Thursday, June 15, 2006

That Queer Silence You Hear... the calm right before the ejecta flies out of the newly formed crater.

The short analysis: when your neighbor defaults on his option-ARM interest-only loan because it adjusted on schedule beyond the limits of his income, the lender will take his paper to the GSE's mentioned in these stories, and when this is happening simultaneously with thousands of borrowers in hundreds of cities across North America, that will mean a run on the reserves at Fannie and Freddy. The price on the bonds Fanny and Freddy sold to raise the cash for those reserves will plummet, reflecting their holder's demand for higher yield in exchange for the risk. Who holds those bonds? Communists. Literally, the People's Bank of China. Well, them and a lot of Japanese, Saudi and European central banks. People who already have a powerful incentive to keep checking the currency exchange rates on an hourly basis to know when it's time to bolt for the door and start dumping U.S. dollar denominated assets. Meanwhile, the housing market is freezing its ass off all of a sudden, and the Federal Reserve Chairman is worried about inflation in an economy where labor costs are stagnating.

Hey, what's the big, bright ball of fire doing in the sky, and why is it moving so slowly and getting bigger?

No comments: