Rising Rates: With A Huff and A Puff They Will Blow Your House Down
by Rob Kirby with Gale Bullock, Realty Reality - Global Real Estate Markets Forum. September 1, 2004
Econometrics of the Cryptic Carry Trade
This reality realty missive is an epic aside about three suckling sibling pigs. They finance homes at larcenously low variable rates giving rise to speculative excess. The result of this being ever burdensome, yet manageable debt loads in appreciating, low rate environments. Their demise is brought on when the big bad wolf and his associates decide actions are necessary to impede (ANTI)[i] further price hikes. The lame attempt to rig the whole process quickly spins up and out of control, as a result of "too much intervention" with regulator's meddling conclusions that corrective measures always need extra oomph (NEO)ii. Rising financing charges obsess new (CON)iii entrants as a result of decreases in disposable income. Dampened demand and the resulting economic drag create winds of change, blowing down the desirability of home ownership. This trio of completely careless contemptuous portly (CCCP)iv pigs had long been known for erecting unstable structures. They all ply their trade in a small town on an Isle known properly as Greater Saint Enronv. Most folks refer to this piggery of a place as GSEvi for short. And for all of you smart ones out there, don't bother looking for GSE on the map. The Isle of Greater Saint Enron only exists in the minds of its portly residents, and the books of its accountants, making it a squalid and loosey-goosey association, fudgingly formed (S&LGAFF)vii by the pandering trio's bogus (PTB)viii derivatives building blocks.
So don't get tricked into a false sense of security or semblance of community, as this offshore Nirvana is all a deceptive sham. After all, in the world today, when are things ever as they appear to be? Precipitous price increases (PPI)x and the appearance of strength and quality construction practices ingratiates (CPI)xi these swindling swine, permitting an idle life of self adulation. From every deception (FED)xii of pompous excess they engender their followers to a life of destruction, peasantry and servitude. So be warned, they curry favor of mighty circumstance (FOMC)xiii and fend for themselves - always. They only answer to their own ranging, ubiquitous, shifting ends (RUSE)xiv and those of their masters.
The Players Lend A Hand in the Blame Game
The three portly piglets' names, coincidentally, are Fannie, Freddie and lest we forget the most affable of the family, Ginnie Mae. Being hindered under debt (HUD)xv, any visual measure (AVM)xvi used to access their health is woefully inadequate. Further investigation requires reading every analysis (FIRREA)xvii of their structural integrity and ultimately deciding in time (AUDIT)xviii the true condition of these swindling swine. Have these enterprises become exemplars of sound business practice, or repositories for toxic business waste [under the guise of two-tiered structured finance, bundled loans, and the derivative counter-party plutonium]? As spiraling costs increase anew (CIA)xix, we must remember we're talking about pure adulterated range raised, trough tainted indulgent pork. They're so obscene in fact, that if you painted them gray and opted (GAO)xx to give them trunks instead of feed bags, you might even mistake them for elephants [or in DemoPublican-ease, Fat Jackasses with long Pony Tails].
Sending Out a SOS or Rearranging RMS Titanic Deck Chairs?
It isn't by coincidence that when ever you find such an unsavory sty of swine (SOS)xxi, there's usually going be a big bad wolf or two somewhere close in tow. Wolves hunt in packs. An alpha male resides/rules in each pack. While our leading villain doesn't always come across like the sharpest knife in the drawer, he would stab you in the back, whilst praising you – quicker than you can say "offshore special purpose entityxxii". Sly indeed, but listening to this wolf howl is less exciting than watching mold growxxiii. He seems to revel in this cryptic cacophony, like he fancies himself as a knighted astrologer (AKA)xxiv or lyrical soothsayer, always speaking c*o*d*exxv.
Could it be his desire to take over the free world and become a really important figure? It's been written that this wolf craves "centre stage" and allegedly needs the green. Perhaps important people make him green with envy? Maybe he couldn't give a pig's poke? Even if he is a big old bad wolf, masterfully disguised (WMD)xxviii in sheep's clothes, I just personally might (JPM)xxix like to call him Greeny – the languid talking carefree maestroxxx (LTCM)xxxi! As for the maestro's other furry friends (Roger the Raccoon (R.R.)xxxii, Lucifer the Snake (L.S.)xxxiii and Johnny on the Spot (J.S.)xxxiv) and their pathetic play toys (PPT)xxxv, they too reside beyond the Rubicon delineating ethically sound fair (ESF)xxxvi play from insidious fraud. Alea Iacta Est. - Julius Caesar
Elvis Has Left the Buildingxxxvii
The foundations of Fannie, Freddie and Ginnie Mae may not be up to the Buffetting that lies in their path (past?). Together they face the same capital adequacy and illusory concerns. Their foundations are weakened. They have been dilapidated not only through regulatory neglect and careless oversight, but particularly the geometric additive weight of increasingly complex engineered layers of derivatives. In a sense this has left them as hollowed out veneered silhouettes of their former selves. Much of their portfolios' contents belong in sewage (BIS)xxxviii holding ponds, where at least their toxic effects could be isolated, removing the systemic dangers they pose to the international monetary financial (IMF)xxxix system. Their diluted capital and weakened collateral held insinuate necessary acceptance (CHINA)xxxx of their derivative building blocks -- which is notably silly (WINS) since derivatives have failed in the past (when it Raines we will all get poor). While the big bad wolf is not (IN) known to be both irrationally determined and exuberantly long winded -- time hastens erudite (THE) action. Harvardxxxxi beckons. If he makes good on his claim, perhaps he still can huff and puff and blow the house down (or up?). At the end of the day, huffing, puffing, and blowing might not be required at all. It is quite possible and may come to pass that his fondness for enrapturing notional derivatives (END)xxxxii, or maybe the snake oil for the squeaky wheel getting the grease that will cryptically conclude this game of Charlatan Charades instead -- not to be confused with the Myth of the Rule of John Lawxxxxiii.
DeDuh. DeDuh. DeDuh. That's All For Now Folks! - Porky Pigxxxxiv
ii NEO Not to be confused with near earth objects. Literally translated as "new". When combined with the word "Nazi" or "con" the word takes on "new" meaning connoting extreme or ultra variations of the predicate. See iii, Con.
v Enron The "energy giant" that filed chapter 11 in 2002. The company was ostensibly set up as a "ponzi scheme" utilizing offshore financial accounts to inflate earnings and hide losses from regulators. See: The Collapse of Enron. Link
viii PTB Powers That Be or leadership. Often accused of having no visible method to their madness. "Why 99, you know we have to murder and kill and destroy in order to preserve everything that's good in the world." --Maxwell Smart to Agent 99 See: Confronting the Powers at: Link
x PPI The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. Occasionally published by the Bureau of Labor Statistics when it suits the PTB (see note viii). See: Link
xii FED The Federal Reserve AKA the central bank of the United States of America which is a private concern and is neither "Federal" nor a "Reserve" of any kind. See: The Creature From Jekyll Island by G. Edward Griffin at: Link
xiii FOMC Federal Open Market Committee. A committee of Fed. Governors who meet at scheduled intervals to chart the movement and direction of the Federal Funds (inter bank) lending rate. See Monetary Policymaking at the Federal Reserve Board at: Link
xvii FIRREA Financial Institutions Reform, Recovery and Enforcement Act of 1989. Legislation passed by Congress in the wake of the S & L debacle to prevent appraisal abuse. See Larry Levy, The Fraud of Appraisal Regulation: Link
xx GAO Government Accounting Office. Tries to apply "general accepted accounting principles" to different departments within government. Both the Pentagon and HUD cannot ever pass this test. Ibid., Sanders and Fitts, The Negative Return Economy (Blame the Bookkeeper) Link
xxii Offshore special purpose entity or offshore special purpose vehicle. Along with Structured Finance, the preferred method of obscuring financial truths from regulatory oversight by Enron, their accountants and their bankers. See Price Waterhouse Coopers: Link
xxiii More boring than watching mold grow. Figure of speech. Richard Nixon is known to have articulated that Alan Greenspan was one of the most boring public speakers he had ever heard. Paper written by contemporary of the Fed Chairman, Pierre A. Rinfret, see: Link
xxviii WMD Weapons of Mass Destruction. The infamous weapons that Iraq's Saddam Hussein was alleged to have but could not be found by occupying forces. In a different sense, the financial "neutron bomb" affectionately known as derivatives. See International Swaps and Derivatives Association (ISDA) at: Link
xxix JPM Short for J. P. Morgan Chase. A U.S. based international banking concern with market capitalization of 139 billion and a derivatives book at March 30, 2004 of 39.6 trillion dollars. See JPM Derivatives Monster Grows at: Link
xxx Maestro Find out more about Bob Woodward's book, Maestro here. I prefer to think of Maestro in terms of Play It Again Sam, another essay penned by Rob Kirby paralleling the fall of the Roman Empire to the situation in modern day America.
xxxi LTCM Long Term Capital Management a hedge fund ostensibly managed by 2 Nobel laureates (econ) that collapsed in the wake of the Russian financial crisis in the late 1990's. They employed derivatives to achieve spectacular leverage in their investment strategies and allegedly "shorted gold" before their collapse which very nearly collapsed the Global Financial System. See Not Free, Not Fair Pg. 29 by John Embry and Andrew Hepburn, Sprott Securities at: Link
xxxii R.R. Robert Rubin Former Treasury Secretary in Clinton administration. Former Co-chairman of Goldman Sachs. Current chairman of Citibank. One of seven members of the Harvard Corporation (with Lawrence Summers) which is the largest non profit org. in the world next to the Roman Catholic Church with assets of approx 21 billion. See: Link
xxxiii L.S. Lawrence Summers. Former Treasury Secretary under the Clinton administration who succeeded Robert Rubin in that role in 1999. Renowned for his academic work with Barsky relating to the importance of gold and gold pricing in a market economy. Currently the president of HarvardUniversity, a post he has held since 2001. One of seven members, with Robert Rubin, of the Harvard Corporation which is the largest non profit org. in the world next to the Roman Catholic Church with assets of approx. 21 billion. See: Link
xxxiv J.S. John Snow Current Treasury Secretary in the Bush administration. He assumed the role from Paul O'Neill who resigned/was fired in 2003.
xxxv PPT Plunge Protection Team Also known as the Working Group on Financial Markets. This body was established in the wake of the stock market crash in 1987 ostensibly to prevent financial melt downs. This group consists of the Chairmen of the Federal Reserve, the Secretary of the Treasury, the chairman of the SEC and CFTC (commodities futures trading commission) See the Washington Post at: Link
xxxvi ESF Exchange Stabilization Fund A pool of capital operated at the discretion of the Secretary of the Treasury of the U.S. with the consent of the President and approved by Congress. See the U.S. Treasury at: Link
xxxvii Elvis Has Left The Building Phrase coined by Al Dvorin. It was in the early 1970s that the star's manager Colonel Parker asked Dvorin to inform fans after a gig that Elvis would not be appearing for an encore. Dvorin took the stage and made his now legendary announcement: "Ladies and gentlemen, Elvis has left the building. Thank you and goodnight." See: Link
xxxviii BIS Bank For International Settlements The BIS is an international organization which fosters cooperation among central banks and other agencies in pursuit of monetary and financial stability. Headquartered in Basel, Switzerland. See: Link
xxxix IMF International Monetary Fund The IMF is an organization of 184 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty. Until very recently the fund was headed by Horst Koehler, who suddenly resigned (in the middle of crucial negotiations of debt rescheduling with Argentina) to accept the nomination to become President of Germany. See: Link
xxxx CHINA Last year, China consumed 40% of the world's cement, 7% of the world's total consumption of crude oil (surpassing Japan as the #1 importer of oil), 31% of global coal, 30% of iron ore, 27% of steel products, and 25% of aluminum. See John Mauldin, China Syndromes at: Link
xxxxi Harvard The University and more specifically the ultra secretive Harvard Corporation-overseer of the Harvard Endowment Fund. The non profit's Endowment Fund is the largest pool of private capital in the world, save the Roman Catholic Church. Among its 7 managers are Robert Rubin and Lawrence Summers, both former Treasury Secretaries of the U.S. The fund achieves investment returns which no one in the institutional investment universe can come close to rivaling. The Fund has been intimately linked to such illustrious failed institutions as Harken Energy and the Enron debacle - but always manages to 'walk away' smelling like a rose. See return comparisons at: Link
xxxxii END The U.S. Department of Commerce today reported that the merchandise trade deficit reached a record level of $631 billion at an annual rate in the first half of 2004, an increase of 15.3% over the same period in 2003. The U.S. trade deficit with the rest of the world and specifically China is not sustainable. See: Link
xxxxiii John Law A cad who lived in the 17th. A native of England who spent time philandering throughout Europe and in particular with French royalty. See Bob Landis, Alan Greenspan Is No John Law at: Link
Rob Kirby | Author, Kirby Analytics
Ole Bear AKA Gale Bullock | Editor, Realty Reality