October 22, 2008
The Financial Turmoil – (The Big Picture)
By Wade Rousse
What’s happening in the economy? Or, how did we get into this situation? Or, can you just explain the Big Picture? If you’re looking for answers to these types of questions, Chairman Bernanke, in his recent remarks to Congress, does a fantastic job of providing them.
Check out the first paragraph of Chairman Bernanke’s remarks. He’s very clear in stating that world financial markets have been under stress. This financial turmoil follows a period where risk was under-priced. That resulted in easy credit and the use of complex financial instruments. As a result, for more than a decade, housing prices increased at an unsustainable rate. Then, of course, they experienced this dramatic decline.
Poor lending practices were involved in the financing of some of these homes. Because of this, many institutions are incurring large losses on mortgages and mortgage-related investments. The boom is currently unwinding, and it’s causing broad-based tightening in credit markets. These difficult credit conditions are now beginning to impact economic growth.
I strongly encourage those of you who would like more details to read the remainder of Chairman Bernanke’s remarks.
October 17, 2008
Credit Default Swaps – (CDS)
By Wade Rousse
Recently, if you’ve watched the news, read the paper, or even had lunch with your grandparents, you’ve probably heard the term “Credit Default Swap.” It sounds complex, but like many other terms in economics and finance, it’s not as hard to understand as it seems.
I think the term “swap” is what causes the problem. Think of these financial tools simply as “insurance” contracts that are designed to protect the bond holder from default.
Here’s an example: Suppose a company needs money to expand its operations. What can it do? Issue bonds! Now, suppose that you are an investor and you purchase one of these bonds. If, after making the purchase, you become concerned that the company will not be able to fulfill its obligation to pay you back, you can purchase a CDS from an insurance company or a hedge fund. Then, if the company defaults, you will be guaranteed the bond’s face value.
I’m confident the problems we are witnessing now in the CDS market will be solved. There’s no doubt that credit default swaps add value to the marketplace. Regardless, this is another concept that sounds very complex but really is not!
October 14, 2008
Easy-to-Use Economic Indicators
The New York Fed has a wonderful feature on their website that gives descriptions of a dozen or so important economic indicators and each has a link to live data so that you get a current chart printed each time you visit! Check it out right here!
Last week, Wade and I were at a Federal Reserve Economic Education meeting in Biloxi, MS in a conference room with no cell/BB service. Talk about an exercise in patience; the ideas were really good, the presenters interesting, the accommodations very nice, but boy oh boy – no news is not good news all the time. In light of the recent events, please write us with any ideas you have for what you would like to see on the blog. I saw some scribbles on Wade’s notepad regarding the subject of collateralized debt obligations for the blog; I am thinking about something to do with the loss of the investment banking world – let us know what you are thinking….
October 3, 2008
Jobs, Jobs, Jobs! -- The Employment Situation
By Wade Rousse
As a former trader who often profited from market volatility, the first Friday of every month was always very exciting. Why? On the first Friday of every month at 7:30 am CST, the U.S. Department of Labor releases its Employment Situation Summary Report, better known as the “Jobs Report.” And if there is one report that consistently moves the market, it’s this one.
Earlier this morning, the report revealed that the U.S. lost 159,000 jobs in September. This brings the total number of jobs lost this year to 760,000. Now with 145.3 million people in the U.S. working, what is the significance of a loss of just 159,000 jobs? Well, due to population growth, it takes approximately 100,000 to 125,000 new jobs each month to keep the economy growing at its current rate. Considering that, this negative jobs number is obviously problematic.
There is no doubt we are in an economic slowdown. This morning’s jobs number confirms that, and if the equity markets are truly forward-looking, they’ve been telling us this all year.
Any thoughts out there about the current employment situation?