January 8th

15:35 GMT +00:00
Depressing statistics

Posted by:
Economist.com | WASHINGTON

Categories:
Business cycles

POLITICS enthusiasts may remember Nate Silver as the statistical wunderkind who made obsessive, data-oriented election horse-race coverage fun again, and won a nation’s heart. One might have expected his star to fall (set?) post-election, but instead he has continued to ply the internet with interesting, numbers-based commentary.

Today, for instance, Mr Silver examines a range of estimates for near-term output statistics, in an effort to gauge the likelihood of America’s entry into a “depression”. Most estimates, like those from the Congressional Budget Office or the Wall Street Journal’s survey of economists, fall on a range varying from bad to grim, but few meet the standards of what we might call a depression. Intrade, he notes, defines the d-word as a 10% (or more) annual decline in output. For comparison’s sake, the CBO just estimated that the American economy would shrink about 2.2% in 2009, in the absence of stimulus.

But get this—as Mr Silver points out, the Intrade depression contract currently prices in about a 40% chance of depression in 2009. This is remarkably high. As Mr Silver notes, Intrade prices are often less than informative due to the illiquidity of the market—there just aren’t enough traders at the site to get a price you can trust. But strangely enough, the depression contract seems to be pretty well-traded.

Mr Silver guesses that this might be due to momentum traders, and he makes his point in a way that allows me to tie this post to a recent Free Exchange theme, which I appreciate:

What the Intrade traders may be betting on, in other words, is other traders becoming more pessimistic at some point between now and close of the contact — a “pessimism bubble”, if you will.

But here’s the real question. Is there a risk of a “pessimism bubble” in the real economy? And if so, are the real markets and the professional forecasters adequately accounting for it?

There is, though it’s very difficult to know how substantial a risk it is. But as Barack Obama prepares to speak this morning on the economy and on the need for a substantial stimulus—which is very real—it’s worth remembering that we should also fear fear. Soon enough, it will be time to ask Americans to be positive again.

It’s going to take WPA II a long time to get in gear if the 1930s is any guide

Why not just take it to Vegas? Why would it all go back in? How many times would this have to happen (total loss of trust) before people wised up? Was this time the time?

It seems nobody wants to address this as even a remote possibility.
The fact is stocks were flat until the 401K plans came about.
Read this article about the blatant thievery on WS. these things can’t go on forever.

http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom

Here is a taste of it.

Later, when I sit down with Eisman, the very first thing he wants to explain is the importance of the mezzanine C.D.O. What you notice first about Eisman is his lips. He holds them pursed, waiting to speak. The second thing you notice is his short, light hair, cropped in a manner that suggests he cut it himself while thinking about something else. “You have to understand this,” he says. “This was the engine of doom.” Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. “I cannot fucking believe this is allowed—I must have said that a thousand times in the past two years,” Eisman says.

His dinner companion in Las Vegas ran a fund of about $15 billion and managed C.D.O.’s backed by the BBB tranche of a mortgage bond, or as Eisman puts it, “the equivalent of three levels of dog shit lower than the original bonds.”

FrontPoint had spent a lot of time digging around in the dog shit and knew that the default rates were already sufficient to wipe out this guy’s entire portfolio. “God, you must be having a hard time,” Eisman told his dinner companion.

“No,” the guy said, “I’ve sold everything out.”

After taking a fee, he passed them on to other investors. His job was to be the C.D.O. “expert,” but he actually didn’t spend any time at all thinking about what was in the C.D.O.’s. “He managed the C.D.O.’s,” says Eisman, “but managed what? I was just appalled. People would pay up to have someone manage their C.D.O.’s—as if this moron was helping you. I thought, You prick, you don’t give a fuck about the investors in this thing.”

Whatever rising anger Eisman felt was offset by the man’s genial disposition. Not only did he not mind that Eisman took a dim view of his C.D.O.’s; he saw it as a basis for friendship. “Then he said something that blew my mind,” Eisman tells me. “He says, ‘I love guys like you who short my market. Without you, I don’t have anything to buy.’ ”

For expiry purposes a depression is defined as a cumulative decline in GDP of more than 10.0% over four consecutive quarters. This is calculated by adding together the published (annualized) GDP figures (as detailed below). If these annualised figures add up to more than -10.0% over four consecutive quarters then the contract will expire at 100.

Expiry will be based on official quarterly GDP figures reported by the U.S. Department of Commerce (Bureau of Economic Analysis, Table 1.1.1, “Percent Change From Preceding Period in Real Gross Domestic Product”) as reported by the BEA.

The final quarterly GDP figures will be used for expiry – not the advance or preliminary numbers. Any revision of the final figures will not not affect the original expiry.

Negative quarters in the preceding year will count towards the total GDP decline for expiration purposes. For example, if the total decline in GDP from Q3 2008 to Q2 2009 exceeds 10.0% then the contract will expire at 100.

The Intrade Depression contract is now at 45% up from 15% a few weeks ago. There’s obvious momentum building. I think the Jan unemployment numbers will take our breath away, all those state systems overwhelmed (NY,NC,Ohio and Mich – about 15% of the national population!), plus the inevitable adjustments to the bad side.

http://www.intrade.com/jsp/intrade/common/c_cd.jsp?conDetailID=647817&z=1230617689492