Risk Is Being Re-Priced
Some housing bubble news from Wall Street and Washington. Bloomberg, “The Federal Reserve added $24 billion in temporary reserves to the banking system amid an increase in demand for cash from banks roiled by U.S. subprime loan losses. BNP Paribas SA halted withdrawals from three investment funds today and Dutch investment bank NIBC Holding NV said it had lost at least 137 million euros on subprime investments.”
“‘Demand from European banks is driving Fed funds higher,’ said John Murphy, senior VP at Tullett Prebon Plc, the world’s second-largest inter-dealer broker. ‘European banks have lack of liquidity in the euro- dollar market which spilled over to the Fed fund market.’”
“The European Central Bank today loaned 94.8 billion euros ($130.2 billion) to meet banks’ cash needs. The ECB said it will provide unlimited funds today at 4 percent, its current benchmark rate, after demand for cash in the European money markets drove interest rates higher.”
“The Bank of Canada today said it will provide liquidity to ’support stability.’”
The Associated Press. “‘This is a mini-panic,’ said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co., calling the banks’ injection of money into the system an unprecedented move, and evidence that the problems in subprime lending are, in fact, spilling into the general economy.”
“‘All the things that had been denied up until this point are unraveling,’ Battipaglia said. ‘On top of this, retail sales were mediocre, which shows that indeed, the housing collapse is affecting the consumer.’”
“BNP Paribas Investment Partners, said it was suspending three funds together worth about $3.79 billion and wouldn’t make investor redemptions until it could determine a net asset value for the fund. ‘The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating,’ BNP Paribas said in a statement.”
From Reuters. “The BNP problems sent judders through European markets already rife with rumors of worsening troubles in Germany. The Bundesbank hosted a meeting with banks involved in the rescue of Europe’s highest profile subprime victim yet, lender IKB (IKBG.DE), to arrange details of its 3.5 billion euro bailout.”
“‘Nobody wants to lend any money. It’s safety first.’ said Karen Birzler, a money market trader at HVB in Munich.”
“The cash markets were seizing up, several dealers said. ‘There appears to be a dash for cash both in dollars and in euros,’ said Nick Parsons, head of market strategy at nabCapital in London.”
“The cost for banks to borrow money overnight in the world’s second largest economic region shot up to 4.62 percent, the highest level since October 2001 and way above the ECB’s 4 percent target. Only when the ECB offered banks extra cash to assure orderly conditions did rates return to normal levels.”
“A Zurich-based money market trader called market conditions ‘crazy’ since Fed Chairman Ben Bernanke has given no signal of concern that credit markets could unpick the real economy. ‘The market is acting like a yo-yo. It’s all very psychological. The possibility of a credit crunch returning is starting to spook everyone,’ he said.”
“A separate European fund valued at 750 million euros was frozen too, and a Dutch bank pulled its planned new listing after suffering subprime losses.”
“U.S. Treasury Secretary Henry Paulson has said repeatedly that he consider U.S. economic conditions to be fundamentally strong and that market volatility reflects disruptions in the subprime mortgage lending sector where defaults are rising.”
“‘Risk is being re-priced,’ Paulson said on Wednesday, implying it was a normal reaction to the difficulties that companies involved with subprime mortgages were experiencing.”
“Residential mortgage delinquencies and defaults are becoming more common among borrowers in the category just above subprime, American International Group said Thursday.”
“AIG, the world’s largest insurer and one of the biggest mortgage lenders, said total delinquencies in its $25.9 billion mortgage insurance portfolio were 2.5 percent.”
“It said 10.8 percent of subprime mortgages were 60 days overdue, compared with 4.6 percent in the category with credit scores just above subprime, indicating that the threat to the mortgage market may be spreading.”
“AIG acknowledged that ‘the continuing weakness of the U.S. housing market resulted in a significant increase in losses.’”
“‘Everyone’s looking at their subprime exposure, and they didn’t do very well,’ said Matt Nellans, an analyst with Morningstar. ‘Their domestic second lien business had a loss ratio of 318 percent for the quarter.’”
“AIG said its mortgage guaranty operation reported a pretax operating loss of $78 million in the quarter. Delinquencies and defaults in second lien mortgages were the major contributors to the decline at its mortgage guaranty business, and losses on first liens, or primary mortgages, also increased and were more severe, AIG said.”
“ABX subprime mortgage indexes tied to risky loans made in last year’s second half are trading weaker on Thursday, according to an analyst.”
“The index is ‘weaker on the day, particularly on the single-A’s,’ the analyst said. However, the gap between prices offered by buyers and sellers is fairly large, he said.”
“H&R Block Inc. said Thursday it will cut more jobs at its struggling subprime mortgage unit and that the planned sale of the business could be delayed until later in the year.”
“H&R Block didn’t give a reason for the possible delay. H&R Block’s earnings have been hurt since last year by the struggles of the mortgage unit.”
“The housing market slump has Toll Brothers’ chief executive perplexed.”
“‘This downturn is very different. It is the first one in my 41 years in the business that’s occurred when you have an up stock market, low unemployment, decent job growth and a very decent economy,’ said Robert Toll.”
BTW, AIG is deeply involved with Fannie Mae, which has hundreds of off-shore entities. Sound familiar?
S&L 2.0
Enron 2.0
Tyco 2.0
I think it is time for AICPA and company to re-examine the accounting standards that keep these liablities off the balance sheets.
Transparency is king.
1929 2.0
Rome 2.0. The center will not hold.
Transparent is the new black…
S&L just went global.
Glad you mentioned FNM. It’s funny how many ‘free marketers’ are willing to give back market share to FNM now that everything is going to hell. Two years ago they were trying to restrict FNM and arguing for caps. Now, they are begging for FNM to lift the caps.
Oh man! They are really slicing and dicing ‘em out there.
This sickens me as well. Privatization of profits, socialization of losses. At least Bush put the kibbosh on this for now. I was somewhat surprised by that.
Though he does recommend allowing (forcing?) the FHA give loans to FBs to refi out of suicide loans. Since the FBs usually put little/nothing down, it’s the banks that are being bailed out at taxpayers’ expense. If the FHA loans go bad, than what?
I’m mad about this.
CASH is the new king again…. finally. Look out below! (Real) Buyers market coming soon to those who waited.
Hallelujah!
Prez is against raising the fannie/freddie cap:
Bush against lifting Fannie, Freddie mortgage cap
http://tinyurl.com/2mwu2e
OMG, I agree with the president about something. I am contemplating self-flagellation until the feeling goes away.
Testify! I’m doing the same and it has me spooked.
Well, the Fed gave the indication it was going to let the markets sort themselves out as well. That’s what we all want, so hang on.
I have a client with signifcant costs tied toward LIBOR. I gave him the bad news this morning…
Spooked wasn’t an appropriate term. After disagreeing with everything the shrub has said for 7 yrs, cheering a single statement by him has me questioning my pinko commie union card >; )
My financial bed is made and doing well after a brief stint shorting builders and getting out. Thanks for all the advice over the last yr and say hi to the puppies for me.
Yeah, but I don’t see them sitting by and watching their beloved banks go up in smoke. They’re gonna cut rates like there’s no tomorrow as soon as the reality of this mess is beyond spin.
They can cut rates, but who will be taking out the loans?
I’m not saying it’s gonna help much. But they’ll do it, nonetheless.
How do you arrive at a loss ratio of 318%?
Its so scary what the Dems might do once they get the WH.
Remove cap on FNMA/Fred allowing unlimited portfolio?
Raise FHA and conforming loan limit to the sky?
Give poor people downpayment assistence/foreclosure/refi help?
At least the free markets will eventually crash and result to a mean. If we massively subsidize housing there is no end to it. However we will be broke as hell after Iraq is over but then they can inflate away to print more money…
Im voting for Ron Paul. No gubbermint intervention in nothin at federal level!
Im voting for Ron Paul because he makes sense about everything. I wish I had discovered him earlier.
Me? Agreeing with Bush? Can’t believe it, but on this issue, I do.
What are they and the markets seeing that we only have glimmers and outlines of?
I think I am starting to go into straight cash today, just to be safe.
What are they and the markets seeing that we only have glimmers and outlines of?
I think I am starting to go into straight cash today, just to be safe.
Dropping housing market + tighter lending standards = Negative equity= no HELOC money = slowing economy = falling stock market.
Let the carnage begin!
well, we did have a big drop today, but we also had the largest runup in 5 years over the last 3 days. There will probably be less consumer spedning, but are people going to stop eating? Stop driving to work? Stop cleaning their apartments and houses? There is a lot of consumer spending that is non-optional too. Some sectors of the stock market may drop, but not all will. Even now, some stocks are fairly valued with good growth potential. Heck even IndyMac has an under 6 P/E right now!
Those “essentials” were essential back in the 70s and 80s, too. See how the stock market was valued then.
IMHO, since 1982, the “growth” in this country was largely due to the credit markets.
Where is the floor?
I’m not a fan of Bush, but in this situation he is right and the Democrats are 100% wrong for trying to get Fannie/Freddie to bail out the big banks and hedge funds by buying up those worthless CDO’s and other mortgages. Let them eat their losses and remember that there is risk involved when lending money to people with bad credit or no income verification.
“here is risk involved when lending money to people with bad credit or no income verification”
And there’s risk involved in lending money to people with stellar credit and solid income verification, but who still require artificially low teaser rates to buy a house they couldn’t otherwise afford…
I am completely disoriented. Bush is doing the right thing.
It is really wierd isn’t it?
bizarro-world has struck the US…
the game must really be over
I thought I’d fall out of my chair. Did the Dunce finally sober up? I’m dumfounded.
I’m going with “even a broken clock is right….” etc. That, and he really doesn’t have a clue yet…. Stand by for a flip-flop
He’s basically recommending the FHA take over these loans. Maybe not recommending giving grants to FBs, but far from “free-market” IMO.
“…Democrats are 100% wrong for trying to get Fannie/Freddie to bail out the big banks and hedge funds…”
I can’t shake the feeling the Dems will get their way. Maybe not soon enough to stop most of the damage but soon enough to keep things from bottoming out like they need to.
Dodd and Schumer are only doing what their financial masters tell them to do. Check this list of top contributors from Minyanville (halfway down the page):
In Schumer’s case the top 9 are all big banks, mostly Wall Street firms.
fnm and fre made it pretty clear they were not going to do that. any expansion of their caps will have limited impact on this mess.
My cognitive dissonance demands an explanation!
Perhaps benevolent space creatures have invaded the brain of our president to instill some semblance of reason to the frenzied economic world… lest their ABX shorts falter and the subprime meltdown boils over beyond the global economy.
Thank you Benevolent Space Creatures!
apparently he is still not cured from Lyme disease
thank the borrelia creatures for a bit of inspiration
Maybe Bush (more likely Tricky Dick) just likes the idea of throwing every unsophisticated FB yahoo out of their houses. They feel not only a right, but a responsibility to take money away from those who aren’t smart enough to keep it. Can’t you picture them saying, “Of COURSE it’s mine, YOU worked for it”.
Blood on the floor in 3….2….1…..
Yeah, let’s not forget the bankruptcy bill and how that ties in to all of this.
In a limited sense, he may be right not to trust them now. A competent president would have cleaned up the Macs long ago, and be able to at least say something coherent about the credit crunch instead of babbling about more corporate tax cuts.
As I recall, Raines and his cronies were in their heyday, leading FNMA investors down the garden path, during the previous adminstration.
Yep, the problems built up over time, behind the scenes. But once they became public, they became something to be dealt with. Imagine the expletives that would have to be deleted if the restatements came out under Nixon! (Followed instantly by a huge turnover)
lmao! There’s only one problem - he’s not smart enough to realize that he’s denying some of his rich cronies a federal bailout. And I’m sure they were on the phone to him immediately after hearing about his stance on this issue. Tomorrow’s headlines will have him saying “What I said yesterday, nevermind. God has told me that a federal bailout is necessary after all.”
His friends must be short
tee hee …
Aug. 9 (Bloomberg) — President George W. Bush said Fannie Mae and Freddie Mac must complete a “robust reform package” before the government will allow the two largest mortgage finance companies to buy home loans beyond current federal limits.
Congress needs to get the companies “reformed, get them streamlined, get them focused, and then I will consider other options,” Bush told a White House news conference today in response to a question about whether the two companies would be allowed to buy more mortgages to help spur the housing market
Pinch me I don’t believe it. I hope President Bush is as stubborn about this as he is about everything else because for once he is dead on correct.
As a Canuck watching the carnage, I too cant believe I’m actually agreeing with GWB on this one.
I’m very worried that any GOV intervention may breed the ugly idea up here too if things finally bust up here in Canada.
Get the hell out of the way and let the free market dictate the outcome.
I truly believe that after all the bloodletting we will all be better off IMHO.
Actually, set the interest rates to 10.5% and just be done with it already.
“… dead on balls accurate. It’s an industry term.”
My Cousin Vinny
I think his position is to: aggressively get out in front of a problem that will happen anyway and go on the offensive to use as a tax lowering opportunity. The tech bubble bursting helped him lower taxes to benefit the rich. Some people lost their shirts but due to wealth consolidation, the top have fared well. Sounds like he wants to use the same playbook.
The president said he also discussed with Mr. Paulson and other cabinet members the possibility of tax cuts and reduced regulations aimed at overcoming what some see as a weakening of the competitiveness of American capital markets compared with those overseas. But he was cautious about saying what he might propose.
“We worked through possible suggestions for Congress to think about,” Mr. Bush said. “It may be an issue that requires a lot of selling to get the conditions right for people to even take it seriously.”
Asked about collapsing housing markets, and the risk of them declining further, Mr. Bush said: “In a way it’s a necessary reaction to a flood of liquidity that came into the market in the past couple years.” That was financial jargon referring to the past several years of easy money, some of it from overseas, at low interest rates.
Mr. Bush said that as a result of the deep pools of money available, “housing got really hot” and that a decline was inevitable. He added that “if the market functions normally” it will lead to a soft landing. “That’s kind of what it looks like so far,” he contended.
The statement appeared to signal the White House’s plan to go on the offensive in the fall to counter criticism and widespread economic anxiety by confronting Democrats on time-tested Republican themes like keeping taxes low and spending under control
.
“I understand there’s disquiet out there,” Mr. Bush said. “By the way, do you think they feel disquiet now? Go ahead and run up their taxes and see how they feel.”
I just had to comment on your “self-flagellation” remark earlier. I’ve been wondering all day what it meant. I liked the sound of it, kinda cynical. So I finally decided to look it up on Wikipedia, and I was quickly directed to a section entitled “Sadism and masochism”… I shoulda left well-enough alone.
Oh you know you’re into it.
tee hee ….
“U.S. Treasury Secretary Henry Paulson has said repeatedly that he consider U.S. economic conditions to be fundamentally strong and that market volatility reflects disruptions in the subprime mortgage lending sector where defaults are rising.”
How is it that this buffoon has any credibility left? Why not just put Cramer in the job, and lose all pretense that it’s not simply a mouthpiece for the financial industry?
You know, I kind of doubt that Paulson really believes a word of that. He doesn’t want to do a bailout and saying all is well except for a little contained subprime mess allows him to let the markets correct. Cramer was probably correct when he says the Street is nervous. Those are Paulson’s people. If they are nervous, he knows about it.
If I have to decide between a politician lying and doing the right thing or telling the truth and doing something mind-blowingly stupid, I’ll take the lying any day. Problem is, we get lying and mind-blowingly stupid together a lot of the time.
Don’t worry. Goldman has the BONY box. LOL
http://www.itulip.com/forums/showthread.php?p=12708#post12708
“Somewhere out there, there are several people that are in trouble — it’s hard to put your finger on it,” said Andrew Busch, global foreign-exchange strategist at BMO Capital Markets in Chicago. “I cannot name names. We know BNP has issues with three funds. But you do not see a movement in overnight rates like that unless there is a huge concern about liquidity and funding.”
Bloomberg
Aug 9
It could be there are a lot of people in trouble, but they just don’t want anyone else to find out.
Totally agree with polly. The alternative is to come out and say “You guys shouldn’t have made all those stupid bets on stupid loans. Now, you get a chance to ‘reprice your risk’ and we’re not bailing you out. Okay fine, here’s $12B now go take your haircut and get a real job.”
Haha, we’d get watch Cramer’s head actually explode on live TV!
“‘Risk is being re-priced,’ Paulson said on Wednesday, implying it was a normal reaction to the difficulties that companies involved with subprime mortgages were experiencing.”
They should get Cramer and Paulson in a room to discuss this and video tape it for everyone
Ben - AIG has off-shore entities or FNMA does? And how is AIG involved with Fannie?
Fannie does, and AIG has guarantees on a lot of her paper, if I recall correctly.
Liquidity crunch?…More like a bank run! Unlimited funds being pumped into the system ,and gold is down $11. Isn’t pumping currency into the system the definition of inflation..Yet Pm’s are down..The rubberband seems to be stretching to the white stage just before the snap!
basic definition is something like “Expansion in the money supply beyond the increase in available goods and services.
But we’ve already got (or soon will have) a whole lot of excess available “goods and services” and the supply is expanding almost exponentially.. houses and everything related to it, including related services.. as well as a slowdown in the need of peripherally related stuff… automobiles, energy.. pretty much everything.
We’ll need to wade through a couple years of some deep recession before anything like inflation can be realized, imo.
Couldn’t agree with you more when it snaps you should see gold over $800 - that it at least where I am betting.
If this credit crunch happens people are going to start reading about Austrian School Econ which will make them more wary of bubbles which will in turn smooth out bubbles and credit induced mania which will probably be good for the economy as speculators invest in their kids’ education instead of granite countertops.
Asking consumers to stop shopping now is akin to asking a junkie to stop after just one hit.
How is injecting cash into the banking system consistant with holding firm on inflationary forces? Am I missing something fundamental?
That is what I am wondering. How does all this “injecting” work? Isn’t it the same as the “printing” that used to happen in the pre-electronic days? We know how well that worked during the Weimar Republic.
The total amount of cash injected wasn’t all that great and I doubt it would seriously stimulate inflation. This was just a stop-gap measure to halt a run on the banks. Uncle Ben gave George Bailey some cash so that he could hold off the scared mob at his door. The “Wonderful Life” problem was essentially the same problem banks are seeing today–their assets are illiquid so that when everyone asks for their money back at the same time the bank runs out of cash.
Now hang on a second… you can’t basically say “it’s not a big deal” in the same sentence as “…to halt a run on the banks”.
If they had to inject enough capital to oil the european financial machine it will certainly have an impact on Euro M1. This is *by definition* inflationary.
Oh great.
On the other thread moving cash to treasuries was recommended but after reading your post I think I’m going to “go to the mattresses”.
“The total amount of cash injected wasn’t all that great and I doubt it would seriously stimulate inflation.”
From news articles this morning:
“Unprecedented”
“This is no small move”
“the Fed committed a large policy error on Tuesday”
“the Fed and the ECB are themselves more in the dark on the problems that lie underneath the surface”
It may not stimulate inflation, but it does not instill confidence.
“It may not stimulate inflation, but it does not instill confidence.”
Agree completely… we’ve had a run on the global bank. Even money market funds aren’t safe.
I believe sitting in Treasuries short term is pretty safe. Granted long term it would be stupid, but for the time being it’s a good move. I checked my Vanguard money market this morning and sure as sh!t 20% of it was commercial paper, so I moved it all to vanguard’s treasury fund which is 100% in treasuries yielding 4.69%. Granted, real inflation is like 12%, but this is basically the same as holding cash only I’m actually making a few bucks in interest and eliminated my exposure to subprime. This is a good solution for the time being, especially considering it’s a 403b retirement account and to get into cash I’d have to liquidate the account which would be a 10% fine plus federal tax. Oddly enough, Vanguard has no cash account. By default you get a money market account that associated with your overall account which leads one to believe that when you move money into the money market it’s safe. Thanks to whoever on here yesterday that posted the bloomberg link about subprime and money markets I got out of that shite pronto.
Vanguard is one of the best Mutual Fund companies out there IMO.
Yep… wish we had the option… i went all stable capital when SP was at 1530 a few weeks ago…. capital fund doing nicely now at 52 week high. Im waiting for 1350 or so then im back in SP and growth.
Any fund that has a seventeenth-century ship of the line as its emblem has my history junkie’s vote.
worked there briefly…they actually do run a tight ship.
Yeah, I couldn’t figure out what my standard MM account held (lots of weird names of the underlying securities), so I moved my money into Muni’s a while ago. Yes, not as secure as US treasuries, but they are generally in second position just behind property taxes. Pretty safe, and better tax effected returns.
Nouriel Roubini does a great job of distinguishing between “liquidity” and “debt” crises. In the former situation (e.g. LTCM), parties are solvent but illiquid. In the later situation, parties are both illiquid and insolvent. Needless to say, Roubini believes this is a credit crisis with fundamentally insolvent parties distributed all over the globe. For a credit crisis, short term injections of liquidity don’t work.
http://www.rgemonitor.com/blog/roubini/
It’s also a signal. The Markets act on signals as much as on anything else.
well, I think it is NOT insignificant. The amount of cash injected just today by the ECB is something like 1/3 the budget of the Netherlands for one year. With crazy lending still rampant in the EU it is asking for trouble.
nzh,
This is a big chunk of change, but isn’t it a very short term loan? E.g. days? So if the money is pulled back again in a couple of days, the inflationary effects are minimal.
Am I correct in assuming that both the Fed and ECB injected liquidity for a very short amount of time, just to ease a panic? So this would be relatively insignificant in terms of inflation. And in fact, if we are going into a serious credit freeze, deflation is the primary concern, right?
It’s a bit like motor oil. No oil, your engine seizes up. The ECB basically said they would give as much oil as any bank wanted today to keep the engine running for at least today.
Central banks DO NOT want to be exposed in this way unless they have to. They are really private clubs where all the important things take place behind closed doors. Central banks even segregate the important staff from everybody else so the number of people in the know is very small.
In summary, this is not a joke, and is probably not a one-day wonder. Presumably some corpses are going to float to the surface in the next few days that will show why everybody pulled their horns in all at once.
Well at the risk of double posting (my early response seems to have vanished), let me quickly clarify. As I understood it, the Fed and ECB infusions were very short term loans, and these should not by themselves ramp up inflation (the initial question). THis is a standard response to a bank run or “liquidity crisis” and really on the only viable option for large central banks when there is such a liquidity crisis.
So I don’t see this short term infusion as either bad policy or a significant inflationary move. HOWEVER, yes this is enormously significant relative to the credit and insolvancy crisis that is the real problem behind the liquidity crisis. And this will NOT be solved by a short, intense infusion of cash.
So the question remains: will Ben and the ECB CONTINUE to pump cash into the system in an attempt to address ongoing liquidity problems that are really solvency problems. If so, we could be in big trouble. Lending insolvent parties more money only makes matters worse, and is inflationary to boot.
officially these are short term loans; but considering other ECB statements and policy especially over the last two weeks, it is very clear that it is NOT temporary. The ECB (and FED) should address the problem (crazy lending), and not the symptoms (like speculators getting in trouble); this is another version of the Greenspan Put and will only make matters worse.
Its even worse on a global scale. I don’t understand why we don’t have 10% inflation yet.
————-
Economist Magazine, Aug 9 2007:
The mandarins of money
———————————-
“Many economists in investment banks and international institutions mistakenly assume that “global” monetary conditions are set by the central banks of the rich economies. Yet over the past year, a staggering three-fifths of the world’s broad money-supply growth has flowed from emerging economies.”
“Their mints are working overtime. Goldman Sachs reckons that growth in China’s M3 measure of broad money has quickened to 20% over the past year. In Russia money supply has grown by a striking 51% and India’s is up by 24%. Indeed, the broad money supply in emerging countries has increased by an average of 21% over the past year, almost three times as fast as it has in the developed world. Adjusted for inflation, their money growth has accelerated alarmingly (see chart). As a result, the entire world’s money supply is growing at its fastest for decades in real terms.”
So we have a liquidity crisis at a time when global money growth is “accelerating alarmingly” ????
Also, liquidity and money supply are misleading in that a lot of it is not printed money, but virtual money “created” as a result of leverage. As the value of these leveraged “assets” is being called into question, the various counterparties are trying to avoid being bagholders by doing margin calls, or maybe sh*t is flowing downhill as party “A” needs money due to a margin call and starts calling in its own tabs.
As margin calls take place and since it appears that much or most of the highly leveraged paper has no buyers right now, only more liquid assets can be sold to meet the calls. Hence selling of things like shares and gold that are very liquid.
In Europe it seems banks also decided to not let go of any “cash” (again very liquid) to preserve it for now. Maybe because the cost of borrowing overnight shot up 50 basis points or so. This would have upset all the financial calculations re spread between lending and borrowing for a bank that move billions each day.
Central banks act as the intermediary for money transactions between banks. Presumably there were large transactions between banks that were not being accepted by one or another, therefore the ECB and others stepped in to bridge the gaps to keep the system flowing. The CB’s role in smoothing the flow of money is normal, but the sudden seize-up and the scale of the intervention is NOT.
current US inflation IS around 11% if you check honest statistics (www.shadowstats.com)!
I’m sure the real inflation rate in the EU is about the same, nearly all mandatory expenses (healthcare, energy, housing cost, education, local and social taxes etc.) have been rising at 8-12% yoy for the last 5-10 years.
the key words in your post are “have been”. Today and tomorrow and beyond will tell a different story.
as 90% of those mandatory costs (in Europe) are set by burocrats and not by the market, I’m 100% sure inflation will keep spurting ahead. And because the ECB still does nothing to stop the surging EU housing/credit bubble, even home prices might rise at double digit rates again this year (already predicted for UK and Netherlands, but probably in more countries with these huge ECB credit injections).
what could possibly drive home prices (or any other commodity) further upwards aside from a lowering of inventory and/or an increased demand?
To the contrary, in the US, demand for homes is falling like a rock due to assorted market pressures (skewed income/price ratios, constricting credit availability, fear of falling knives) while home inventory rockets upwards for various reasons (new construction continues, people default on loans and are put into the street as perhaps a million moew foreclosures loom on the horizon).
When fewer dollars than previously are now needed to buy something, it’s called deflation.
And a German real estate firm is opening up ’stores’ in NY, FL and elsewhere in order to sell cheap US housing to Europeans.
They’ll love the commute from Florida to Munich.
to joeyinCalif:
the US housing market is still the exception to the rule, and if you look at the big picture (average prices) even there the pricecuts are relatively small. In Europe home prices are still surging ahead and the kind of action we are seeing this week will certainly provide more support for the ridiculous valuations in Europe. It has NOTHING to do with fundamentals, they have been irrelevant for at least 5-10 years (depending on country). The Netherlands has plenty of options in store for driving prices higher, like even more free loans and subsidies, higher ceilings for government-guaranteed mortgages and more efforts at demolishing cheap houses (to be replace with luxury villa’s).
to de:
yes, as long as credit is as good as free in Europe people will continue to use it for buying foreign real estate. EU speculators don’t rent out their second homes; they know from experience that this is not necessary to bother with, because appreciation alone will provide the cashflow. I think we need 5-10 years of declining prices before they realise that is not a law of nature.
They injected cash to fight of deflation, not inflation. Inflation is going away on it’s own. It’s already gone in many areas. You’ve all seen what is happening to durables - housing, autos, appliances, big-ticket electronics. As debt-driven consumption recedes, prices for non-durables should see downward pressure as well.
It was out of control credit growth that allowed asset prices to rage upwards. That credit growth is, at a minimum crippled now and seems to be in actual retreat. The CBs talk about inflation and some of them were sincerely trying to fight it. But here in the US, I think we are the epicenter for powerful deflationary forces as credit collapses.
The injection was into bank reserves to enable them to lend more. The problem is, once confidence is lost no one wants to lend or borrow. Thus the injection may be as effective as pushing on a string.
Each night, banks need to borrow from one another to meet margin requirements, etc. (they need enough cash on-hand). Cash is harder to come by these days, so the overnight discount rate on the open market rose to as high as 5.5%–the Fed target is 5.25%, so the Fed injected some cash into the system to relieve the pressure and bring the inter-bank borrowing rate back to their target of 5.25%.
The action is indicative of risk premiums rising, cash becoming more precious, credit contracting, not expanding.
What did I miss?
“‘All the things that had been denied up until this point are unraveling,’ Battipaglia said. ‘On top of this, retail sales were mediocre, which shows that indeed, the housing collapse is affecting the consumer.’”
Amen brother, amen. Now let’s come clear on the ‘R’ word!
Interesting coming from Joey B, one of the real bulls/cheerleaders of the dotcom and stock market bubble.
Last fall on a business show he said that he was beginning to take money off the table or something like that. Since then, I’ve rarely seen him on TV.
He was pumping the HB’s at the peak, as usual he was wrong…
In my circle, the finanical conservatives were all people that were burnt by the dotcom fallout either by job or stock losses. Once burnt, twice shy.
There is me. I worked in dotcom (actually telcom) and saw the disaster brewing, and lost my job in the bust. This time, I saw the disaster brewing.
It really funny how slowly everything unravels. We on this board have seen this coming for a year or more and its just hitting the markets now. How silly that Wall Street pays money managers millions or billions in fees and this sort of thing happens. According to them its always a sure bet… until it isn’t sure anymore at which point they take their high salary earnings and bonuses and move on until the next mania. Didn’t we learn anything from the dot com fiasco ?
What I have learned is the new American economy LOVES bubbles, and they have hired cheerleaders called economists and other who promote these lies. It has changed from a sound economic model, to more of a ponzi scheme/pyramid scheme economics of last one in gets burned. This has all happened in the last 20-30 years as well, and you can see it happen with the junk bonds, S&L, Dot.com, and now RE related money. The only constant that is going to have any impact is change, and hopefully we will go back to the boring small gains of history and not more bubble economies.
Oh and the next bubble I see coming will be an alternative energy bubble, not all together a bad thing but it will be a bubble.
at least we have an unprecedented CO2 bubble forming, and some astute traders in London are already getting filthy rich from it.
We mentioned carbon trading here in the summer of ‘06 as a place to speculate along with a few vehicles to do it.
i think the next bubble is already in the works.
american infrastructure.
“invest in america”
“a nickel for america”
slogans are already starting.
What happens to that if the oil bubble bursts? I’m looking at oil and oil service shorts.
I think that it’s already started and that we just had the first move down and an oversold bounce right now. I filled up for $2.63 yesterday. Nice when a fillup is less than $40.
I was surprised to see liquidity numbers in a housing bubble blog. I look at the numbers every morning at another site so I keep track of them. Looks like many others are watching those numbers too.
Costco’s selling gas for $2.55 here in Dallas TX
Exactly. I’m more interested in getting out of my longs for now but what i see in oil is that we had a 5 wave decline last year followed by 3 waves up which indicates maybe the primary trend is down. Also today’s break in gold and silver indicates same kind of liquidation and deflationery tendencies. Cash appears to be king but with all the losses that are apparently being taken and with central banks saying they will support the markets i am starting to wonder whether there is a safe place for it. The Bank Holiday thing in the ’30’s comes to mind.
How is oil in a bubble? Demand growth from China and India is a runaway train. The four largest super-giant fields are all in confirmed decline, with Cantarell in Mexico in a true crash mode and Burgan in Kuwait not much better. Have there been some new super giant oil fields that have been discovered that I didn’t hear about? We are totally, absolutely addicted to oil. No substitute available that provides the energy in such a compact, portable, stable form.
Sure oil might go down to the high 50s, but look at the monthly chart. It is still in an uptrend, after having bounced strongly off the long-term uptrend line back in January.
I am looking for a possible commodities bubble… or the next real estate bubble….gonna spread it out thin
I’d add agricultural research and related industries. The big push I’m seeing in research is looking for advances in food crops and related machinery.
Biofuels, biofuels, biofuels…. In ag research, this is the mantra of the day. Even if most of it doesn’t make any economic sense.
“Professionals”, in almost any realm, are dependent on the popular myth that what they do is difficult and best left to ‘professionals’. Tell that to Wilbur and Orville. LOL
Hopefully blowups like this will waken people up to the fact that 99.99999% of people in suits are full of shit, always have been and always will be. I see someone in a suit, I automatically assume they’re full of shit.
Time for a real Bear market in people in suits? I definitely agree.
The traders who are truly worth their bonuses not only have our skills (patting myself on the back) at recognizing when markets have soared beyond what economic fundamentals would justify, but also have a better insight into mass psychology than we do, and recognize that once a stampede starts, it takes on a life of its own. They then profit from the stampede itself, as well as their skill in allocating resources to assets supported by sound fundamentals. The neat trick is to time their escape.
“The traders who are truly worth their bonuses…”
Are working for themselves.
Not sure if there is going to be another bubble, maybe not for a long time. Ask yourselves, was there a bubble in the early 1930s? Inflation of the money supply is almost a precondition for a bubble and the actions of the CBs are a desperate attempt to avoid deflation. If that fails, which I think is likely, we will have to worry about the safety of depositary institutions and other ways to store value. No inflation = no bubble.
The only thing we learn from history is that we don’t learn anything from history. I love that quote.
I don’t buy that for a second.
“‘This downturn is very different. It is the first one in my 41 years in the business that’s occurred when you have an up stock market, low unemployment, decent job growth and a very decent economy,’ said Robert Toll.”
Are you really that stupid Bob?
Yes, he is, evidently.
But this quote is the whole reason for the mess. The models that everyone uses has always assumed the ability to pay back loans. They cannot handle loans that will NEVER be paid back. And that’s all they look at - models. We’re all here due to our common sense.
The models that everyone uses has always assumed the ability to pay back loans. They cannot handle loans that will NEVER be paid back.
The models also assume the collateral for the mortgage has been adequately measured.
Not a chance of this happening with the origination rackeetering going on relative to the selection of an ethical and honest appraiser during the last four years.
Hit the number wanted and say nothing negative in the report about the neighborhood or the residence.
Just lie your fookin’ azz off so the mortgage can be sold to a bagholder.
So the models are doubly screwed.
Ain’t no way anybody’s gonna get a handle on this disaster.
It’s just too big.
A reasonable summary.
“up stock market, low unemployment, decent job growth and a very decent economy,’”
just goes to show that anything can be screwed up if ya try hard enough.
Reminds me of that Despair.com poster for Meetings. “None of us is as dumb as all of us.”
Stop making sense! Have some more yummy Kool-Aid.
There’s one sure-fire method to determine if Bob is that stupid. Find out how much Toll Brothers stock he has sold in the last 12 months.
Exactly. only people who are stupid are the ones listening to him. What’s he gonna say?–we’re in a horrific bubble, you’d be nuts to buy a Toll Bros home?
He’s been selling since late 2004, IIRC. Not stupid, just trying to look like he’s stupid.
But he was smart enough to sell hundreds of millions
of his own stock in spring/summer of 2005. (peak of bubble).
I have long had a theory that these corporate guys have a “public
facing” posture. It is often very different (maybe even opposite)
to what is known internally.
What amazes me is that these guys can go on a public forum
and pontificate this B.S. and do it with sincerity and
a straight face.
What perhaps is even more amazing (and tragic) is that
J6P buys their stories hook, line and sinker.
Therr acting would put Sean Penn to shame.
If they ever started handing out Academy Awards for utter,
total and complete B.S. these guys would be nominated
in all 10 catagories!
CEO are always divesting stock in down and up markets. Even Bill Gates does it. Microsoft mints money. But prudent management requires diversification. Don’t understand this idea that something is wrong or amiss by coroporate officers selling stock.
You are right!
I’m on my way to the bank. I’m going to $1 bills, that way I’ll have more to burn to keep warm this winter.
$1 bills? The exaggeration here really crosses the line sometimes.
You should know there’s far more value in copper pennies, despite the new anti-melt law.
You are right but he was looking for something to burn to keep him warm during the winter as we march onward through this great inflation
Pennies aren’t copper anymore. At least, they haven’t been since 1982. They’re 97.6% zinc.
What a funny concept, it’s illegal to destroy illegal money. LOL And legal money, gold and silver, it didn’t matter what you did with it because it’s weight and purity was it’s value. Didn’t matter if you had it weighed and coined, or in a pile of grains, or stuffed up your butt as a marital aid, it was still worth what it was worth.
That is what I am thinking too. All this “injecting liquidity” talk is making me want to buy a wheelbarrow. How is this different than the “run the printing presses” of an earlier era?
In Weimar Germany a wheelbarrow was good but gold and silver was better
Don’t believe for a second the risk takers and beta chasers are gone. Look at Cisco, up for the day at a 6 year high, and the Nasdaq was green for a few minutes. I thought I was seeing things!
I know Tx, did you notice KLAC today? The speculation is very much alive and well.
Of course it is. KLAC is a short killer, it was even in the bear market.
About time Home Depot got smacked.
Another stock buyback cancelled
That stock buyback announcement was to prop the price up temporarily so the CEOs could sell more. They had no intension of buying any back. You think the CEOs would really care if HD went under? Hell no, they already have like a gajillion each, time to retire and sit around the pool in Jaimaca reliving the good old days like mafia types fondly remember hits.
Here is an article on a REIT that just last week said its dividends were not in danger, then today announced no dividends. By the way, their portfolio’s borrowers’ weighted average FICO was 715 with a (fiat) 71% LTV. So this is definitely not subprime, toxic stuff most likely, but subprime no.
“Nothing illustrates the swift collapse of the home-loan market better than Luminent Mortgage Capital of San Francisco, which is teetering on collapse the week after it assured investors it was fine.”
http://sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2007/08/09/BUI5RF6IS.DTL
One of the most maddening thing about this credit bubble to me has been the assimilation of the FICO score as a measure of someone’s worth as a person. I know people with FICO scores in the 500s who are loaded and just don’t use credit, then what was Casey Serin’s FICO score when he took out his 8 mortgages?
yep… I had an unused 150 equity line on my home, 50k in unused credit card lines (no balances anywhere) and was declined for a gap card when the clerk talked me into the 10% discount.
People who pay off their cards in full don’t make them much money. They’d rather have someone with a fraction of the wealth that will pay the minimum for the rest of their lives at 22%
Amen. It’s as if your (future) ability to repay doesn’t matter, rather all that matters is your (past) performance in repaying. As long as you had a good FICO, who cares how much was being borrowed.
I think that we’ll loans return to what they always should have been. You qualify based on income and net assets, and then your credit history is looked at for any problems.
my depression era father is worth a ton but doesn’t have a credit card to his name - pays cash or check for everything.
Got a chuckle when he recently filled out the department store credit app for the 10% off discount and then a few weeks later got a note that he wasn’t approved. what a great system.
“I know people with FICO scores in the 500s who are loaded and just don’t use credit, then what was Casey Serin’s FICO score when he took out his 8 mortgages?”
I’m not loaded, but my score was sitting at 525 when I got my first credit card. I tried to avoid credit but eventually realized it wasn’t worth the hassle.
It was a pain to be asked for a $500 deposit for cellphone service or be denied an apartment even though I would have had no problem paying 6 months rent in advance.
I went out and got a couple of super low limit cards (couple hundred bucks) and used them to buy gas and the like. It was a cheap simple way to get myself 200-250 points across the bureaus in a few years.
71% LTV? Maybe when the loans were taken out, but with the decline in home prices, the mortgages may be more like 80% LTV now. And who knows how long it will be before they’re at 90% LTV.
Might EVERY mortgage portfolio be under water in a few years?
One aspect of this bubble that rarely gets mentioned on this blog is the change in the tax code regarding capital gains tax on the sale of your primary residence. I suspect this has had a material affect on the instability of the housing bubble. For example, I sold my home recently and am currently renting as I agree with much of the analysis done by posters here. However, had I had to pay capital gains tax on my gain, it may have been enough of a disincentive to keep me in my home with a low fixed rate mortgage. How many others out there have made a similar decision based on the current tax law? Now we can make the argument that people in my position are a small minority. However, what about the millions who when selling their homes the past few years with huge capital gains and buying another home severely decreased their down payments because they were no longer required to roll the gain into another property to avoid capital gains tax? Combine this with low interest rates, lenders allowing little or no down payments, and stated income programs, and the disincentive to NOT roll your gain into the new home purchase as a large down payment appears to have become irresistible for many, many people. It appears this has added additional leverage to an already overly leveraged market, unnecessarily increasing risk for both borrowers and lenders.
Agreed, it’s a good insight. Rather than take the gains and buy a new primary residence, people took the gains and bought 5 overleveraged houses to flip. Not too shocking that prices skyrocketed as a result.
Not everyone did that. Ever since the tax law change, each house we bought cost less than what we got from selling the prior house. Each time the equity went back into the next house so we’d have a smaller mortgage. Now we’ve reached the ultimate goal- no mortgage at all.
It is right to impose capital gain tax on primary resident is perhaps another debate.
In this unique time, would you rather pay 99% capital gain tax on your sold house or loose some or all of your down payment on the sold house?
Let me alter my post about capital gains a bit. I said
“It appears this has added additional leverage to an already overly leveraged market, unnecessarily increasing risk for both borrowers and lenders.”
I should have omitted the word “unnecessarily” - the change in tax law has worked out well for me and many others, but from a macro perspective, it certainly increased the risks to the market (especially to lenders) when the inevitable market down turn arrived, as average home equity (as a % of home value) held by home owners has been declining for some time.
I wouldn’t be surprised if ALL capital gains exclusions on the sale of a primary residence were eventually cleansed from the tax code to trap those home owners with equity remaining when the market bottoms from exiting the realm of ‘home owner’ without paying a hefty tax penalty.
The change in the capital gains law was in conjunction with the lowering of FED rates to historic lows. All this was orchistrated with forethought to create this bubble to keep the consumer economy going just a few years longer.
Many sellers took advantage of the $500,000 tax free home sale. Sold in 2005, took my 500 out of overprice California home and bought small farm home for cash 350 and rest in 90 day T bills. Not everyone fell for this fake Watt St. market. History tells us this movie has played before and re-runs aren’t necessary boring as watching the Wall St boys up to their old tricks can be lessons for all to see. Sad many believe “this time is differant”.
Me too. Sold 13 mos ago, banked 7 years of appreciation (and diy improvements). Renting. No tax incentive to get back into market. And definitely no cash flow incentive to get back into Seattle market. Rent is roughly half of comparable mortgage.
I almost sold our home last year because we were at the 500 mark. We decided doing anything for cap gains reasons with housing is silly but we thought about it alot. Had it been the old rules it never would have even come up.
I almost sold our home last year because we were at the 500 mark
You won’t have to worry about that ever again.
“One aspect of this bubble that rarely gets mentioned on this blog is the change in the tax code regarding capital gains tax on the sale of your primary residence.”
That topic was discussed to death here already. Go back to the 2005 archives if you are sufficiently motivated to find the discussion.
However, what about the millions who when selling their homes the past few years with huge capital gains and buying another home severely decreased their down payments because they were no longer required to roll the gain into another property to avoid capital gains tax?
The “down payment” had nothing to do with the old tax law. You had to buy a house, the amount you paid for the house decided that tax amount, not the amount of the down payment. That would have added some leverage to the market, but with the gain on the last house these people could afford it.
“‘This downturn is very different. It is the first one in my 41 years in the business that’s occurred when you have an up stock market, low unemployment, decent job growth and a very decent economy,’ said Robert Toll.”
Well Mr.Toll it is different this time because never before have so many been lent so much with out having to show their/any ability to repay the debt. So for the first time in your 41 years in the RE business you are going to see a massive correction!
in the months before the crash of ‘29 there were a lot of high visibility cash injections into the system.
Remember the first “emergency” rate cut in 2001? What did the markets go down, another 40% after that?
I know that’s why this has me thinking we are more spot on than perhaps we want to be.
We’ve been there for some time, IMO. Oh for the days when anyone who posted here was either a gloomster or wore a tinfoil hat.
More than a few still wear tinfoil hats here…I recall those who expected a 50% fall in home prices during 2006…
I’m not an expert on economies and financial markets but have learned alot from this board, I always knew fundamentals were out of whack and agree with most predictions on this blog.
but for some reason I feel things are changing faster than I thought they would, I also sense the excitement on this board as if everyone here is alarmed by what’s going on.
Are we going to wish that we were wrong, will things get really nasty? any one with experience from previous (milder) bubbles can give me any insight about how things unravel after a bubble?
I’m glad that I have been right all along. Yes, it will be a disaster, but no apologies will be heard from me for thinking that way. These idiots knew what they were doing–pure, unadulterated greed–and now they are getting burned by it.
We will be burned by it, too, since we all live in the same world, but we’ll only be mildly singed, unlike these idiots who bought overpriced houses with suicide ARMs. My “bitter renter” status will end once we hit bottom, and that will make me very happy.
“Don’t shoot, let ‘em burn,” I shout. I hope they learn from their mistakes, but we know they won’t…
An old front page from The Economist, but more and more relevant each day:
http://www.financialsense.com/fsu/editorials/iacono/2007/images/07-08-07_Economist_Greenspan.jpg
This is one of the few dead tree publications I still read. Two good articles today. One, the House has a bill in session that would mandate the inclusion of index funds in 401k plan options. I couldn’t support that any more. Everyone who I help with 401(k)s is required to use index funds or I can’t help them. They are so much better and more efficient than managed funds. Of course, the fund industry is screaming and making the predictable disingenuous arguments:
http://www.pionline.com/apps/pbcs.dll/article?AID=/20070806/PRINTSUB/70803046/1031/TOC
and then the same pension fund folk are buying subprime “bargains”. Sheesh:
http://www.pionline.com/apps/pbcs.dll/article?AID=/20070806/PRINTSUB/70803047/1031/TOC
did I ever mention how much I favor self-directed options for 401ks? LOL, about 500 times.
Markets after lunch went into tailspin. NYSE down over 200 last I looked. Banking is locking up in Eurozone with some interbank tranactions delayed or awaiting European Central Bank “injections”.
What are we seeing here people?
I’m a bit surprised that the liquidity crisis appears to be worse in Europe than in the US? Doesn’t that seem a bit backward?
Nope, exactly as it should be, because the US sells its MBSes and Europe buys them. Just wait until China realizes it has the same problem on its hands. This isn’t just occurring in Europe. Others bought too.
This explanation makes a lot of sense. Our current account deficit has been funded by the sale of mortgage backed securities.
But I’m guessing that Asia (particularly China and Japan) are far more invested in US mortgage paper than Europe, so the other shoe still has to drop.
I do not believe Japan bought any MBS, China bought a total of ~150B. Jackson and then Paulson went to China to try to get them to buy more MBS loans. “Investing in MBS offers better returns for China than US Treasury bonds, and at the same level of risk” Jackson claimed
China’s response was not suitable to print.
IMHO it is because the Euro banks have disclosure, US banks do not have similar disclosures. The US banks can hide with ’smoke and mirrors’ their actual financial status. I am pretty good at reading financial reports and I cannot tell if any US bank is really making moneys! (I know a lot of them are making moneys, but their reports are junk.)
The old saying you don’t pay your bills by taking principal money out of the bank, looks like this crisis is going to get a whole lot worse, sites like this could have told them that the whole housing thing is going south fast?
mini-panic?
Is there such a thing?
i reckon that’s like being sorta pregnant.
“‘Nobody wants to lend any money. It’s safety first.’
… and you can still get nodoc, 110-120%, ARM , 10x income and all kinds of other unhealthy loans in Europe, at rock bottom rates, no problem at all. The ECB should make sure that the idiots that make these loans in the EU housing market do not get any further credit, but they are doing exactly the opposite. All this money is going to the big speculators that caused the problem in the first place.
P.S.: I’m still waiting for an announcement about the credit losses in the big Dutch pension funds. They have loaded up on US mortgage debt over the last years and are some of the biggest players. If small banks already have huge losses, the losses with these pension funds must be too big to mention. I guess we will be told about the damage in a few years when our government has secretly arranged a bailout with taxpayer money (after all these are pensions for government workers).
I need a drink.
We appreciate you guys taking some of the meltdown…
NHZ - You make a good point. I am wondering if Europe’s own credit-bubble, long ignored by the media more focused on the US, will end up blowing up first. As they say … It’s always the quiet one you have to worry about!
- Bostonian
Who are holding these? Banks, or same securitization method as here - ultimate holders pension, mutual, hedge funds?, cbs?
difficult to find out who is holding the bag, but my guess is that most of the risk ends up with the big pension funds = the taxpayer. They are HUGE players in Europe, the Dutch government worker pension funds even run their own hedgefunds (so they don’t need to tell anyone what toxic waste they are holding).
Here in the US, the biggest holders are banks and insurance companies. Hedge funds are large holders also but still of smaller magnitude. The attempt to get the CDOs into the hands of the designated bagholders (pension funds and the public) was only partially successful.
The Bear Stearns funds transferred some of their CDO holdings to Everquest Financial, which filed for an IPO. Fortunately the funds blew up before the risk could be layed off on the public and the deal was cancelled.
http://www.businessweek.com/bwdaily/dnflash/content/may2007/db20070511_093244.htm?chan=rss_topEmailedStories_ssi_5
Bear also had a big conference for pension funds to sell CDO equity tranches to them back in the Spring. Got some buyers but not as many as they wanted. They were trying to dump this toxic waste. Probably figured it would be cheaper to fight the inevitable lawsuit than take that loss. BS still got stuck with a bunch of it. Serves them right.
Toxic loans drove our economy and now the Euro zone growth is also being fueled by toxic loans. Look at Spain (already imploding) and see what the end is going to be like.
I’m waiting for the first announcement about a Spanish bank or fund that is in trouble. Up to now all EU losses appeared in places where you would not really expect them (mostly German / French / Dutch banks with exposure to foreign hedgefunds or US mortgage CDO stuff).
–
“‘This downturn is very different. It is the first one in my 41 years in the business that’s occurred when you have an up stock market, low unemployment, decent job growth and a very decent economy,’ said Robert Toll.”
Well, Mr. Toll, do you remember 2002? Down stock market, falling employment, bad job market and poor economy. And with all the housing was doing great and your stock was rising in falling market. Do you know why? Free-flowing liquidity to buy homes. Now things are in the reverse. Also, you over-built, far in excess of the Fundamental Demand for house-dwelling, like crazy. You didn’t notice Vacant Units, Year Round, rising all these years?
Jas
Family friend once worked for Toll Bros. While in their employ, he created a slogan about their home construction quality:
Guaranteed for Five Years. Then They Fall Apart.
My mother has been using that slogan for YEARS.
My favorite is, “You can get better quality but you can’t pay more.” It’s funny how some people don’t get it. Kinda like, “I’d give my right arm to be ambidextrous.”
I’m convinced that 90% of the people on this blog for over 1 or more years are better qualified than Paulson to ru(i)n the Treasury.
We can do round robin so no one person gets burned out. Tag team Treasury Secretaries. All the new printed bills will be signed HBBs Inc.
If true, it is solely because Mr. Paulson has no comprehension of what is happening to the 90% of the population that struggles to pay bills.
In my case I could certainly RUIN the treasury, my ex could run up a bigger deficit than the US is currently saddled with.
I would pay a lot of money to sit down with Paulson to find out what he REALLY thinks.
I don’t take what he says in the paper as any indication of what he feels personally.
He’s one of the captains on a massive ship heading into a Cat-5 hurricane. To keep the crew working on the ship, saying “all is well” is much better than “we’re all going to die”, but the end result will likely not change–and he knows it.
“The Federal Reserve added $24 billion in temporary reserves to the banking system amid an increase in demand for cash from banks roiled by U.S. subprime loan losses. BNP Paribas SA halted withdrawals from three investment funds today and Dutch investment bank NIBC Holding NV said it had lost at least 137 million euros on subprime investments.”
Good thing the Fed’s printing press is still in good workin order…
This is a good time to keep an eye on Gold. So far it’s moving with the general tide. But at some point it is going to be mobbed as the safety-haven of last resort.
Who will be buying and with what? Don’t you think that those who could afford gold would have it by now? I sold lots of gold on ebay in 2005 and early 2006 to what I think were housing bubble buyers. Buying gold with their heloc. I think the sellers of gold will out number the buyers over the next few months.
yup.. people are already selling gold and the price is falling.
The time to buy gold, and the time expect it’s price to rise is when the future seems bright and rosy..
Once the SHTF, people need to sell it, wherein it fulfills it’s role as a hedge against bad times.
Actually, it’s being sold right now to cover debts, and yet it’s not dropping in the toilet. It will be absorbed by the people with the money at low low prices, til the stupid masses have no more to sell and are still underwater, then the price will shoot up. Gold will be traded among the wealthy at high prices after the masses have been pilfered. Want to be wealthy, by gold cheap now and hold it.
“It will be absorbed by the people with the money at low low prices”
hopefully, for gold investors, it’s not being absorbed by a new and improved flavor of GFs (greater gold fools).
Gold protects against inflation, but a credit contraction is inherently deflationary. It all depends on the Fed response…Helicopter drop or no helicopter drop?
If they did this twice a month it would equal our trade deficit. Then we have to pay interest on it too.
I wish we only needed 48B a month. I believe we are at a need of 63B per month.
Yeah, but then the budget deficit would feel left out.
“‘This downturn is very different. It is the first one in my 41 years in the business that’s occurred when you have an up stock market, low unemployment, decent job growth and a very decent economy,’ said Robert Toll.”
Note to Mr. Toll: Check this out…
http://en.wikipedia.org/wiki/Florida_land_boom_of_the_1920s
“‘This is a mini-panic,’ said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co., calling the banks’ injection of money into the system an unprecedented move, and evidence that the problems in subprime lending are, in fact, spilling into the general economy.”
mini-panic = oxy-moron
I thought about this comment a lot today, the reason is that I did not see panic. If there was panic I would expect a 7 -10% drop. This was and is a normal selloff, not even down 3% (which in general happens about once a year).
So a mini-panic is when the stocks sell off, having been manipulated over the last few years.
Huh, I thought this was the news. http://health.yahoo.com/experts/rockertraining/5130/stay-off-the-scale
It’s front page yahoo.com. What’s going on here? LOL
Let me try again.
http://news.aol.com/entertainment/television/story/_a/girl-goes-into-labor-at-idol-audition/20070809093909990001
Damn, what’s going on?
Run, do not walk, to this article on the Psychology of Sub Prime Loans:
http://scienceblogs.com/cortex/2007/08/the_psychology_of_subprime_mor.php
Excellent article Peterpaul! The comments that followed the article were interesting as well. IMHO, the REIC probably did not know the specifics of this research, but they chased sales any way they could. When prices began to get out of reach for most “buyers” REIC made the monthly cost more “affordable” to stimulate buying or at least to keep the train moving. What this research says to me is that even if the lender was crystal clear with J6P regarding the long term risk, J6P would still choose to take on that risk even if they KNEW they could not afford it. So is this then an argument for loan approval based on the highest potential cost to the borrower at their fully documented income level? Is there any reason why regulators felt that the consumer could be expected to make rational decisions if given the risk information? I, for one, am in favor of personal choice if it is coupled with personal responsibility for said choices. BUT, I know from my experience that each and every time I questioned the advice to use an ARM I was told that it was a short term solution that would be replaced by a fixed rate loan after appreciation had occurred. I can only imagine that this follow on message was coupled to many recommendations for these risky loans and that changes the perceived risk.
“‘This downturn is very different. It is the first one in my 41 years in the business that’s occurred when you have an up stock market, low unemployment, decent job growth and a very decent economy,’ said Robert Toll.”
This is a downturn caused by housing costs being driven up beyond the reach of the consumer. Mr. Toll, property is only worth as much as a person is willing to pay and right now the consumer is sending you a loud and clear message that they are not willing to pay the current high costs. In real terms, wages have not kept pace with the rapid appreciation of home prices in most parts of the country. Take a good look at the midwest and the number of job loses and forclosures and that also may help you understand why the consumer is not purchasing homes.
I agree. Take out all factors that he mentioned and it simply comes down to affordability….Buyers are not going to buy until prices remain flat once again..thanks to the media buyers are now getting a Basic 101 education on the downfalls of the housing market..and no one is willing to “invest” money into a market that is so unraveled and has yet to show the so called “bottom.”
No one has a problem with T-bills being held electronically instead of on paper?
““The BNP problems sent judders through European markets already rife with rumors of worsening troubles in Germany.”
Finally, there’s that J-word! If you’ve got the judders, you know the jigger’s up.
I like to sell my puts into doom. So, got half of yesterday’s buy for sale and the rest has a stop on it. Some of them are near doubles, overnight. And who said flipping houses was a great investment?
Very nice, young lady!
legging into a small qqqq call position too. bet they send that up in a hurry
My stomach can not handle day trading. I just watch my positions and my targets like a hawk.
Hope you get your bounce. :>)
Bob Toll sounds like a real genius!
Whoops!
http://www.thestreet.com/s/goldman-closing-fund/newsanalysis/wallstreet/10373398.html?puc=_tscana
Drat, just when I thought it was safe to buy US equities.
Hoz,
I finished reading the free .pdf book (Reminiscences of a Stock Operator) that you provided a week and a half ago. Do you have another book to recommend? Also is it possible to point me in the direction of where I can learn more about:
1) borrow moneys in Japan from bank
2)buy Euro sell Yen =EuroYen
3) buy British Gilts
4) buy US stocks with Gilts as your margin requirement and remember for CSE’s there is little margin requirement.
Thanks.
First, did you enjoy the book?
Second, How good are your math skills? If good
The Mathematics of Financial Derivatives: A Student Introduction
Paul Wilmott
(The stock, options and commodities markets are mathematical.)
Probability Theory in Finance: A Mathematical Guide to the Black-Scholes Formula
Sean Dineen
Third, this trading strategy is called the “carry trade”, there are many different forms this takes. Some on this blog use the NZ or Australian bond markets because of the higher rate of return. The “carry trade” I will not recommend to any but the most knowledgeable investor.
Hoz,
Yes, I loved the book. Of course, it also gave me a very good lesson how much I still have to learn. I think the book strikes a particular cord when it mentions that nothing is new in Wall Street. It all has been tried before. Yes, I am pretty good in math(Calculus and Discrete Math), so I will look into both those books you mentioned. No problem about the “carry trade” I just thought your comment, “It would be an incredible act of bravery or stupidity for a “carry Trader” not to buy US stocks when 3 legs are done” was an interesting pattern. That comment kind of made me think of the main character in the book, Jesse Livermore, when he makes his very first trade and checks his little book and says yes the stock should go up. Thanks again for taking the time to offer some advice.
Time to buy the dip?
DCA!
Off-topic, but anyone heard from Hedge Fund Analyst lately? Haven’t seen him post in a while, not even to laud his hero, the mighty Mr. Greenspan. My what a difference a year makes.
Tx, I just love the “exploit inefficiencies” reference. How’s that working for them?
The source says the fund is one of many quantitative funds that made arbitrage bets in a bid to exploit inefficiencies in the market.
Well, crapping on quantitative analysis is one of my favorite pastimes here
It’s great, “When Genius Failed” was published years ago, was very popular, yet people still think they can outsmart the market.
All those quant models work great, until they don’t.
OT - I haven’t been keeping up with all the topics as I’d like to but I wanted to share this with the group. Apologies if this has already been posted.
A friend keeps up with Atlanta news and sent me this:
Attorney Serves 3 years In Jail for Mortgage Fraud
http://www.ajc.com/metro/content/metro/northfulton/stories/2007/08/09/fraud_0809.html
Excerpt -
“A former closing attorney from Cumming was sentenced Wednesday to three years and one month in federal prison for his role in a mortgage fraud scheme that defrauded lenders of millions.
Christopher Halcomb, 45, who has already been disbarred over his involvement in the scheme, also was ordered to pay $15.6 million in restitution, according to the U.S. Attorney’s Office.
Evidence showed Halcomb participated in a mortgage fraudscheme orchestrated by Florida resident Phillip E. Hill, 49 from early 2000 to early 2001.
According to federal prosecutors, Halcomb helped Hill and others defraud some banks and other mortgage lenders by fraudulently inflating property values and submitting false borrower qualifying information to obtain loans.”
BayQT~
Where did all the loss money from the Europeans, Chinese go to ?
-American builders: Toll brothers …
-American investment banks: Bear Stearns, GS …
-American home sellers
-American mortgage brokers
-American Realtors
-American gangsters, fraudsters
-American J6Ps
We Americans really get them good. Our SP/Moody rated our
junk bonds AAA so we could unload them on the Chinese, the Europeans.
don’t worry about the EU, most of the EU politicians worship Bush and his gang, so they will happily pay their fees to keep the Great American Empire rolling along. As for China, I think the subprime and Blackrock losses should open their eyes and I doubt they will be as stupid as the EU in responding to all this.
I dont know if anyone posted this before, but someone came up with a website to save the housing market(ya right).
let me know what you think, could be a weekend topic (get some laughs)
http://www.savetheamericanhome.com/
I’m speechless.
All right which one of you guys did this? This is hysterical and the funniest thing I’ve seen today!
I got it off brokeroutpost.com.
They still have a sense of humor!
I’m speechless too.
“Housing is over valued for today’s economy. By 2012 (5 years) American homes value will increase enough to fill the gap. ”
This has got to be a joke.
Property values sore in many areas because the buyers who could not qualify in the past now can and we move into the “buyer market”.
Sore.
“Buyer market”.
anyone else completely dizzy?!
Will today’s worries fade tomorrow like they keep doing?
Will Bush really and truly insist on making sure FannieMae is ’straightened out’ before caps can be raised?
Did anyone see Jim Cramer’s latest crap telling everyone Jim Lockhart is responsible for the millions of people about to lose their homes?!
http://videoplayer.thestreet.com/?clipId=1373_10373377&channel=Cramer+On+Demand&cm_ven=&cm_cat=&cm_ite=&puc=swptile&ts=1186689599245
Seriously, somebody needs to drag him away now…
cheers!
OT but I can’t believe there are still idiot flippers out there. Don’t people watch the news?
http://www.zillow.com/HomeDetails.htm?zprop=20783310
If you were to guess how much this house is really worth, what would you say? My formula is to revert back to at least 2004 (of course I take zillow with a grain of salt) so I would say 220k at best. It is in Hancock Park & I know for a fact that they installed some premium Ikea cabinets to spruce it up during the last flip.
All right which one of you guys did this? This is hysterical and the funniest thing I’ve seen today!
DARN IT, DARN IT, DARN IT, I just wanted to pick up some sweet deals in West LA, I didn’t ask for a Great Depression II, G-d help us all. Oh well at least my puts are up…
LOL!
” I didn’t ask for a Great Depression II”
We’re holding you responsible,missy, and it’s going on your permanent record.
“A senior vice president of online retailer Amazon.com Inc. exercised options for 5,000 shares of common stock under a prearranged trading plan, according to a Securities and Exchange Commission filing.
In a Form 4 filed with the SEC Tuesday, Andrew R. Jassy reported he exercised the options Friday for $7.93 apiece and then sold all of the shares the same day for $80 apiece….”
At that point he said suckers.
and from the Federal Reserve:
“Foreign central banks were net sellers of U.S. Treasury bonds, although increases in agency debt stemmed the decline in overall holdings, Federal Reserve data showed on Thursday…”
Funny it wasn’t China or Japan.
“Foreign central banks were net sellers of U.S. Treasury bonds, although increases in agency debt stemmed the decline in overall holdings, Federal Reserve data showed on Thursday…”
Funny it wasn’t China or Japan.
Really? Links? That could be very interesting!
Got popcorn?
Neil
No popcorn for this puppy,
Reuters
http://tinyurl.com/2kbma5
LOL
Why increase agency debt? Seems like that is where most of the problems are going to be.
These words could come back to haunt AIG. From the AIG Chief Risk officer:
“We believe that it would take declines in housing values to reach Depression proportions — along with default frequencies never experienced — before our AAA and AA investments would be impaired,” said Chief Risk Officer Bob Lewis, in a conference call with analysts on Thursday. “AAA”- and “AA”-rated investments are considered to be those of highest credit quality.”
jeez, be careful what you ask for, Mack.
Just observed the Nikkei is continuing the fun. Maybe we shouldn’t say, Bring it on! But it’s kinda tempting.
same idiots as those in the Netherlands; Aegon management will not make any provision for subprime losses because all their US subprime stuff is rated AA or AAA.
NBC broadcast news this evening featured a story on the market drop today, with commentary by some bald headed nut job named “Cramer”. This guy looked and talked like some psychotic prophet of doom trying to get the populace alerted to the imminent saucer invasion. Bizarre stuff. Have they always used this guy? I don’t have cable and have never seen his schtick before, but I’ve seen his name on this blog. How come he’s suddenly front and center? I thought he was some kind of sideshow clown on CNBC?
“…nut job”, tee hee! “…psychotic”, lmao. It didn’t take you long to recognize his character flaws.
PAGE ONE
GLOBAL SCALE
How Subprime Mess
Ensnared German Bank;
IKB Gets a Bailout
By CARRICK MOLLENKAMP, EDWARD TAYLOR and IAN MCDONALD
August 10, 2007; Page A1
DÜSSELDORF, Germany — Five years ago, a little-known bank that lent to small and midsize German companies decided it wanted to broaden its business. An affiliate of the bank started buying complex bonds invented in the U.S.
http://online.wsj.com/article/SB118670471880693703.html?mod=googlenews_wsj
We were right, thank you.
Bernanke, Paulson Were Wrong: Subprime Contagion Is Spreading
By Bob Ivry
Enlarge Image
Federal Reserve Chairman Ben S. Bernanke
Aug. 10 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke was wrong.
So were U.S. Treasury Secretary Henry Paulson and Merrill Lynch & Co. Chief Executive Officer Stanley O’Neal.
The subprime mortgage industry’s problems were contained, they all said. It turns out that the turmoil was contagious.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a.pPEmZeZZCk&refer=home
ABS investors favor subprime yields over alt-A despite selloff
By Allison Pyburn in New York
Published: August 9 2007 14:44 | Last updated: August 9 2007 14:44
Borrowers of alt-A mortgages may be of higher caliber than their subprime counterparts, but that hierarchy doesn’t necessarily hold for the bonds backed by the two types of loans. In fact, some alt-A securities are trading in line with comparable subprime-backed bonds, according to several market participants.
“We’ve historically been very wary of alt-A because of the decreased levels of subordination in the transactions,” said a buyside source. “We are much bigger believers in subprime.”
http://www.ft.com/cms/s/b23f1414-467b-11dc-a3be-0000779fd2ac,dwp_uuid=e8477cc4-c820-11db-b0dc-000b5df10621.html
Helicopter drops of liquidity are prominently tallied on the marketwatch.com front page… Doesn’t this kind of news tend to lead interested observers to question the ability of liquidity injections to prop up markets, rather than to bolster confidence? For some reason, “greasing the credit markets” does not strike me as a very promising form of medicine for a credit market beset by a confidence crisis over shoddy underwriting standards.
Pouring on the liquidity
European and Asian monetary authorities make an additional $100 billion available in an effort to grease the credit markets.
CENTRAL BANK ACTIONS
Aug. 9
Bank Injection
ECB $131 billion
Federal Reserve $12 billion
Bank of Canada $1.1 billion
Aug. 10
Japan $8.5 billion
Australia $4.2 billion
ECB $84 billion
Total $240.8 billion
marketwatch.com