February 11, 2005


One of the aspects of the lighter-than-air airships I didn't cover in yesterday's Whiskey and Gunpowder was the use of huge airships for shipping and transportation. The program is called Mobilus. You can find out more here, where the Office of Force Transformation invites you to imagine a world where....
  • A new form of airlift dramatically increases the overall capacity of the transportation network from origin to destination (strategic and operational distances) and within theaters of operation
  • Humanitarian relief – massive amounts of food, modular hospitals, water purification equipment – can be delivered directly to the point where it is needed
  • This maneuver capability can overcome area denial and anti-access measures by flying directly to the destination area and offloading in austere areas
  • New trade patterns can open land-locked countries to better commerce Heavy construction materials can be delivered into dense urban centers with minimum disruption
  • High volume/heavy loads can be taken off our highways and moved another way The US air transportation system becomes a more robust and agile network capable of absorbing disruptions due to weather or attack
  • Military capabilities can rapidly maneuver to critical points across the earth at least three times faster than by ship and be ready to operate immediately – and do so at lower cost than existing airlift
  • Mineral resources and oil can be obtained with far less environmental impact and at lower monetary cost
  • Business logistics are streamlined because many physical transportation limits no longer apply
  • The US Aerospace Industry again takes a dominant place in the world and offers new challenges to entrepreneurs and engineers

The $600 Billion Gorilla

Some lowlights to highlight the dismal chart below:
  • The trade deficit grew 24% last year, from $496.5 billion in 2003 to $617.7 billion in 2004
  • Imports from China were up 30% to $196.7 billion. Exports were up 22.6%, but only to $34. 7 billion
  • The weaker dollar relative to the euro increased exports to Europe by 13.5% from $155.2 billion to $176.2 billion. But imports grew nearly as fast at 11.6% from $253.1 billion to $282.6 billion.
  • The trade deficit as a percentage of GDP grew from 4.5% in 2003 to 5.3% in 2004.

source: Bureau of Economic Analysis, Department of Commerce

Regional Bankers at Risk

The report from the Office of Management and Budget I refer to below mentions the exposure regional banks have to the GSEs through ownership of mortgage backed securities (MBS). There are two indexes made up of banking stocks. One is the Philadelphia Banking Index (BKX). The other is a HOLDR from Merrill Lynch called the Regional Bank HOLDR (RKH). RKH has the following holdings, which are nearly the same as BKX, hence the simlar performance, charte here against the Philly Gold and Silver Index (XAU) since the beginning of the "reflation rally" in March 2003. AmSouth Bancorporation (ASO) Bank of America (BAC) BB&T (BBT) Fifth Third Bank Corp. (FITB) Comerica Incorporated (CMA) J.P. Morgan Chase (JPM) KeyCorb (KEY) Marshall and Ilsley Corporation (MI) Mellon Financial Corporation (MEL) National City Corporation (NCC) Northern Trust Corporation (NTRS) Piper Jaffray Companies (PJC) PNC Financial Services (PNC) State Street Corp. (STT) Sun Trust Banks Inc. (STI) Synovus Financial Corp. (SNV) U.S. Bancorp (USB) Wachovia Corporation (WB) Wells Fargo & Co. (WFC) A couple of things to note on the chart below. First, volume in RKH exploded in April of last year, about the same time ETFs became very popular as convenient proxies for sector trading. Second, the XAU is down by half from its gain, measured over the last two years. Take a look at the other chart below to see how it looks, technically speaking. Is it time to buy gold calls? Bottom of the channel? Or moving down to the next channel?

Mortgage Growth

From the "Analytical Perspectives," which I mention below, comes this graphic showing just how large and leveraged the GSEs have become. The MBS that aren't retained are out there somewhere, sitting on the balance sheets of regional banks, or in the portfolio of an insurance company, or a pension fund. Ticking.

The Housing Bull that Debt Built

Each year the Bush White House produces a budget, it also produces a report called "Analytical Perspectives, Budget of the United States Government." As the title suggests, it's a real page turner. But if you're patient and you look hard, you will come across some gems. In this year's version, I found an entire section on Fannie Mae and Freddie Mac, the Government Sponsored Enterprises (GSEs.) The risks section was especially interesting. Below I've cut a snippet from that section and emphasized certain passages. Earlier this week the Washington Post reported that the Bush administration may and try to limit the growth of GSE assets. Practically speaking, the new regulation would limit the amount of mortgages the GSEs add to their balance sheets. And practically speaking, this would make the market for new mortgage credit tighter, conceivably leading to slower home price growth (and many other darker consequences.) It's clear the Bush folks are taking the GSE problem seriously. It's not clear they can do much about it. Here's what the report had to say... "The risks undertaken by the GSEs, if not properly managed, may pose athreat to their solvency. Under some circumstances, they also may threaten the stability or solvency of other financial institutions andthe economy. Current Federal law explicitly exempts the securities ofthe GSEs from the statutory limitation on commercial banks' investmentin the ''investment securities'' of individual firms. In a February 2003 study conducted by OFHEO utilizing FDIC data, over 2,000 commercial banks held at least 51 percent of their capital in the formof debt issued by Fannie Mae; and almost 1,000 commercial banks heldat least 51 percent of their capital in the form of debt issued byFreddie Mac. Should a financial crisis affecting the GSEs and other financial actors develop, the market's misperception of Government backing ofGSE securities could affect its course and resolution. A September2004 Federal Reserve Bank of Atlanta study indicated concern that severe stress to one of the GSEs might contribute to weakness in other financial institutions that hold significant GSE obligations, especially if the path to resolution of the crisis and the potential for Government intervention are misunderstood. The potential for systemic risk arising from the GSEs' size and their central role in mortgage markets combined with the difficulty of managing the risks inherent in a large mortgage portfolio raise fundamental questions about the value they add through their support for mortgage lending and reduced costs to borrowers relative to the risks their current operations pose. Some research by Federal Reserve economists suggests that GSE securitization activities have a relatively small effect on mortgage interest rates—just a few dollars a month on an average mortgage—and that their practice of holding mortgages in portfolio has almost no effect on mortgage costs. Instead of being leaders in increasing historically underserved groups' access to credit, the GSEs have actually trailed the market averages in a number of dimensions. The Administration has sought to narrow the gap by lessening the risksposed by the GSEs and increasing the benefits they offer to the public