The latest TAF auction had almost no bidders, with a Bid/Cover ratio of a downright confusing 0.08, indicating nearly no demand for these instruments. This is called a liquidity trap, wherein you reach a point where adding liquidity to a market does no good. Accordingly, Paulson has decided to rebuild the TARP officially (the US$700B+ bailout package) swapping now for pretty much anything they want - credit card debt, auto loans, whatever. 24/7 Wall Street suggests that "Credit default swaps on US debt may just became a big business," words you don't want to hear.
So far, however, the TARP and the other instruments have been, as predicted, instruments for looting rather than recovery. Rolling stone describes it as "a lot like Iraq — a 'free-fraud zone' where private contractors cash in on the mess they helped create." The administration also quietly changed tax law by fiat - or to use their word, "reinterpretation," which in this case means ignoring the plain text of the law and pretending it isn't there - to give large banks around $150B in tax breaks. This is, yet again, blatant action in direct violation of law.
Relatedly, Mr. Bernanke, Mr. Paulson, and other administration officials have repeatedly said that none of this whole mess could have been anticipated, but that's not only not true, it's contradicted by their own statements, and Karl Denninger wants to know if it's time for subpoenas yet. I, of course, think it's long past time.
The S&P needs to hold and bounce off current levels or technicals say things get very, very ugly in the next month or so. MarketWatch is quoting a market analyist (Paul Mendelsohn, Windham Financial) as "There's just total panic setting in," triggered by Best Buy's poor results. There are still some people saying holiday sales will rise, but that's pretty crazy; 24/7 says to look for a 10% decline outright. He also thinks there's zero chance of GM or Ford being allowed to fail in this climate. I have other sources I can't name or link who indicate similarly. NASDAQ closed below 1500 (first time since 2003), down 5.2%; Dow closed down another 411 (-4.7%); S&P 500, as mentioned above, sits slightly above critical support levels in the 840 range, closing at 852, down 5.2%.
Mish takes apart the latest unemployment report, noting that yet again, despite collapse outright in construction and financial services, the Bureau of Labour Statistics's black-box "birth-death model" again added thousands of hypothetical jobs in both these categories. As usual, he notes that the BLS should be "ashamed" to report these numbers, and that "There is simply no way in a real estate crash that net new construction businesses are added. Note that are there net new professional and business services when mortgage and financial activity is collapsing." The U-6 figure - the one closest to that used in most countries - puts US unemployment at 11.8%.
This long article at Portfolio discusses a fundamental change in the function of Wall Street moving forward. It's good. This New York Times article describes a town where literally 90% of mortgages are underwater. This is how broken some of these mortgages are:
The Martinezes bought their house in early 2005 for $630,000. It is now worth about $420,000. They have an interest-only mortgage, a popular loan during the boom that allows owners to forgo principal payments for a time.That's a month. Jesus.
But these loans eventually become unmanageable. In 2015, Mr. Martinez said, his monthly payments will be $12,000 a month.
There are rumours floating around of mass outright seizure of 401(k) and IRA accounts by the Federal government, with the intent that they be "swapped" for "Guaranteed Retirement Accounts (GRAs) managed by the Social Security Administration." So far this consists mostly of testimony made to this effect by Teresa Ghilarducci on October 7th before the House Committee on Education and Labor.
In trade news, the Baltic Dry index seems to have stabilised for the moment in the low 800s, with the last couple of days hanging around the 820 level. China's having problems. Brad Setzer thinks a China recession is inevitable, that the world could really use a "Chinese economic locomotive" but isn't going to get one. The LA Times has a story on factories being deserted as exports slow. The BBC reports a wave of migration back to the countryside as manufacturing jobs disappear.
Much more importantly, China has announced a US$580B+ stimulus package at home. That's a lot of spending, even for China. Brad Setzer worries but is not certain that this means China will stop buying US treasuries as it has to do other things with that money now. Alphaville lays out the scenario for not buying - and in fact outright dumping - US treasuries by China. A site I normally would not link to (because gold bugs), Financial Sense, has a distorted but still disturbing graph of falling international reserves. Is this related? I don't know. (Please note that the graph is highly problematic in that it very abruptly changes timescale, and we don't have access to the rest of the graph - or the underlying data - at that timescale. I hate shit like that.) But combine that with the lack of TAF demand above, and I worry.
A tossed salad of data; the ABX has started another run lower, with all tranches hitting new lows. (These are collateralised debt obligations, the things that started this mess and which broke first.) Anything less than AAA is trading well under a dime on the dollar, with BBBs under a nickel. The CMBX - commercial property risk spreads - are at new highs, and remember, here, up == bad, and these numbers are phenomenally bad. But the dollar index continues to climb; I'll frankly admit I don't understand this yet, but you can't argue with the data.
Finally, The New York Times has an article on Icelanders coping with the economic collapse in their country.