The Formula That Killed Wall Street
His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.
Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li’s formula hadn’t expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system’s foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.
Very nice article on the dangers of financial markets to those that believe that math can provide all the answers. Math can help find opportunities. However markets have physical, psychological and regulatory limitations. And markets frequently experience huge panics or manias. People continue to fail to model that properly.
Related: All Models Are Wrong But Some Are Useful – Leverage, Complex Deals and Mania – Financial Markets with Robert Shiller – Financial Market Meltdown – Failure to Regulate Financial Markets Leads to Predictable Consequences
Economists are raising projections for the USA economy in the second half of 2009. The predictions are still for an anemic economy growing at just 1.5% and with unemployment reaching 10.1%. Still I think if we achieve that we should feel lucky. Economists Raise U.S. Outlook as Recession Fades
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The economy probably shrank at a 1.8 percent rate from April to June, the latest survey showed, less than economists forecast last month. The U.S. will return to growth in the current quarter and expand 2.1 percent next year.
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A separate report from the Commerce Department today showed the trade deficit unexpectedly narrowed in May as exports jumped while imports of crude oil and auto parts slid. The gap between imports and exports decreased 9.8 percent to $26 billion, the smallest since November 1999, from $28.8 billion in April.
Unemployment will rise to 10.1 percent in the first quarter of 2010 from 9.5 percent last month, already the highest since August 1983, the survey of economists showed.
The trade deficit is still far to large. And the to move the economy in the right direction we need to continue reducing personal debt (and start reducing government debt).
Related: First Quarter GDP 2009 down 6.1% – When Will the Recession Be Over? – Warren Buffett Webcast on the Credit Crisis
The Society for Actuaries has published a good resource: Managing post-retirement risks.
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Many investors try to own some assets whose value may grow in times of inflation. However, this sometimes will trade inflation risk for investment risk.
• Common stocks have outperformed inflation in the long run, but are
poor short-term hedges. The historically higher returns from stocks
are not guaranteed and may vary greatly during retirement years.
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Retirement planning should not rely heavily on income from a bridge job. Many retirees welcome the chance to change careers and move into an area with less pay but more job satisfaction, or with fewer demands on their time and energy.
Terminating employment before age 65 may make it difficult to find a source of affordable health insurance before Medicare is available.
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Insurance for long-term care covers disabilities so severe that assistance is needed with daily activities such as bathing, dressing and eating. Some policies require a nursing home stay; others do not. The cost of long-term care insurance is much less if purchased at younger ages, well before anticipated need.
The full document is well worth reading.
Related: Many Retirees Face Prospect of Outliving Savings – How to Protect Your Financial Health – Financial Planning Made Easy – personal finance tips
Once again the data shows that the 30 year fixed mortgage rates are not directly related to federal funds rates. In June the fed funds rate increased 3 basis points, 30 year mortgage rates increased 56 basis points. Since January the fed funds rate is up 6 basis points is up while 30 year mortgage rates are up 36 basis points. Home prices have continued to fall even with the very low mortgage rates.
Related: Mortgage Rates: 6 Month and 5 Year Charts – historical comparison of 30 year fixed mortgage rates and the federal funds rate – posts on financial literacy – GM and Citigroup Replaced by Cisco and Travelers in the Dow – Jumbo v. Regular Fixed Mortgage Rates: by Credit Score
For more data, see graphs of the federal funds rate versus mortgage rates for 1980-1999. Source data: federal funds rates – 30 year mortgage rates
U.S. Job Report Suggests that Green Shoots are Mostly Yellow Weeds by Nouriel Roubini
It’s clear that even if the recession were to be over anytime soon – and it’s not going to be over before the end of the year – job losses are going to continue for at least another year and a half. Historically, during the last two recessions, job losses continued for at least a year and a half after the recession was over.
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The latest figures – published this week – on mortgage delinquencies and foreclosures suggest a spike not only in subprime and near-prime delinquencies, but now also on prime mortgages. So the problems of the economy are significantly affecting the banking system.
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So the outlook for the US and global economy remains extremely weak ahead. The recent rally in global equities, commodities and credit may soon fizzle out as an onslaught of worse- than-expected macro, earnings and financial news take a toll on this rally, which has gotten way ahead of improvement in actual macro data.
Certainly this is not a forecast that will make people happy. I agree that the expectations for a nice quick recovery have become too optimistic. I am far from certain what lies ahead but the second half of 2009 does not look to be very strong. It is still a time to be cautious.
Related: Jim Rogers on the Financial Market Mess (Oct 2008) – Beware of the Sucker’s Rally – USA Consumers Paying Down Debt – Investing quotations
Another wave of foreclosures is poised to strike
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Mark Zandi of Moody’s Economy.com estimates that 15.4 million homeowners — or about 1 in 5 of those with first mortgages — owe more on their homes than they are worth.
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Government and company reports show that the number of completed foreclosures nationwide slowed sharply late last year and into early this year, largely because of various moratoriums in effect during much of the first quarter.
But anecdotal reports indicate that foreclosure sales have started to climb again in the second quarter. And the pipeline is clearly getting fuller. In the first quarter, some 1.8 million homeowners nationwide fell behind on their loans by 60 to 90 days, a 15% increase from the prior quarter, according to Moody’s Economy.com. The research firm said that loan defaults rose sharply as well, to 844,000 in the first three months of this year.
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Even as defaults among subprime borrowers have trended lower this year, newly initiated foreclosures involving prime mortgage loans saw a significant increase in the first quarter, jumping 21.5% from the fourth quarter, according to a government report of loan data from national banks and federally regulated thrifts.
This is more bad news for the economy. As I have been saying the economy is still in serious trouble. Cleaning up the damage caused by living beyond our means for decades does not get cleaned up quickly. This are actually going as well as could be hoped for, I think. We need to hope the remainder of this year sees the economy stabilize and then hope 2010 brings some good news.
Related: Nearly 10% of Mortgages Delinquent or in Foreclosure – Over Half of 2008 Foreclosures From Just 35 Counties – How Much Worse Can the Mortgage Crisis Get? (March 2008) – Mortgage Rates Falling on Fed Housing Focus
Peter Schiff answers economic questions from Reddit users (see part 2). See our Economics and Investing Reddit. He made the point that inflation will be a serious problem. He also recommended several books, including: Economics in One Simple Lesson by Henry Hazlit and The Biggest Con: How the Government is Fleecing You by his father. He is an opinionated economist. I certainly do not agree with everything he says but I think he is worth listening to. As an investor I believe it is important to seek out unconventional opinions and find worthwhile unconventional opinions that can help you beat the market.
Related: Skeptics Think Big Banks Should Not be Bailed Out – Inflation is a Real Threat – Let the Good Times Roll (using Credit) – Dell, Reddit and Customer Focus
Nonfarm payroll employment continued to decline in June (by 467,000), and the unemployment rate increased to 9.5% (with a total of 14.7 million unemployed), the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Job losses were widespread across the major industry sectors, with large declines occurring in manufacturing, professional and business services, and construction.
Since the start of the recession in December 2007, the number of unemployed persons has increased by 7.2 million, and the unemployment rate has risen by 460 basis points (from 4.9% to 9.5%). The number of long-term unemployed (those jobless for 27 weeks or more) increased by 433,000 over the month to 4.4 million. In June, 30% of unemployed persons were jobless for 27 weeks or more.
Employment in manufacturing fell by 136,000 over the month and has declined by 1.9 million during the recession. Health care employment increased by 21,000 in June. Job gains in health care have averaged 21,000 per month thus far in 2009, down from an average of 30,000 per month during 2008.
The number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed in June at 9.0 million. Since the start of the recession, the
number of such workers has increased by 4.4 million.
About 2.2 million persons (not seasonally adjusted) were marginally attached to the labor force in June, 618,000 more than a year earlier. These individuals wanted and were available for work and had looked for a job sometime in the past 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.
Related: posts on employment – Unemployment Rate Increased to 8.9% – Can unemployment claims predict the end of the American recession? – The Economy is in Serious Trouble – Over 500,000 Jobs Disappeared in November 2008