The Bottom of the Subprime Market and Other Musings

Let me be the first to officially declare the bottom of the subprime market. It seems that Bear Stearns - once the most respected bond house on the Street, now a joke since it kicked off the subprime implosion with the failure of two of its hedge funds last summer - has taken a reported $1 billion bet against the subprime market. In other words, Bear - which bet heavily on subprime in its ironically named High-Grade Structured Credit Fund and High-Grade Structured Credit Enhanced Leveraged Fund - is now betting that subprime will get worse.

On the fundamentals, I concur. But it's tempting to bet against Bear betting against subprime, so badly have they miscalculated the sector in the past. Bear posted its first-ever quarterly loss in the fourth quarter of last year on subprime losses, and has been courted by Chinese securities giant Citic, among others.

I've cruised the Caribbean fairly extensively, and it's common for the islands and the Mexican and Central American ports to readily accept dollars in lieu of local currency. But now, we Americans, long accustomed to everyone else in the world speaking our language and accepting our currency, are getting a taste of our own medicine.

Increasing numbers of businesses in New York City are reported to be accepting euros, pounds and other foreign currency, something that was unheard of not long ago. The hordes of Europeans flocking to the US to vacation and shop, taking advantage of unprecedented exchange rates in their favor, are bringing their euros into Big Apple shops - and the shopkeepers are accepting them. In fact, some aren't even bothering to exchange them, holding them instead for their own next trip abroad.

It's a far cry from the time not too many years ago when I booked a room in a London boutique hotel overlooking Hyde Park for my family. The hotel was running a special where it charged the rack rate in US dollars, effectively creating a one-for-one exchange rate between the dollar and the pound. At that time, $1.42 would buy a pound; now it takes $1.95, and it took $2.11 in November. We won't see those specials again for a while, but the Europeans and Brits are getting great deals here. Maybe we should send the tax rebates to them - they'll spend them.

On that topic, a survey by American Century Investments, the mutual fund giant headquartered right here in Kansas City, finds that more than half of respondents plan to save their tax rebates or pay down debt, as I've predicted all along (and as was the case with the post 9/11 rebates, in spite of what the revisionist historian Hank Paulson says). As I've noted earlier, what else do politicians expect when they throw cash at people when they lack confidence about their financial future?

According to the survey results, 36% of Americans will reduce debt with their rebates, while 25% will sock them away. Just over a quarter - 27% - said they plan to immediately spend the money. So even if the entire plan were devoted to the rebates, that would provide a spending boost of just $410 million, or 0.0003% of GDP. Problem solved.

One last musing: it's been entertaining to see all the TV stars, movie stars, rock stars and authors endorse this year's slate of presidential hopefuls. It wasn't that long ago that endorsements were made by newspapers, labor unions, trade associations and other politicians. Now, we've got Oprah, Robert DeNiro, Chuck Norris and Donny Osmond publicly backing candidates, and author John Grisham has thrown his, er, pen into the ring. This should be a criterion for the right to vote: if you are actually inclined to say, "Gee, Candidate X is good enough for Chuck Norris, so he's good enough for me," you shouldn't be allowed in the booth.

Now if you'll excuse me, I need to call a press conference to announce my endorsement for president - I want my 15 minutes on TV.