The Death of Equitization and Securitization

A coda on housing and foreclosures from the Chicago Tribune: “Michigan and Ohio, battered by automotive-related job losses, together recorded 45,000 mortgages entering some stage of foreclosure in the first quarter. Those are increases of 91 percent and 39 percent, respectively, compared with last year’s fourth quarter.”

And of the ARMageddon (yuk yuk) in the sub-prime market, this: “‘The increases we’ve been seeing in foreclosures don’t even reflect the worst-case scenario that could happen when the $2.7 trillion in adjustable rate mortgages are reset over the next 18 months,’ said Rick Sharga, vice president of marketing at RealtyTrac.”

Here’s the problem I have as an avowed dollar bear: what are the alternatives?

On an interest rate differential basis, the dollar is still more attractive than the yen and the euro.

On a pure GDP growth basis (admittedly unhealthy growth), the dollar is more attractive than the euro and the yen.

And the fiscal and monetary policies of Japan and the governments of Europe are NOT, respectively, any better than American fiscal and monetary mismanagement. In many cases, they are worse. Europe and Japan probably have worse unfunded social welfare liabilities than the United States, with the same kind of socially disruptive immigration issues that arise when you have to import foreigners to pay for the retirement of the Boomers.

The whole monetary ecosystem, if you will, is filled with dinosaurs. Except gold, which is old but never ages. Its chief virtue is that it does not have to adapt to changing conditions it all.

Gold survives all the punctuated equilibrium in the world. It’s Darwininan advantage is that it does not change at all! It can’t!

Ferguson is right, though, about the rising cost of financing short-term debt. I wrote about that in The Rude Awakening a while back with a chart showing essentially a balloon payment on the debt…as nearly $1 trillion is rolled over this year at much higher rate.

That’s the question though really, will there be any takers, even at higher rates?

Surprisingly, there always seems to be takers. But I think that’s because the demand for the dollar isn’t displaced merely because people sense that it’s a lousy currency with lousy caretakers. It is and they are.

But look at how liquidity in overseas markets has sent stocks even lower than in the United States. Things may be drying up in the United States, but they are downright parched elsewhere, which doesn’t leave many good and safe alternatives to non dollar-denominated wealth preservation. The dollar is the leaky global lifeboat. But it’s one that everyone is accustomed to piling into. In fact, it’s the only one big enough to accommodate institutions, central banks and individuals – unless that is, not everyone can survive the sinking.

If it goes down, everyone else is going down with it. No one has quite figured out how to “get out of the dollar” as a practical matter. China is working at it. According to an Associated Press article, “In the past six months, China has signed deals totaling more than $7 billion for stakes in oil and gas fields in Kazakhstan, Nigeria, and Syria. A state-controlled company is considering a $2 billion offer for yet another Kazahk property. The more prominent story was that China ran a $13 billion trade surplus in May (after a $100 billion surplus last year).

But even if China plows more of its surplus into oil and energy, there just aren’t enough other liquid, exchangeable stores of value around. They aren’t making oilfields any more, or if they are, they don’t make them like they used to: cheap, abundant, and easy to get at.

So, you either stay in cash or in other illiquid things like art, real estate, pinball machines, or gold coins…and wait for some liquidity there.

There is a larger issue here and it is the destruction of all this paper wealth, the fictitious economy, 10 years of misallocated global capital that must be liquidated. Maybe BussinessWeek had it slightly wrong and was slightly early when it wrote, “The Death of Equities.”

Maybe the newer version of that headline is “The Dof eath Equitization and Securitization.” All these so-called assets people have been trading are going to up in smoke. Or to mix metaphors, after the meteor hits, we’ll know which species of businesses and stocks can survive in a competitive world, and which are just Frankenstein abominations conjured up by clever bankers and accountants.

Money is a commodity. All the world’s money producers are making defective products. The roads of globalization are full of them. We’ve, or at least I’ve, been thinking some market-generated hybrid will replace them. But maybe there isn’t an easy replacement or substitute for the dollar. The post-war, post-Bretton Woods world has lived and grown and inflated with it. And now it will wither and contract as the dollar dies.

P.S. Is risk a commodity? All these credit-backed securities make trading risk possible. But no one really wants to own the risk. They just want to own the return. Securitizing risk to get it off one balance sheet and onto dozens doesn’t seem to have mitigated the risk of owning a bad loan; it seems to have distributed it far and wide.