Skip navigation

Category Archives: Fincancial Crisis

As part of my work, I rely on statistical analysis to guide my thinking and broader analysis.  Lately Ive seen correlations go haywire, as can be expected in times of stress.  Just to give a flavor of the industries that have been hit: oil rigs in the US and Canada, furniture manufacturers, RV manufacturers, auto manufacturers, even GDP (mainly consumption and residential investment).  For a credit analyst, the all time most worrying of these is the path of recovery rates, which are tightly tied to default rates, as default rates rise to unprecedented levels.  These trends and their correlation to other indicators no longer follow historical patterns.

As a result, our models can only be used if we extrapolate trends, which is very risky.  So as I regress variable on variable on variable in an attempt to at least define the contours of a pattern or a trend, I find myself forecasting/predicting beyond the reach of applicable historic data. If anyone has an idea how to handle this, then please share it.  I have some ideas, such as adjusting predicted outcomes by the lower of the error terms (assuming that tings cant REALLY get as bad as as the model usually predicts), but I would love to hear from the blogoshphere.

I’mreally going to go out on a limb here.  Ive been trying to get excited and worked up about this bankruptcy, but can’t seem to get too exercised.  I have exposure to Chrysler Financial, which surprisingly rallied on news of the filing. I also have exposure to the auto supply chain, which does worry me.  So I should be a bit rattled. But it seems like this will be well managed and “surgical”, a term which sounds really silly.

I was a bit discomfited by the plans for the UAW to hold 55% of the equity, which immediately appeared to me to be a case of the lunatics running the asylum, or my like the unions, running business.  Right, uh, that is exactly what we have.  But a colleague laid out the excellent logic of handing the mess to its creators.  Perhaps now the unions will have a greater incentive to manage the company to profitability and not to employee benefits.  I would that it were that clear.  I still despair that the UAW will not in fact be any different.

At any rate, I cant get too exercised. perhaps because there is a measure of inevitability in it all.  I do wonder if Chrysler was the first because of its private equity ownership. I cant help but think that this has something to do with it.  We’ll see how it all rolls out.

Simon Johnson and James Kwak are beating the inflation drum again.  As my post of a couple days ago reveals, I don’t disagree about the risks to inflation.  The Fed’s aggressive posture towards increasing liquidity through monetary supply expansion (both directly and through ancillary monetization of bank assets) creates a tinderbox than can explode at the slightest spark.  The alternatives, obviously, are far worse.  Facing the uncertainy of collapsing markets, Im not sure what exactly people expect the man with his hand on the monetary policy lever to do but expand the money supply. 

I see it a bit differently, however.  Much of the ARRA that recently passed both houses will flow to infrastructure projects, which have longer spend out periods.  That aggregate demand, assuming it is real, could potentially come at a time when organic demand is returning to normal and unemployment is reverting to (closer to) full employment. My concern is that the secondary effect of the stimulus may come later, when it is less needed and when in fact it may even be dangerous.  If we do succumb to inflationary forces, Bernanke will undoubtedly be pilloried.  Unfortunately, he will so suffer even if fiscal profligacy pushes us over the edge.  In any event, people will forget the precsriousness of our position in the second half of last year and the first half of this year.