated among those mortgages issued last year.
  • In other words, the Fed sees the problem as an underwriter's issue, rather than as a housing collapse issue.
  • Berry concludes that, "It would be a serious mistake, however, to assume that the losses in the subprime market are a portent of things to come in the rest of the housing sector, much less the broader economy."
  • We agree. It would be a serious mistake to simply assume that losses in the subprime sector are a sign of what lies ahead for housing and the broader economy.
  • So we'll just have to base our opinion that losses in the subprime sector are a sign of what lies ahead for housing and the broader economy on the data, which leads us to today's Number Two.

2. The Damage Isn't Spreading If You Ignore the Damage

According to a piece in the Wall Street Journal today, there ARE signs that pain in subprime mortgages is beginning to spread. Hey, didn't the Fed just say...? Uh, never mind.

  • The WSJ story today is a catch-up piece to something we noted in Five Things on Tuesday; late payments in the so-called Alt-A market, which caters to consumers with slightly better than subprime credit, but below prime borrowers, is running at four-times the historical norm.
  • Do you know how many so-called "in-between" Alt-A loans were originated last year? A record $400 billion according to the Journal.
  • That accounted for 16% of all mortgage originations last year, the Journal reported, and with subprime loans the segments together made up about 40% of all loan originations.
  • Data from UBS AG show that the default rate for Alt-A mortgages has doubled in the past 14 months, the article said.
  • Meanwhile, here's something else for the isolated subprime mortgage & mild housing correction camp to consider:
    - Home Depot (HD) says it's bracing for slower growth due to slumping sales in its retail segment this year thanks to... the housing market.

3. Getting Carried Away

One of the members of the Bank of Japan's policy board issued a rather stern warning against continuing to pursue the carry trade, according to the Financial Times. So, does this mean the jig is up?

  • According to the FT, Atsushi Mizuno, one of the board's more hawkish members, said: "If accommodative monetary conditions are kept over the long term, it is highly likely that some side effects will occur."
  • What are some side effects?
  • Apparently, Mr. Mizuno referred explicitly to the carry trade, saying a falling yen could have a global impact by distorting flows of international capital.
  • Meanwhile, separately, a senior finance ministry official said he thought a sudden reversal of the carry trade was unlikely because institutional investors were hedged against currency swings, while retail investors were less likely to repatriate funds quickly, the article said.
  • The official, who wasn't named in the piece, reportedly said, "Rates of 0.5 per cent, or even worse 0.25 per cent or zero, make the market economy a joke. Money must have some price. Otherwise you just have a free flow of money investing in inefficient enterprises."
  • A free flow of money investing in inefficient enterprises?
  • I'm sorry, we're going to have take a moment to digest the bitter irony of a senior finance ministry official in Japan remarking on "a free flow of money investing in inefficient enterprises."
  • Taking a moment here.
  • See, the bitterly ironic part of that statement is that driving a free flow of money to invest in inefficient enterprises has been THE WHOLE POINT OF JAPAN'S ECONOMIC POLICY FOR MORE THAN A DECADE!

4. Why Do the Super Rich Need So Much Money?

Economist Christopher Carroll at Johns Hopkins University says the question of why the super rich would want so much money turns out to be a real puzzle, according to the New York Times.

  • Mr. Carroll wrote an article almost a decade ago, "Why Do the Rich Save So Much?", asking why is it that rich households have higher lifetime savings rates.
  • According to the Times, the rational economic argument for accumulating wealth is that people want to use it for something: to spend, to give to their families to enhance their future standard of living or to do something philanthropic.
  • However, according to some statistics unearthed on the 60 richest Americans and their philanthropic efforts, people are accumulating money far faster than they are giving it away.
  • As of September 2006, the 60 richest Americans had an estimated $630 billion of wealth, up more than $62 billion from the year before, but had pledged only $7 billion to charity, the Time says.
  • The lone exception is Warren Buffett, who has pledged to give away $42 billion to charity.
  • So why do the rich save so much? Professor Carroll says maybe they love money, not for what it can buy but just for its own sake.
  • Or maybe, like the rest of us, they have needs... which leads us to today's Number Five.

5. Things We Can't Live Without

The number of things Americans say they can't live without has multiplied significantly in the past decade, according to a new Pew Research Center survey.

  • The Pew survey asked the "Luxury or Necessity?" question about 14 different consumer products designed to help make everyday life more productive, more convenient, more comfortable, more efficient or more entertaining.
  • Survey respondents placed the 14 items on a very broad range along the "necessity" scale -- with a high of 91% describing a car as a necessity and a low of 3% saying the same about an iPod, the Pew Research center said.
  • Interestingly, however, wherever there has been a significant change in the past decade in the public's judgment about these items, it's always been in the direction of necessity, the study says.
  • And on those items for which there are longer term survey trends dating back to 1973, this march toward necessity has tended to accelerate in the past ten years.
  • So what are the items Americans need the most?
  • The Pew Research Center has a long list. But man, it's boring. Stuff like a car, washer, dryer, blah, blah, blah.
  • On the other hand, the Depew Research Center has a far more interesting list of things Americans need. See below.

    The Depew Research Center. What American Need.
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