MONDAY, FEBRUARY 25, 2008

UP AND DOWN WALL STREET  

By ALAN ABELSON



Zimbabwe, Here We Come!



RECORDS, THE RUSTY OLD SAW GOES, ARE MADE TO BE BROKEN. So, incorrigibly jingoistic as always, and fully aware it still has a ways to go, we have every confidence that the U.S.A. can ultimately break Zimbabwe's record, set only this year, of an annual inflation rate of 100,580%.

Scoff not, please. We know that, at least by the official count, our own inflation rate remains in single digits. But, if a rapidly undeveloping country like Zimbabwe can lift its rate nearly 35,000 percentage points in a single month, our vaunted American know-how with a little concentrated effort can surely top that.

Besides such natural advantages as a world of experience in running up debt and living far, far beyond our means, we're blessed with an administration and a Congress dedicated to the debasement of the currency, a Federal Reserve manifestly willing to pay any price for even a modicum of fleeting growth and vast legions of financial operators of great ingenuity and little conscience who can turn something into nothing.

An obvious prerequisite to making a serious run for the No. 1 spot is to drop pronto the fiction of "core" inflation. A handy if crude device aimed at befuddling the masses here at home by craftily eliminating any commodity whose price is rising from our yardsticks of inflation, it's totally counter-productive if we truly intend to surpass Zimbabwe.

As it happens, the time is particularly ripe for us to get serious about participating in this mug's game (or should be say, more aptly, this Mugabe's game?). For it's an election year and things are getting deliciously nastier. You can tell that from the rude sound of halos being knocked off candidates' fair heads.

Sen. McCain, the Republican hopeful, not the least of whose claims to political fame is that he's Mr. Clean, is accused of playing footsie with lobbyists eager to curry his fancy and abuse his good name. Sen. Obama has achieved the front-running position among the Democrats by sedulously eschewing substance in favor of pulse-pounding rhetoric, featuring, it emerges, some particularly stirring oratorical flourishes he "borrowed," unbeknownst to the audience and without a by-your-leave from the involuntary linguistic lender.

We suspect that each of the senators, duly accompanied by adoring loyal spouse, will follow the precedent set by Hillary and Bill Clinton in 1992 and appear on 60 Minutes to forthrightly -- or at least solemnly -- deny the allegations of doing anything untoward and earnestly vow never to do it again.

At program's end, as the cameras zero in on the beatific couple, there won't be a dry eye in the nation, especially if it's one of those days when the wind is kicking up a storm of dust particles. In any event, because this is an election year, being called to account for questionable past behavior provides further incentive to adhere to protocol that requires candidates for such high office to shed even the faintest suspicion of fiscal restraint.

So our advice to Zimbabwe is to revel while you can in setting a new all-time global high in inflation. For as the immortal Pogo would warn, the future is gaining on you, and the future is us.

WE'D BE REMISS IF WE FAILED TO TAKE DUE NOTE of the fact there is a different view of inflation abroad among a lot of savvy folks. We'd dearly love to cheer you up and break the mist of gloom that seems to envelop these columns by reporting they don't see it as the prime threat to the economy or the financial markets. Which they don't.

Trouble is, this eminent company-which includes the likes of Albert Edwards, now of Société Générale (clear evidence that the French bank, despite getting swindled out of $7 billion, can't be all bad)-believes the looming monster menace is not inflation, but its opposite number, deflation.

So it really boils down to choosing your poison, which even we must admit, unless you're a Borgia, is not an especially merry enterprise. But don't despair, our erudite old buddy and Roundtable member Marc Faber posits that inflation and deflation can coexist (which strikes us as the worst of all possible worlds). As to our own view, we think it's one of those rare instances when both sides of the argument have it right, and our expectation is for a ravaging inflation to be followed by a debilitating deflation.

Marc, as he makes clear in his latest Gloom, Boom and Doom epistle, is bearish on the outlook for both our economy and stock market (not, to be sure, an unfamiliar stance for him). He points out that since financial institutions have provided or facilitated the excessive credit growth that has fueled the big bull markets in equities in recent years, you would logically assume that strategists, money managers and other such investment luminaries "would get a wake-up call" when the stock prices of those financial institutions, which got so fat, rich and sassy from their dubious exertions, collapsed.

But that only illustrates Marc's one fault: Despite his having journeyed to the far corners of the earth and seen everything, he's still too generous and forgiving of human frailty. What the diehard bulls can't grasp, he sighs, is that the credit bubble has burst and the deep wounds being inflicted on the financial sector portend an extended and painful period of weakness both for it and the general economy.

In fact, he's a bit more pessimistic than even that downbeat assessment suggests. For his reading of financial history is that "the bursting of a bubble has always been a signal that the economics of a region or a sector had changed, or were about to change, for a very long time, if not permanently."

It follows, then, that the radically changed environment brought about by the bursting of the credit bubble, one of the true mothers of all bubbles, is likely to result in a much more subdued global economy. And not just for a year, but a long time, possibly a very long time.

SPEAKING OF CREDIT, AS WE JUST WERE, this seems a timely occasion to give some to Stephanie Pomboy. Stephanie, as you're probably aware since she's no stranger to this space, puts out MacroMavens, a weekly commentary on the economy and the markets, enlivened by her sparkling prose and acid wit that adorn a wealth of insight and information.

The occasion is the sixth anniversary of MacroMavens. If you've just come in, Stephanie is unorthodoxy personified, wonderfully adept at puncturing myths and popping bubbles with pointed fact, whether originating in Wall Street, Washington or other louche locales. The credit crisis has provided a great stomping ground for her from its incipiency through the seizing up of the SWAPS market; invariably, she's a step or two ahead of the actual disaster.

All the grandiose plans to prop up the sinking homeowner appear absurd to her in the face of the obvious question: With $6 trillion of the $8 trillion in residential mortgage debt securitized, how do you get a lender to renegotiate a mortgage when you don't know who the lender is?

Most interesting in her latest screed, we thought, were her candidates for the next serious casualties of the credit collapse, credit cards and commercial real estate. For a spell now, Stephanie has been predicting that to make up the void in home-equity lending, consumers will shift to plastic, foreshadowing a bumper crop of credit-card delinquencies. And she observes that "while smiley-faced pundits laud 'still low' delinquency rates," such figures conceal the fact that explosive growth in credit-card borrowing has been accompanied by a "massive increase" in dollar amount of delinquencies.

The other terrible accident waiting to happen, Stephanie cautions, is commercial real estate. Eager to make up for lost residential mortgage volume, banks have been pouring dough hand over first into the commercial real-estate market, creating, naturally, a huge and swiftly inflating bubble. Such profligate lending has swollen commercial real-estate loans to 14% of all bank loans, the largest slice since data first was collected 13 years ago.

Inevitably, delinquencies are starting to rise apace with the burgeoning loans and have reached their highest level in a decade. The problem is a dead certainty to get worse, as troubles in Wall Street spill over into the commercial real estate market. Stephanie cites a report by CB Richard Ellis that 42% of commercial real estate in lower Manhattan and 28% in midtown is tied to the financial sector.

Ruminating on the frantic scurrying about in Washington to come up with some palliatives for distressed homeowners (especially those who vote) and stretched-to-the-limit lenders (especially those who chip into campaign coffers) Stephanie views the efforts with something between wonder and mild incredulity.

Contrary to the conventional wisdom and the traditional lack of any kind of wisdom in Washington, she avers, "The current credit bust is not simply a function of reckless real-estate lending -- residential and commercial. It is a function of interest rate 'resets' across the entire U.S. economy."

Consumers aren't the "only ones who haplessly heeded Greenspan's call to ARMS." Everyone, she explains, switched to borrowing short. Municipalities, for example, as we've just had unhappy reason to discover. And so did Corporate America with a vengeance: Floating-rate paper now accounts for 54% of its overall issuance, up from 26% in 2002, and a tidy $565 billion in corporate bonds have to be rolled over this year, 34% greater than last year.

Hey smiley face, what's so funny?


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