Financial analysts should have seen the subprime bomb ticking

In fact, some did:

“All of the old-timers knew that subprime mortgages were what we called neutron loans — they killed the people and left the houses,” said Louis S. Barnes, 58, a partner at Boulder West, a mortgage banking firm in Lafayette, Colo. “The deals made in 2005 and 2006 were going to run into trouble because the credit pendulum at the time was stuck at easy.”

“I’m one guy in a research department, but many people in our mortgage team have been suggesting that there was froth within the market,” said Jack Malvey, the chief global fixed income strategist for Lehman Brothers. “This has really been progressing for quite some time.” …

“We’ve contended for a while that there was an issue in subprime debt,” said Neal Shear, global head of trading at Morgan Stanley. “A year ago, we were aware that delinquencies were going to rise.”

Meanwhile, since everybody who has followed this issue knows that the incestuous action of ratings agencies like Moody’s, touting subprime derivatives on which they stood to profit, is a fair part of the problem, the European Union is planning to investigate possible conflicts of interest. Where’s the SEC, on our side of the pond?

And, the anti-Cassandras also bear blame for being in denial still, primarily through their claim that this is a just a problem with subprime mortgages.

No, it also has affected a number of Alt-A mortgages, the next class above subprimes. Therefore, it has affected more collateralized debt obligations. It’s also caused other classes of mortgage to hike their interest rates.

And, with the peak in number of adjustable rate mortgages due to reset nearly a year off, we’re still not at the bottom of this.

Wal-Mart slumps; leading economic indicator of rocky times ahead?

Decades ago, General Motors’ Charlie Wilson said that what’s good for the country is good for General Motors, and vice versa.

No Sam Walton never made such a claim for Wal-Mart, nor has current CEO Lee Scott. Nonetheless, whether defending Wal-Mart’s pay scale or the “Wal-Martizing” of many small towns, there’s been plenty of economists who have, in essence, been ready to make that claim on behalf of the retailing behemoth.

Well, the flip side of that would be that what isn’t good for Wal-Mart isn’t good for the country. So, if Friday’s report on Wal-Mart sales means anything, it reinforces the likelihood of a recession, in my mind. Home Depot also reported problems, but its sales have been limping for several months. The Wal-Mart news is new and fresh:

Economists said the sluggish performance of the chains — Wal-Mart missed its profit forecast and Home Depot’s earnings dropped — could signal broader troubles in the economy.
“It’s a red flag,” said Jay Bryson, global economist at Wachovia. “If consumer spending starts to weaken, the overall outlook for economic growth will diminish.”
That, Wal-Mart executives said, is precisely what has begun to happen in its 4,000 United States stores over the last three months — even after the chain cut prices on 16,000 products this summer.
“Many customers are running out of money at the end of the month,” said H. Lee Scott Jr., the chief executive of Wal-Mart.

Home Depot started slumping some time back, once adjusted-rate mortgages began to rise, and its fortunes are more narrowly tied to housing. But, Wal-Mart’s problems would seem to reflect broader economic problems, in some cases, and broader economic worries about the future by people who have not been affected.

It is not horrible economic news if a company misses an earnings-per-share forecast by a penny. But, to be 3 cents off is a little more serious. I’m sure WallyWorld is already adjusting its third-quarter forecast. But, unless it outperforms that, rather than just hitting it on the mark, the Street might not be too impressed.

Plus, don’t forget those price cuts on 16,000 items. That forced dozens if not hundreds of Wal-Mart suppliers to do their own adjusting. And, if their products still aren’t selling well, some of them could be looking at layoffs in the future.

That makes it official in my mind; I’ll raise my 12-month recession odds from 2-5 to 1-2.

Iraq insurgents continue to think a step ahead of the American military

The latest twist? House bombs.

The 2nd Brigade, 3rd Infantry Division calls itself the "Send Me" brigade, and on Saturday, its soldiers were quick to send themselves to find the man who shot Pfc. William L. Edwards, a wide-eyed 23-year-old from Houston. They quickly identified the house where they believed the assailant was hiding and moved in, just as the sniper knew they would.

Inside the house, one soldier stepped on a pressure plate, detonating an estimated 30 pounds of explosives hidden under a stairwell. In an instant, four troops were killed; four others were injured. Edwards died later in the hospital. The sniper escaped.

The attack in Arab Jabour, southeast of Baghdad, was particularly savage, predicated on knowledge of the soldiers' sense of duty to a fallen comrade. Military commanders say the number of similar incidents — those in which soldiers are lured into a house rigged to explode — has risen dramatically across Iraq in recent months.

Especially for Marines, who are fanatic to the point of myth-making about refusing to leave a fallen comrade behind, these house bombs have to be like baited traps. The story notes this is all part of a pattern of emerging complexity in attacks, such as combining roadway IEDs with post-explosion ambushes, usually involving more insurgents at one site than previously was the case.

As for our top military PR? It’s a “spin” issue more than something to seriously address right now:

Officials attribute the increasingly sophisticated attacks to desperation on the insurgents' part after troops became too successful at finding roadside bombs and other explosives.

“It’s a clear sign that they could not get to us by other means, and that's a good sign,” said Lt. Col. Michael Donnelly, a spokesman for the American operation in northern Iraq, describing the pattern of house bombs in that area. “Obviously we're countering the improvised explosive devices, and force on force, they know that they can't fight us.”

This lying toady refuses to, or has orders to refuse to, credit insurgents for ever-rising tactical and technological ingenuity, even though he describes another example of such ingenuity in his very next breath:

But ambushes and rigged houses can cause many more casualties than smaller improvised explosive devices, which rarely kill more than one or two people at a time. Increasingly, Donnelly said, insurgents are creating a “daisy chain” of house bombs, in which an initial explosion can trigger blasts up and down a block.

Donnelly claims that the bombs leave tell-tale signs. Right.

If that really were the case all the time, why would the bombs be being used more and more? And, if it is starting to become true, the insurgency is probably already moving on to its next set of tactics.

In fact, Donnelly admits that, while keeping his BushCo happy face painted on.

Donnelly said that as U.S. troops become more skilled in identifying house bombs, al-Qaeda in Iraq will probably develop even more advanced techniques for attacking soldiers. But the American military’s counterinsurgency abilities, assisted by increased cooperation from Iraqi citizens, would prevail, he said.

Sure. Black is white, and the Red Queen loves Alice to death.

Smile at the airport, or the TSA will arrest you?

No, I’m not kidding:

“Specially trained security personnel” will be watching passengers for “micro-expressions” that will reveal treacherous agendas and insidious intentions at airports around the country. These agents, who may literally hold your fate in their hands have been given a lofty, Orwellian name: “Behavior Detection Officers.”

So, you’re supposed to smile while being told your flight has been cancelled? You’re supposed to smile while standing in an hour-long line trying to book a replacement flight? You’re supposed to smile while your plane sits on the tarmac, running late, and leaving you wondering if you’ll arrive at the next airport in time to make your second flight connection?

Here’s how a scenario could play out:

Apparently, these Behavior Detection Officers work in pairs. One scenario is that an officer might move in to “help” a passenger retrieve their belongings after they’ve been screened. And then the officer will ask where the passenger is headed. If the passenger’s reaction sets off alarm bells in the officer’s well-trained mind, another officer will move in and detain them. Let’s be really clear here. If a stranger moved in on me like that, I’d tell that person to go to hell, throw in a few other expletives for good measure and probably give them the finger as I stomped off. Of course, I wouldn’t be stomping very far.

Orwellian, indeed.

What next? Do we move beyond Orwell to Huxley and “Brave New World,” with the airport thought police passing out mind-control happy pills? Free Prozac with your in-flight pretzels and peanuts?

Tripartite Iraq? Bipartite? Or still unified, with new boundaries?

Abu Aardvark’s excellent article on what appears to be the final collapse of Sunni participation in the government of Iraq got me to thinking about what the longer-term results might be.

I know that a number of pundits, some historians and even a few American politicians have bandied about the idea of a tripartite Iraq, on Shi’a/Sunni Kurd lines. It’s usually presented as if this were the only realistic option (by politicians and pundits), or the most likely actual option (by historians).

In any case, a tripartite Iraq vs. current Iraq are presented as the only two outcomes, usually. But, the Sufi philosopher Idries Shah once said, “There are never just two sides to any situation,” and that is the case here.

For example, what if Sunnis, Shi’as, Iranians and Turks combine to do a partition of Poland move on the Kurdish state? Then, we’re down to a bipartite Iraq.

Or, what if Kurds and Shia’s stay together, with a Sunni area making a formal declaration of independence? Then we have a bipartite Iraq.

Or, what if the Saudis get so frustrated they issue an invitation to the Sunni area to let itself be taken under the Saudi wing? To appease Bush, they could make this as innocuous as possible, but then complete the annexation during the heat of the presidential election season or just after, confident they can then get away with it. Then, we have a still unified, but shrunken, Iraq, with an enlarged Saudia Arabia now having even more of both oil reserves and Falafist fundamentalists in its midst.

Hurricanes are incredible things — here’s an analogy

Looking at five-day forecasts of the inexorable intensification, and projected storm track, of a major hurricane like Dean — especially in light of Hurricane Katrina and the possibility that Dean will shoot the Cuba-Yucatan gap into the Gulf of Mexico with only moderate landfall diminution — leads me to an analogy.

When you were a kid, especially if you were a boy, did you ever hit a baseball in a street, or an open field next to houses, and watch its inexorable arc toward somebody’s window? Or did you throw a football indoors, hit a living room lamp or vase, and watch it tumble toward the floor in what seemed like slow motion?

Or, as an adult, have you accidentally bumped a glass off the counter and seen it tumble toward the inevitable crash on the linoleum-over-concrete kitchen floor, in what seemed like a freeze-frame progression?

In all those cases, you and I knew what was going to happen, but were powerless to change the trajectory of the baseball, lamp, or glass.

Well, that’s what a big hurricane is like. You have a pretty good idea where it’s going to be two-three days from now, and a decent probabilistic estimate of where it’s going to be four-five days down the road, but there ain’t a damn thing you can do about it (other than evacuate, of course).