Northman's Fury

I came across two stories recently that show why the quote above is so popular.

The first quotes studies to show overall wage stagnation.

Even in a growing economy, only about a third of Americans can be considered upwardly mobile -- meaning they will end up with more inflation-adjusted income and a higher relative economic standing than did their parents. The rest are maintaining their standing or falling behind; about one-third slip down the income scale over the course of a generation.

When specific groups are considered, the news is even more unsettling. Men in their 30s have experienced a sustained slide in their inflation-adjusted incomes, which fell by 12 percent between 1974 and 2004.

And most shocking of all: About 45 percent of middle-income African American children end up falling to the bottom of the income scale over a generation, compared with 16 percent of white children -- meaning that even solidly middle-class African American families lead fragile economic lives.

According to the Pew studies, America has less upward economic mobility than Denmark, Canada or Finland. "In America, more than other countries," says project director John Morton, "the circumstances of your birth have more to say about where you end up than how we tend to think of ourselves."

The second quotes another study to show precisely the opposite.

If you've been listening to Mike Huckabee or John Edwards on the Presidential trail, you may have heard that the U.S. is becoming a nation of rising inequality and shrinking opportunity. We'd refer those campaigns to a new study of income mobility by the Treasury Department that exposes those claims as so much populist hokum.

. . .

The Treasury study examined a huge sample of 96,700 income tax returns from 1996 and 2005 for Americans over the age of 25. The study tracks what happened to these tax filers over this 10-year period. One of the notable, and reassuring, findings is that nearly 58% of filers who were in the poorest income group in 1996 had moved into a higher income category by 2005. Nearly 25% jumped into the middle or upper-middle income groups, and 5.3% made it all the way to the highest quintile.

Of those in the second lowest income quintile, nearly 50% moved into the middle quintile or higher, and only 17% moved down. This is a stunning show of upward mobility, meaning that more than half of all lower-income Americans in 1996 had moved up the income scale in only 10 years.

Both studies, of course, are likely entirely true and accurate. Statistics don't lie. People making selective use of them, however . . .

Look at the stories carefully, and you'll see that what they're measuring is quite different. The first story is measuring the difference between generations; what do my siblings and I make today compared to our parents. The second story is measuring the same people over a ten-year span. What do I make today compared to what I made ten years ago. (Well, given my youth, not really, but you get the picture.)

The second story is a case where the deck is stacked, statistically speaking. Take people in their mid-twenties, just entering the workforce, and follow their careers for ten years and on average, just on experience alone, they should be getting better-paying jobs as they go along. Certainly if I take what I was earning just after finishing school and compare it to what I'm making now, I've advanced quite considerably up the ladder.

On the other hand, if you take what I make now and compare it to what my father was making at my age, (with him having, I might add, far less education and the debt-load that accompanied it), then my actual progress, if any, looks far less spectacular.

Wage stagnation isn't a myth, it's all about how you look at the data, and what data you're looking at.

More people are coming to realize just how bad the credit crunch is going to be.

The amount of losses that financial institutions have already recognized - $20 billion – is just the very tip of the iceberg of much larger losses that will end up in the hundreds of billions of dollars. At stake – in subprime alone – is about a trillion of sub-prime related RMBS and hundreds of billions of mortgage related CDOs. But calling this crisis a sub-prime meltdown is ludicrous as by now the contagion has seriously spread to near prime and prime mortgages. And it is spreading to subprime and near prime credit cards and auto loans where deliquencies are rising and will sharply rise further in the year ahead. And it is spreading to every corner of the securitized financial system that is either frozen or on the way to freeze: CDOs issuance is near dead; the LBO market – and the related leveraged loans market – is piling deals that have been postponed, restructured or cancelled; the liquidity squeeze in the interbank market – especially at the one month to three months maturities - is continuing; the losses that banks and investment banks will experience in the next few quarters will erode their Tier 1 capital ratio; the ABCP and related SIV sectors are near dead and unraveling; and since the Super-conduit will flop the only options are those of bringing those SIV assets on balance sheet (with significant capital and liquidity effects) or sell them at a large loss; similar problems and crunches are emerging in the CLO, CMO and CMBS markets; junk bonds spreads are widening and corporate default rates will soon start to rise. Every corner of the securitization world is now under severe stress, including so called highly rated and “safe” (AAA and AA) securities.

Roubini notes that a lot of the problems that are being hidden at the moment are sitting in the Level 3 asset class, what Ian Welsh called "mark-to-make-believe" in his Wile E. Coyote post.

And the kicker is at the end of the post is where the amount of level 3 assets are compared to the financial institutions equity:

Let's have a look at Citigroup. Their equity base is $128 billion. Therefore, their Level 3 assets to equity ratio: 105%  

How about Goldman Sachs?  Level 3 assets are $72 billion, equity base is $39 billion. Their Level 3 assets to equity ratio is 185%. 

Morgan Stanley:  $88 billion in Level 3, equity base is $35 billion. Ratio: 251% (WOW!) 

Bear Stearns:  $20 billion in Level 3, equity base is $13 billion. Ratio: 154%  

Lehman Brothers:  $35 billion in Level 3, $22 billion in equity. Ratio: 159% 

Merrill Lynch: $16 billion in Level 3, $42 billion in equity. Ratio: 38% 

Once the real value of those assets are disclosed, or are able to be discerned, they have the ability to wipe out the capital of most of the major financial institutions.

The dead air awaits.

Washington Mutual Inc. got what it wanted in 2005: A revised bankruptcy code that no longer lets people walk away from credit card bills.

The largest U.S. savings and loan didn't count on a housing recession. The new bankruptcy laws are helping drive foreclosures to a record as homeowners default on mortgages and struggle to pay credit card debts that might have been wiped out under the old code, said Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank.

I have nothing to add.

The loonie has now passed $1.10 US. The major reason for this is the weakness of the US dollar. It is also part of the reason oil is fast approaching the $100.00/barrel mark. That's in US dollars, which means its relatively cheaper for everyone else, but it also has a psychological barrier quality to it.

The speed of the dollars collapse has just been incredible, and a little scary.

Between Numerian's article on Saturday and Ian Welsh's yesterday, the guys at the Agonit really know how to depress a guy, particularly when I see this as well:

The dollar's decline to record lows may turn into a ``more violent correction'' that requires the U.S., the European Union and Japan to intervene in foreign- exchange markets, said analysts at Morgan Stanley.

Still pumping the legs with dead air beneath them?

This story is both amusing and illustrative at the same time:

The world's richest model has reportedly reacted in her own way to the sliding value of the US dollar - by refusing to be paid in the currency.

. . .

According to Brazil's weekly magazine Veja, when Ms Bündchen signed a deal to represent Pantene hair products, she demanded that the brand owner, Procter & Gamble (P&G), paid her in euros.

Of course, she's hardly alone in this. As the story indicates, a lot of big investors aren't too keen on the US dollar these days either.

I'm certainly quite happy that I've been avoiding the US market for some time despite financial "experts" advice. Even if all the investments did was stand still for the last five years, I'd have a 70% gain in their US dollar worth. It's hard to argue with that kind of math.

Given yesterday's news that Citigroup has replaced its chairman and plans an additional $8 to $11 billion in write-downs, this rather depressing post by Numerian at the Agonist is looking rather prophetic:

We live in a strange world in which inflation and deflation are galloping rampantly about the globe, both at an increasing pace. Economists aren’t used to such a world, and their instinct is to choose one or the other as the true operating phenomenon, and in that case the default choice is almost always inflation because deflation is so rare.

. . .

So Brahma can accomplish some good, though obviously too much inflation at too rapid a pace can be dangerous. Investors around the world are now chasing after “things” – oil, wheat, gold, copper – anything with tangible value that has some scarcity. One of the reasons tangible things are so valued is that Shiva is out destroying the intangible things like paper assets.

Take the interesting case of Merrill Lynch. In June it was sitting high on the world, the king of the mortgage securitization business. Four months later, Merrill Lynch has been forced to write down about $8 billion of assets, destroying 20% of its net worth and the equivalent of the past four quarters of its profits. Stan O’Neal has lost the chairmanship of Merrill Lynch, and analysts are openly discussing another $10 billion more of write-offs. Some are whispering about the possible collapse of the firm and forced merger with someone stronger.

What hath Shiva wrought? Deflation, certainly, and not just in the mortgage business. Banks, hedge funds, brokers, so-called Special Investment Vehicles (off-balance sheet repositories for bank assets) – they’ve all woken up to an unprecedented and unexpected drop in the value of anything they own that cannot be readily sold. Due to the prevalence of the mark to market process – so useful in the past 15 or so years in allowing the financial industry to declare profits and bonuses when paper instruments were going up in value - financial firms are now struggling to determine how truly deflated their assets are going to be.

Everyone says the banks have not “come clean” about their problems. The truth is, banks don’t really know how bad their problems are. The picture changes from day to day. In August most financial markets had seized up and no one was making prices to each other. Things improved for a while but just this past week the same problems came back with a vengeance. Wednesday last week when the Fed lowered interest rates 25 basis points, it could not actually achieve this goal without injecting $41 billion into the banking system to force rates down. This was the second greatest liquidity injection by the Fed in the last ten years, the largest being right after the 9/11 attacks.

For Fed policy aficionados, the sight of the Fed pushing money into the interbank market to achieve an interest rate cut is extraordinary. It tells us that Fed Funds – the purest and safest form of cash – are another one of those “things” that are now scarce and valued in a world that is highly skeptical of debt instruments. It also tells us that the market-setting level of overnight rates in the U.S. is higher than the Fed wishes it to be.

One of the most interesting things about the Wall Street recovery of the last few years is that all of the wealth being generated was paper wealth; finding ways to generate larger and larger valuations for the same assets. Both through driving demand as in the housing market, and through newer and more complicated financial instruments.

It became a game of pushing paper around while very little of tangible value was actually created. That's all coming back to bite them, and the rest of us.

There's just no stopping the rise, it seems

Oil prices have continued their unremitting climb, passing the $96 a barrel mark after figures showed a surprise fall in US crude reserves.

. . .

At the current rate of increase, prices are set to top $100 a barrel during the next week.

Adjusted for inflation, prices are still below the $101 high reached in November 1980.

I'm sure that makes us all feel better.

Actually, given the fall of the US dollar, the rest of us are actually probably even paying less in real terms for our oil and gas, not that with its rise it is very easy to tell. Still, like just about every other major currency, the Canadian dollar just hit a record high against the US one.

The Canadian dollar surged to a modern-day high against the U.S. dollar late Wednesday after the Federal Reserve cut interest rates again and oil prices surged to another all-time high.

In after-hours trading, the loonie went as high as $1.0617 US, eclipsing the previous 50-year high of $1.0614 US set on August 21, 1957.

That's the highest the Canadian dollar has climbed since it was allowed to float in 1950.

I also like this little piece of historical trivia

According to a history of the dollar posted on the Bank of Canada website, the U.S. dollar plunged in 1864 as the Confederate Army approached Washington during the U.S. Civil War and the Union government temporarily shut down gold trading.

On July 11, 1864, the Canadian dollar was worth $2.78 US.

Given Confederation was in 1867, I would have never guessed that.