Brad Sester : Crisis analysis of credit risk(US/Europe) vs currency risk(China/Japan/Saudi)

[c1ue]

Re: Brad Sester : Crisis analysis of credit risk(US/Europe) vs currency risk(China/Japan/Saudi)

Clue, I'm trying to sort this out so bear with me. If real estate values go up is it not true that some people are actually poorer, i.e. the ones who don't have enough capital to get in on the game and so have to sit on the sidelines as the prospects of them ever buying an affordable house disappear? They still may make the same money, but it is just not enough to buy that house they want anymore. And then on the flip side, as long as the property hasn't had any structural problems in the interim, isn't saying they all lose money on the downside the same thing as calling it a zero sum game?

Jay,

How can not owning an asset cause you to be poorer? This is the kind of "keep up with the Jones" thinking that caused the overconsumption to start with. In reality there are some effects - for example being forced to pay higher rent should rents go up.

But keep in mind that if your analogy is correct, then theoretically homes going down in price should pay you dividends as a renter. I'm checking my pocket, and seeing no dividend checks.

Here's a better example - one which hopefully even the economic simpleton $#* can understand:

Let's say I have 1000 ounces of gold in my pocket which I bought for $231K. $231K left my liquid assets and have now become a physical commodity.

The price of gold rises to $800/oz.

The worth of said 1000 ounces is $800K right? So who lost the 569K? Did $569K suddenly appear in my bank account? Can I spend this $569K? NO - unless of course I borrow against it. But then the act of borrowing is a transaction.

Conversely if the price of gold drops to $730/oz, who then actually lost $70K? Did my bank account suddenly drop? NO

Again, had a transaction occurred such as my borrowing against it, I may get another transaction forced on me (margin call) but otherwise nothing changes.

No actual money changes hands until said gold or any other security/commodity is sold.

This is different than an option (or a derivative). The option always has a monetary price because it expires. Part of the price - maybe all if it is 'out of the money' is purely a function of mathematics. Thus in this case he who created the option (the creator) got a sum of money in exchange for the option - but the sum of money is not fully his until the option is ended.

Because the option requires more - specifically a delivery of the optioned security at a given price, and thus the sum of money will be affected should the option be exercised and a security forced to undergo a transaction.

The $#* supposedly analytical zero sum is crap.

Show me how anyone can capture the change in value of the full market for themselves either going up or down - or better yet who is holding the "put" or "call" on the entire residential real estate market.

I'm sure if you (Jay) apply yourself, you can find lots of other examples. An easy one: Equity Office Properties which Zell sold at the top.

Had Zell not sold, then the money that actually exchanges hands would have been much less. But since he DID sell, the cash he got for the sale did come out of the pockets of the buyers who now have discovered their mistake. But who would have lost money had Zell not sold?

This has nothing to do with calculus - and everything to do with having a clue.

[Supercilious]

Re: Brad Sester : Crisis analysis of credit risk(US/Europe) vs currency risk(China/Japan/Saudi)

Let's say I have 1000 ounces of gold in my pocket which I bought for $231K. $231K left my liquid assets and have now become a physical commodity.

The price of gold rises to $800/oz.

The worth of said 1000 ounces is $800K right? So who lost the 569K? Did $569K suddenly appear in my bank account? Can I spend this $569K? NO - unless of course I borrow against it. But then the act of borrowing is a transaction.

That was exactly my point c1ue if you had the patience to read a few sentences. That is the hypothetical transient value which is often mistaken with notional value. The hypothetical transient value is the only one that can vanish into nothing. This is exactly what I wrote.

Again, had a transaction occurred such as my borrowing against it, I may get another transaction forced on me (margin call) but otherwise nothing changes.

Here you go into risk and leverage. Borrowing against it is not really a transaction, because you don't have to sell any of that gold to use it as a collateral (unless you got a margin call). You are just mixing things with innocence.

This is different than an option (or a derivative). The option always [...]

Are you arguing with yourself. Where do I talk about options ???

The $#* supposedly analytical zero sum is crap.

Now are you arguing with simple math?

Had Zell not sold, then the money that actually exchanges hands would have been much less. But since he DID sell, the cash he got for the sale did come out of the pockets of the buyers who now have discovered their mistake. But who would have lost money had Zell not sold?

This is funny.... now you are making my argument This thing is exactly what I was saying. If people lost money in transactions with Zell (or whoever), then Zell made money by selling overpriced crap to people. That is called a zero sum game.

This has nothing to do with calculus - and everything to do with having a clue.

Actually it has a lot to do with Riemann sums, but you are right on the second part: it has everything to do with having a clue ... and you don't have one.;)

(Really comrade c1ue, are you so upset I was right about Russia's economy going down the drain especially after the idiotic campaign in Georgia, that you can't think straight anymore ?)

[phirang]

Re: Brad Sester : Crisis analysis of credit risk(US/Europe) vs currency risk(China/Japan/Saudi)

That was exactly my point c1ue if you had the patience to read a few sentences. That is the hypothetical transient value which is often mistaken with notional value. The hypothetical transient value is the only one that can vanish into nothing. This is exactly what I wrote.



Here you go into risk and leverage. Borrowing against it is not really a transaction, because you don't have to sell any of that gold to use it as a collateral (unless you got a margin call). You are just mixing things with innocence.



Are you arguing with yourself. Where do I talk about options ???



Now are you arguing with simple math?



This is funny.... now you are making my argument This thing is exactly what I was saying. If people lost money in transactions with Zell (or whoever), then Zell made money by selling overpriced crap to people. That is called a zero sum game.


Actually it has a lot to do with Riemann sums, but you are right on the second part: it has everything to do with having a clue ... and you don't have one.;)

(Really comrade c1ue, are you so upset I was right about Russia's economy going down the drain especially after the idiotic campaign in Georgia, that you can't think straight anymore ?)

nyet, nyet nikavo!!! :eek:

[Jay]

Re: Brad Sester : Crisis analysis of credit risk(US/Europe) vs currency risk(China/Japan/Saudi)

Let's say I have 1000 ounces of gold in my pocket which I bought for $231K. $231K left my liquid assets and have now become a physical commodity.

The price of gold rises to $800/oz.

The worth of said 1000 ounces is $800K right? So who lost the 569K? Did $569K suddenly appear in my bank account? Can I spend this $569K? NO - unless of course I borrow against it. But then the act of borrowing is a transaction.

Conversely if the price of gold drops to $730/oz, who then actually lost $70K? Did my bank account suddenly drop? NO

Again, had a transaction occurred such as my borrowing against it, I may get another transaction forced on me (margin call) but otherwise nothing changes.

As gold rises aren't losers in the zero sum game all those people who held assets that depreciated against gold?

[Supercilious]

Re: Brad Sester : Crisis analysis of credit risk(US/Europe) vs currency risk(China/Japan/Saudi)

Fresh from Brad's blog:

http://blogs.cfr.org/setser/2008/10/23/very-true/

Very true

Posted on Thursday, October 23rd, 2008 by bsetser
Alan Ruskin argues that the moves in the foreign exchange market today — with the dollar and yen rising sharply against nearly everything — reflect an unwinding of bets made on the assumption that the world economy would remain strong and market volatility would remain low even as the US slowed.
[...]
In retrospect, large inflows to the emerging world - and expectations that emerging currencies were generally on an appreciating trend, making it safe to borrow in foreign currencies (or sell insurance against a large depreciation of an emerging market currency) led investors to take on a lot of risk. Consider for example the rise in borrowing from global banks by many emerging markets (documented by my colleagues at the Council’s Center for Geoeconomic Studies) over the past few years. The fuel for the current market fire was there.
I still never would have imagined that the emerging world could experience a sudden stop like it is experiencing now while it was still running a large aggregate current account surplus. Particularly after most emerging markets had built up rather substantial reserves. Both should have helped to buffer against a huge swing in market sentiment, at least in aggregate.

I haven’t done a detailed analysis, but my sense is that the scale and pace of recent market moves — and in all probability the scale and pace of associated capital flows — is comparable to the Asian crisis of 97-98.


Faster perhaps.


That is scary.

Well if Brad Setser says it ... well ... it must be Very True

[c1ue]

Re: Brad Sester : Crisis analysis of credit risk(US/Europe) vs currency risk(China/Japan/Saudi)

That was exactly my point c1ue if you had the patience to read a few sentences. That is the hypothetical transient value which is often mistaken with notional value. The hypothetical transient value is the only one that can vanish into nothing. This is exactly what I wrote.

Unfortunately your supposed example is one fraught with transactions, whereas your talk is all about price at margin markets like currencies.

Therefore again you either are stupid or are trying to confuse people by bait and switching examples.

As for your Riemann sums - once again - you again throw out another bait and switch load of bull puckey. How does the area under the residential real estate curve - representing value - get captured by an outside person? Outside of the existing method of charging fees on transactions?

As for Russia - what I'm seeing is so far exactly what I've described: the large companies and some Russian banks which borrowed lots of money a la Western Capitalism model are now suffering as credit has dried up.

The government now gets another opportunity to do the right thing:

1) Take back control of the sold off national assets for a song - specifically for new loans
2) Subsidize the oligarchs who stole said assets to begin with

We already know how the 'free world' has decided.

As for Setser - again you read a general thought, apply it to everything, and think you are so smart.

The Thailand crisis, the Russian '98 crisis, and Argentina, Mexico etc etc were all examples where the nations in question had monstrous currency account deficits.

These were not a problem so long as FDI inflows were positive, but when the FDI flow turned around then the CAD was forced to become CAS overnight.

China and Russia are both major CAS nations; are you suggesting that they will suddenly become CAD nations overnight? Or why then does an FDI outflow force systemic changes in such CAS nations?

But keep whistling your super financial conspiracy theories and vacuuming nickels in front of the steamroller.

All I care about is that others have enough information to make decisions rather than listen to your wannabe guru talk.

[phirang]

Re: Brad Sester : Crisis analysis of credit risk(US/Europe) vs currency risk(China/Japan/Saudi)

FNM/FRE debt has just been "guaranteed", and so that's GREAT news for the market.

I think we're almost at the end of the real credit crisis... now the economy, on the other hand...

[don]

Re: Brad Sester : Crisis analysis of credit risk(US/Europe) vs currency risk(China/Japan/Saudi)

[Supercilious]

Re: Brad Sester : Crisis analysis of credit risk(US/Europe) vs currency risk(China/Japan/Saudi)

I completely agree.

[Chomsky]

Re: Brad Sester : Crisis analysis of credit risk(US/Europe) vs currency risk(China/Japan/Saudi)

I completely agree.

Hear, hear!

[ASH]

Re: Brad Sester : Crisis analysis of credit risk(US/Europe) vs currency risk(China/Japan/Saudi)

The big confusion that allow people to believe that a crashed market is similar to a money destruction mechanism stems from not understanding the difference between notional value and hypothetical transient value (which are not the same).

Preamble: I'm jumping in here to ask questions because I'm trying to make sure I understand the basic mechanics of this issue -- not because I think I understand how things work and am looking to dispute $#*, jk, or c1ue.

Would it be correct to say that when a crash wipes out a whole bunch of market value, like when the MSM says "the DJIA lost $2T in value this week", that DOESN'T mean the headline number actually changed hands, because (a) the entire share issue of the DJIA components probably were not traded at the start of the week, and (b) neither were they all traded at the end of the week. Profits or losses related to the change in price were only realized for the shares that actually traded, and in the limit of low trading volume at either endpoint, most of the market value that is "lost" does not wind up in anyone's pocket. My understanding is that the market value of the shares which were not traded is what you refer to as "hypothetical transient value." Although the loss of this hypothetical transient value did not result in a corresponding gain for anyone, neither did it directly destroy any money. As for the value of shares which were traded and sold at a loss, I agree that the loss simply reflects money having changed hands, rather than its destruction.

What I wonder about is this: Does not the loss of hypothetical transient value indirectly affect the supply of money in a fractional reserve banking system where securities can (now) be exchanged for treasuries, and treasuries can be deposited as reserves upon which to create debt money? If the securities were purchased with borrowed money, and the purchaser was a bank that now needs to employ its capital to pay off its loans instead of using it to generate credit, then certainly there should be an indirect effect upon the money supply. If we're talking about property rather than securities, then maybe the property backed a loan, and the fall of its hypothetical transient value triggers foreclosure and default. I understand from Bart that the extent to which credit may be regarded as money is a point of contention -- and one which I'm unprepared to argue. But, assuming that credit can function as money, then would not destruction of the transient value of securities or property eventually lead to processes which do destroy money directly -- for instance credit redemption or default?

On the point of trading in securities being a zero-sum game... this is reminiscent of Warren Buffet's observation that minus a slow (and unsexy) average rate of return related to productivity growth, most trading in American stocks is just churning.

[c1ue]

Re: Brad Sester : Crisis analysis of credit risk(US/Europe) vs currency risk(China/Japan/Saudi)

ASH,

The confusion exhibited by $#* is that while in a given transaction, there is a zero sum (i.e. the two parties feed out of the same bowl), the values of the rest of the securities, commodities, or properties of the same type/class of those in said transaction are not zero sum.

As to your question - absolutely there can be money/credit supply impact of a price change. Witness the failures of various banks recently (WaMu/Wachovia/LEH); the reason the failures did not occur earlier is that the value of the stock earlier was sufficient to exchange for cash. But at the end, the value of the stock was insufficient.

This can apply also to equity in a home. A high equity percentage allows borrowing such as HELOCs, but a drop in said equity percentage can also result in withdrawal of HELOC access.

[touchring]

Re: Brad Sester : Crisis analysis of credit risk(US/Europe) vs currency risk(China/Japan/Saudi)

money/investments/asset values are not zero sum. if a single share of stock trades down a dollar, every share of that company in every portfolio is marked to market, and millions of dollars go to money heaven. no one makes the money that is lost. [though you- or more likely finster - could argue that every extant dollar just got a tad more valuable.]

Cash is now the most valuable commodity.

China has been very quiet recently, btw.

Li: "Sorry, i have my own problems, count me out".

[Supercilious]

Re: Brad Sester : Crisis analysis of credit risk(US/Europe) vs currency risk(China/Japan/Saudi)

Would it be correct to say that when a crash wipes out a whole bunch of market value, like when the MSM says "the DJIA lost $2T in value this week", that DOESN'T mean the headline number actually changed hands, because (a) the entire share issue of the DJIA components probably were not traded at the start of the week, and (b) neither were they all traded at the end of the week.

That is absolutely correct. The phrase " the DJIA lost $2T in value this week" says nothing about about the money that was actually lost or made. Only if you have an unsegmented transaction, you know the initial and final value and the volume of the transaction you can find out how much money money exchanged hands. Composite indexes such as DJIA or (more correct) Wilshire 5000 just give the total value of stocks (included in the index) based on a price discovered through a partial bid-ask process.

Profits or losses related to the change in price were only realized for the shares that actually traded, and in the limit of low trading volume at either endpoint, most of the market value that is "lost" does not wind up in anyone's pocket.

Correct. Actually if you want to be analytically correct, you have to take into account every transaction with respect to price differential and volume for every stock of an index (a system of Riemann sums). In high volatility markets you may get to the surreal situation in which a long a chain of transactions with a variable volume function you may actually have net transactional gains (over the population of traders) when the DJIA lost in value over a week (although that is a rather theoretical possibility and the markets have to be really screwed to get such a result in real life)

My understanding is that the market value of the shares which were not traded is what you refer to as "hypothetical transient value." Although the loss of this hypothetical transient value did not result in a corresponding gain for anyone, neither did it directly destroy any money.

Correct. The hypothetical transient value is somehow similar to unrealized loss or profit. You can construe the correlation as:
Unrealized loss/profit = hypothetical transient value-price of security at the acquisition moment (for short selling is vice versa)

As for the value of shares which were traded and sold at a loss, I agree that the loss simply reflects money having changed hands, rather than its destruction.

That is absolutely correct. And that is a zero sum game (if you put in the equation initial and final price of the shares, when you don't have the full transactional history of that security)

What I wonder about is this: Does not the loss of hypothetical transient value indirectly affect the supply of money in a fractional reserve banking system where securities can (now) be exchanged for treasuries, and treasuries can be deposited as reserves upon which to create debt money? If the securities were purchased with borrowed money, and the purchaser was a bank that now needs to employ its capital to pay off its loans instead of using it to generate credit, then certainly there should be an indirect effect upon the money supply.

That is a very good question. Before 1929 this was the case with those famous loans for J6P shareholders. Due to some rest of regulations left unburied, that is valid only for LBO's and some private equity double dipping operations.

If we're talking about property rather than securities, then maybe the property backed a loan, and the fall of its hypothetical transient value triggers foreclosure and default.

If you we are talking about any form of leveraged investment with a real estate collateral that is true. With CDO's and SIV's the situation is completely turned on it's head.
A SIV lends money to a bunch of Joe Sixpakers (so they can buy pseudo MacMansions), and the capital (which may not be leveraged) is provided by continuous rolling of commercial paper. Commercial paper in this case plays the role of bank deposits. If the commercial paper dries out, it's an equivalent to a run on the bank. SIV's work on razor thin profit margins (some times as low as 0.1-0.25%). If a small percent of J6P's defaults they are gone just becuse they can't pay the intrest on the CP. Something similar happens with most CDO's, but in that case the deposits are provided by banks, hedge funds, mutual funds you name it. If those deposits were made with borrowed money against the value of the CDO ... then ...

I understand from Bart that the extent to which credit may be regarded as money is a point of contention -- and one which I'm unprepared to argue. But, assuming that credit can function as money, then would not destruction of the transient value of securities or property eventually lead to processes which do destroy money directly -- for instance credit redemption or default?

That is correct with two important qualifiers.
You have money destruction through default of Joe Sixpack which propagates through the lending chain to the ultimate lender (or credit insurer in the case of an existing CDS). If J6P continues to make his obscene mortgage payments after reset, it really doesn't matter if the value of his house goes down the drain and he gets a hefty negative equity. No money is destroyed, the shows goes on

You can have destruction through deleveraging, if the securities in questions were bought with leveraged credit (no collateral other than that security itself) and the holder of the security gets a margin call he can't honor. But, even in this case, one can make the jesuit argument , that the money destroyed through leveraging is the money that was created in the first instance through that particular leveraged investment. So, again someone made some money at the beginning of the transaction and someone lost it at the other side of the deal.

On the point of trading in securities being a zero-sum game... this is reminiscent of Warren Buffet's observation that minus a slow (and unsexy) average rate of return related to productivity growth, most trading in American stocks is just churning.

Yup.

[Supercilious]

Re: Brad Sester : Crisis analysis of credit risk(US/Europe) vs currency risk(China/Japan/Saudi)

ASH,

The confusion exhibited by $#* is that while in a given transaction, there is a zero sum (i.e. the two parties feed out of the same bowl), the values of the rest of the securities, commodities, or properties of the same type/class of those in said transaction are not zero sum.

Hello, tavarisch c1ue stop putting words in my mouth. Are you incapable to read a few simple sentences. Where did I say that "the values of the rest of the securities, commodities, or properties of the same type/class of those in said transaction" are a zero sum???:eek:
Do you need Ritalin or basic reading lessons?

Look c1ue I understand you may be loosing money or your business is at risk in the current environment in Russia, but it's not my fault. For that, your dear Czar Putin and the Wall Street thugs are responsible. And I have a profound dislike of any kind of thugs (KGB or banksters).

Yes, it's true, I have now part of my portfolio shorting Russia and I'll make good money when Russia is going down (and I'll take a loss if the Putin kleptocratic system is triumphant as you claim), but it's unfair to consider me an enemy of the Russian people just because I don't take the BS of RussiaToday propaganda...that dumb siloviki propaganda you are trying to push here on this forum.