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Musings, Rants and Links over the 18th Fairway:02/09/2010

We finally got a mixed bag on the employment front this month, a welcome change from the purely awful. However, with everyone focused on “creating” jobs I think this quick synopsis attacking the unrealistic expectations of when and where jobs will come from is well worth reading. This chart gives you an idea of how bad it really has been (click image for larger version)

PercentJobLossesJan2010

Yves Smith looks at the problem of how to handle the prospect of the financially weaker members of the European Union possibly defaulting. neither the PIIGS nor their colleague states want to take the steps they may need to take. Markets however are sending a clear message, “Do Something!” The risk goes beyond the direct damage from the potential losses from holding these countries debts. European banks are already shaky, with shaky assets and still a lot more leverage than is safe. I believe Europe’s bear market is likely back on.

European banks are shaky? How provincial of me not to mention our own banks. The coming wave of defaults in the Alt-A and Prime mortgage space are not getting enough attention, Yves helps out there as well. Not only are the losses coming (pretending loans are good only works until they actually default) but the banks are in for some serious lawsuits from all kinds of parties that bought the toxic loans. First in line are Freddie and Fannie. They will still lose at least 400 billion, but they’ll take a good chunk out of the banks hide on the way down.

the phrase “credit specialists at Citi” is not exactly the kind of thing which instills enormous confidence in analysts and investors these days

I think that is an understatement. They want to sell another fancy derivative designed to remove all risk if there is a systemic crisis when, of course, those supposed to pay up will certainly have the money to do so….Right?

Please imagine me banging my head against the keyboard. And no, the response of the Citi Spokesman doesn’t make me feel any different, in fact, it makes me feel worse.

The term liquidity is the pixie dust the financial commentariat uses to obscure what is really going on. I maintain, and have throughout the last few years, that our difficulties have not been a liquidity crisis (though many who had no business exposing themselves individually to liquidity drying up for them certain had a liquidity crisis) but a solvency crisis. David Merkel points out that liquidity always exists, it just goes where the marginal credit buyer has gone. Where insolvency risk seems to be increasing, the marginal buyer can become very scarce and will provide it to areas seemingly exposed to less risk. At the end of the day it is solvency that is our problem, and until we solve that liquidity will go to those perceived to be least at risk. Right now that is the government and those they are backing. Hence a credit crunch for much of the economy.

Speaking of credit, consumer credit has now declined for 11 straight months. A record, and by a long shot. (Click image for a larger version.)

ConsumerCreditDec2009

In the “no big surprise department,” and paralleling the argument I made at the time, it has now been shown that the ban on short selling during the crisis did not help support prices and damaged stock market liquidity. In the no surprise at all department the biggest complainers turned out to have fundamental problems that short sellers were pointing out accurately (much better than our regulators.) The loudest complainer of all, Overstock.com and their bizarre CEO, Patrick Byrne. The upshot, they have been cooking their books for years, just like the short sellers were claiming.

Cross posted at The View from the Bluff