With economic uncertainty steadily increasing as 2008 approaches, we would like to offer best hopes for peace and a Merry Christmas to all our readers.

Pain Street USA: '08 housing outlook
_{The forecast is for a longer, deeper home-price slump than previously expected, with double-digit declines in many markets.}

The United States is deep in its worst housing slump since the Great Depression, and according to a new report, it's not going to get better any time soon.

In a new survey, Moody's Economy.com says many metro areas will record losses of 20 percent or more during the downturn, with the national median price for single-family homes dropping 13 percent through early 2009. Factoring in discount offers from sellers, the actual price decline would be well over 15 percent....

...."There has been a sea change in seller psychology since the subprime shock this summer," he said. "Sellers now realize they have to drop their prices to make a sale and prices are coming down very rapidly in some markets."

World bankers resort to firebreak

Never before have the central banks of North America, Europe, and Britain, acted together as such a unified phalanx, but never before have transatlantic credit markets seized up with such violent effect.

"This is a drastic action. The central banks want to place a fire-break to stop credit tensions spilling over into the broader markets and becoming the catalyst for a global economic crunch," said Ian Stannard, an economist at BNP Paribas.

While yesterday's joint move was sketched at the G20 a month ago, and fine-tuned in encrypted telephoned calls over the past month, the final trigger seems to have been the spike in the crucial three-month money rates that lubricate finance. Dollar and sterling Libor spreads have vaulted in recent days. Euribor spreads reached an all-time high of 99 yesterday morning....

...."There's a real danger that this may not work. Both the Fed and the ECB have injected a lot of liquidity before, but the banks are hoarding it. We're still seeing all the signs of stress with Libor and the VIX [fear gauge] at very elevated levels. The reason is that people still don't know where the bodies are buried," he said. "This may be a Made-in-America credit crisis but the Americans have cleverly exported their sub-prime cancer to pension funds all over the world. The risk now is a recession on both sides of the Atlantic," he said.

March is when we realize that the dollar doesn't come back

_{Arlington Institute issues a Financial Alert based on M·CAM Analytics}

The Chinese currency wild-card may become relevant far sooner than expected. An effort by China to convert its $1.4 trillion U.S. Treasury holdings into euros is not viable for many reasons -- not the least of which is the European Central Bank's inability to absorb such an event.

When February comes, the Chinese are going to do something as they will have to decide what the exposure is going to be with the treasury. As I see it they have to just dump the treasury. They only keep it because they can use it -- they have 43% direct/indirect of US treasuries so they'll dump them on the market.

OPEC price with the whole fluctuation of oil futures presages the event. They are going to run the price of oil as high as they can get it on the dollar, while buying US treasuries from China with the money. When the dollar does collapse, they'll flip denominations.

The wild card is long about March when the OPEC cuts spot oil off the dollar to the euro. One can look at the current oil price at close to $100/barrel and fail to see that, as this premium price is currently turning around and investing in a weakening dollar, the effective price (less the dollar investment hedge) is probably closer to $50/barrel than the spot price reflects. Currency problems will change the game -- they are financially structuring themselves to take the hit.

When we can't afford to buy oil commodities on a spot market -- it compounds the problem however the consumer that Saudi Arabia ships to is liquid (China). In the US it is a big problem. There is still a market for oil; it just changes.

When you come out of Straits of Hormuz, turn left.

According to Gregory Peters, head of credit strategy at Morgan Stanley:

There's a greater than 50 percent probability that the financial system will come to a grinding halt. You have the SIVs, you have the conduits, you have the money-market funds, you have future losses still in the dealer's balance sheet in the banks [..] That's all toppling at once.

Financial institutions are acknowledging that the losses could reach over $400 billion, and that is before an additional several hundred billion dollars worth of residential real estate enters foreclosure, leading to additional losses in the derivatives market of many times that figure due to leverage.

Over the next few months, major impacts will be felt.

First, the gargantuan bond insurance industry is teetering on the brink of the abyss, with rating agencies threatening downgrades of 14-18 notches (from AAA to deep junk). That could leave trillions of dollars of bonds uninsured, and therefore no longer able to borrow a triple A credit rating independent of their true worth. Those bonds would lose much of their value, and many large investors, such as pension funds, would be obliged by law to sell anything below investment grade.

Secondly, US accountancy rules changed November 15, affecting the upcoming financial year. "FASB 157" dictates that banks and securities firms can no longer hide their worst assets as Level 3, which allowed them to be kept off balance sheet. Trade in classes of commercial paper theoretically worth more than entire countries will have to be valued using observable inputs for the first time (where possible), rather than mark-to-make-believe.

In addition, as of January, banks can no longer indemnify their auditors for signing off on accounts they cannot verify, leaving the auditors potentially liable over the virtually unquanitfiable exposure of their clients to the derivatives market. Auditors are therefore likely to make every effort to verify valuations where evidence of true value can be found.

A cascading failure of financial institutions is all too possible.