The New York Times has reported that Bank of America recently circulated a confidential proposal to select members of Congress warning that the losses from mortgage related writedowns could exceed 789 billion dollars.
From the article: Bold my emphasis, Italics my add.
"To prevent that, Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates." Is it just me, or are we rewarding people for having bad credit or lying about their ability to repay by forgiving debt and giving them lower rates? Why doesn't EVERYONE deserve this?
"“We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market,” the financial institution noted." Ok, now this one just makes me laugh.
Ok, people, the real point here is in the number -- 789 Billion Dollars-- that Bank of America floated in Washington. Could it be that the insiders have known all along that this crisis will result in over a HALF TRILLION dollars in losses? Why would they float this number privately, but continue to publically support the notion that the worst is behind us?
Because the worst is not behind us. Not by a long shot. We've got 3 more years of this, at a minimum. Housing values on a national level are going to come down 50 to 60 percent before you even begin to sniff the bottom. The real question is who is going to be dragged under this bus and how long will the bottom last.
Stay tuned.
What Are the Banks Really Doing?
Many thanks to Housing Doom for the post that spawned this comment:
"About one year ago, I read an article that stated the lenders don’t want to sell because that would translate into a loss on paper. However, as long as they hold the property, it is an ASSET! I suspected this a long time ago, even though the press and realtors told me that the banks don’t want to hold the properties….blah, blah, blah. It’s all about perception, not reality. They don’t care it the place falls down, just as long as they look good on paper."
It's an interesting point, and one that seems to make some sense (even though it's evil).
Most of the large mortgage providing banks such as Bank of America, Washington Mutual and Countrywide, Wachovia, Chase, Citigroup and smaller regional banks like National City are insolvent or very close to it because of the multi-billion dollar mortgage writedowns, the explosion of loan-loss reserves on their books and the billions more writedowns to come.
Couple this with the plethora of stories about entire blocks of foreclosed properties not on the market yet and properties where the banks are "sitting" on offers for 3 months or more, and you can see the value of that statement. They need to hold assets on their books and this is an easy way to do it.
But it's not the right thing to do. Not by a long shot. It only adds to the problem. The longer they keep homes on the books, the longer those homes remain vacant. The longer they remain vacant, the higher to probability that the homes fall victim to vandalism, squatting, drug dealing and disrepair. I don't need to tell anyone what that does to the values of the surrounding areas not to mention the bad karma. This also greatly decreases the chance that the home or any of the homes in the area will ever sell, and if they do... for pennies on the dollar. Add to this the 1 million homes that builders are already on pace to build this year (but in 2007 new homes sold at a 600K pace, so they are currently STILL building 40% more new housing than they need), the foreclosures that do hit the market and the existing level of inventory... throw in the credit crunch for good measure and see what happens.
This is frightening, folks. The banks are perfectly willing, if you believe this theory, to perpetuate the spiraling housing market to keep assets on their books to stay solvent. At the same time, they are petitioning the government to take their bad assets. Fed short term borrowing is at record levels and leveraged buyout deals are falling apart due to lack of funding.
Believable? You do the math.
"About one year ago, I read an article that stated the lenders don’t want to sell because that would translate into a loss on paper. However, as long as they hold the property, it is an ASSET! I suspected this a long time ago, even though the press and realtors told me that the banks don’t want to hold the properties….blah, blah, blah. It’s all about perception, not reality. They don’t care it the place falls down, just as long as they look good on paper."
It's an interesting point, and one that seems to make some sense (even though it's evil).
Most of the large mortgage providing banks such as Bank of America, Washington Mutual and Countrywide, Wachovia, Chase, Citigroup and smaller regional banks like National City are insolvent or very close to it because of the multi-billion dollar mortgage writedowns, the explosion of loan-loss reserves on their books and the billions more writedowns to come.
Couple this with the plethora of stories about entire blocks of foreclosed properties not on the market yet and properties where the banks are "sitting" on offers for 3 months or more, and you can see the value of that statement. They need to hold assets on their books and this is an easy way to do it.
But it's not the right thing to do. Not by a long shot. It only adds to the problem. The longer they keep homes on the books, the longer those homes remain vacant. The longer they remain vacant, the higher to probability that the homes fall victim to vandalism, squatting, drug dealing and disrepair. I don't need to tell anyone what that does to the values of the surrounding areas not to mention the bad karma. This also greatly decreases the chance that the home or any of the homes in the area will ever sell, and if they do... for pennies on the dollar. Add to this the 1 million homes that builders are already on pace to build this year (but in 2007 new homes sold at a 600K pace, so they are currently STILL building 40% more new housing than they need), the foreclosures that do hit the market and the existing level of inventory... throw in the credit crunch for good measure and see what happens.
This is frightening, folks. The banks are perfectly willing, if you believe this theory, to perpetuate the spiraling housing market to keep assets on their books to stay solvent. At the same time, they are petitioning the government to take their bad assets. Fed short term borrowing is at record levels and leveraged buyout deals are falling apart due to lack of funding.
Believable? You do the math.
Slipping Deeper into Doo-Doo
Ok, so the title of my post is a little childish. I get it. But when you think about it, so is the ever upbeat reporting of the current financial crisis.
Take this article from Reuters, quoting Ara Hovnanian as saying that housing values should stabilize in the second quarter, with a rebound in sales by Spring of 2009.
"The head of the Red Bank, New Jersey-based home builder said he sees U.S. home prices stabilizing in the first half of this year and that prices likely remain constant for a "couple of quarters." But where will they go after that, oh great one?
"He said sales will sharply rebound once the excess inventory of new homes is sold."
"At the end of 2007, the supply of new homes for sale stood at 9.6 months, according to the U.S. Commerce Department, more than double what is considered a healthy supply."
Ok, so does anyone see the contradiction here? We've got darn near a 10 month supply of new homes available and builders haven't stopped building. Couple that with the supply of existing homes, foreclosures that are soon to be on the market, natural relocation statistics, the contraction of credit and the fact that we have a wildly overpriced housing market, even with the current decline and ... well... I guess it's easy to make predictions when you're already a billionaire.
Take this article from Reuters, quoting Ara Hovnanian as saying that housing values should stabilize in the second quarter, with a rebound in sales by Spring of 2009.
"The head of the Red Bank, New Jersey-based home builder said he sees U.S. home prices stabilizing in the first half of this year and that prices likely remain constant for a "couple of quarters." But where will they go after that, oh great one?
"He said sales will sharply rebound once the excess inventory of new homes is sold."
"At the end of 2007, the supply of new homes for sale stood at 9.6 months, according to the U.S. Commerce Department, more than double what is considered a healthy supply."
Ok, so does anyone see the contradiction here? We've got darn near a 10 month supply of new homes available and builders haven't stopped building. Couple that with the supply of existing homes, foreclosures that are soon to be on the market, natural relocation statistics, the contraction of credit and the fact that we have a wildly overpriced housing market, even with the current decline and ... well... I guess it's easy to make predictions when you're already a billionaire.
Ara Hovnanian
I want some of whatever the hell this guy is smoking.
So let's move on...
The Philadelphia Fed Index declined yesterday from -20 to -24. As expected, "Wreconomists" got it all wrong. Expecting a rise to -10 (and that would be better?), many wreconomists were rather dismayed by the report.
"As far as this indicator is concerned, a recession, and a severe one at that, is already underway," said Paul Ashworth, at Capital Economics."
"The headline index is now consistent with a deep recession, if sustained at this level," said Ian Shepherdson, chief economist at High Frequency Economics in a note."
"It is one of the earliest readings on the U.S. economy in the month and has had a solid track record at predicting national manufacturing and future trends in actual output."
"The collapse in the outlook for activity six months out was particularly worrisome Merrill Lynch said. It posted the steepest decline in the 40-year history of this report, suggesting the United States is facing a recession on par with the early 1990s downturn rather than the milder 2001 contraction." Might I go out on a limb here and say on par with an even deeper recession... one that many of us don't remember?
Benjamin Tal, senior economist at CIBC World Markets "estimates 30% of below-prime mortgages taken out in 2006, including subprime and other exotic mortgages, are already in a negative equity position and that figure could climb to 50%. The urge to walk away from their homes will be high." Yep. Short lived this recession will be. Housing prices... no problem. They're gonna rebound in July this year!
Are Fannie and Freddie the next to fall?
As the credit crisis continues, a couple of thoughts come to mind. Sobering thoughts.
Fannie Mae and Freddie Mac have all but been completely cleared to start taking on much larger mortgages. As high as $700,000 in some areas. FHA has been cleared to do the same. All of this is done under the guise of "helping" distressed home owners in default of their current mortgages.
Conventional wisdom (or the government) is telling us that these higher loan limits will enable those in default or close to default to refinance their loans into "safe" and lower fixed rate mortgages. Of course, this should help to stem the tide of foreclosure, shore up the beleaguered housing market and help to end the subprime crisis all the while keeping the U.S. from falling into a recession.
Now... wouldn't that be nice. Unfortunately... conventional wisdom does not apply here.
Fannie and Freddie have already posted MULTI-BILLION DOLLLAR LOSSES. All due to the fact that foreclosures on their books are at record levels. Now, let's add mortgages that are almost THREE TIMES THE SIZE of the median home price in the country. Mortgages that are either in default or about to go into default. Let's burden the GSE's with these toxic buyers. Oh yeah, and add on a heavy dose of depreciating assets.
What do YOU think will happen. It's clear to me, as it should be clear to everyone out there, that the government has absolutley NO idea what to do with this crisis. It's also very clear that Wall Street is not running for cover, but DIVING for it.
The thought that we are about to dump this problem on Fannie Mae and Freddie Mac should be a very sobering one.
Fannie Mae and Freddie Mac have all but been completely cleared to start taking on much larger mortgages. As high as $700,000 in some areas. FHA has been cleared to do the same. All of this is done under the guise of "helping" distressed home owners in default of their current mortgages.
Conventional wisdom (or the government) is telling us that these higher loan limits will enable those in default or close to default to refinance their loans into "safe" and lower fixed rate mortgages. Of course, this should help to stem the tide of foreclosure, shore up the beleaguered housing market and help to end the subprime crisis all the while keeping the U.S. from falling into a recession.
Now... wouldn't that be nice. Unfortunately... conventional wisdom does not apply here.
Fannie and Freddie have already posted MULTI-BILLION DOLLLAR LOSSES. All due to the fact that foreclosures on their books are at record levels. Now, let's add mortgages that are almost THREE TIMES THE SIZE of the median home price in the country. Mortgages that are either in default or about to go into default. Let's burden the GSE's with these toxic buyers. Oh yeah, and add on a heavy dose of depreciating assets.
What do YOU think will happen. It's clear to me, as it should be clear to everyone out there, that the government has absolutley NO idea what to do with this crisis. It's also very clear that Wall Street is not running for cover, but DIVING for it.
The thought that we are about to dump this problem on Fannie Mae and Freddie Mac should be a very sobering one.
The Big 'D' Word - If it's not likely, than why are we using it so much?
It's the 800 lb. gorilla in the room. No... not your retirement nest egg and the fact that you're not contributing near enough to your IRA... the other gorilla, the Depression one.
You see, it seems that every CEO, Politician and Economist out there is going out of their way to note that even though the similarities exist between today's Wreck-Onomics and the Wreck-onomics of past crises, we will avoid a depression and most likely only have a minor recession.
Let's recap:
Subprime Crisis - Only contained to subprime
Ooops... well what we meant to say was that hybrid option arm and negative amortization loans to borrowers with prime credit are lumped into that, so it may spread, but no further.
Home Prices - apprecation will slow to a more normal level, but not go negative.
Oooops... well... of course in areas where the appreciation was abnormal the resulting depreciation will look negative, but the homes will remain above their original value and will most likely be contained to small geographical areas.
Ooops... well.... what we didn't realize at the time is that almost 50% of the new homes built were speculative buys, and once those people exited the market it would drag new construction down like a body in the Hudson chained to cinder blocks.
Ooops... looks like this is spreading into the prime sector... now we need help.
Ok... I could go on and on (and usually do), but I think you get the picture.
Here we have another article from a global economist touting the possibility of a depression. This being the most bearish so far... but the shoes are still dropping...
Bold is my emphasis, italics my add.
"Fear that a hobbled banking sector may set off another Great Depression could force the U.S. government and Federal Reserve to take the unprecedented step of buying a broad range of assets, including stocks, according to one of the most bearish market analysts.
That extreme scenario, which would aim to stave off deflation and stabilize the economy, is evolving as the base case for Bernard Connolly, global strategist at Banque AIG in London.
"Avoiding a depression is, unfortunately, going to have to involve either a large, quasi-permanent increase in the budget deficit -- preferably tax cuts -- or restoring overvaluation of equity prices," Connolly said on Monday. In other words, we've got a tremendous bubble that has burst, and the only way we can save ourselves from depression is to either skyrocket our already volcanic deficit, or artificially inflate our markets, creating another asset bubble. Isn't this how we got into trouble in the first place?
"If conventional monetary policy is not enough to produce that result, the government may have to buy equities, financed by the Fed," Connolly said. The government may have to play the market? This is a horrifying thought.
While Connolly already sees some parallels with the 1930s, he expects that a more pro-active central bank and government will probably help avert a repeat of that scenario today. Here's the "feel-good denial phrase".
The build up of a credit bubble in recent years was similar to the late 1920s run-up to the Great Depression, he said. Sound familiar?
Then, investors were very optimistic about new technologies, and stocks rose against a backdrop of low inflation, and a trend toward globalization. There was even an equivalent of the modern day subprime mortgage debt meltdown in the form of U.S. loans to Latin American countries which had to be written off.
"The big difference is the attitude of central banks and specifically the attitude of the Fed," Connolly said.
However, Fed rate cuts alone are unlikely to avert a prolonged period of economic weakness because the danger still exists that a burdened banking sector will choke off credit to consumers and households. This is already happening, and in a big way.
"The Fed probably can't fix it all on its own now," Connolly said. "There is a chance the Fed gets forced into unconventional cooperation with government," which could involve buying a range of assets to reflate their value. That's right, folks. Let's artificially inflate assets once again. My god... if there was ever a case for Wreck-Onomics, this is it.
That would be reminiscent of some steps the U.S. government took in the 1930s when the economy was mired in deflation and high unemployment.
Either way, investors face bleak prospects now without some kind of further government intervention, he said.
Those steps might offer clues to investors in stocks and commodities, which Connolly expects the government might be ultimately force to step in and buy to stabilize markets. He expects that a depression may be averted, but only by the state and the Fed reinflating the price of such assets.
Beleaguered housing, non-government fixed-income securities and even the now overvalued Treasury market have little hope of generating substantial returns for investors over the next few years, he said.
"If we don't avoid depression, the only thing worth holding is cash," he added."
You see, it seems that every CEO, Politician and Economist out there is going out of their way to note that even though the similarities exist between today's Wreck-Onomics and the Wreck-onomics of past crises, we will avoid a depression and most likely only have a minor recession.
Let's recap:
Subprime Crisis - Only contained to subprime
Ooops... well what we meant to say was that hybrid option arm and negative amortization loans to borrowers with prime credit are lumped into that, so it may spread, but no further.
Home Prices - apprecation will slow to a more normal level, but not go negative.
Oooops... well... of course in areas where the appreciation was abnormal the resulting depreciation will look negative, but the homes will remain above their original value and will most likely be contained to small geographical areas.
Ooops... well.... what we didn't realize at the time is that almost 50% of the new homes built were speculative buys, and once those people exited the market it would drag new construction down like a body in the Hudson chained to cinder blocks.
Ooops... looks like this is spreading into the prime sector... now we need help.
Ok... I could go on and on (and usually do), but I think you get the picture.
Here we have another article from a global economist touting the possibility of a depression. This being the most bearish so far... but the shoes are still dropping...
Bold is my emphasis, italics my add.
"Fear that a hobbled banking sector may set off another Great Depression could force the U.S. government and Federal Reserve to take the unprecedented step of buying a broad range of assets, including stocks, according to one of the most bearish market analysts.
That extreme scenario, which would aim to stave off deflation and stabilize the economy, is evolving as the base case for Bernard Connolly, global strategist at Banque AIG in London.
"Avoiding a depression is, unfortunately, going to have to involve either a large, quasi-permanent increase in the budget deficit -- preferably tax cuts -- or restoring overvaluation of equity prices," Connolly said on Monday. In other words, we've got a tremendous bubble that has burst, and the only way we can save ourselves from depression is to either skyrocket our already volcanic deficit, or artificially inflate our markets, creating another asset bubble. Isn't this how we got into trouble in the first place?
"If conventional monetary policy is not enough to produce that result, the government may have to buy equities, financed by the Fed," Connolly said. The government may have to play the market? This is a horrifying thought.
While Connolly already sees some parallels with the 1930s, he expects that a more pro-active central bank and government will probably help avert a repeat of that scenario today. Here's the "feel-good denial phrase".
The build up of a credit bubble in recent years was similar to the late 1920s run-up to the Great Depression, he said. Sound familiar?
Then, investors were very optimistic about new technologies, and stocks rose against a backdrop of low inflation, and a trend toward globalization. There was even an equivalent of the modern day subprime mortgage debt meltdown in the form of U.S. loans to Latin American countries which had to be written off.
"The big difference is the attitude of central banks and specifically the attitude of the Fed," Connolly said.
However, Fed rate cuts alone are unlikely to avert a prolonged period of economic weakness because the danger still exists that a burdened banking sector will choke off credit to consumers and households. This is already happening, and in a big way.
"The Fed probably can't fix it all on its own now," Connolly said. "There is a chance the Fed gets forced into unconventional cooperation with government," which could involve buying a range of assets to reflate their value. That's right, folks. Let's artificially inflate assets once again. My god... if there was ever a case for Wreck-Onomics, this is it.
That would be reminiscent of some steps the U.S. government took in the 1930s when the economy was mired in deflation and high unemployment.
Either way, investors face bleak prospects now without some kind of further government intervention, he said.
Those steps might offer clues to investors in stocks and commodities, which Connolly expects the government might be ultimately force to step in and buy to stabilize markets. He expects that a depression may be averted, but only by the state and the Fed reinflating the price of such assets.
Beleaguered housing, non-government fixed-income securities and even the now overvalued Treasury market have little hope of generating substantial returns for investors over the next few years, he said.
"If we don't avoid depression, the only thing worth holding is cash," he added."
My point, exactly.
Monetary Disorder - Yep, That's What It Is.
Now, we don't want to jump on the "the world is finished" band-wagon too quickly, but truth-be-told, there are some significantly compelling arguments out there that are and have been warning us of the down side risks out there. Most notably, the banking system. Not just here at home in America, but world-wide.
Seems that the Fed is fighting a systemic virus with antibiotics like TAF and lowering the discount rate as quickly as possible. Problem is... antibiotics don't kill viruses. The only way to survive a viral attack is to wait it out and hope the damage isn't too great.
Of course, this kind of announcement from the Federal Reserve would spark darn near a riot in the credit markets and the stock markets here and abroad. Traders want the market propped up. As "Fernando" said "It is always better to loook goood than to feeeel good", and that's what the markets want. It's quite apparant they don't feel good.
For now, the media will continue to splash headlines touting the expertise and fundamental prowess of those who would make our "Subprime Headache" go away, but I leave you with the following excerpt from Prudent Bear... one which is both compelling, factual, believable and frightening. You can view the entire article here.
Bold is my emphasis, italics my add:
"Well, I believe the dam broke in January. The leveraged players were hit with losses from all directions. Their long positions were immediately slammed with simultaneous bursting Bubbles round the globe. Meanwhile, a rush to unwind positions led to upward pressure on the heavily shorted sectors, only compounding the leverage speculating community’s predicament. Last year fostered an extraordinary dynamic of ballooning “crowded trades,” and January saw the bursting of this multifaceted Bubble. In other words, traders are betting heavily against this market, but over-speculation on the dips is killing them. They are getting caught with their hands in the cookie jar.
The leveraged speculating community has suffered the occasional tough month – last August providing a recent case in point. Each time, however, performance quickly bounced back. In true Bubble fashion, each quick recovery from a setback emboldened all involved; industry fund inflows not only never missed a beat – they accelerated. Yet a strong case can be made today that this (historic) Bubble has now burst – that last year was the “last gasp” before succumbing to New Post-Credit Bubble Realities. I don’t expect performance to bounce back, while I do foresee a flight away from the leveraged speculating now beginning in earnest. With “crowded trades” unraveling virtually across the board, marketplace risk is now escalating significantly for leveraged strategies in general. Systemic liquidity issues and dislocated market conditions have created an environment where there is seemingly no place to hide. The bubble has burst in earnest, and there is no trade out there that is a comfortable place. Hedging and even arbitrage are not effective, no one "trusts" the market.
Importantly, a leveraged speculating community “unraveling” would prove a death blow for myriad sophisticated trading strategies and risk models, with enormous ramifications for systemic stability. There are unmistakable “Ponzi Dynamics” involved here worthy of a few Bulletins.
Going forward, I expect a foundering leveraged speculating community to be At The Heart of Deepening Monetary Disorder. The initial victims appear the fragile global equities market Bubbles and the U.S. Corporate Credit market. Forced deleveraging of hedge fund corporate debt and derivatives is in the process of creating a massive overhang of securities to sell, (see... market crash) in the process profoundly curtailing Credit Availability and Marketplace Liquidity throughout. The ramifications for our finance-based Bubble Economy are momentous. As an economic and financial analyst (as opposed to “fear-monger”), I feel it is imperative to highlight that it is more “technically” accurate to categorize the unfolding scenario in the historical context of an economic “depression” rather than “recession.” This is certainly not shaping up as a short-term inventory-led economic adjustment or “mid-cycle” slowdown. Instead, we have now entered the very initial stages of what will likely prove a deep, prolonged and arduous adjustment to the underlying structure of our Credit and economic systems. "
Yep... you read that correct. The observation has been made that this all smells of severe depression. Something Main Street either won't tell you, or is afraid to.
Seems that the Fed is fighting a systemic virus with antibiotics like TAF and lowering the discount rate as quickly as possible. Problem is... antibiotics don't kill viruses. The only way to survive a viral attack is to wait it out and hope the damage isn't too great.
Of course, this kind of announcement from the Federal Reserve would spark darn near a riot in the credit markets and the stock markets here and abroad. Traders want the market propped up. As "Fernando" said "It is always better to loook goood than to feeeel good", and that's what the markets want. It's quite apparant they don't feel good.
For now, the media will continue to splash headlines touting the expertise and fundamental prowess of those who would make our "Subprime Headache" go away, but I leave you with the following excerpt from Prudent Bear... one which is both compelling, factual, believable and frightening. You can view the entire article here.
Bold is my emphasis, italics my add:
"Well, I believe the dam broke in January. The leveraged players were hit with losses from all directions. Their long positions were immediately slammed with simultaneous bursting Bubbles round the globe. Meanwhile, a rush to unwind positions led to upward pressure on the heavily shorted sectors, only compounding the leverage speculating community’s predicament. Last year fostered an extraordinary dynamic of ballooning “crowded trades,” and January saw the bursting of this multifaceted Bubble. In other words, traders are betting heavily against this market, but over-speculation on the dips is killing them. They are getting caught with their hands in the cookie jar.
The leveraged speculating community has suffered the occasional tough month – last August providing a recent case in point. Each time, however, performance quickly bounced back. In true Bubble fashion, each quick recovery from a setback emboldened all involved; industry fund inflows not only never missed a beat – they accelerated. Yet a strong case can be made today that this (historic) Bubble has now burst – that last year was the “last gasp” before succumbing to New Post-Credit Bubble Realities. I don’t expect performance to bounce back, while I do foresee a flight away from the leveraged speculating now beginning in earnest. With “crowded trades” unraveling virtually across the board, marketplace risk is now escalating significantly for leveraged strategies in general. Systemic liquidity issues and dislocated market conditions have created an environment where there is seemingly no place to hide. The bubble has burst in earnest, and there is no trade out there that is a comfortable place. Hedging and even arbitrage are not effective, no one "trusts" the market.
Importantly, a leveraged speculating community “unraveling” would prove a death blow for myriad sophisticated trading strategies and risk models, with enormous ramifications for systemic stability. There are unmistakable “Ponzi Dynamics” involved here worthy of a few Bulletins.
Going forward, I expect a foundering leveraged speculating community to be At The Heart of Deepening Monetary Disorder. The initial victims appear the fragile global equities market Bubbles and the U.S. Corporate Credit market. Forced deleveraging of hedge fund corporate debt and derivatives is in the process of creating a massive overhang of securities to sell, (see... market crash) in the process profoundly curtailing Credit Availability and Marketplace Liquidity throughout. The ramifications for our finance-based Bubble Economy are momentous. As an economic and financial analyst (as opposed to “fear-monger”), I feel it is imperative to highlight that it is more “technically” accurate to categorize the unfolding scenario in the historical context of an economic “depression” rather than “recession.” This is certainly not shaping up as a short-term inventory-led economic adjustment or “mid-cycle” slowdown. Instead, we have now entered the very initial stages of what will likely prove a deep, prolonged and arduous adjustment to the underlying structure of our Credit and economic systems. "
Yep... you read that correct. The observation has been made that this all smells of severe depression. Something Main Street either won't tell you, or is afraid to.
Recession - Who Knew?
CNN.Money is posting that the Recession is finally here.
Oh, the suprise. A recession. No way! Couldn't happen. Not to America. Not in the land of:
"Homes for Sale! Homes for Sale! Step right up and get your No Money Down Home For Sale! Never mind your income, we don't need to see it! Never mind that you have no savings, 2 car payments, 5 credit cards, a personal line of credit and you make $45,000 dollars a year! 'Wink' - boy do we have the loan for you! What's that you say? You actually make $125,000 a year? GREAT. Sign here. It's yours. Hey, whataya say about buying another one, or even 3 more like it, cuz housing NEVER goes down, you know. It's the best investment EVER. Yep, this baby here, for a paltry $450,000 has 1100 square feet, 1 and 1/2 baths, 2 bedrooms and a postage stamp lot, both in size and shape! I'm telling you, these are FLYING out of the plan. Sold 4 yesterday to that guy over there. He works at 7-Eleven. No, he doesn't own it... sign here, here, here, here, here, here and oh yeah... here. He's the clerk! You'll probably be able to sell this a week after you close for $525,000. MINIMUM. Bought 2 myself and flipped 'em in a month. If you promise to keep it a secret, the builder is gonna raise the prices in the next phase by 15%... how's THAT for a guaranteed money-maker? Ok... I'll just take your $500 hand money check and turn this in to my Sales Manager. What's that... oh, sure... we'll wait 3 days to cash it. Payday comin' up Friday... yeah... I did that too."
HOLY CRAP people, why are we suprised about this? Why do we glue ourselves to cable vision every night and listen to "economists" and politicians and business "experts" tell us that we are going to "narrowly miss" a recession. That the labor market is still good, inflation is stilllow, and that the Fed will make us all better. Right.
WAKE UP, America. You are smarter that that! Debt is bad, any way you look at it, it's bad. I'm 37 years old. My father is 65. The difference between his generation and mine is that they believed it. Mine was taught to leverage leverage leverage. Want a car... borrow the money. You MUST get a credit card in college to establish your credit. What?!? I've got to go into debt to show I'm responsible? BAAAA-LONEY.
This country has been borrowing short to live long for 40+ years. We've been told that we can do it because the good 'ole U.S. of A's credit rating is second to none. Top notch. A+++ (that's AAA if youre a rating agency). And now that we've passed along our toxic and criminal way of investing on to our "friends" in.. oh let me see... China, Britain, Spain, Germany, Scotland, Canada, Mexico and more... how's that credit rating, America? Of course, with every new political and business cycle, we "refinance" the debt and push it off to "future generations." Our pundits and politicians cry at the podium about how much they "care" about delivering a "Better America for our children" by borrowing more now to live large. RIGHT. Unfortunately, folks, my generation is paying for it. The cards have dropped.
Now I'm not saying that we're screwed across the board, and I'm not saying that it's over by any means. But the rhetoric isn't working anymore, and our economics have become "Wreck-Onomics".
The medicine we are taking is absolutely the wrong kind. Let's lower rates while lenders tighten credit more than in the last 50 years and at the same time raise "energy efficiency" standards to the point where our raw materials prices soar through the roof. All the while, the value of the very backbone of our economy, the housing market (think of it... 70% of the economy is fueled by consumer spending... what did George Carlin say... "you got all this stuff, you buy all this stuff, and then you need to buy a house to put all your stuff in" or something like that)is dramatically declining in value and volume. So.... do the math.
Keep you cash, pay off your car if you can, buy canned goods and go ham sandwiches, America... this is gonna be a long one.
Oh, the suprise. A recession. No way! Couldn't happen. Not to America. Not in the land of:
"Homes for Sale! Homes for Sale! Step right up and get your No Money Down Home For Sale! Never mind your income, we don't need to see it! Never mind that you have no savings, 2 car payments, 5 credit cards, a personal line of credit and you make $45,000 dollars a year! 'Wink' - boy do we have the loan for you! What's that you say? You actually make $125,000 a year? GREAT. Sign here. It's yours. Hey, whataya say about buying another one, or even 3 more like it, cuz housing NEVER goes down, you know. It's the best investment EVER. Yep, this baby here, for a paltry $450,000 has 1100 square feet, 1 and 1/2 baths, 2 bedrooms and a postage stamp lot, both in size and shape! I'm telling you, these are FLYING out of the plan. Sold 4 yesterday to that guy over there. He works at 7-Eleven. No, he doesn't own it... sign here, here, here, here, here, here and oh yeah... here. He's the clerk! You'll probably be able to sell this a week after you close for $525,000. MINIMUM. Bought 2 myself and flipped 'em in a month. If you promise to keep it a secret, the builder is gonna raise the prices in the next phase by 15%... how's THAT for a guaranteed money-maker? Ok... I'll just take your $500 hand money check and turn this in to my Sales Manager. What's that... oh, sure... we'll wait 3 days to cash it. Payday comin' up Friday... yeah... I did that too."
HOLY CRAP people, why are we suprised about this? Why do we glue ourselves to cable vision every night and listen to "economists" and politicians and business "experts" tell us that we are going to "narrowly miss" a recession. That the labor market is still good, inflation is still
WAKE UP, America. You are smarter that that! Debt is bad, any way you look at it, it's bad. I'm 37 years old. My father is 65. The difference between his generation and mine is that they believed it. Mine was taught to leverage leverage leverage. Want a car... borrow the money. You MUST get a credit card in college to establish your credit. What?!? I've got to go into debt to show I'm responsible? BAAAA-LONEY.
This country has been borrowing short to live long for 40+ years. We've been told that we can do it because the good 'ole U.S. of A's credit rating is second to none. Top notch. A+++ (that's AAA if youre a rating agency). And now that we've passed along our toxic and criminal way of investing on to our "friends" in.. oh let me see... China, Britain, Spain, Germany, Scotland, Canada, Mexico and more... how's that credit rating, America? Of course, with every new political and business cycle, we "refinance" the debt and push it off to "future generations." Our pundits and politicians cry at the podium about how much they "care" about delivering a "Better America for our children" by borrowing more now to live large. RIGHT. Unfortunately, folks, my generation is paying for it. The cards have dropped.
Now I'm not saying that we're screwed across the board, and I'm not saying that it's over by any means. But the rhetoric isn't working anymore, and our economics have become "Wreck-Onomics".
The medicine we are taking is absolutely the wrong kind. Let's lower rates while lenders tighten credit more than in the last 50 years and at the same time raise "energy efficiency" standards to the point where our raw materials prices soar through the roof. All the while, the value of the very backbone of our economy, the housing market (think of it... 70% of the economy is fueled by consumer spending... what did George Carlin say... "you got all this stuff, you buy all this stuff, and then you need to buy a house to put all your stuff in" or something like that)is dramatically declining in value and volume. So.... do the math.
Keep you cash, pay off your car if you can, buy canned goods and go ham sandwiches, America... this is gonna be a long one.
Housing Bubble? What Housing Bubble?
The following quote was penned in July of 2005 by Carl Steidtmann, chief economist and director, Consumer Business, Deloitte Research.
Bold is my emphasis. (Italicized, Wreck-Onomics comments.)
"Everywhere you turn these days the buzz is about soaring real estate prices. If you are lucky enough to be a homeowner in one of the hot markets like South Florida or New York City, owning real estate is almost as good as winning the lottery. The increase in household wealth is seen by many analysts, who can’t stand the thought that someone somewhere might be doing well in this economy, as a sign of some future catastrophe to come. All the hype about a housing bubble is an excellent illustration of Benjamin Disraeli’s lament that there were ‘liars, damned liars and statisticians.’ (You mean no-one lied about their income Carl? Or the fact that they were going to occupy the residence when they were actually going to flip it?)
While many of the housing price indexes that are published by both government and industry trade groups show prices spiraling higher, you really need to be a statistician to understand what they are saying. (Apparantly you were correct about this, because no-one else understood it either. We all saw what was coming, but you, the expert... well... according to Mr. Disraeli above, statisticians were liars to. Oh, and it turns out he was right.)
When you strip away all of the white noise around a housing bubble, what you find is a robust market for housing that is undergoing several profound changes all of which manifest themselves in higher home price indexes, none of which adds up to a housing price bubble." (Just how much do they pay you for this amazing revelation, Carl?)
Don't take our word for it... watch this and see what the other "experts" had to say, both past and present. Of note are the Realtors... hmmm....
Bold is my emphasis. (Italicized, Wreck-Onomics comments.)
"Everywhere you turn these days the buzz is about soaring real estate prices. If you are lucky enough to be a homeowner in one of the hot markets like South Florida or New York City, owning real estate is almost as good as winning the lottery. The increase in household wealth is seen by many analysts, who can’t stand the thought that someone somewhere might be doing well in this economy, as a sign of some future catastrophe to come. All the hype about a housing bubble is an excellent illustration of Benjamin Disraeli’s lament that there were ‘liars, damned liars and statisticians.’ (You mean no-one lied about their income Carl? Or the fact that they were going to occupy the residence when they were actually going to flip it?)
While many of the housing price indexes that are published by both government and industry trade groups show prices spiraling higher, you really need to be a statistician to understand what they are saying. (Apparantly you were correct about this, because no-one else understood it either. We all saw what was coming, but you, the expert... well... according to Mr. Disraeli above, statisticians were liars to. Oh, and it turns out he was right.)
When you strip away all of the white noise around a housing bubble, what you find is a robust market for housing that is undergoing several profound changes all of which manifest themselves in higher home price indexes, none of which adds up to a housing price bubble." (Just how much do they pay you for this amazing revelation, Carl?)
Ok... so were off to the races and nothing about it seems unordinary. Mr. Steidtmann goes on to say:
"A financial bubble is first and foremost a monetary phenomenon. (This seems almost impossible to comprehend, but is he actually in denial about this?)
If you look at money growth in the US in the late-1920s or in the late-1990s you will see a sharp acceleration in the growth of the monetary aggregates. The same was true in Japan in the late-1980s during the Nikkei bubble. In the late-1990s, the Fed greatly expanded the amount of money in the banking system in part out of fear of Y2K related financial market disruptions. While those fears fortunately never came to pass, the money the Fed pumped into the banking system found its way to Wall Street where it sent internet related stocks soaring. Since the breaking of the internet bubble in 2001-2002, liquidity has expanded at a much more moderate pace with current growth in the monetary base running at just above 4%, a fraction of the 1999 bubble inducing levels. (Utterly amazing... this hack mentions the great depression, the 15 year stagnation of the Japanese economy and the Dot.com bubble as if they were merely "phenomenom" that really didn't happen. And he seems to completely ingore the fact that one of the conditions of the acceleration of each bubble's bursting was the unabashed and brazen liquidity pump by the Bank of Japan and the Federal Reserve. Sound a little familiar? If not, you will find that the similarities between today's economy and the Great Depression are scary.)
"The psychology of market participants in a bubble is also different from normal times. As a bubble reaches its peak the market participants are in search of the greater fool. Buyers buy only in the expectation that there is a greater fool out there who will pay a higher price. Eventually the greater fool is found and the price falls. As the market searches for the greater fool, the rising price brings out extra and sometimes unexpected sources of supply. It is this combination of increased supply (overbuilding) and narrowing demand (rising defaults creating a credit crunch) that results in the breaking of a market bubble and a fairly rapid descent in price. While there is some anecdotal evidence of market speculation, (Hmmm... here's an exerpt from an arctile in the Idaho Statesman in 2005 touting the fact that the Homebuilders were worried about speculation and that it comprised 50% of the local market. Where in the HELL did this guy get his information from? Some speculation? How about 50% of all new homes sold in 2005 were estimated to be speculative buys. How about the fact that some of the large homebuilders reported nearly a 50% drop in new home sales in 2007? This wasn't speculation? This wasn't a bubble? Good god.) most participants are buying houses because they still represent a very good long term value. "
Later on he mentions the supply of available homes:
"Financial bubbles come to a crashing end when the sky high prices lure a wave of supply onto the market that crushes demand. Were housing a bubble, the high price of existing housing should be fostering a boom in home building. (I guess the never-ending wave of 'McMansion' neighborhoods covering the hills in California, Arizona, Florida, New Jersey, Ohio, Georgia, Nevada, Virginia, Maryland, et. al. were no indication of oversupply. Nor were the ever ballooning profits of the McMansion builders who couldn't wait to raise prices by 10-15% per phase in each plan they built. NAAAWWWW.... no oversupply here, Carl.)
While new housing starts have risen steadily over the past couple of years, when adjusted for population, new home building is no where near the heights of building activity set back in the 1970s." (You mean when there was actually DEMAND for housing, and lenders required that you put money down and could demostrate your ability to repay the loan?)
"And finally, as interest rates have come down, the affordability of home ownership has gone up. Asset prices are high, but the actual cash flow cost of housing is near record lows due to low interest rates. (Ummm.... you mean record low TEASER interst rates on MTA Option Arms, 2/28 ARMS and No Income Verification loans) The share of an average American household income going to finance a new median priced house today is lower then it was at any time in the past two decades. Interest rates are going to have to rise more than a little to increase the cash flow cost of housing back to the levels seen in previous decades." (This is just nonsense. It was then and it is now. The median home price in this country has far outpaced the growth in income for over 5 years. Any "economist" with half a brain has access to these statistics.)
Of course, it's easy to Monday-Morning-Quarterback this. However, these were the experts that ignored the fundamentals. Can one economist get it wrong... sure. Interesting to note that it seems the link to his "employee" page at Deloitte Research yields... nothing.Don't take our word for it... watch this and see what the other "experts" had to say, both past and present. Of note are the Realtors... hmmm....
The "Shill" voice of Panic
Interesting enough, Robert Shiller is considered by many to be one voice of reality amongst many dreamers and kool-aid drinkers. What I find very compelling, however, is his need in this video to repeatedly mention the fact that we are NOT headed for a depression, that a depression is what the U.S. WILL, according to him, avoid. However, he points out the similarities in consumer confidence figures and housing price declines while mentioning that this time around the latter is much larger, both in asset value run-up to the bust, and potential decline.
Another commment of note is that he states that the $150 Billion stimulus package, which has yet to see the actual light of day, is approximately a 1% boost to GDP. Of course, what he doesn't mention is that that would be if those that receive the cash actually spend every penny of it buying something.
Again, here we have another world-renowned expert touting Wreck-onomics.
While in general we agree with Mr. Shiller's views on the housing crash and the impending further deflation of the asset bubble, it is clear to us that he is either denying the inevitable, or sugar-coating his fear. Most likely a little of both.
Another commment of note is that he states that the $150 Billion stimulus package, which has yet to see the actual light of day, is approximately a 1% boost to GDP. Of course, what he doesn't mention is that that would be if those that receive the cash actually spend every penny of it buying something.
Again, here we have another world-renowned expert touting Wreck-onomics.
While in general we agree with Mr. Shiller's views on the housing crash and the impending further deflation of the asset bubble, it is clear to us that he is either denying the inevitable, or sugar-coating his fear. Most likely a little of both.
Stash The Cash
The following is an excerpt from SafeHaven.com
Bold is my emphasis
Printing Money to Avoid Immediate Banking Collapse
"According to the Federal Reserve Board website, U.S. non-borrowed bank reserves have gone from $37B to $199M (nope, that's not a typo) in the last month. We have been discussing this with Sitka Pacific Capital's Mike 'Mish' Shedlock for the last two weeks. He concludes: "Banks in aggregate have now burnt through all of their capital and are forced to borrow reserves from the Fed in order to keep lending." Simply put, the U.S. banking system has no reserves. In addition, the FDIC has recently begun modernizing large-bank insurance rules. We hope this is a wake-up call to everyone as to the extent of the credit crisis. Bank account balances should be used only for transactions. Instead cash should be held in the form of U.S. Treasury Bills at a conservative brokerage or trust. Under the mattress is also perfectly acceptable (your parents or grandparents had to do it!). For investors, we advised last year to sell the banks. Banks will be soon forced to sell assets (yes, even 10 year Treasury Bonds) at deeply discounted prices to pay depositors."
These guys are actually recommending that you keep all your money in either CASH in your house, or by short term treasuries. Only use a bank account to pay your bills, i.e. checks or card transactions.
Also, pay attention to the first part...
"U.S. non-borrowed bank reserves have gone from $37B to $199M (nope, that's not a typo) in the last month."
This is an actual Federal Reserve statistic, and is quite alarming. What this means is that in the entire federal banking system, according to the Federal Reserve, banks ONLY HAVE 199 MILLION of "cash". Banks are required to keep a percentage of their assets as "reserves" which used to mean actual cash in the vault so that in the event of a run on the bank they have money to hand out to their depositors. The Fed regulates this percentage and it varies (slightly) day to day. If a bank does not have the required reserves, it must borrow them by either going to another bank (the overnite, or fed funds rate) or borrowing directly from the Fed. (the discount rate).
The fact that the entire banking system has now borrowed over 90 percent of it's reserve requirements from the Fed or other banks is absolutely Orwellian. It signifies more than a credit crunch. What it means is that the banking system is currently damn near out of money.
This is NOT a good sign. This is bad bad bad. I am seriously considering the mattress cash.
Bold is my emphasis
Printing Money to Avoid Immediate Banking Collapse
"According to the Federal Reserve Board website, U.S. non-borrowed bank reserves have gone from $37B to $199M (nope, that's not a typo) in the last month. We have been discussing this with Sitka Pacific Capital's Mike 'Mish' Shedlock for the last two weeks. He concludes: "Banks in aggregate have now burnt through all of their capital and are forced to borrow reserves from the Fed in order to keep lending." Simply put, the U.S. banking system has no reserves. In addition, the FDIC has recently begun modernizing large-bank insurance rules. We hope this is a wake-up call to everyone as to the extent of the credit crisis. Bank account balances should be used only for transactions. Instead cash should be held in the form of U.S. Treasury Bills at a conservative brokerage or trust. Under the mattress is also perfectly acceptable (your parents or grandparents had to do it!). For investors, we advised last year to sell the banks. Banks will be soon forced to sell assets (yes, even 10 year Treasury Bonds) at deeply discounted prices to pay depositors."
These guys are actually recommending that you keep all your money in either CASH in your house, or by short term treasuries. Only use a bank account to pay your bills, i.e. checks or card transactions.
Also, pay attention to the first part...
"U.S. non-borrowed bank reserves have gone from $37B to $199M (nope, that's not a typo) in the last month."
This is an actual Federal Reserve statistic, and is quite alarming. What this means is that in the entire federal banking system, according to the Federal Reserve, banks ONLY HAVE 199 MILLION of "cash". Banks are required to keep a percentage of their assets as "reserves" which used to mean actual cash in the vault so that in the event of a run on the bank they have money to hand out to their depositors. The Fed regulates this percentage and it varies (slightly) day to day. If a bank does not have the required reserves, it must borrow them by either going to another bank (the overnite, or fed funds rate) or borrowing directly from the Fed. (the discount rate).
The fact that the entire banking system has now borrowed over 90 percent of it's reserve requirements from the Fed or other banks is absolutely Orwellian. It signifies more than a credit crunch. What it means is that the banking system is currently damn near out of money.
This is NOT a good sign. This is bad bad bad. I am seriously considering the mattress cash.
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