Economics Update

Today, since they've been off the update for a while, I'd like to welcome back a monoliner insurer, specifically AMBAC which lost even more money than forecast, $3.6 billion.

However, they are looking to turning things around. Specifically, they have their "lawyers and forensic experts"looking at 17 big money losing contracts, targeting (it appears) Bear Stearns and First Franklin. The max losses were originally seen at 10-12%, and now they are staring down the barrels of over 80%, so they may have a good case.

We'll be seeing a lot more of this, and insurers won't be paying out in the near term without this sort of teardown of the contract and investment looking for evidence of deception of some sort.

In related news, bondholders recovery on bankruptcy has plunged, with B+ bonds going from around 42¢ on the dollar to less than 10¢.

This is not a liquidity crisis. It is an insolvency crisis.

The Fed, however, is still treating this as a liquidity crisis, because there is no cure for an insolvency crisis but the dissolution of the entities involved, and it will auction another $75 billion in Treasuries in exchange for pieces of the big sh%$pile.

Speaking of the sh%$pile Moody’s just downgraded 1,923 residential mortgage backed securities in the past to days.

It's likely to get worse. Robert Shiller, who is one of the creators of Case-Shiller housing index, believes that house prices will fall more than 30% from their high, and likens this to the slump associated with the Great Depression.

In terms of the more general economy, we have UPS saying that it's seeing a dramatic slowing in the U.S. economy, and in its business, and Target's write offs on its credit card sales are soaring. They are at an annualized rate of 8.1% for March (ouch) up from a rate of 6.8% in February (ouch x2).

In currency, we already know about the Dollar cracking the $1.60 barrier, but now we are seeing a price hike driven by this, with Airbus raising prices on its planes.

We're going to see a lot more currency driven inflation.