Citi = State Bank of America

U.S. Eyes Large Stake in Citi (WSJ)

My Comments: Carnage in financial stocks will continue. I think the November market lows will be conclusively broken in the times ahead. The market is not going to believe anything bank CEOs will say about capital adequacy. I maintain that nationalization is a good thing for the short-term.

DOW Broke November Lows: I Am Buying S&P Hedged for Financials

Source: Wall Street Journal

My Comments: Bank stocks are weighing on indexes. XLF fell 5% today(Citi: -14% to $2.51, BAC: -14% to $3.93). The nationalization theme is playing on markets. Ruling out the case where the government injects capital by buying bad assets at above current market values, severe equity dilution seems a certainty. Markets are adjusting to that eventuality. I think S&P will also break its November lows at some stage. But minus financial stocks, nationalization makes me optimistic. In the long-term, political interference will certainly not be a good thing for allocative efficiency. For now, however, government ownership will inspire confidence and is good news for the rest of the economy. I am now inclined to buy SPX hedged for financial sector stocks. I am also selling December S&P@1000 calls.

Distribution of Consumer Debt Burdens

2004 Survey of Consumer Finances

Mean Values of Net worth and Debt in Thousands of Dollars

Percentiles of income
**********NW*Debt
INC<20 * 72.6 * 24.6
20-39.9 * 121.5 * 41.9
40-59.9 * 194.6 * 69.9
60-79.9 * 340.8 * 108.9
80-89.9 * 487.4 * 156.4
90-100 * 2,534.6 * 296.5

Percentiles of net worth
**********NW*Debt
NW<25 * -1.4 * 32.0
25-49.9 * 47.1 * 66.3
50-74.9 * 185.4 * 111.4
75-89.9 * 526.7 * 137.5
90-100 * 3,114.2 * 293.9

Source:http://www.federalreserve.gov/PUBS/oss/oss2/2004/scf2004home_modify.html

My Comments: This data is dated. The latest survey results are not out yet. A lot of analysis is needed to arrive at solid conclusions. How income,debt and ownership of earning assets are distributed is key. Without that most of these aggregate numbers do not mean much to me.

Debt Service/Personal Disposable Income Does Not Look Alarming, But Averages Are Deceptive

Source: Barron's, Bridgewater Associates

My Comments: Household debt service at about 15% of personal disposable income does not strike me as particularly alarming. I mean is paying $750/month out of $5000 that burdensome? But then averages are deceptive. Obviously, the distribution of both income and debt incidence is important.

Baltic Dry Index: Showing Signs of Life

Source: Bloomberg

My Comments: I am now looking for signs of recovery or for indications that things are getting materially worse. A pretty bad global recession is already in the price. The big game now is guessing whether we are headed for a depression or the bottoming process for the economy has started.

The More You Pay, the More You Owe!

The Debt Deflation Theory of Great Depressions by Irving Fisher

In a state of over-indebtedness, there would be a tendency for liquidation:

1. Debt liquidation leads to distressed selling
2. Contraction of deposit currency as loans are paid off which leads to falling velocity of circulation
3. Fall in level of prices leading to swelling of the dollar and that this fall in prices is not interfered by reflation
4. A still greater fall in worth of businesses leading to bank bankruptcies
5. A like fall in profit
6. A reduction in output, trade and employment
7. Pessimism and loss of confidence
8. Hoarding and further slowing of the velocity of circulation
9. Complicated disturbances in the rate of interest rate, fall in nominal rates but a rise in real rates

The more you pay, the more you owe!

Solution: Create Inflation! How?

"The fact that immediate reversal of deflation is achieved by the use, or even the prospect of the use, of appropriate instrumentalities has just been demonstrated President Roosevelt."

My Comments: If Prof. Fisher is correct, given the steps that authorities have taken, we should escape the debt-deflation spiral.

Rout in Long Bonds: U.S. 30-year Treasury Yield

Source: Wall Street Journal

Gloomy Data from Asia Continues

South Korea’s January Exports Decline by Record 32.8%(Bloomberg)

"South Korea’s exports tumbled by a record 32.8 percent in January, foreshadowing a deepening slump in Asia’s export-driven economies.

Shipments fell by the most since figures were first compiled in 1957, and at almost twice the pace of December’s 17.9 percent decline, the Ministry of Knowledge Economy said in Gwacheon today."

My Comments: When the U.S. consumer experiences a sudden stop. Asia falters. India is relatively insulated, but the sheer magnitude of the global demand shock implies that the Reserve Bank of India will ease again. Eventually.