WSJ’s real time economics blog run an interview with John Taylor of Taylor rule fame. Good reading for those interested in U.S. monetary policy.

When does Queasing (quantitative easing) become debt monetization? There are no hard and fast rules and a lot of semantics involved, but the distinction is worth drawing argues Accrued Interest.

For anyone looking to get a feel for the development of emerging market local-currency corporate bond markets VoxEU has a nice overview post of this space.

Infectious Greed picks up on a post at Panjiva blog (first I’ve heard of these guys) showing a 5% decline in goods shipped to the U.S. in September – Naked Capitalism notes the seasonal trends in the data. For those interested, Panjiva’s original post is here, under the rather U.S-centric title that global trade has declined (rather than U.S.-bound shipments).

VIX humming back below 23 – back to the levels of the great moderation it appears.

REIT Wrecks casts its magnifying glass over the ugly going-ons in San Francisco’s real estate securitization market.
“San Francisco’s multi-family sector now has a CMBS default rate of 21.7%, which is almost double the 12.93% multi-family delinquency rate in Detroit.”

But also read the morningstar post earlier.

“Is this recent strength the beginning of a sustainable bottom, or just a dead-cat bounce? Well, I can say with some certainty that prices are weakening as I write, but not by any more (and maybe even less) than in a normal year at this time. Seasonality is strong in housing, buoying prices in the spring and weighing on them in the later part of the year. In truth, it won’t be until next spring that we have a good idea…

More appropriately, it’s likely the foreclosure inventory represents beginnings of a mix shift as many former owners become renters while some former renters become owners. But at what price are these transactions likely to occur? We’ve maintained for a while that home prices will find support at levels where investors can purchase the foreclosed properties and rent them back to the people who used to be owners at attractive returns. Prices in many markets are already there. The “15 times annual rent” rule is a back-of-the-envelope method for determining fair home prices based upon the area’s rental rates. By this admittedly simple metric, homes look cheap in many regions.”

Now, if you can pick up the cheap financing on offer and take advantage of the tax rebates to put zero skin in the game then it may be possible to get a decent assymetrical pay-off by investing in U.S. housing right now.

Of course, this depends on a number of other factors such as property etc. But the general idea goes something like this:
30-year mortgage rates are very, very cheap right now. Now they may go lower but the risk is greater on the upside and for spreads to start widening going forward.
With an 8% tax rebate and FHA financing (you only need a 3.5% downpayment) you can pick up a $230k property with effectively zero downpayment.
Sure, it sounds a little sub-primey but with zero skin in the game courtesy of the tax rebate and super low 30-year mortgage rates it looks like a pretty asymmetrical pay-off.

I am not normally a huge fan of thematic investing but this is very interesting:
MarketFolly notes hedge fund Passport Capital publishes some interesting research about their positions. Their latest piece is on the investment case for farmland – worth noting the recent investment by buyout funds/venture capital in Chinese dairy farming and also for those that get the Gloom, Boom & Doom reports the section on Ukranian farmland are based on similar logic.

A copy of Passport’s full 36 page report is here.

Jesse’s Café American does the necessary digging and pieces together how much gold the Fed & Treasury are holding. The short answer btw is 261,499,000 fine troy ounces, but the post is still worth a read, including the light it sheds on the Fed’s Gold Certificates.

Also… Wikipedia has this list of officially reported gold reserves.

Given how miserable its economic outlook is, I’m sure Latvia probably wishes it had a bit more gold, although at number 66 on the list it has more than Hong Kong.
Anyway, the aptly named Creditwritedowns weighs in with its own platter of solutions for the poor folks in Riga watching their economy going down the tube.

Recommendation number two sounds good:
“Don’t answer the phone when the foreign creditors call the government.”
Not exactly responsible advice but then who cares when everyone loves the trashiest sovereign credit right now anyway.

Does anyone else also find it disturingly ironic that the IMF is once again putting the screws on an emerging market economy with policy recommendations that no G7 politician would dare contemplate and it’s up to a former IMF economist (Simon Johnson) to point out the unhealthy degree of sway big finance has over politicians in the U.K. and U.S.?

Creditwritedowns also takes another look at the U.S. saving rate with a bevy of factoids and graphs.
“Savings rates averaged 9% through 1982. They were consistently above 7% through 1992.”

Falkenblog focuses on the flawed thinking behind the media lauding of analysts who make the most prescient recent market calls.
Oaktree Capital made a very similar point all the way back in 1996 (opens straight into a pdf).

While some parts of the U.S. economy may have turned something of a corner the problem spots are gonna take a long time (years) to work out.
Check this comment from Federal Housing Finance Agency Acting Director Edward DeMarco picked up by Bruce Krasting…
“- Currently the Enterprises are managing a real estate owned (REO) inventory of almost 100,000 properties, a number expected to grow.”
That’s a lot of houses. Entire 14-page FHFA Senate testimony here.
Alas, it doesn’t look like the problems are being ironed out in the space, rather aggravated further. Calculated Risk looks at a New York Times article about a new wave of silly loans fermenting at the Federal Housing Administration.

An extreme piece of anecdotal evidence on the poor employment situation in the United States – 10,000 apply for 90 factory jobs

A long (as usual) New Yorker Profile of the, how shall I put this… ‘unorthodox’ former hedge fund manager Martin Armstrong and technical analysis. Mr. Armstrong’s latest missive (I think) is available here for those interested – long at 77-pages.
A less flattering, more amusing, dated and shorter profile of ‘Marty’ written by Tokyo markets prognosticator Cassandra and is also available here.
Alternatively, you can rent Darren Aronofsky’s debut film Pi, which bears more than a passing resemblance to Mr. Armstrong’s travails but with a great Oribital soundtrack, lashings of Jewish mysticism, and a side-helping of migraines & nose-bleeding scenes for good measure. (It’s also a good movie)

Pershing Square’s latest short idea and it’s a… REIT.

Econbrowser has some good fodder for the peak oil brigade and implications for big oil M&A.

Unexpected payoffs three and half decades later – Scientific American explores why the current strain of H1N1 swine flu is hitting the under 30s far harder than the over 60s.

U.S. analysts are more bullish heading into the current earnings season than they have been at the start of any other earnings season since the recession began.

Non-seasonally adjusted data shows total consumer credit actually grew month-on-month in August due to an increase in non-revolving credit, says Naked Capitalism. However, if you look at the non-seasonally adjusted chart here you can see that non-seasonally adjusted consumer credit has been on a downtrend since Q3 2008 and only ticked up in August, one data-point does not a trend make and it is non-revolving credit that ticked higher, which is incidentally where auto loans fall under and August was the month for Cash-for-Clunkers, so the question is whether C4C distorted the non-seasonally adjusted figures and if Sept. will return to trend?

Anyway, tons of debt chart porn over at the credit writedowns site.

Manual of Ideas blog links to an interview with Oaktree’s Howard Marks done by the folks at Columbia Business School.

Anyway, while we’re on the subject of magazine covers, this five-page paper from 2007 (Are Cover Stories Effective Contrarian Indicators?) is very much worth reading. It looks at covers from Business Week, Forbes and Fortune over two decades to see if they can be used as contrarian plays – and hey presto, a lot of evidence they can. I would be curious to know what the track record of The Economist or our sister publication Barron’s are?

As interesting – the % of positive and negative covers the three weeklies ran over the period – Business Week ran a lot more negative stories than bullish Forbes, for example.

And so we lead on to Forbes, which has an amusing slideshow of countries that billionaires could buy – some of the real estate on offer is not so appealing: North Korea, Somalia etc. although buying out the Bahamas does have its charms.

One area where there is no shortage of real estate buyers though is the lower-end of the housing market in Southern California – the tax credit and the U.S. government being pretty much the entire current mortgage market doubtless help. Anyway, interesting video of the current state of play by Jim the Realtor over at Calculated Risk.

Naked Capitalism has some illuminating stats on household debt levels and stock market performance. The charts mirror similar observations by Steve Keen of the correlation in economic growth and debt levels in Anglo-Saxon economies.
Some of Naked Capitalism conclusions – primarily “a new secular bear market may have just started in 2007” – seem a bit odd, particularly in light of the big deleveraging of the U.S. consumer continuing apace in August. Long-term chart here.

How bad are U.S. consumer loan defaults and bankruptcy filings?
Credit Slips makes the point the surge in bankruptcy filings is bad when looked at year-on-year but that is reflective of new bankruptcy legislation put in place in 2005 and are actually reasonably steady this year, plus some other observations.

A chart at Calculated Risk helps visualize this, and shows filings now reaching around 2000-2005 levels (although I’m not sure given the legal changes whether the two periods are directly comparable).

Accrued Interest also has a great post on the nature of loan defaults based on various securitized loan pools.
“I think the correct way to think about this is that we really have two waves of consumer loan losses. The first is related to bad lending. These are burning out now and won’t be a problem on the margins going forward. The second is old-fashioned recession style delinquencies.”

An interesting chart on inflation-adjusted gold prices from Bianco Research, via Big Picture, on this basis Au is still some way off its highs.

Manheim Used Car index up in September – C4C obviously helped by taking out some capacity but the up-trend predates this.

Bored of Mario Tennis? How about some real-time vigilantism? Internet Eyes proudly offers up a GBP1,000 prize per month to spot crimes from streamed CCTV feeds.

As Mish Shedlock puts it “Supposedly Robert Fisk knows the plans but “Americans have not discovered the details”.”

Brown Brothers Harriman also point out the ever-so-important practical problems “the yuan is not convertible and the GCC does not exist… Managing such a currency basket has proven very difficult in the past and would require a whole new bureaucratic apparatus to manage”

If you want a proper reason to be terrified about the future of the dollar and most G7 currencies then re-read page three onwards of the Hayman Capital shareholder’s letter I linked to yesterday. Uncle Ben & T-Geit are doing better jobs over the long-term of trashing their currency than Fisky.

And then read page ten of Hayman’s letter for background on Latvia to get a feel for why Sweden’s banks are doing shareholder bailouts... sorry, rights issues. On the plus side, it should make Riga even cheaper for stag weekends. It’s also probably the reason that Swedbank equity has over 55% short utilization, making it the most utilized short stock in Europe, and most at risk of a short squeeze. The rest of the world’s unloved stocks available here.

Manual of Ideas tries to disaggregate what makes up the ROI of a buyout shop’s wheeling & dealing - the results are not too dissimilar to most asset managers: luck, skill and varying degrees of greed.

Their post was inspired by this (long) NYT article on PE’s success at flipping and running companies into the ground (also the source for James Kwak’s similair post on shareholder value yesterday at Baseline Scenario).

Still as grizzled distressed debt maestro Marty Whitman of 3rd Avenue pointed out in a recent interview (audio file about 30 mins long), most of the time Wall St. did do their due diligence homework and picked decent companies, they just loaded them with silly capital structures, as long as the creditors and company can restructure the debt loads properly a fair few of them will come out the other side.

Economist Steve Keen contends the Ozzy central bank is “taming a lion that is sound asleep with its rate rises”.

“A downturn that is already in train as a debt bubble bursts will be made worse by this increase in rates at a time of greatly heightened financial fragility… I doubt that we will see any sustained acceleration in the debt to GDP ratio, with the consequence that the debt-financed component of aggregate demand will be anaemic at best. Since that has been the major source of growth in aggregate demand for many years now, I expect that economic growth will be substantially less than the RBA anticipates.”
Sobering reading, but not sure what his solution to the problem is from this post.

Research Ahead flags a peculiar phenomenon in Germany where small companies are finding it easier to get access to credit than their large-cap brethren (you need to scroll down past the first chart to get to the relevant section; the first part is the standard critique of the U.S. BLS birth-death model) and offers up the reasons for this divergence.

The situation in the United States, on the other hand, is the polar opposite. The Atlanta Fed’s blog also points out that American small businesses have been among the biggest source of job losses in the current downturn.

Perhaps there is more momentum and life left in this here rally says Tobin’s Q - although best to burn your copy of Stocks for the Long Run and stick around for only a year, or three going by the stats offered up.

Interesting…. Apparently August turnover velocity was orders of magnitude higher on the Nasdaq than on the go-go mainland Chinese markets. A global market breakdown done month-by-month in pdf format is available here, if you’re keen to find out, say, velocity in Bermuda vs. Llubjana.

More stuff for the technical analysts to chew on: % of stocks in the S&P 500 above their 50-day M.A. is ticking down.

And 2009 isn’t turning out like 1929 going by the charts.

Wondering what a keister bomb is? Read on…

Business Insider has an article on a key concept in Behavioral Economics/Finance: the endowment effect, and offers up their own take on the phenomenon.
Here is a four-page Scribd document taken from the 16 ‘page’ slideshow at Business Insider.

Shareholder value for beginners and why it sometimes is rational to run the company you own into the ground, especially if you are a buyout shop, by James Kwak of Baseline Scenario.

Accrued Interest looks at the piles of cash in bond funds that need to be put to work after managers missed the initial rally.

Ugly chart of the day – Las Vegas house prices.

Control fraud & Fraud epidemics
Control fraud – organizational leaders use the organization to game results to their own benefit and protect them from prosecution.

ECONOMETRICS & ENCOURAGEMENT OF ADVERSE SELECTION
Econometric practices tend to focus on benefits of high profitability as measured by share prices, net profits.
The problem is fraud is done to maximize these benchmarks in the most egregious way, thus, econometrics can often end up tacitly creating an environment that fosters fraudulent practice

Optimization mechanisms become highly perverse and instead encourage adverse selection.

In China, producers of Melamine-tainted milk saw massive competitive advantages in the baby milk market as their product was cheaper to make – and it killed and maimed tens of thousands of childrens.

Another great example of this were liar loans in U.S. as the very worst borrowers and data were encouraged to make incorrect applications.

Pareto optimality – this did not occur in U.S. subprime loans as both parties were made worse-off (the company extending the loan was worse off as was the borrower), the agents of the transaction however were a lot better off.

Long before fraud becomes widespread it can shut down markets – think about if 1 in a water 100 bottles were poisoned: no-one will drink bottled water.

CORPORATE GOVERNANCE & CONTROL FRAUD
Most of the supposed fixes don’t work – corporate governance etc.
Corp goverance is useful for many things but it won’t prevent control fraud.
The reason being you can’t ‘govern’ control frauds as the organization is controlled and governed already often by the very top and often with the backing of the entire organization.
You can short-circuit controls by bonuses, stocks etc. This can turn majority of people into supporters of the system. Any ‘softly, softly framework’ will be taken apart by this

It’s still possible to create the appearance of regular order by hiring prestigious institution to sign off on fraud – be this auditor or external directors.

Agency-cost is essentially a variant of control fraud but it says this can be paid away. You can’t pay away corruption.
Back-dating options – destroys all notion of performance-related pay, unless cheating is the performance you are benchmarking

How to Commit Control Fraud
Assets with no readily verifiable market values means you can inflate the assets very easily. (Options, securitized products).

These assets also inflate capital.
Creating phony assets allows you to grow very rapidly as you can leverage your assets.
Ultimately you will also create enormous losses

Firm assets must be convertible to personal assets for control fraud to occur – you can use accounting fraud to do this.
If many lenders or a handful of large lenders do this you create a hyper-inflated bubble.
Using corporate mechanisms to transfer wealth from stakeholders to insiders.