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Five Things You Need to Know: Federal Reserve Unleashes Operation Credit Storm; But It's Business-As-Usual; Socionomics of the Food Section; Alan Greenspan Unwittingly Discovers Socionomics; Point/Counterpoint:The Fed Rate Cut Will Help Save Our Home


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. Federal Reserve Unleashes Operation Credit Storm

So, what does this 50 basis point "shock and awe" Federal Reserve rate cut mean? Well, pardon us as we firmly plant both palms of our hands on the sand and with great force and energy pull our heads out of it. Like us, you know what the Fed rate cuts mean. And, also probably like us, you really kind of hate to admit it.

  • It was interesting yesterday afternoon to catch all the Fed analysis permeating the airwaves and media outlets.
  • Some, such as NAHB President Brian Catalde, noted that "by cutting the federal funds and discount rate each by a half a percentage point, the Fed has sent a strong signal to financial markets and American consumers that it intends to ensure that the economy keeps moving ahead and the housing market regains its strength."
  • "Maybe our boy has righted the ship,'' gushed Robert Toll, CEO of Toll Brothers (TOL).
  • Meanwhile, even as this real-time analysis was playing out, the headlines scrolling across Bloomberg had the whole thing covered.
  • What does the rate cut mean? It means this:
  • And this:
  • And even as those headlines were scrolling and analysts and economists were saying things like this:
  • There was this:
  • And this:
  • Nothing is without cost.
  • The cost of attempting still more credit expansion is spelled out in the headlines above.
  • Whether the Fed is successful in its attempt to "help forestall some of the adverse effects on the broader economy," is entirely dependent on risk appetites and the willingness for consumers and businesses to absorb more credit.
  • But again, that is a temporary solution.
  • The Fed's use of the word "forestall" in the statement perhaps unconsciously acknowledges this.
  • Forestall can mean "to prevent by taking precautionary measures," but it can also mean "to delay."
  • Ultimately, that is all that happened yesterday.
  • The Fed sought to delay the adverse effects on the economy.
  • The bill will arrive later.

2. But It's Business-As-Usual In the Real World

Meanwhile, even as Wall Street banks and brokerage firms rejoice over the Fed's rate cut decision, it's business-as-usual in the real world.

  • As many as half of the 450,000 subprime borrowers whose mortgage payments increase in the next three months may lose their homes because they can't sell, refinance or qualify for help from the U.S. government, according to Bloomberg.
  • How can that be, won't lower interest rates help consumers too?
  • Sure, but the number of borrowers whose mortgage payments jump in the next three months will be the second-highest ever for a quarter, according to Credit Suisse Group.
  • Subprime borrowers face an average increase in their mortgage payments of 26%, or $400 a month, according to CoreLogic.
  • Can't they refinance now thanks to the Fed's rate cut?
  • According to Bloomberg, about 48% of subprime borrowers wouldn't qualify to refinance into a mortgage that conforms to the underwriting rules established by government-sponsored agencies Fannie Mae (FNM) and Freddie Mac (FRE).
  • Meanwhile, mortgage providers such as Countrywide (CFC) are completely "out of the subprime business."
  • CFC CEO Angelo Mozilo said at a Bank of America (BAC) investment conference in San Francisco, "The only subprime loans that Countrywide will originate will be GSE-eligible, period."
  • Hmm, that almost sounds like diminished appetite for risk and credit to us.

3. Socionomics of the Food Section

If you really want to understand financial markets all you really need to do is read the Food section of your local newspaper. Seriously. There are few things more intimate, yet still as closely intertwined with overall social mood as food; what restaurants are popular, what types of cuisine are in favor, what kind of wines, liquor, fruit, etc. It's all there. Today we'll take a look at the front page of the New York Times' bi-weekly Dining In section.

  • Today there are three articles on the front page of the Times' Dining In section, all with important socionomic messages.
  • The main feature article on the front page is "Lunch With a Food Revolutionary."
  • What's socionomically important about this article?
  • Well, note the language in the headline: food revolutionary.
  • Revolutionaries are, by definition, those who are engaging in a "radical" change, or supporting a social and political "overturning" of something established.
  • In this article, the Times is profiling Alice Waters, author of the upcoming book, "The Art of Simple Food: Notes, Lessons and Recipes from a Delicious Revolution."
  • Sounds harmless enough. We're talking about food, after all. But stop for a moment to consider what is at stake in Waters' book; the American food supply, the big business of agri-corporations, a movement toward what Waters believes is a true, radical change - "a country full of people who eat food that is good for them, good for the people who grow it and good for the earth."
  • It's also a book full of recipes striving toward simplicity in both design and preparation; a rejection of hyperstylized food and fusion techniques that are themselves associated with the complexities and hyperreality of modern life, and by extension, financial markets.
  • The second article is the Wines of the Times feature.
  • As if on cue, the article seeks "Happiness for $10 Or Less."
  • You may be thinking, well, everyone loves a bargain... but think again.
  • This important socionomic viewpoint presented in the article could be as true of subprime loans and why they are a symptom of something larger as about $1,000 wines:
    "Still, rationality doesn't often enter into buying decisions. For some, money is meaningless, whether that's true because of huge credit lines, daddy's millions or success in business. These people will buy whatever is most expensive."
  • Money meaningless? Indeed. So why an article at the far end of that meaningless scale?
  • Perhaps because social mood is transitioning from "meaningless money" to something else.
  • The last article on the front page is a seemingly innocuous meditation by food critic Frank Bruni on Peter Luger's steakhouse, "The Original Master of Blood and Butter."
  • Luger's is a 120-year-old New York institution.
  • But what is interesting about the article is this: after noting that he believes the 120-year-old restaurant needs more consistent food and less dismissive service Bruni asks, "Has Luger grown tired of us? Or have some of us just grown tired of it?"
  • The question itself, which comes first, the restaurant's actions, or our interpretations of those actions, leads us to today's Number Four...

4. Alan Greenspan Unwittingly Discovers Socionomics

Alan Greenspan's whirlwind book promotion tour finally landed him on Comedy Central's The Daily Show with Jon Stewart last night. We particularly enjoyed this quote:

Greenspan: "I've been dealing with these big mathematical models of forecasting the economy, and I'm looking at what's going on in the last few weeks. … If I could figure out a way to determine whether or not people are more fearful or changing to more euphoric, and have a third way of figuring out which of the two things are working, I don't need any of this other stuff... Forecasting 50 years ago was as good or as bad as it is today. And the reason is that human nature hasn't changed.

  • Yes, if only there was a way to model transitions in social mood from euphoric to fearful and from fearful back to euphoric... if only.
  • Going back to Frank Bruni's question in today's Number Three, "Has Luger grown tired of us? Or have some of us just grown tired of it?", in many ways this lies at the very heart of socionomics.
  • Does social action motivate change in social mood, or does social mood motivate change in social action?
  • Socionomics supports the thesis that humans' unconscious impulses to herd lead to the emergence of social mood trends, which in turn shape the tone and character of social action.
  • This perspective applies across all realms of social activity, including economic, financial, political and cultural.
  • Greenspan's unwitting acknowledgment that if he could "figure out a way to determine whether or not people are more fearful or changing to more euphoric" then he could throw away his other models is precisely why those models he, and other economists, rely on are powerless at predicting future outcomes.
  • When social mood supports credit expansion, as it has for the better part of a two decades, then the kind of central bank policy practiced by Alan Greenspan indeed looks "Maestro"-like.
  • When social mood no longer supports credit expansion, however... well, just ask Japan.

5. Point/Counterpoint: The Fed Rate Cut Will Help Save Our Home

The Fed Rate Cut Will Help Save Our Home

By Richard Jones

Thank you Fed Chairman Ben Bernanke, thank you! With yesterday's 50 basis point cuts in both the Federal Funds and Discount rates, we finally are able to see some welcome respite on the horizon. Why, banks even followed suit almost immediately by lowering their prime rates 50 basis points as well. Yes, relief is finally here!

I don't mind telling you, the little missus and I were worried. In 2002 we took out a $500,000 Option ARMS mortgage, an adjustable rate mortgage with the option of making interest only payments for the first five years with a five-year incremental step-up in payments.

Everything was looking fine for the first five years. Our initial monthly payment on the Option ARMs mortgage was around $1,600. Over the past five years it has slowly crept up to $2100. That extra $500 is beginning to hurt. In August, however, our mortgage lender sent us a note telling us what the 2008 payment is going to be. Prepare to grab the seat of your pants: $4,100!!!! That's right, $4,100!!! Who can afford a payment like that?!?!

Even worse, thanks to what they call "negative amortization," whatever that means, they say our original loan balance of $500,000 is now $535,000!!! How did that happen?!?! Obviously we were worried. That kind of mortgage payment would ruin us. We'd have to sell... assuming we could find a buyer. And I don't even know that we could sell for a price that covers the $535,000 mortgage!

Well, thanks to Big Ben we're back in business, baby. Our refinancing papers are already in! We're going to take down a fixed-rate mortgage this time at a payment we can handle. See, thanks to the Federal Reserve, things usually work out just fine. My wife and I can sleep at night. Thank you Fed Chairman Bernanke! Now, I'm going to buy Alan Greenspan's new book, he's the one who started this whole thing.

Mr. Jones, I'm Afraid There's a Little Problem With Your Refinancing Application

By Darren Salisbury, Loan Officer

Is this Robert Jones? I meant Richard, sorry. Richard Jones at 233511 Magnolia Stone Haven Wintergardengreen Court Acres Estates? Ok, good. Wow, uh... Mr. Jones, I, uh, I hate to be the bearer of bad news here, but there seems to be a slight problem, with, ah, with your refinancing application. No, no we got the $500 processing fee check, no problem there. That's not refundable, by the way, just want to be clear on that. Right. Yeah, it, uh, just kind of looks like we're not going to be able to approve this refinancing package.

Yes, I'm sure. Whoa, absolutely, I agree $4,100 a month is way, way too high for a house in, ah, where are you? Right, Magnolia Stone Haven Wintergardengreen Court Acres Estates. Hey, did the developer ever finish the community pool and recreation facilities there? Wow, I'm surprised at that. They were the same developers as Crystal Glen Squire Thirstwood Cove Hammock Lake and they finished the community pool and rec center on that development six or eight months before they abandoned it. Well, on the bright side, with the Fed rate cut and all, maybe they'll come back and finish it. Would certainly help the resale value.

Yes, I checked on that and unfortunately you're outside the GSE guidelines and, look, if it ain't GSE it ain't gettin' done these days. Have you tried taking in some boarders, maybe raising some cash by renting out the east wing? Sure, but you have, what 5,600 square feet there, right? Ok, just a thought. Well, good luck with everything. If it gets down to the wire for you, give me a ring back. My brother-in-law handles distressed property sales.

No positions in stocks mentioned.

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