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Monday, June 29, 2009


second derivative deterioration?

the story of recent weeks on the economic front has been one of green shoots and second derivative improvements. perceived changes in the rate of economic collapse have been taken as an excuse for equity to make a fabulous charge off the lows, aided by a systemic short squeeze and probably no small amount of bleedover from federal reserve bank excess reserve expansion (conspiratorially organized or no, it makes little difference).

the story has thusfar had few exposed flaws and discontinuities -- after all, the pace of collapse in 4q08 and 1q09 stood to be mitigated by fiscal stimulus and an effective financial system backstop. however, the second derivative improvement isn't actual economic improvement, and one wonders when expectations of an actual recovery could begin to be disappointed.

and now -- via john hempton -- perhaps a leading indication that one of the most intractable of all american economic and financial problems, that being housing, is again accelerating to the downside.

I have been firmly in the “second derivative is good” camp for some time. Green shoots were few and far between – but the economy no longer appeared to be in free-fall. ...

The data I considered most persuasive was the delinquency data at Fannie and Freddie. It gets worse every month, but until the last data point it was getting worse at a decreasing rate (especially if you adjusted for the foreclosure moratoriums they implemented).

Today I am more worried. My favourite data point (rate of increase of Freddie Mac delinquency) has deteriorated – especially in their insured portfolio. Its not sharp deterioration – and it is possible – even likely – that Freddie Mac will have end credit losses considerably lower than the bears anticipate. But as a second derivative bull I am feeling just that little bit less certain.

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