Excuse-onomics And The Housing Bubble
Readers suggested a topic on analysts and the housing bubble. “One thing that interests me a lot about this bubble is the practice of ‘excuse-onomics’ in market analysts’/economists’ reports. Whereby 99 percent of their data point strongly to one conclusion (a housing bubble, a credit bubble, P/E ratios out of whack, etc etc), yet they grasp for and emphasize that one small piece of data that could possibly indicate otherwise.”
“What this seems to indicate is analysts lodged deeply in the pocket of Wall St., but of course that is another weekend topic suggestion.”
One wrote, “The problem is CYA. As a public economist, you get villified if you manipulate the markets, regardless of if you are right. Few economists would rant about the housing bubble in 2005 even if it was clear to the rest of us. Alan Greenspan himself could have called it a bubble and people would keep on buying houses, and once the music stopped, those without chairs would blame HIM for stopping the music, not general economic overbuilding.”
“The housing bubble collapsed of it’s own weight, as was always the outcome, and now economists are just starting to talk about it.”
Another said, “A recession looks likely and I hope that’s all it will be. I wanted the bubble to deflate or pop, so I could get a cheap house for cash. But I do not want a depression.”
A reply, “You will be able to find that cheap house for cash in due time. I bought one in the Tampa Carrolwood Village area in 1991 that was forclosed during that downturn in RE for $85,000. It was built three years earlier and the people that lost it paid $142,900. It worked for me and it will work for you, just let this mess cycle through it’s course.”
One shared this, “My dad has considered me a doom and gloomer for a while now. However, he has recently seen the light (I think). It seemed evident to me as we were driving around Lancaster, PA earlier this week. That’s an Amish area. I said, ‘The Amish have the right skills and lifestyle to make it through a recession.’”
“Normally my dad would snap back something like, ‘What are you talking about recession? There’s no way that will happen.’ This time, however, he said, ‘Yeah…they won’t skip a beat.’ Acceptance.”
One pointed to a recent report, “Inspired by this whipsaw of a Zandi report, in which he proceeds to tick off a bunch of reasons why the economy is near crisis, then up and predicts no recession because ‘employment figures’ will be good.”
One agreed, “I don’t get this Zandi guy. One moment he seems to make sense and then comes a comment like the one about employment.”
From the MarketWatch article, “The problems in the U.S. subprime mortgage market could spiral out of control into a global financial crisis, economist Mark Zandi said.”
“With a ‘high level of angst’ in the financial markets about who will take the losses from more than $1 trillion in risky mortgages, we could be just one hedge-fund collapse away from a global liquidity crisis, said Zandi, chief economist for Moody’s Economy.com.”
“‘Mounting mortgage delinquencies and defaults now pose the most serious threat to the global financial system and economy,’ Zandi said in his report.”
“‘If there is a fault line in the global financial system, it runs through the U.S. housing and mortgage markets,’ he said.”
“Here are some highlights of his forecast, based on a study using anonymous data collected by consumer credit agency Equifax: Home prices will fall 10% from the peak nationally, more in the bubble regions in California, Florida, Nevada, Arizona and Washington, D.C.”
“Home sales could bottom later this year, home construction could bottom early next year, and house prices could bottom late next year. It’ll be 2010 before the housing market could be termed ‘normal.’”
“About 17% of total mortgage debt is at risk, totaling about $2.5 trillion in subprime, Alt-A and jumbo debt. About $1.4 trillion is at serious risk of default. Investors will lose about $113 billion as $460 billion worth of mortgages default.”
“As for the U.S. housing market, Zandi expects a lot more pain, but not a recession.”
From CNN Money. “‘The ultimate outcome of the decline in mortgage credit quality is not wholly predictable,’ Moody’s Economy.com said in a July 26 report. While there are efforts being made to forestall the surge in foreclosures, ‘the downside risks outweigh the positives,’ the report said.”
“America’s era of easy money is going out with a bang - and on a global scale. ‘The fact is we live in a general equilibrium world,’ said Paul Kasriel, chief economist at Northern Trust. ‘Everything affects everything else and [the U.S. housing slowdown] is spreading to other parts of the economy and the credit markets.’”
“One of the latest bursts of market anxiety came on Thursday with news that a second Australian hedge fund, this one partly owned by Dutch financial-services giant ABN Amro, has also has run into trouble because of its exposure to U.S. subprime mortgages.”
“‘This is a global problem,’ said T.J. Marta, fixed-income strategist at RBC Capital Markets. ‘Optimists say that because the markets are global we are spreading out the gain, but also spreading any losses.’”
“‘Pessimists say that the issue will hit a psychological tipping point and because it is a global problem it will be felt broadly in many places,’ he said.”
“Central banks across the globe, but most crucially in the U.S., Japan and Europe, had cut interest rates to historic lows five years ago, in a bid to jumpstart their economies after the slump of 1990s equities bubble and years of deflation in Japan.”
“Low rates encouraged borrowers of all stripes and created a surge in global liquidity, which first helped fuel spectacular gains in assets, not least of which was the U.S. housing market bubble.”
“But rising interest rates across the globe in recent years have finally started to take their toll, economists believe. Previous campaigns to lift interest rates have typically led to financial debacles of one form of another.”
“For now, markets on Wall Street are only beginning to price in some…worst-case scenarios. ‘We have had global hedge funds, private equity and U.S. stocks driven higher by cheap credit,’ Kasriel said, ‘and all that is changing now.’”
I’ve got an “excuse-onomics” concept for you…the so-called Black Swan event:
http://en.wikipedia.org/wiki/Black_swan_theory
http://www.turtletrader.com/nassim-taleb.html
“A black swan is an outlier, an event that lies beyond the realm of normal expectations. Most people expect all swans to be white because that’s what their experience tells them; a black swan is by definition a surprise. Nevertheless, people tend to concoct explanations for them after the fact, which makes them appear more predictable, and less random, than they are….Black swans can have extreme effects: just a few explain almost everything, from the success of some ideas and religions to events in our personal lives….How would an understanding of the world …have helped anyone guess what was to happen next…the Internet bubble: not only were these events unpredictable, but anyone who correctly forecast any of them would have been deemed a lunatic (indeed, some were).”
My contention is that many (most) “Black Swan” events are actually “Grey Pigeon” events…a confluence of easy to understand, interconnected, but easy to over look variables that, when taken as a whole, are totally unbelievable but at the same time, almost undeniable. I give you both the collapse of the internet bubble and the (coming?) collapse of the housing/credit bubble. If you were truly paying attention, you would notice that the pigeons (that ones everyone else was ignoring through PERCEIVED familiarity) were acting funny, becoming more aggressive, and acting in unison. People would call you nuts, of course, because EVERYONE (even the shoeshine boy) knows how pigeons are SUPPOSED to act. Heck, economic models were even constructed on how these Grey Pigeons are *supposed*. But there comes a point in time when the flock of pigeons does something so totally bizarre and powerful, so world changing, that it can no longer be denied that something strange and scary is going on. People say “how could this have happened?”, and “we didn’t see it coming!”, and declare a “Black Swan event” has happened, but in reality, if they had been watching with their eyes instead of with their mouths, they could have predicted the outcome.
The internet bubble bust was NOT a “Black Swan Event” (BSE). It was a “Grey Pigeon Event” (GPE). If you really knew about and reflected on what was going on with the internet stocks (ie not get caught up in the mania), you could have predicted what was to happen…the same way that the people on this blog (the ones actually paying attention and not assuming that grey pigeons aren’t worth watching) predicted the events of the past two years.
The eventual credit and housing collapse will not be Black Swan Events. They will be Grey Pigeon Events.
In the middle of reading a self-congratulatory book by Benoit Mandelbrot. He convincing shows that financial markets are not a random walk (normal distribution) but fractal in nature (the blind archer distribution–it has a name after a French mathematician, but I can’t remember it).
All this nonsense about six sigma events and black swans in the market is just that.
A most beautiful book. But his point was that modeling markets without taking into consideration sigma events was financial suicide. “Volatility, far from being a static entity to be ignored or EASILY COMPENSATED FOR, is at the heart of what goes on in financial markets.” Benoit Mandelbrot (my emphasis) His example was a sigma 10 event. In this market, a sigma 3 will do more than sufficient damage.
I think you are talking about Bachelier. Although I haven’t read about this stuff for awhile, IIRC, Mandelbrot hypothesizes price changes are described by a Levy stable distribution. As I recall, the normal distribution is a special case of the Levy stable distribution, and the only one having a finite variance. Another special case is the Cauchy distribution which has an infinite variance.
This topic falls into the area of heavy-tailed distributions, which have long-range dependency and describe self-similar behavior. A simple heavy-tailed distribution is the Pareto distribution.
That’s the kind of mind clog I get for taking a grad class in financial statistics with grad students working on a degree in financial engineering.
I’m not even trained in finance or economics and I could see this coming 3 years ago even before I started reading blogs like this. This isn’t an outlier! It’s completely predictable! It’s as predictable as gravity so I don’t know what the big surprise is unless you are a complete walking lobotomy case.
I think that Getstucco should win the July quote of the month award for: 14000 we hardly knew ya.
So what are we going to get the rest of this year? Yesterday on CNBC somebody emailed from Texas and said the correction was the best thing for the market. It is a wonderful buying opportunity and that by Xmas the Dow would be at 16000. I think that long before we see 14000 again we will see 12000 or maybe even 10000.
“I think that Getstucco should win the July quote of the month award for: 14000 we hardly knew ya.”
Oh, man, how did I miss that gem? ROTFLMAO!
A team of doctors is currently working feverishly to put Goldilocks back together again. The endeavor began with the words, “Gentlemen, we can rebuild her. We have the technology. We have the capability….”
…to give her an n-trillion dollar bubble butt. Goldi got back.
I think I agree. Every week this housing credit problem will be spotlighting some bank, mortgage co, hedge fund, etc. Each time you’ll probably be seeing a drop in the market.
Looks like we already have a winner for Monday.
AHM - Bunch of bad news late yesterday. Stated they were no longer paying any dividends on their common stock and both classes of preferred due to cash crunch. Bet that one gets all the other lenders going down again on Monday. I wouldnt be surprised to see it go from 10 Friday to under 5 sometime this week. Wish I had some puts on it.
I have one put but I’m going to buy more. The way that stock trades it looks like there are a LOT of optimistic buyers keeping it up. It should have gone to 0 a long time ago along with New Century. This last headline should be the stake through it’s heart.
I’m hoping the puts aren’t too expensive Monday morning. If they are, I’ll shift over to IMB and CFC puts.
“I think that long before we see 14000 again we will see 12000 or maybe even 10000.”
WAman, I agree. And I look forward to buying more shares per month in my equity investing at 12,000 and at 10,000!
The correction this week could continue next week. I hope it will, as it will be healthy for the markets. I am building up more cash in my money market reserve in Vanguard to put another $5700 into VFINX (for my IRA) and DODFX on the first trading day in January 2008.
Most likely the DJI will be below the 2002 low before a resumption above 14K. Don’t get suckered into a NASDAQ type scenario where the losers bought all the way to the bottom with a recovery that did not see half-way back to the top. Through lots of painful trading, I have learned to let the trend get established. I have lost lots o’ dough guessing tops and bottoms. Made lots o’ dough with patience.
Yeah that would be sweet, wouldn’t it. I’d be retired for sure if that happened.
I’m shorting anything related to the American housing market but staying long basic materials and oil. I think oil is heading high but the oil companies are afraid to raise gas prices for fear of political retaliation. Why else would EXXON miss earnings this quarter? This is another nail in the Los Angeles coffin where almost everyone drives a gas guzzler. I’m expecting gasoline over $4.00 soon just on the decline of the value of the dollar even though supply isn’t going down. We are now competing with other countries for these resources and their currency is worth more dollars that ours. So, while they pay the same for oil, copper, iron and other imports, we pay more.
We’re freaking doomed.
The market creeps up higher n higher w/little fanfare until an even milestone is reached, like 13000, or 14000. Then, when it drops in a large chunk, people get all excited with prospects of buying at a savings.
Uhhh look people, just like houses, 5% off a 200% increase, especially in a few short years, is NOT a reason to light bonfires of celebration.
Perspective; a valuable commodity that cannot be bought,
only realized.
exactly. imho, dow should not be above 7000. why? too many reasons to list. but all you need to think about: are we stronger and more competitive than when we were at dow 7000?
enough said
I despise the arguement that financial engineering reduces risk by spreading it out. That would only be true if you took the same amount of risk and spread it among more folks. The problem of course is that they have created exponentially more risk, which was then spread out. So what they have really done is raise both total and average risk and created the potential for genuine systemic disaster. To see this, one need only look at that the total notional value of derivatives outstanding and especially of credit derivatives, with special attention to CDOs, CLOs and CDSs.
One result has been to put off risk to those that don’t understand it or even know it exists. The quotes from some pension fund attendees at a recent Bear Stearns CDO sales fair were frightening in their naivete. BS was trying to push them into risky CDO tranches right before the recent blowup - they waited until the last second to try to hand off the ticking timebomb. The now shelved Everquest IPO was another vehicle to push their CDO exposure onto ignorant bagholders - in this case small investors.
It would seem that informed speculators have a fairly constant demand for risk. They certainly have not reduced their risk exposure due to the existence of derivatives. The belief that financial engineering reduces risk may in fact have led them to take on even more risk. They create risky instruments, sell them on, then create even more of them. Traditional intermediaries have more risk than usual not less. Many investors have risk they don’t even understand and the total system risk is enormous.
That should be clear by the amount of damage we are seeing just from the machine grinding to a standstill. What will happen when it actually starts to unwind?
“What will happen when it actually starts to unwind? ”
Black Rain
A reason for a lot of people to get drunk.
I’m moving my investments to Low cost producers of booze.
The other forms of “sin” that will see additional business in this downturn… aren’t easy to invest in and keep my job!
Got popcorn?
Neil
Yep. You ever notice the poor always find ways to buy their cigarettes, and booze, plus gamble and buy lottery tickets. Yet they always are a month or two behind on their car and house and rent payments.
Yep…
Cigarettes… How could I forget that! Duh! Maybe because I’m a Californian and dislike smoking.. but this is money! Hmmm… time to do research.
Altria.
Check out Wintergreen Fund - almost 25% of assets in Tobacco companies worldwide. Good performance.
MO and BUD
Take a look at groceries too. Folks still gotta eat and food inflation will be great for comp store sales and revenue/profit growth.
MO and BUD OK but maybe too high end. Gotta go with the discounters. Variable cost of production of beer and cigarettes is extremely low. Noticed Miller High life selling for $2.99/6-pack in Florida (love their commercials, although they don’t make me want to buy) - also noticed their brand “Chill” next to it at some exorbitant price - nice shelving strategy. And what are Marlboros - $5? 25c/stick?
Speaking of marketing: I was thinking about what must be the greatest marketing stroke of genius in the history of business - the six-letter word that effectively doubled shampoo demand: Repeat.
Low cost “luxury” goods are supposed to do well in economic downturns. Think of the woman who can no longer afford to go out shoe shopping on the weekends treating herself to a lipstick or new nail polish.
Supposedly my great grandfather put $300 cash into his pockets EVERY NIGHT during the depression because his hair salon had one of the first permanent wave machines. North Shore women in Chicago had money…
Paul
MO now has political protection. They are a huge cash cow for politicians via the legal settlements. The low-price guys will never be allowed to grow enough to become a threat to Altria’s cash flow. Sad but true and it does pay a nice dividend.
While BUD will get hurt by folks moving down the price scale, they are more likely to benefit from that trend overall. Some of their customers will switch to Milwaukee’s Best but I’d bet far more microbrew drinkers will come down to mid-priced stuff, which is BUD’s bread and butter so to speak.
The upper middle class may be the worst impacted relatively speaking. They’ve already lost a bunch of (theoretical) home equity; now their stock and bond portfolios are getting hammered as well. Sure, the really rich will take a bigger percentage hit, but that will impact their consumption and lifestyle less. Those folks will just save and invest less of their income and consume a bit higher percentage.
It’s not really a matter of growing enough to threaten MO; it’s a matter of what is a better investment. A lot of the small companies are private, so, yes, MO, is the obvious choice.
But I think the MO story is old - it’s too well-known as a great value stock to really be one. It acts heavy, like it’s overowned by big funds, always a negative. The P/E is lower than other tobacco stocks, but not as low it has traditionally been in the past, despite slower growth recently. Why? Imperial (UK), Japan Tobacco, and others are now the more aggressive international players. The Marlboro and American cigarette cache story has played out, methinks.
Having said all that, I believe it is the only Dow stock with a negative correlation to the market, so traditionally it has been the classic out-performing bear market stock, but even that may work less well since it has become more heavily-owned as litigation threats have eased somewhat.
I primarily own MO, BUD, SWY and WAG as hedges. I intend to make the real money on my short positions but have no desire to be leveraged and short - that would just be the same mistake a lot of hedge funds are making on the long side. I was looking for diversified, non-cyclical large-cap exposure, preferably with good dividends. Basically, it’s just to keep from getting killed in a short-squeeze, of which we’ve had many.
The smaller guys have more upside potential but a lot more risk and volatility. Small-caps have been underperforming for a long time now also. There was probably also more of a takeout premium built into the smaller names.
Those longs will certainly outperform in a bear market, but that’s not where the real money is. That’s already come from shorting builders and will come from shorting financials - especially lenders, financial insurers (ABK, MTG) and underwriters (BSC, LEH, eventually GS too).
All my long positions need to do is provide some protection against countertrend rallies, not crater during the extended declines and pay a little cash dividend.
Interesting - sounds like a good strategy. Three big down days out of four is the biggest bear signal the market has given in five years.
Good post and its a subject I think about all the time .The industry increased the risk based on a faulty model of ,”Real Estate always goes up “. Real estate going up will cure all risk therefore it doesn’t matter what kind of loan we make or who we make it to . Very prudent and wise long standing loan underwriting rules went out the window .
The loan designers and loan raters applied the behavior of the people from past lending cycles to determine the behavior for people under the new lending guidelines .
One model might of been …..People will stop paying all other bills before they will let their mortgage payments default . Yes , this is a true premise if the borrower has some skin in the game and they qualified for the loan when they purchased it ,and their intent was long term owner occupied ownership of the property .
Another model might be ……… High credit score borrowers won’t default because they won’t want bad credit scores. In prior lending cycles this premise holds true . But in a market riddled with short term gamblers and bad credit risks borrowers that will default ,they will take the good credit people down with them ,especially the ones that didn’t have skin in the game .
Another model might be that the defaulting borrower will just sell or refinance and cure the default therefore there is no risk .This model is false if real estate doesn’t go up in a given year giving a out for that borrower .
Apparently the industry didn’t account for fraud or faulty appraisals in any of their models for risk factors during this easy money cycle .
Oh sorry ,I was responding to arroyogrande and somehow the above post didn’t get in the right place .
I closed on my house on May 4 of this year. I was very lucky to do so as I got a 100% loan. I was also lucky to sell my previous home in just a few days. My first is a 75% at 6.125, my second is at 8.25% and is a 5 year balloon. I wanted the balloon so I could pay down my debt as fast as possible. I have set up a spreadsheet that shows how much I need to pay in order to accomplish that. I did not have any “skin” in the game as some might put it, but I would never ever walk away from any loan that I took out! I am sure there are many people who took out a 100% loan and are just like me.
Assuming you have lots of cash reserves from your previous home sale’s profit, and that the 8.25% is fixed for 5 years, you’ll probably be OK. If not, hope your income if steady and recession proof. In 5 years (when you refi out of your balloon), 8.25% may look as cheap as 99 cent a gallon gasoline. Good luck to ya.
Got diversified assets?
Heck, HW, the whole U.S. economy has been built upon the rise of the boomers. Now that the majority of them are moving past their peak spending years, the financial landscape will suffer a major tectonic shift. Japan’s experience will look like the teaser trailer for America the movie.
“‘This is a global problem,’ said T.J. Marta, fixed-income strategist at RBC Capital Markets. ‘Optimists say that because the markets are global we are spreading out the gain, but also spreading any losses.’”
Aw, crikey, global THIS!
One of the problems with globalization is the contagion it spreads, physical and financial. What do you do when you’ve got a classroom full of kids and one of them gets sick? You send him home. You make sure he goes to a doctor, takes his medicine and doesn’t come back until he’s better and isn’t contagious. You quarantine to prevent contagion.
Wow, go to Countrywide’s website and click on REOs, I’m listing them 100 per page and there’s over 20 pages.
From the Countrywide Foreclosures blog:
http://countrywide-foreclosures.blogspot.com/
10,203 Homes Offered For Sale on Countrywide Financial’s Website
Total Asking Price: $2,036,110,172
(As of July 22, 2007)
Two billion (”book value”) of foreclosures…is Countrywide the biggest homeowner in the US?
Countrywide Financial is being hit hard by the subprime meltdown. I have a money market account with Countrywide Bank because they have 5.45% APY. Do you think they are a risk to any deposits over the 100K insured by the federal government?
I don’t know. I only know Countrywide by reputation as the “McDonald’s” of mortgages. They’ve made lots of crummy loans. If I were you, I’d pull out everything over 100K until you researched them. You can get over 5% in lots of places now.
Don
No sense in taking that risk. Many of the smaller home loan banks (successors to the S&Ls) are already in trouble. You can get decent yields (about 1% lower) in a treausry MM fund. Gets rid of default risk completely and the interest in non-taxable by state government. If you live in a state w/ high income tax, your after-tax income won’t take much of a hit and you’ll be a lot safer.
Try Vanguards prime money market. It was yielding 5.24% a few weeks ago.
I have Vanguard Prime MM Fund, but, while less risky than uninsured deposits with a single financial institution, there is absolutely no guarantee that some of these securities (large CDs, bankers’ acceptances, repurchase agreements, and commerical paper, for the most part) won’t default. In fact you can lose principal as well as interest if there was a calamity.
I would be very careful, they are no longer selling mortgages, just originating them and keeping them at a huge loss. Even your 100K will take years to get it back, until the FDIC gets around to give it back to you. Just because it’s insured it does not mean you’ll get it back the next day.
Since when is a MM fund FDIC insured in the first place? Get your money out NOW.
Countrywide has lost their mind. They are still doing the zero down nonsense. Sure, they’re requiring a little more than just a pulse these days, but the loans are still extremely risky. If I had to pick a big lender to go down, they’re my “sure thing”.
Good to know about the Vanguard money market fund. I’ve had Vanguard accounts for years. Love that company.
I just saw a so-called 9% interest rate at http://www.prosper.com/prm/lender2.htm. Read carefully and it sounds like extremely high-risk loans. Better stay clear of those folks.
It’s all good…everything is “contained.” It will be a “soft-landing” or a souffle. There are no bubbles, just balloons.
I cannot wait to see the tax bill they will soon have to pay on these properties.
I hope that a popcorn shortage does show up!
I was just looking at CA when I gave those figures, but of course, nationwide they have many more.
What’s amazing is that I see multiple properties with the same person. (investors, flippers, FB…whatever you want to call them)
Somebody provided a link to a story recently, where a flipper was losing 40 properties.
Those are the RE handling the properties.
“We have had global hedge funds, private equity and U.S. stocks driven higher by cheap credit,’ Kasriel said, ‘and all that is changing now.’”
From your lips to God’s ears, Kasriel. Let’s hope it changes for the better. From what I can see, many global hedge funds and private equity is run by a bunch of bums who I compare to kids playing with matches. No responsiblity. Look, I wouldn’t mind if their activities were contained, like gamblers in Vegas. Hell, they can pump and dump all they want to, as long as they are in their own little world and not affecting the rest of us.
Their not!. That’s the problem. Nobody knows with any degree of confidence who’s on first base and where all the promises to pay back if margin calls start. What a big scam. Who will be “out of the money” only history will tell. Smart ones you can bet have cash out and are on “vacation”. Good place to be as the fooled investors are wondering now what happened?
maria bartiromo couldn’t stop mentioning the soveriegn wealth funds yesterday. did she just learn about them or something? they aren’t doing much for mergers or the stock market right now. they aren’t doing much for MBS. why aren’t they buying houses?
Alrightey, then, who do we trust to NOT give us excuse-o-nomics? Who have the HBBers endorsed as being fairly truthful and accurate?
Fleckenstein? Gross? Who else?
I’d like to endorse one of our own, Hoz. I may not always agree, but I trust him.
I vote for Hoz if he can also get the pothole fixed on my street !
Not me, baby - I vote for Clouseau
“I’d like to endorse one of our own”
I vote The Lingus and LVLandlord.
VA Infester. My favorite idiot.
Geez, and I thought HFA held a special place in your heart!
I haven’t heard that name, The Lingus, in a long, long time.
I miss his impeccable courtesy and sunny disposition.
The Chief Economists at many of the big firms have been very, very cautious for quite a while now. In addition to Paul Kasriel at Northern Trust, take a look at David Rosenberg at Merrill and Stephen Roach at Morgan Stanley. Roach has been all over the imbalances in China’s economy and both of them basically snort with contempt anytime the word “contained” is uttered.
Though not technically an economist, homebuilder analyst Bill Cara at Credit Suisse gets special mention. He didn’t tell us anything we didn’t already know about the direction of housing. But he did quantify the problem, tell us what order things might fall and give us a roadmap of things to look for. I found it tremendously useful.
“Bill Cara at Credit Suisse”
Add Ivy Zelman to the list…
Right, Ivy Zelman. Didn’t she get in trouble for telling the truth about something or other? That’s the sort of thing that burns me up.
Ivy Zelman is no more with Credit Suisse.I think it had to do with Centex
After Ivy Zelman gave a deposition in the Lennar case being brought againt Mike Morgan, she was severed from Credit Suisse.
You’re right. It’s Ivy Zelman. Bill Cara was the independent analyst that helped publicize the research. Zelman was the senior analyst who actually wrote the report.
Gary Shilling.
GetStucco has my vote for keeping the pot always stirred with lots of good, documented stories. THANKS!
The way it looks to me (and maybe I need a reality check) is that spin and lying and covering things up has become a way of life in many areas and that this has become sort of an epidemic in society. I seem to see it everywhere, in the housing market, in politics, in the war, in immigration, in our justice system (how about that Gonzo, what a piece of work, if ever you needed someone to be truthful and above reproach, the Attorney General should be that person, but instead we’ve got a spinning toady), in financial markets, in trade, etc. It has even become admired, and I can’t understand why. Are we that badly off, or is this just perception? Because I do know a lot of very decent people who don’t do this sort of thing and I don’t think you have to spin to be successful. In fact, I would argue, if you have to spin, you’re a bum and shouldn’t be allowed any responsiblity anywhere until you straighten yourself out.
And along those lines, when I wuz a pup, if I got caught lying, I got my backside lit up good. Lying was considered cowardly and one of the worst things you could do, in my family. I’m not talking about social lies, like telling someone they look good when they look like death warmed over. I’m talking about things like whether or not I broke the car or had a party when the ‘rents were away or if I clipped something from one of my sibs.
palmetto ….I was raised the same way you were and I have the same questions you do . There doesn’t seem to be any shame anymore and it’s more like ,”catch me if you can “.
I remember a quote from a book I don’t remember the title to because it was so long ago .
” A society that does not render reward and punishment fairly is doomed to fail .”
” A society that does not render reward and punishment fairly is doomed to fail .”
Testify, Housing Wizard. And especially, if criminality, lawbreaking or undesirable acts are rewarded, then that’s what we’ll get.
They don’t need to be rewarded, just going unpunished is enough to encourage the behavior.
I think that you are on to something. Just look at the world of sports. It seems that everybody who has wealth feels they are above the law.
Hhahahah.
http://www.thestreet.com/s/wall-street-bonuses-in-peril/newsanalysis/businessinsurance/10370534.html?puc=_tscs
BWAHAHAHAHA! Well, boody-hoody-hoo! Too bad, maybe some of the big swinging d**ks won’t be able to put another crappy addition on their already oversized POS faux mansion in Greenwich.
“POS faux mansion in Greenwich.”
Some of these BSDs have NO taste or class. I cringe every time I go up north to visit and see some of the monstrosities they’ve constructed. Sheesh.
WOW - that is very telling. I see a bloodbath coming that will take out some big players.
Loose credit terms such as so-called covenant-lite loans — which contain few if any maintenance provisions that would allow an investor to ensure performance — are returning to haunt banks. When the markets were hot, banks had no choice, one banker noted, because “if you don’t extend credit on weak covenants, then you risk losing the business forever.”
I had to read that last sentence again. What a bunch of fools.
“if you don’t extend credit on weak covenants, then you risk losing the business forever.”
if you do extend credit on weak covenants, then you risk losing your business entirely.
“Here are some highlights of his forecast, based on a study using anonymous data collected by consumer credit agency Equifax: Home prices will fall 10% from the peak nationally, more in the bubble regions in California, Florida, Nevada, Arizona and Washington, D.C.”
I know of an extremely large city where prices have tripled since 9/11 … but it doesn’t make the list because it’s different there.
“Home prices will fall 10% from the peak nationally, more in the bubble regions in California, Florida, Nevada, Arizona and Washington, D.C.”
Don’t forget all the markets that were artificially propped up by “investors” from the bubble states looking for places to put their “equity gains to work.” Those markets will get whacked as well, and probably way more than the 10% national estimate.
If voodoo financing really is going away, and buyers no longer have access to an annual house ATM bonus, I think the willingness and ability to pay these prices will drive the RE market into the tank for years to come. Good. Let the FB’s enjoy their bloated mortgages and let everyone else make a sane decision for themselves & their families.
See any parallels between the handwringing and angst after a normal stock market correction and the first part of the housing bust? A small move down, just a fraction of the move up, and you’ve got hedge funds blowing up, etc., just like you had subprime lenders going belly up when the housing market hadn’t given much back pricewise.
I’ve come to think that markets today are being run by children who don’t know what adversity is.
“I’ve come to think that markets today are being run by children who don’t know what adversity is.”
Let them experience it. Experience is the best teacher. It isn’t always kind, but it usually puts a good lesson across.
“markets today are being run by children who don’t know what adversity is.”
Dang, the whole US is being run by a child who doesn’t know what adversity is, fer chrissakes.
It’s called Da Nile, and it’s in Washington DC
Dang, the whole US is being run by a child who doesn’t know what adversity is, fer chrissakes.
But see, that’s why he needs to listen in on our phone calls. It’s just his way of getting in touch with the common man.
(Excuse the politics, but it is Saturday after all.)
So howcome no one learned from the tech bust?
Greenspan.
I’ve been trying to figure that one out.
My best study case are my in-laws, who are classic bubble chasers. It seems to be a problem of a)short term memory (that Internet tech bus was *years* ago) , b)active self-deceit (I’m not investing in Pets.com this time) and c)greed. My in-laws are “saving for retirement” but that apparently means to them you need a skillion billion dollars in order to do so (rounded to the nearest whole number). I’ve been trying to figure out when exactly they will have “enough” money. Whatever that number is, it always appears to be much higher than whatever it is they have now. Consequently, they seem to require a ridiculously high return on their money and are prone to bubbles.
I’ve been trying to figure that one out.
My best study case are my in-laws, who are classic bubble chasers. It seems to be a problem of a)short term memory (that Internet tech bus was *years* ago) , b)active self-deceit (I’m not investing in Pets.com this time) and c)greed. My in-laws are “saving for retirement” but that apparently means to them you need a skillion billion dollars in order to do so (rounded to the nearest whole number). I’ve been trying to figure out when exactly they will have “enough” money. Whatever that number is, it always appears to be much higher than whatever it is they have now. Consequently, they seem to require a ridiculously high return on their money and are prone to bubble investing.
Sorry for the double post…
Amen brotha!
here is the problem. they are all pollyannas who’ve been raised and worked during the time of one of the greatest bull markets of all-time. it pays to be a buy the dipper.
what did Indiana Jones say?
yeah, that’s when the ground falls out from underneath you.
“I’ve come to think that markets today are being run by children who don’t know what adversity is.”
I’ll bet there’s a HUGE dominatrix market created by Wall Streeters. LOL! Maybe that market will fall off with bonuses.
“dominatrix market created by Wall Streeters.”
Hedgie want a wedgie?
Maybe that’s my calling. I certainly have the animosity required to humiliate.
LOL! Did I ever mention how I found this blog? I was entering key words in google for the housing bubble/bust, etc. and somehow clicked on a San Diego real estate investors forum. Some FB on there was in deep doo-doo and asking for help out of a jam he’d gotten himself into and you, txchick, gave him one helluva blistering flame. Some poster over there told the guy not to listen because you were a “Ben Jones groupie”. I had seen this blog in passing, so went back to it to see what it was all about and I’ve been here ever since. November 2005, if memory serves.
(And don’t anyone get cute here, I wasn’t looking for a dominatrix)
I wasn’t looking for a dominatrix
No, I’m sure you already had one.
Always been that way palmetto. Remember the “boom boom room” at Smith Barney IIRC back in the mid-1990s. The NYC swingers clubs were and are heavily infested with Wall Street types. The line from the Great Gatsby comes to mind: “The Rich are different from you and me.” It’s true on more than just a superficial level.
Think about the psych profile of a lot of these folks - vicious, amoral overachievers. My observation is that many are passive-aggressive, insecure and overcompensating for it. It’s a sick, sick culture and I always advised the young ladies I knew to either avoid it like the plague or get out ASAP if they were already in it.
Wow, I forgot about that boom-boom room, but now that you mention it, I remember hearing something about it from my sis who knew a number of Wall Street types. One guy in particular, who is now a minor hedgie (got a million dollar bonus this year, wonder if he’ll have to give it back?) was pretty vicious sometimes in his attitude toward others.
explain to me how a hedge fund is only 15% exposed to the mortgage market(which appears to be all mortgage bonds) and is down 10% this year while the market isn’t? does this mean they own housing stocks? maybe a few lenders and home builders? if it’s mostly your mortgage securities, wouldn’t you need a at least a 75% drop for 15% of your portfolio to put you down 10%? what am I missing?
$3 Billion Hedge Fund Is Down 10% for Year
By JENNY ANDERSON
Published: July 28, 2007
Market participants say Sowood’s credit securities were sold at a deep discount, which some in the market viewed as a fire sale, leading to speculation that the fund was in distress.
The fund was up a little more than 1.5 percent through March, according to an investor letter, showing how quickly the markets — and a fund’s returns — can turn. Marketing documents indicate that a little less than 15 percent of the portfolio’s risk is in structured credit.
http://www.nytimes.com/2007/07/28/business/28fund.html?_r=1&adxnnl=1&oref=slogin&ref=business&adxnnlx=1185648542-5DsJz1Mf+dhaKmgmFfUJRA
on your mark
get ready
get set
mark to market!
The key questions are down 10% as of when and using what methodology? If it’s 10% as of 6/30, then they’ve clearly taken a serious additional loss on top of that 10% since the risky end of the credit market has melted down. Higher rated junk is off 6% or so in July and the real garbage (CCC and below) is worse, as is anything housing-related. Even at 6%, using typical hedge fund 2.5x debt on top of equity and loss becomes 21%.
Then there is the separate issue of the normal BS hedge fund “mark to model” valuation. In that case, there could be big discrepancies between the real value and the book value.
BTW, how’s that Mississippi Company doing?
Anybody notice if crime has jumped in the NY area? People who are stressed sometimes take it out on others. I wonder what the family life is like for some of these investment bankers?
CSEs operate under Basel 2 regs for a hedge fund (which is a CSE), a 100K AAA bond requires $500 for margin. Should the bond become rated BBB the margin goes to $5K. Leverage can be a bitch.
Mark Zandi is the biggest BS artist around, when I talked to him in 12/2006, he said don’t worry the housing market will be fine. In 3/2007 he changed his mine to a small drop, this month it’s 10% drop. Any guess what he will say in 9/2007? Oppps it’s a 20% drop.
I thought the Mark Zandi had been pretty clear that he thought there was a housing bubble for quite some time. I found this quote from Nov 2005:
“While there’s disagreement on what a downturn will mean, it’s widely held that a number of factors could bring prices down. A decline in prices will track interest rates: If rates go up sharply, housing prices will plummet, said Mark Zandi, chief economist at Economy.com, an independent provider of financial research. If rates increase slowly, housing prices may ease gradually.”
About 15 years ago I was asked by a client to substitute for him on a panel session at conference after he decided to stay home rather than make the trip. I was really not qualified to fill-in for the client (he was a government official in charge of a program and I was just the external consultant who did analysis for him). Mark Zandi was one of the other people on the panel and I remember him being a very pleasant person to speak and a good public speaker who really knew what he was talking about.
I am more concerned with his analysis than his as a person. I would expect an economist at a major establishment to produce meaningful analysis, not just go with the flow, as he does. Plus my firm is paying for the analysis and listening to his nonsense back in 2006, on how the market will be fine, was just a waste of my time.
I remember reading quotes from him in the local papers in Chester county PA when he was very young in the business. Even then his calls were on the money.
Strongly disagree. Zandi has been one of the few consisten people during this bubble. He called it a bubble, warned about a crash, and now is talking about effects from the crash. I rank Zandi right up there with Robert Shiller in terms of reliability.
I really have a problem with Zandi’s assertion - a very common one if you listen to the talking heads - that everything will be just fine “bnecause the economy is fine.”
The economy is a lagging indicator. The economy was just fine in 1928, and we had fairly good employment even in 1929. By 1931 we had unemployment as a result of the credit bubble popping. Shades of deja vu.
whoops - wrong thread
“As a public economist, you get villified if you manipulate the markets, regardless of if you are right. Few economists would rant about the housing bubble in 2005 even if it was clear to the rest of us.”
Suppose an economist with high public visibility recognizes problems with the economic status quo which the masses neither perceive nor could grasp after a careful explanation. Recognizing that microeconomic behavior is heavily dependent on mass public perceptions, the economist has a very strong incentive to paint a prettier picture than he sees.
If the economist casts the status quo in a positive light, he keeps alive the possibility that his comments will encourage individual behavior which actually contributes more to the collective good than if private individuals are hunkered down in fear and trepidation.
A more frank and less rosy assessment can easily be recast by those with less insight as undue pessimism, or at worst, an effort to upend a healthy status quo. A kill-the-messenger effect may ensue.
Chicken littles were wrong at the tail end of the 1970s crisis (before the Reagan boom), during the reagan boom, and at the tail end of the Reagan boom. So put on your flak jackets and check out the following:
Crisis Investing: Opportunities and Profits in the Coming Great Depression by Douglas Casey (Hardcover - Jul 1980)
Crisis Investing for the Rest of the 90’s by Douglas Casey (Hardcover - Oct 1993) - WOW was this wrong in 1993!
What the smart money is betting on in 1985: By Doug Casey by Douglas R Casey (Unknown Binding - Jan 1, 1985)
The Coming Currency Collapse and What You Can Do About It by Jerome F. Smith (Hardcover - Sep 1980)
Profits from silver by Jerome F Smith (Unknown Binding - 1983)
How you can profit from the coming devaluation by Harry Browne (Unknown Binding - 1970)
You can profit from a monetary crisis by Harry Browne (Unknown Binding - Jan 1, 1975)
How to Prosper During the Coming Bad Years - A Crash Course on Personal and Financial Survival by Howard J. Ruff (Mass Market Paperback - 1979)
How to Prosper in the Coming Bad Years by Howard J. Ruff (Mass Market Paperback - Jul 1981)
Making money: Winning the battle for middle-class financial success by Howard J Ruff (Paperback - 1986)
Howard Ruff’s crash course for the serious investor by Howard J Ruff (Unknown Binding - Jan 1, 1987)
How to Prosper During the Coming Bad Years by Howard J. Ruff (Paperback - April 1984)
Few economists would rant about the housing bubble in 2005 even if it was clear to the rest of us. …
“The housing bubble collapsed of it’s own weight, as was always the outcome, and now economists are just starting to talk about it.”
Well there were a few voices crying in the wilderness in 2005, your know. And even in the New York Times.
Read one of the many laughable neocon attacks on Krugman’s correct bubble call in 2005
However, I do expect a 40% drop in real estate prices during the next 6 years. That includes the left coast. I have some Kool-Aid drinking friends who tell me LA is different. Lots of money from outside the U.S. buying RE there is supposed to keep prices up. Okay, so how would that explain doubling or tripling of prices in Las Vegas? San Diego? Florida? Fresno?
Fact is, the massive increases in LA prices since the Fall of 2003 or early 2004 is due to the same blind speculation the other real estate markets had all over the world. A credit bubble is a credit bubble.
I told one of my Kool-Aid drinking friends that he will get his condo in Hermosa Beach for $250,000. He does not believe me. Okay. No more than $375,000 within the next few years. Currently prices there are around $800,000 base.
No kidding. No foreign investor is buying the dumps in the middle of West LA and Venice gangland yet the prices have soared to $1000/sqft in some places. It’s young idiots who are looking for trendy places who have been given access to huge amounts of credit and who, predictably, used it all on frivolities and are going to ruin their financial futures.
Anyone have any idea why this stock hasn’t crashed, ANH (Anworth Morgage Asset Corp). It’s profile on yahoo is something like this:
Anworth Mortgage Asset Corporation operates as a real estate investment trust. It invests primarily in the United States agency, single-family adjustable-rate and fixed-rate mortgage-backed securities, and residential mortgage loans.
It looks like a prime candidate for wipeout yet its stock has remained relatively stable. I have puts on this one.
None of the previous bubbles were fueled by very lax (i.e. completely missing) mortgage standards. They were caused by monetary inflation and shifting of jobs. This one is very different. It gave fools access to trillions and they predictably blew it all on bad investments. It’s going to pop and unwind 30 years of Los Angeles decadence.