Sunday, September 28, 2008

J. at One Month

Little J is one month old. He is healthy and full of personality. A parent can’t ask for more than that!

Jude can also be a little fussy. But he's so cute so you can't be annoyed for too long. Rachel thought both of our faces explained the situation pretty well :-)

We’ve walked a lot in our BOB stroller. Starbucks is a mere 8 blocks away, and we’re training Jackson to sit in that empty stroller space that Jude isn’t yet utilizing.

Saturday, September 27, 2008

Four Generations

Last week the Mardock extended family briefly gathered for a rare and wonderful "Generational Photo." Below (from Jude's perspective), is grandpa, great grandpa, dad, and little Jude. Also in the room was great grandma, grandma, and mom.

Thursday, September 25, 2008

CDSs Part II, From $0 to $62 Trillion in 7 Years

Eight years ago, we survived the millennium bug, Bush won due to inefficiencies in the electoral college system, and credit default swaps were a thing of fiction. They simply didn't exist. Today, they amount to over $62 trillion. To put that number in context, I graphed CDSs next to the paltry US Gross Domestic Product, and also next to the total market capitalizations of both the US stock exchanges, and the aggregated world stock exchanges. Said another way, the stock market capitalizations represent every stock of every company listed, times the number of stocks outstanding. And yet, CDSs - instruments that most people have never heard of - insure an amount six times greater than the US GDP, and more than every stock market in the world put together.

Data (comma delimited, in millions)
US GDP,9817.0,10128.0,10469.6,10960.8,11685.9,12421.9,13178.4,13807.5
NYSE + NASDAQ,15131.6,13766.3,11009.8,14173.1,16240.5,16914.6,19286.2,19664.5
All World Markets,31125.4,26904.9,22809.6,31325.8,36863.3,40974.1,50791.7,60874.4
Credit Default Swaps, - ,918.9,2191.6,3779.4,8422.3,17096.1,34422.8,62173.2

US GDP Source: Bureau of Economic Analysis (link)
Credit Default Swaps Source: ISDA (link)
Equity Market Capitalizations: World Federation of Exchanges (link)

Sunday, September 21, 2008

Credit Default Swaps: 89 Times Bigger Than $700 Billion

A couple of years ago I took an interesting course called “Credit Risk Management” where we learned how to calculate some of the more arcane derivatives such as interest rate caps, floors, and swaps, and credit default swaps. It's an extremely fascinating science in risk mitigation.

Credit default swaps (CDS) are a risk mitigation technique. A CDS is an insurance policy against bankruptcy. More specifically, an entity enters into a CDS contract to insure against another entity’s debt (credit) becoming worthless. To calculate a CDS, you must know the entity’s probability of failure and probability of survival for each period of the CDS contract. Throw in t-bill yield curves, future rates, spot rates, discount functions, and you can begin to calculate the basis point spread (margin) between what the debt (bond) is currently trading for, and what you think it “should” trade for given its bankruptcy risk.

A scary document from the ISDA (here)

According to International Swaps and Derivatives Association, the notional value (essentially, the face value or underlying value) of CDSs was $62.2 trillion and growing rapidly. Said another way, if all the companies listed on the stock market went bankrupt tomorrow, someone (like AIG, or now the American people) would have to pay out $62.2 trillion dollars even though the entire worldwide stock market is valued at between $20 and $30 trillion. By comparison, the mortgage market – which has caused the greatest economic crisis since the Great Depression
is a mere $7 trillion and falling. (Source). Another scary number on that ISDA document: $382 trillion – the notional value (the underlying value at risk) of all interest rate derivatives outstanding. On their most basic level, think of an interest rate derivative as the transaction you went through to fix your variable mortgage or student loan. On a whole the derivatives market is around $450 trillion dollars (or 12 times larger than all the economies on earth put together).

So what happens when that $450 trillion starts sloshing around? What happens when an interest rate lowers or raises higher than expected, or when mortgage backed securities go belly-up, or when major companies begin to go bankrupt? I can’t think of anything less than economic catastrophe. We're already seeing companies that pay out CDSs beginning to go bankrupt, and the SEC declared no short selling financial stocks to keep other companies that pay off CDSs from going bankrupt like AIG. AIG was the largest backer of CDSs. Check out an article from February of this year (here). Then follow that up with an article from last week (here). People spoke about AIG’s exposure to CDSs earlier this year, and sure enough, AIG went bankrupt this month.

I encourage others to read more about CDSs, about AIG, and about the dollars associated with these derivatives. It makes you quickly realize that President Bush’s $700 billion is 1) directed precisely at the derivatives market, and 2) grossly and incomprehensibly under funded. $700 billion is 1/645th of $450 trillion. Now I realize what Bush, Bernanke, and Paulson mean when they say: “There is a much greater risk to doing nothing.”

Saturday, September 13, 2008

10,000 Visitors and Counting

It seems only yesterday we started this blog. But lo and behold, the official "site meter" at the bottom of this page registers 10,300+ visitors. Wow! To be fair, probably a quarter of those are me...

Friday, September 12, 2008

To Politick or Not?

I'm tempted to interject a few political jabs from the "independent voter" p.o.v. It is, after all, the height of the election season. But how to do it cleanly and insightfully on this blog dedicated to family? Any suggestions? Yes? No? Here's an example of something I'm dying to point out: Sarah Palin said Georgia should be a NATO member, and that she would then attack Russia if Russia invaded Georgia. Sarah Palin would go to war with Russia. Russia, a super-power with as many nuclear missiles as America. Russia, a fiesty country of 150 million people with a long history of distrust towards America. Russia, who for the last 20 years we've had cordial relationships with. Georgia, a pleasant little country the size of West Virginia with a population the size of the greater El Paso area.

To bring it home a bit, I think of that Sting song: "I hope the Russians love their children too." I know I love my little fuzzy headed, Precious Moments(tm)-eyed bundle of joy. Am I prepared go to war with Russia because a sub-clause of an antiquated alliance of nations formed solely to defend against a dead Soviet Union says we must attack? Heck no. I don't think of myself as an effete non-patriotic independent wacko, but the continuation of aggressive foreign policy from the GOP has me a little on guard. The Russians insist they are being "swift boated." They say they were protecting people from a Georgian offensive and that we don't see the whole story. Whether or not I believe Russia's side is irrelavent. What is relevant is whether or not we would attack Russia based on incomplete information. What is relevant is the shift in America's foreign policy that has now made such a possibility worth discussing. The GOP's tough talk on protecting the world by military force, and their cavalier attitude towards invading Russia if something similar happened to Georgia (not mentioning the differing geopolitical points of view of the situation) has me concerned about the possible perpetuation of the GOP's current foreign policy platform.

Saturday, September 06, 2008

Little Jude

Little Jude sleeps 20 hours a day, whines and squeeks several times an hour, poops about 4 times a day, and smiles (aka, stretching his face muscles) about 2 times a day. He's the cutest thing we've seen in a while. Rachel and I are constantly impressed with the little sweet spirit that we brought into this world. Last night at Chevy's (chain tex-mex restaurant), a waitress came over, told us her brief life story, and continued to recommend we have more kids, because "people who have cute kids usually only have one kid... and that's going to be really bad for America's future, if you know what I mean." (note, that is verbatim). Today at Costco, the 80-year old lady serving potato salad samples told us 1) that we shouldn't take Jude out so early in his life, 2) take care of your wife because she's no doubt in great pain, and 3) "back in my day child birth was a horrendous experience; we had to stay in the hospital for two weeks ... we used lots of ice packs." (again, that's verbatim).

We really do appreciate all of the suggestions. We may or may not use them. But at the very least they make good potential blog posts and topics of conversation.
Jude is a cutie. We're already sad that his first couple of infant weeks will quickly pass. But we're also looking forward to the next stage of development. And eventually, for the time when Jude and dad can play checkers.