Financial Markets Wise-Up To The Housing Bubble
Here are some reports from financial markets on the housing sector. “The three-year hot streak experienced by real estate investment trust stocks may be nearing an end, two Wall Street analysts said on Monday. Merrill Lynch analyst Steve Sakwa said REITs trade at 23 times forward adjusted funds from operations compared with their three-year average of 12.4 time AFFO.”
“‘While short-term momentum may push the REITs higher, we are becoming increasingly concerned about the valuations as most metrics continue to move to all-time highs,’ Sakwa wrote. Other similarities include building sales by noted investor Boston Properties Inc. The office REIT slowed development in the late 1980, as the U.S. real-estate market headed into a depression.”
“The discovery of huge hidden losses at General Motors’s finance arm have raised fresh fears of bankruptcy at the world’s biggest carmaker, sending tremors through the credit derivatives markets. The struggling group asked for a filing delay after admitting to an extra $2bn in accounting errors at its finance arm GMAC, raising total losses last year to $10.6bn. The news triggered a sharp spike in the cost of default insurance on GMAC’s bonds, rising 75 basis points overnight.”
“Timothy Geithner, president of the New York Federal Reserve, warned in a recent speech that the $300,000bn derivatives market had raced ahead of the infrastructure needed to support it. ‘They have not ended the tendency of markets to occasional periods of mania and panic. They have not eliminated the possibility of failure of a major financial intermediary. And they cannot fully insulate the broader financial community from the effects of such a failure,’ he said. A ’significant’ proportion of total trades do not even match up, he said.”
“A Florida real estate investment company has bought a North Raleigh apartment complex with plans to convert the units to condominiums. It is a popular strategy in bigger markets, but one that is expected to trail off as long-term interests rise. ‘Lenders and the equity sources are pretty much gone because interest rates are rising and I don’t know how many months of press about the housing bubble,’ said Jason Nettles of the brokerage that represented the sale. ‘Those guys don’t want to lend with the risk of it winding up an apartment deal. It’s hard to finance a deal in Florida now, much less Raleigh. In Florida, unless you’re on the water, it’s almost impossible.”
“Despite robust wood consumption at housing construction sites throughout North America—spurred by abnormally mild weather conditions in various regions, lumber prices eased in February. March sales have continued to weaken. Richard Egelton, chief economist at BMO Financial Group in Toronto expects transaction prices to trend lower in 2006 and 2007, as North American housing construction cools.”
From TheStreet.com. “The hot Phoenix area housing market is seeing slowing sales and a dramatic spike in housing inventories, according to a research report from Raymond James. Sales of existing single-family homes and condos fell 24% year over year in February, and listings increased 939% in the same period, analyst Rick Murray wrote. ‘As prices have stagnated since August, inventory levels have continued to grow, as we suspect an increasing number of speculators are placing their homes on the market,’ Murray wrote.”
“‘It is clear speculators have headed for the exists in Phoenix. Given the increase in mortgage rates recently, it would seem as if this market will continue to face increasingly more challenging conditions, especially in light of the enormous surge in inventory,’ Murray says.”
For those that don’t know, GMAC is a big player in the mortgage business.
My poor sister has learned about GMAC. Her husband works at GM, and some financial planner (who ought to be taken out and shot) convinced her that GMAC bonds were a safe bet…
I heard some lady on some radio show last year asking for advice on her GM and GMAC bonds. This was before they really started looking bad in the mass media. The guy told her to hold them, and it sounded like she was going to listen to him.
GM might get a double whammy between their struggling auto business and the “now in process” RE bust taking place with mortgages resetting over the next two years. I think I read somewhere that a very large portion of their overall business is derived from mortgages.
Who knows, between the two stuggling entities, this might send GM down the river once and for all…. *shrug*
The GMAC mortgage loan originator in my territory always used the most dishonest, corrupt, appraiser he could find to do his deals.
F*ck you GMAC…Time to take the pipe.
GMAC tried to get a massive (thousands) pre-payment penalty out of us, but I had the original contract right there to fax them and they backed off immediately. (Always good to keep the documents in the case).
Good job Arwen!
“Sales of existing single-family homes and condos fell 24% year over year in February, and listings increased 939% in the same period,”
for a minute i thought he said listings are up 939%
That is an incredible number. The End.
I said this before and I was criticized:
There will be blood in the streets of Phoenix. 939% increase. This is unreal. Imagine if you own a business and your inventory increased by this amount. Say you owned a car dealership and this happened to you? You would be out of business in no time!
Doesn’t ‘blood in the streets’ go back to the old Rothchild quote? Pretty common useage, IMO.
Ben,
That is where I first read the quote, from an Interview with Rothchild. And I remember he said ‘Do not buy till the price came down to 20%’
That made me follow path of caution….now I hear different possiblity.
The Economist Mr. Thornborg of UCLA Anderson fame has been talking about housing bubble and market being 40% overvalued. And also the fact a high percentange, 40% ?of Cal job was tied to real estate.
On his latest inteview though, he is saying the possibility of price staying same, and seller be able to sell at todays price in 2011!!.
Is this not what all the NAR cheerleader and real estate bulls been basically saying as well: That price has reached a permanent High Platue!
The Economist Mr. Thornborg of UCLA Anderson fame has been talking about housing bubble and market being 40% overvalued. And also the fact a high percentange, 40% ?of Cal job was tied to real estate.
On his latest inteview though, he is saying the possibility of price staying same, and seller be able to sell at todays price in 2011!!.
____________________
I was wondering about that as well. Back when you could find only a little info on the bubble, Mr. Thornberg was there, trying to warn everyone. This was a few years ago, already.
I can only guess that he is aware of the potential danger of the implosion of the credit bubble, and is trying to calm the masses. Also, he might want to avoid being blamed for the housing bubble.
In southern Marin, in SF City proper, maybe some other places - owners may be able to sell in 2011 for what their places are “worth” today (and that’s not saying what prices may do in the meantime, nor is that inflation-adjusted).
For everywhere else in California, I would bet that homes will sell for less in 2011 than today.
Mr. Thornberg is just trying not to scare the shit out of everybody.
One comment: Flat for 5+ years is equivelent to the market dropping nearly 15% if inflation is just ~3%/year.
Agreed. But that is not any correction! In 2005 Alone price went up about 13% nationally and about 21% in california I think. (not exact figure..)
If I go to Zillow.com and see any southern Cal home price graph, one can what a unreal the price incease have been.
What is more interesting, the price have been risimg steadily and then from Jan 2004 onwards it took a even steeper Climb.
That is when I guess the credit Floodgate was fully open….may be there was there sign of “deflation” and FED has pumped extra money into consumers hand.
Those who did NOT buy , like me, though lost out on price gain, actually did otherwise ok. Have the same job etc. And those who was owing or bought even in 2005 ended up $100K richer , on papaer atleast. (based on average SOCAL SFR price)
Any corelation between Steeper price increase from Jan 2004 onwards and anything Fed did or said?
Anybody…please post.
Thanks to the people on this Blog, I am more curious about finances and may be even getting a feel.
Without getting the bigger picture, financial advance can be what a BEETLE on a floating and drifting woodplank achieves in trying to move forward.
Sorry but what does IMO mean?
in my opinion
Now blood in the potholes!
“It’s hard to finance a deal in Florida now, much less Raleigh. In Florida, unless you’re on the water, it’s almost impossible.’’
I’m sorry but just label me stupid. By what means would someone want to finance a Florida deal because “it’s one the water” when we are entering an age of increased hurricane activity? I guess I went to some alien school of investing!
I have even seen Lenders require extra insurance on a property in order to lend in a high risk locations as a condition of the loan .
This article points to what I feel is going to start happening ,(along with interest rate hikes ). Were going into a tight money market . The lenders will require more down , they will be tough with the underwriting /appraisals etc. They wont want to take the risk in a declining market/excess inventory market . The Lenders are kicking themselves right now for not seeing the investor driven markets .
not to correct you wiz, but the lenders will be required to require more money down, at least those that are left.
yep
Ad came in on the fax at work today (SF Bay) $1M loan for $3k / month. No doc.
Tightening appears a way off yet.
Still loose with the juice here in South Florida. You can still get the “Smart Loan from the Smart Guy” at 1% with no points and no origination fees and he’ll pay for the appraisal.
You can listen to the so-called smart guy’s schtick on http://www.wsbrradio.com every weekday at about 6:10 p.m. eastern. Good for a few good laughs…
In this environment they aren’t going to re-write their ads.
They will keep running the ads and say that unless you have a 1,000 point fico score you don’t qualify for that loan.
I know FICO’s don’t go to 1,000. That is my point.
Very True. The ads arent changing on Yahoo or anywhere else either. Still seeing mortgage ads that state Rates are at all time lows. Refi now!
Any dimwit with half a financial brain knows that rates are a higher than alltime lows.
the new credit scoring method is going to 990 that ought to slow things down.
I was talking more about A paper Lenders . But they will all tighten up some .
they aren’t hiding M-3 for nothing. I can see them ‘tightening’ by .25% for a while and at the same time continuing to flood the market with dollars to ease the housing slowdown. Don’t know where this ends…
I think this is a good point, and tend to agree. They might be tightening up on the most visible end (interest rates) while loosening up on the other (monetizing debt and/or buying debt via Caribbean hedge funds). It isn’t outside the realm of possibility, IMHO. Stealth hyperinflation…
That’s the funny part of all of this.
In a declining market, with outstanding loans to presumably protect, lenders will be choking back the pool of eligible buyers that could help to keep property values up - protecting some of their older loans.
Less loan sales volume AND increasing defaults.
In a corner 1000000 ways…
That’s it .
The Lenders are kicking themselves right now for not seeing the investor driven markets .
Oh, they all had the opportunity to see the investor driven markets alright, via reports from honest ethical appraisers. Unfortunately, all those guys were sacked from the “approved appraiser” list at the insistence of the local cabral of real estate agents, who couldn’t have somebody accurately reporting the market with the chance the truth might screw up their deals.
Have no sympathy for these people
Phoenix Summarized
7/20/2005 10748
7/22/2005 11122
8/6/2005 12196
8/9/2005 13244
8/18/2005 14087
8/27/2005 15011
9/8/2005 16106
9/16/2005 17419
9/23/2005 18226
9/30/2005 19192
10/7/2005 20052
10/14/2005 21238
10/21/2005 22302
10/26/2005 23132
11/3/2005 24193
11/8/2005 25244
11/17/2005 26261
12/3/2005 27238
1/6/2006 28224
1/11/2006 29222
1/15/2006 30415
1/19/2006 31085
1/26/2006 32142
2/2/2006 33087
2/10/2006 34234
2/17/2006 35144
2/19/2006 36260
3/5/2006 37064
3/11/2006 38011
3/18/2006 39074
40k baby
quarenta mil
orty-fay ousand-thay
phuck - we’re gonna have a 40k party next saturday.
can you feel it?
i can feel it
can you feel it?
yes you can
i like this abridged version much better.
It seems that the real estate market in OR is still doing fine. I’m not a realtor, but homes are still getting the asking price as far as I can tell. Is there a way a nonrealtor can get info on the housing market in my area?
Oregon is at the tail end of the whip…it will tank soon.
Ask a local realtor for a *written* CMA report (Competative Market Analysis) for the area you are interested in. Let the realtor know what price range you want the report to reflect.
The CMA will tell you how long each house has been on the market (although there are ways to fudge this) and any price reductions that have taken place, in both the asking price and final sales price. Good stuff.
You may have to build a spreadsheet and manually pull the stats daily.
Also try zillow.com
“Timothy Geithner, president of the New York Federal Reserve, warned in a recent speech that the $300,000bn derivatives market had raced ahead of the infrastructure needed to support it.”
$300,000bn seems too low for the credit derivatives market. Isn’t it in the TRILLIONS?
This is from a British site. I don’t think they use ‘trillion’. Probably 300,000 billions.
Originally in the UK etc. a billion was 10^12 and a trillion was 10^18. 10^9 was a milliard.
These days I think everyone accepts US usage (billion= 10^9, trillion = 10^12).
$300,000bn = $300T
How right you are. My SLO mind skipped over the last 3 zeros. 300,000 billion is = 300 T. A derivitive market that large is definetly a cause for concern.
At the FED mandatory meeting held in September 2005, with the Fed and his major co-conspirators…there were $23 tillion in “notional value” of derivatives “that contracthad been written BUT no confirmations had not been documented from June, 2005.. The boys were given until June 2006. To catch up and post those confims..And oh by the way, they hope to fix the markets (low Volitility) so NO one BLOWS up when they get the executed confimrs to give to accounting….I wonder who is on the Wrong side of those GM, Dana, Delphi & Ford Credit swaps? Issued as at nominal value of $5-10,000 /per ten million of bonds…..last trading, i believe near 275,000/ plus $50, 000 every six months for 5 years. “Send me my confirm please, so I can rush it done to “our ace Enron like accounting teams.
this from a realtor in redondo, hermosa and manhattan beach, CA
I sold four houses over the weekend, market is still pretty good
She sold them at what kind of a discount ? The high end market
is strange anyway .
In every market decline there are bagholders… those that bought just before the plunge. You may have found 4 of them this past weekend, provided the financing and appraisals come in and they don’t back out at the last minute…
tell the realtor we couldn’t give a rat’s rear end over 4 lousy fools who just bot at the top. we’ve got our eyes on the prize. phoenix, south fla, central valley calif……….
Look, at $900K+ for a 60 year old 2 or 3bd PoS near the Hyperion water treatment plant that processes the sewage for 9M people is not going to stand the downward pressure long. After a 50% haircut prices will still be $200K high. Think US median price for sub-par housing. Gonna get very ugly when people with a shred of sense start taking a hard look and saying, “It’s simply not worth it”.
A correction LOL!
>market is still pretty good
In ‘dondo, dude? Whooooaaa! “still pretty good” is a long way off from “the market is hot!”, which is what I suspect it was last fall. Can you ask your realtor friend:
A. How do things compare to the same time last year (frenzy wise, etc.)
B. Were there any price reductions in the houses that he/she sold? If so, how much?
Also, are we talking $500K condos or $900K houses?
Just got an email telling me “Seating Almost FULL for this THURSDAY: Special Financing, Grants & 0 Interest Loans for Teachers, District/City Employees & First-Time Buyers. This TV and Radio Guru is out of the Santa Cruz-San Jose area. Check his site if you want to see the pap being peddled to make a Spring Rush start in the bay area housing market.
(us.f821.mail.yahoo.com/ym/ShowLetter?MsgId=7838_2783368_91251_1951_5146_0_33278_16994_4128768637&Idx=0&YY=86930&inc=25&order=down&sort=date&pos=0&view=a&head=b&box=Inbox)
This gem on ny times RE blog:
6:08 pm
Bleak Open Houses
Categories: General, Agents & Brokers, Statistics
Another indication that the New York City housing market is slowing can be found in a report on open houses released yesterday by the Manhattan brokerage firm Barak Realty.
The company analyzed and charted average attendance at Sunday open houses from Jan. 15 through March 12 and found that attendance had declined 13.7 percent from Feb. 19 through March 12, compared with the previous four-week period.
Of course, it could just be the cold weather that’s keeping people away. But stay turned: Barak Realty says it plans to conduct regular monthly studies of open houses this year. – VIVIAN MARINO
Cold weather???? Feb-March have seen some incredibly warm days (weekends included) - Cold shoulders maybe, but not cold weather
Let’s see… probably March Madness. Next month… Easter… and so on…
PTF -
Thank you. I appreciate your tracking and have the July 20th inventory number of 10,748 committed to memory. The condensed version is great!
OT -
Heard on the radio today that in the Seattle area, apartment to condo conversions are becoming a problem because they are displacing renters. I think I recall a few months ago someone here posted that a RE investor once told them that apt. to condo conversions were a sign of the coming end of a RE bull market. Sorry, I do not recall who posted or exactly what they said. Correct me if I have this wrong.
I think $300,000bn = $300,000,000,000,000.00
Approximately equals a thirty-year fixed mortgage w/0% interest and annual payments = US GDP.
no, you have three too many zeroes here
Nope, Geoff is right…that’s $300 TRILLION.
Some of this was posted under another topic but is appropriate to the REIT problem:
I bought my first house in 1984 for zero down at 13% interest at an inflated price of $63,000. It took 14 years for the property to “appreciate” to $77,000!
By 1998, 14 YEARS LATER, the Phoenix market started to improve and I needed to escape a deteriorating neigborhood. I had completely remodeled and landscaped the property but the neighbors lived like pigs. I had the nicest house in the subdivision and got top dollar at that time. I felt lucky to get out when the getting was good.
This is the incredible part of the story and I believe represents a true MICROCOSM of the Phoenix market and the U.S. real estate market in general:
The property has been resold three times in the last 7 years, most recently in December 2005. The last sales price? Can you believe $210,000!!!! I wouldn’t give $50,000 for it. REALLY. It’s currently on the market again, just 3 months later.
This is the scary part:
The first and second loans on the property total $204,000, and are both held by a microcrap REIT based in New York, MortgageIT Inc. (MHL) Their stock as dropped 50% in the last 6 months. They have a market cap of only $287 Million.
I expect they have a bit further to go on the downside.
I normally don’t scare easily but the systemic risk for some reason hit me with this posting.
Buffet’s has been warning on derivative risk since 2003 and they lost $404M unwinding inherited derivatives in a benign market.
Ouch.
“The discovery of huge hidden losses at General Motors’s finance arm have raised fresh fears of bankruptcy at the world’s biggest carmaker, sending tremors through the credit derivatives markets. The struggling group asked for a filing delay after admitting to an extra $2bn in accounting errors at its finance arm GMAC, raising total losses last year to $10.6bn. The news triggered a sharp spike in the cost of default insurance on GMAC’s bonds, rising 75 basis points overnight.”
What’s an $11bn loss between friends? At least GMAC reports; Fannie supposedly is sitting on an $11bn loss, but we can only assume the actual news is worse, or else they would have given firm numbers…
“Timothy Geithner, president of the New York Federal Reserve, warned in a recent speech that the $300,000bn derivatives market had raced ahead of the infrastructure needed to support it. ‘They have not ended the tendency of markets to occasional periods of mania and panic. They have not eliminated the possibility of failure of a major financial intermediary.”
Fannie Mae = the Voldemort of the mortgage lending business
(the financial intermediary which must not be named)
“They have not eliminated the possibility of failure of a major financial intermediary. And they cannot fully insulate the broader financial community from the effects of such a failure…”
Geithner is making me wonder whether those HB puts will pay off when the thing collapses. Is there a risk we bubble believers could have bet correctly, but will be left holding the bag when counterparties cannot pay up?
I believe that is the case, hence the worry about ‘cascasing cross-defaults.’ If you get a big enough problem, all that will be left of Wall Street is the street.
‘cascading.’
Oh well, maybe I will luck out again, like I did when my failed S&L made good on my CD, including interest, after the S&L collapse. What — you say there is no deposit insurance on put options???
D@mn!
GS,
Don’t even mention this possibility. Shame on you!
Really, if this happens, I will be one pi$$ed-off CA renter…
“Financial Markets Wise-Up To The Housing Bubble!!!!!”
My gut feeling on this is………..they have know about it for some considerable time. The only logical path for The Fed and others is to try and manage a slow and orderly decent.
If everybody were to openly admit it we would have TOTAL PANIC.
This down trend will be gradual and painful, and the process will only start to speed up when we begin to have large numbers of foreclosures and company failures. This is still a little way off yet.
The process may seem to be moving slowly at the moment, but it will happen. All we can do is watch and wait, and perhaps learn for the future.
The fact that these large mortgage companies are losing this much money this early in the beginning phase of the decline is VERY bad news.
Imagine where these companies will be after 3-4 years of a bad market.
One can only imagine…
Talked to a realtor friend of mine this weekend. One of the good guys, never pulls any crap and has been in RE all of his life.
Re: NoVa market….. He said across the board there’s already a 10% drop and that the only activity left is the hispanics buying. DON’T pick on me, I don’t mean anything by saying that, that’s just what he told me.
novasold
at least it’s not the irish……
Hey I’m Irish and I can only say that crazy stuff could have happened last Friday so who knows what future stats might show
novasold
I was talking to the adults at a kid birthday party this weekend - conversation all about Northern VA Real Estate - all the ladies talking about the rising inventory, folks who can’t sell - then a guy comes in and says “I met a guy who wants me to go in with him to fix up houses and resell them for a profit” and the ladies politely nodded and said what a good idea. I felt like I needed a shower.
Were they Irish? Just kidding.
Seriously though, I don’t know how things are going to work out in NoVa, I think the outer counties are going to be a mess but I can’t say about in and around the beltway, but there are always people who are the last to know.
I have heard people in the hallways, the elevator, the grocery store, on the WO&D trail talking about the RE bubble. If there are some people who are so disconnected not to know that even if prices don’t fall, but flatten-out, and they get on the bandwagon now, then they deserve what they get. I’m not one who is gleeful at the thought of the burst b/c a lot of ordinary people will get hurt, but if someone is so out of touch not to be an investor now, in any market, oh-well!
novasold
You don’t need to kid :). Because of low Euro mortgage rates, Ireland is currently inflating an enormous RE bubble.
London bloggers (who know a thing or two about expensive RE) are writing about Dublin prices with utter amazement.
I have insight into the Irish market. I have mentioned this in a previous topic.
I have a friend who lives in Dublin who earns a great living, has a downpayment saved, and has looked at several slapped-up developments.
She gave up 3 months ago… Disgusted. Now sales reps for the same developments that would not return her calls before are suddenly phoning her offering her “showing appointments” any time that will suit her.
The Dublin market defies explanation.
The best part - reading the the Irish Sunday Times while I was there a couple of weeks back. The local real estate ads were entertaining as it was, but to see the number of Flordia developers advertising to the Irish - pure comedy! Guess they truly are hoping for the rich foreign investors to save their A$$es…
I saw these spanish ads in the library encouraging spanish speaking people to join ‘home ownership’ workshops. I couldn’t believe it. You are not doing anyone a favor encouraging them to buy in this crazy market.
http://www.arlingtonva.us/Departments/CPHD/housing/housing_info/CPHDHousingHousing_infoHomebuyersEsp.aspx
My realtor friend didn’t refer to that, but I suspect that here at least that is alot of what is going on. Taking advantage of those who can’t understand the english media so well.
Now that’s awful. But I’m not surprised.
novasold
For the bulls who point to strength in the Australian economy post RE bubble, I seriously doubt we should hold the same expectation here: http://www.smh.com.au/news/business/millions-ride-shares-rocket-to-riches/2006/03/20/1142703288751.html
The resource boom has been really, really good to Australia, and picked up the slack just as the housing bubble burst. Perfect timing. What will do the same for the US?
Also, broadly speaking, Superannuation (aka Super) = 401k
from bigpicture blog
looks like low volume/hig price is a serious indicator everywhere.
I moved my 401/Downpayment money–130K total to treasury fund last year. was feeling bad for some time now, with market going high and higher. GMA has some one other than melody pitching that market has only one way to go! UP!.
Nasdaq Volume Decreasing
in Markets | Technical Analysis
Barron’s Michael Kahn points out that Weak Trading Volume is Troubling for Stocks:
“In the stock market, fuel is trading volume. Without volume, a price advance will soon slow down, if not stop and reverse. Momentum may keep trends going for a while, but sooner or later the market is going to require buyers to put real money where their collective mouths are and buy a lot of shares.
Chart watchers call this a bearish divergence as prices rise while indicators, volume in this case, fall and typically it is price action that adjusts.
The market has reached new highs but has done so on less activity. It is a warning sign that something is not quite right with the rally, but it does not constitute a sell signal on its own. Still, the fact that the public is not buying like crazy, despite what the pundits are saying, is worth knowing.
As most people know, Wall Street is ripe with colorful sayings and one that comes from the technical side is “In price, there is knowledge.” It is another way to say that all information is in price action.”
One thing about derivatives, and hedging: in a crisis, evrything could move down. LTCM thought they diversified by betting on various things, but when the problems happened, they discovered everything was going down. The other thing which I find interesting is that there’s a backlog of up to 40% for matching parties & counterparties in derivatives, and how they aren’t computerized. There was a small blurb in the WSJ recently with the 40% figure. I was shocked. Isn’t the $300 Trillion figure sort of double-counted? Wouldn’t the net figure be much less (though even 10% could be a major problem if the CW went awry)?
Even if it was only 1%, you’re still looking at $3T.
The Fed has planned for a possible “problem” at a clearinghouse. It’s called, “NewBank.” Kind of creepy.
Who came up with the name?
George Orwell? (NewBank / Newspeak / Greenspeak, etc.)
Probably the same people who cam up with “firstgov.gov”…yech.
Warren Buffett has stated that derivatives are weapons of financial mass destruction, due to their incredible leverage. Every year now, we hear of old time banks and new ones going broke in a day or two when a derivatives trade goes south for them. The recent victims are the Chinese petroleum procuring company that lost about $700 million in some air fuel hedges gone wrong. The trader responsible has been arrested, as I recall, and probably going to rot in a Chinese work prison.
I could talk about the Barings collapse, the LTCM collapse, and others.
What would happen if there was a real interlinked derivatives domino collapse and not just one affecting two or three banks only? A financial catastrophe of unimaginable scope.
Nonetheless, the man has made a fair amount of dough in the reinsurance biz, which, at the end of the day, looks a lot like derivatives… (Like the good doctor says, do as I say, not as I do.)
I remember on episode on “60 Minutes” concerning derivatives following the Capital Hedge Fund disaster.
Opening shot had Morley S. with this other guy who had like a PhD in finance and business economics standing in front of a derivative formula written on a blackboard.
So Morley says, “Mr. X, you’re recognized as a leading US academic in the world of finance and economics-can you explain this “typical” derivative formula for our audience…
Mr. X stands backs, hand in chin, brow furrowed while he looks at the board. After about 10 seconds, he turns to Morley and says, “I have absolutely no clue what on earth this is suppose to represent, or what it means…”
None? None…
Guess they baffle Mr. Buffet too.
Somebody go call Jeff Skillings.
The derivatives issue creeps me out. The fact that people look at risks to be hedged as something they can imagine. What about the “500 year flood” type calamity? For some odd reason, I just thought of the fact that “program trading” is commonly blamed for the 87 crash. I don’t know why, since I’ve been worried about something else for 10 years…
GetStucco
WARREN BUFFETT LOSES $404M IN DERIVATIVES, SEES CHAOS
Buffett also has some insight into derivatives and the danger they pose to the world (not to mention Berkshire Hathaway’s balance sheet):
“Long ago, Mark Twain said: “A man who tries to carry a cat home by its tail will learn a lesson that can be learned in no other way.” If Twain were around now, he might try winding up a derivatives business. After a few days, he would opt for cats.
We lost $104 million pre-tax last year in our continuing attempt to exit Gen Re’s derivative operation. Our aggregate losses since we began this endeavor total $404 million.
Originally we had 23,218 contracts outstanding. By the start of 2005 we were down to 2,890. You might expect that our losses would have been stemmed by this point, but the blood has kept flowing. Reducing our inventory to 741 contracts last year cost us the $104 million mentioned above.”
If you thought the housing downturn in Australia had finished……..check this out………
http://www.abc.net.au/news/newsitems/200603/s1597112.htm
However, if you multiply the December quarter by 4 you get about 144,000 starts per year. Applying population ratios, that is equivalent to 2 million starts per year for the US.
So activity is still pretty high. What is significant is that it’s still falling.
don’t confuse housing starts with housing sales
This just in from London - watching Fox News over here and just caught Neil Cavuto having a rant about how negative the mass media is on the US Economy. According to him, it has been widely predicted that the housing market, stock market, US Dollar, etc all should have crashed by now. Well, according to him, everything is hunky-dory (because none of this has happened so far).
“Housing starts may not at an all-time-high, but what is wrong with being at a second all-time-high?” (hmm… rising glut of inventory?)
Oh - and my favorite - unemployment at 4.7%. He further ranted that that must mean 95.3% of the popluation is fully employed.
And to sum it all up - he mentioned that others berate him for not looking at “the numbers”, which he replied “that is exactly what I do, look at the numbers”.
Neil - anyone ever tell you that there are lies, damn lies, and statistics?
Numpty.
The one thing Cavuto is right on is the media is more negative today, with a Rep in the Wh, than when a Dem was in the WH. If the govt’s lies about the economy stayed the same, then it wouldn’t matter much- the truth could be divined from the fake numbers. However, over time, the govt always seems to be changing the definitions of full employment, inflation, bubble, savings etc. Now, once again, we learn from Bernanke that the US isn’t consuming too much- the rest of the world is saving too much. The answers and the definitions always seem to fit. How lucky we are.
I have always thought that Neil was a pretty smart chap. His rant sounded like he was some sort of shill. Surely he knows that employment figures and CPI (my favorite) are subject to government interference…
He also said “perhaps it is because bad news sells better than good news”. Please, the media has been pumping everything good (economically) since 9/11 as if there was some sort of Goebbels-esque manipulator writing their copy…
No tanks in Baghdad!
And that is the problem with these Carnival Barkers. You rightfully called him a Shill. Sadly, Larry Kudlow, truly a talented economist, has marginalized his own name recognition by floating the same lies out of some warped loyalty to a failed political ideology.
What we keep hearing is “everything is wonderful”, “the economy is moving along nicely” and trite little ideological expressions that fall flat when thrown up against the reality on Main Street.
I’ve been asked to tone down the political rhetoric so I will phrase this in a way that obscures the reality. (That is the means of communication of the current leadership isn’t it?)
Those elected officials who are currently in power have huge credibility gaps on so many issues because of their countless policy failures. They HATE government and will do anything to diminish the good that government CAN do. The problem with the current crowd is that they embrace an extremist ideology.
Well put, Mr. Lingus. Your assertion is more persuasive without the epithets. The carelessness of the current government about their responsibilities will make interesting stories in a future history class.
Anyone buying a condo in North Raleigh, NC has got to be crazy! I’m from that area, and I just don’t get it. Who in the world will be an overpriced condo conversion in the middle of suburbia (which, in Raleigh, is a stone’s throw from the boonies in most locations)?
I feel kinda sorry for people who are so driven to buy anything that they will waste money on an investment that is destined to fail.