Although they are laggards, the credit rating agencies, as a following indicator, give us a peak into what we can expect to materialize over the coming six months to a year. When the rating agencies first started to downgrade CDO’s and other asset backed securities this summer, it portended the beginning of a volatile and dark period in the credit markets generally.

Now, as they have publicly recognized that 2007 vintage subprime mortgages are the worst of any to date, the markets will likely not be as surprised with this new wave of downgrades, although it may suggest that there is more carnage yet to be uncovered as the older vintages “mature” and the wave of ARM’s on the right side of this page start to have a greater impact on homeowners.

This article discusses the not-so-pretty rating’s outlook: Subprime Delinquencies Accelerating, Moody’s Says

Credit Suisse’s Dougan Says Mortgage Turmoil May Last

Credit Suisse Group Chief Executive Officer Brady Dougan said the market for mortgage credit will be “problematic” for as long as 18 months.

Bernanke Spoke With Rubin as Credit Crisis Worsened

The Federal Reserve’s Aug. 7 decision to keep interest rates unchanged set off a chain of high-level discussions with Wall Street executives, money managers and cabinet officials that culminated in Chairman Ben S. Bernanke’s public about-face 10 days later, according to records of his schedule.

Starting with a phone call from former Treasury Secretary Robert Rubin the day after the August rate meeting, Bernanke’s appointments included Lewis Ranieri, founder of Hyperion Capital Management Inc., and Raymond Dalio, president of Bridgewater Associates.

With that kind of access I think I might be more comfortable predicting a put too. Must be nice to be able to move those multi-billion dollar funds in confidence that your conversations have predictive power.

Credit crunches and buildings fall. The world turns upside down and things we used to count on become the dreams we wish we still had. The sounds of happiness and laughter drift into sounds of yelling and despair and all that we used to hope for gets trapped in dissonance and angst. Call it a bill and obligation or a future hoped for in vain. All these images arise across a country of golden ambers aflame in overzealous pursuit of the dream. I keep hoping we will wake up and see daisies and lilies and sunshine. I think we can.

I got this message today from a friend here at school. Please read this note.

Hello,

My name is Avi Kremer. Three years ago I was a normal, healthy 29-year old. Then I was diagnosed with ALS, also known as Lou Gehrig’s disease. Now I am confined to a wheelchair, and I can barely use my hands. ALS is rapidly destroying all of my physical functions. The disease is fatal and there is no cure. Unless we find one, I will die within three years.

Last year I joined forces with friends and top researchers in the field to found Prize4Life, an innovative non-profit organization that is already removing the obstacles that stand in the way of a cure. But we need your help. We are asking you to give $1 at www.dollar4life.org and to spread the word about our unique campaign. It is your support more than your money that is important – we aim to demonstrate how a large number of small donations can result in meaningful impact. The power of one, times a million, can help us find a cure.

If you choose to give $1 and to tell your friends about the Dollar4Life campaign, if you put the information on your blog and on your website, if people see it and they give and tell people too, then that $1 will quickly become $100 and then $1,000 and eventually $1 million. That $1 million could save my life and the lives of the 500,000 people around the world who have ALS.

Please go to www.dollar4life.org to make your donation. Each donation will light up a pixel in the portrait gallery of ALS patients on the website. We hope that with your help we will light up one million pixels and brighten the life prospects of ALS patients everywhere.

To learn more about the Dollar4Life campaign and Prize4Life*, the organization that will receive the full amount of every donation, please visit www.dollar4life.org. If you would like to contribute with a check, please make it payable to Prize4Life, Inc. and address it to P.O. Box 381708, Cambridge, MA 02238-1708.

Thank you,

Avi

Greenspan Sees `Rethinking’ on CDOs After Losses

Although the equity markets regained their footing and have now surpassed the peak set this summer, the credit markets continue to be in difficult shape, highlighted by Citigroup’s announcement yesterday that they will take a huge loss based on writing down some of their credit assets.

I try not to be a cynic, but the more I think about this, the more it looks like the froth in the equity markets is benefitting the have’s (i.e. the slice of American’s who can afford to have a piece of this pie), while the have-nots are continuing to be left in the dust of a crumbling real estate market with their dollars depreciating against not only currencies of countries they may never visit, but also against stuff like oil, wheat, and platinum.

If this is true it comports with the concept of the rich having power over Washington and through that power the Fed…

But it also comports with the idea that the increased leverage in the system makes the equity markets more volatile – on both the upside and the downside – so that what we are seeing now is a volatile move in reaction to the base stimulus provided by the Fed.

I have never claimed to be able to predict the next move in something like the Dow or Nasdaq, so I won’t start yet…I just think if Greenspan is only now acknowledging CDO’s may have to be revised, we have a long time until the system digests just how bad things got in the credit markets. Some big investors tend to agree: Fed Fails to Restore Creditor Confidence, Pimco Says

This article sounds interesting and kinda true. The point is basically that once the masses have caught on – the jig is up. This one speaks specifically about Hollywood’s latest – an obsession with hedge funds – and the implication that now hedge funds are doomed.

Hedge Funds in Hollywood: TV and movies have rediscovered Wall Street. Time to sell!

Popular culture, which is created by some of the least business-savvy people on the planet, has always been slow to latch onto business and economic trends. The covers of large-circulation magazines are a good contrary indicator. And TV, movies, and books are even worse.

Perhaps a better indication of not so good things to come, a previously cheerful Goldman Sachs economist has apparently determined that things aren’t looking to well after all. Maybe people are finally starting to recognize that the greatest bubble in real estate history is exploding and this is going to have broader ramifications than a bunch of overpriced fake-AAA securities.

Goldman Sachs tiptoeing into the bear camp

Goldman Sachs has abandoned its ultra-bullish view of the world economy, warning of a likely recession in Japan and mounting risks that US property slump could spread to parts of Europe.

And unfortunately for the dollar and the Chinese, they seem to be showing up at the wrong time for the party: China’s $200 Billion Sovereign Fund Begins Operations

But then again, maybe this is a new paradigm. Or not.

I guess it has taken awhile for me to respond to the news about the Fed’s 50 bps cut partially because it is hard to know what the implications of the cut will be beyond the short term pop everyone witnessed over the last week and partially because I was surprised enough to take a step back.

As I mentioned in my response to a comment here not everyone was surprised that the cut was 50 and not 25 bps, and in fact Goldman and Merrill were apparently anticipating such a cut.

I found the earnings announcements last week interesting. I was glad to see Lehman continue to stay ahead of expectations and not just for personal reasons – it is great to see a company that has risen from underdog status among the elites continue to fend off foes. It was also surprising before, but certainly not after, their announcement to see that Goldman outperformed partially by being short subprime and subprime-related credit throughout the summer. I guess it seems obvious that if someone like me can identify that trade that the dudes at GS would be all over it.

I guess part of the reason I am bit surprised that the “put” appears to be alive and kicking is that this means things are really bad out there, and the future opportunity set for our economy does not look good. For all the doomsday lingo I have tossed around here and in person with many of you, I am optimistic that our country will continue to be great – and so it saddens me to see the Fed concede the weakness of the dollar and to openly risk inflation out of what must be perceived as necessity. It seems such a move could only be motivated by a genuine concern that this was necessary to stave off more dislocation in the capital markets.

While the equity markets have flown since, we do not at all appear to be out of the woods on the credit side, and as Bloomberg noted, our neighbors are struggling with the CP market effects even with CAD/USD parity: Subprime Panic Freezes $40 Billion of Canadian Commercial Paper

And there is still a ton of buyout debt out there to be funded. I read something yesterday putting the figure at still over $340B.

Let’s hope that the credit markets are satisfied with the Fed’s liquidity boost…though I would have to guess that the negative press on this front is likely far from over.

The Commercial Paper market is set to roll over a ton of debt over the next couple of weeks. According to this blog quoting newsweek:

The shaky U.S. credit markets will face a critical test over the next few weeks, as companies try to find buyers for hundreds of billions of dollars in short-term debt that is set to expire. Corporate borrowers are expected to struggle in refinancing their debts, and the repercussions may go far beyond the companies in question. …

The tightest squeeze may come in what’s known as the asset-backed commercial paper market. … About $417 billion worth of asset-backed commercial paper is scheduled to come due during the weeks of Sept. 10 and Sept. 17, or about half of the $959 billion market, according to Sherif Hamid, an investment-grade credit strategist at Lehman Brothers.

I think these images from the Fed, speak for themselves.

This in the midst of a week where big banks are trying to market billions of buyout debt and BSC, GS, LEH, and MS all announce earnings.

Could be a choppy week indeed. I am investigating SKF and IAI as a way to express a view.

To tip my hand and show, contrary to what the previous post may indicate, that I believe numbers have power – if nothing more they add content to our intuitions and reason.

This is truly one of the coolest displays of statistical data I have ever seen. It also reveals some unintuitive but right-sounding observations about the development of the “Third-World” over the last few decades.

If you have a few minutes, give it a watch:

But don’t take it too seriously:

It may be the fault of my Econometrics professor in undergrad who talked about how he enjoyed single malts and parties in his undergraduate days while laughing about “statistical significance.” He introduced me to EconoMagic.com, and the glint in his eye as he emphasized the latter half of the site’s name coupled with the ease with which I always been able to “massage” the data likely both contributed to my skepticism.

So when I saw this article today, I couldn’t help but smile:

Most Science Studies Appear to Be Tainted By Sloppy Analysis

The point of the article is clear from the title – those of us who groan every time someone says “they have proven _____” fill in the blank – are now not only backed by Taleb-like Fooled By Randomness talk, but also an article in the Wall Street Journal about research by a serious scientist.

The irony is of course obvious. Statistically proving that scientists are statistically irresponsible is just kind of funny to me for some reason.

I guess I just feel like more often than not we – scientists, economists, investors, researchers, theorizers – are wrong more often than we are right. Its just really hard to predict the future or come upon anything like the “truth”.

That doesn’t mean we should give up trying. But when Goldman’s Global Alpha gets hammered a few months in a row and Greenspan admits that he saw the Subprime risk but couldn’t translate it to a market reaction, it makes one wonder how much we really know about stuff as simple as the capital markets – much less important stuff like science.

Batter up for predicting the next move in the markets…my guess is we have only heard the first of a many shoes (or statistical gaffes) to drop.