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The Housing Bubble
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How the Fed funds rate cuts, which are being touted as a response to the housing market/mortgage crisis, will only help wall street and actually hurt main street.
…or won’t even help Wall Street, but will attempt (and fail) to keep banks solvent.
After all, the Fed is nothing more than an organization made up of member commercial banks, and after all else, it still will act in its members’ interests. The public, “The Economy,” the dollar, and if it is necessary, the gov and Wall Street, would all be sacrificed in the interest of the Prime Directive.
The news is bad and is getting worse every day and we still haven’t seen the major damage from the re-setting mortgages. Personally, it looks to me like we’re in the pre-game warm-ups for the trashing of the US, as was done with Russia, in the name of “globalization for the greater good”. And the housing bubble will be the scapegoat. Wall Street, the Fed, these are the real “enemies” of the people and prosperity. The “game” right now, IMHO (there’s always a game, we just don’t know a lot of times what game is being played) is to keep things going long enough until the 2008 coronation of Mrs. Clinton. Not that I think it has to be inevitable, but even a pundit or two here and there is expressing some bemusement why their own media acts as if the election has been pre-determined in some way.
But can everything be “gamed” until the 2008 election? I’m not so sure of this.
palmetto: Give the resets time, defaults are a delayed echo effect of the reset. Once the payment skyrockets it will take 60-90 days before the bank intiates foreclosure proceedings. Some people will muster the extra money to cover the higher payments, sacrificing other discretionary expenditures which will show up in the aggregate in the form of a drop in consumer spending and the ballooning of outstanding CC debt and late payments in other bills (utilities, HOA fees, car payments etc.) Once critical mass is reached in the # of resets that results in a the ripple affect working its way through all quarters of our consumer based economy then we shall see what we are all concerned about. By this time next year the cracks in the dike will have broken and everything will be in free fall recession, right after the presidential election of course!!
Can something this big really be staved off until a specific fixed point in time has passed? Not to be an apologist for the current adminstration, because there is number cooking going on aplenty, but this thing - like all large macroeconomic events is taking on a life of its own. So far I’ve been dead wrong since at least 1999 as to when it would break, but when it does break it will do so when it pleases and it is going to ugly.
Perhaps the plan is that it “breaks” on juniors watch so that the new queen can do her work without having to field questions about who is to blame. That notwithstanding, I’m with Palmetto on how this appears to be shaping up. It’s a new world order scheme and we get to be the pawns.
“2008 coronation of Mrs. Clinton”
You have got to be kidding me. She is not even in office yet, and she is being blamed for this economic mess.
Time to up my donation to the Hillary for President campaign.
I think it is not too early to start pinning the blame on Hillary, on the outside chance she gets elected.
P.S. Be careful not to bankrupt yourself by making too many HBB-anger-motivated contributions to Hillary.
“P.S. Be careful not to bankrupt yourself by making too many HBB-anger-motivated contributions to Hillary.”
While your misturbating over Hillary, I’m using the info gained from HBB to buy GLD options over the last 2 weeks. Housing down, Gold up. Plenty of profits to give to the next Commander in Cheif.
seems that way doesn’t it…
The way I see it:
The real mortgage credit problem is that ARMs are resetting to higher rates and that a major part of the population have taken out ARMs in order to delude themselves into thinking they can afford a particular house. Thus they can expect much higher mortgage payments. Juggling interest rates only slightly effects the borrower’s ability to repay, because the reset point, based on LIBOR, only varies slightly… a hypothetical ARM might reset from 7.5% currently to between 10.25% and 10.5%, depending on LIBOR at the time of reset.
The only beneficiaries of a rate cut are those people who can and will continue paying at our hypothetical 10.25% but go under water at 10.5%. That’s a slim margin to be hanging on to and not too many people will make it.
Meanwhile, as the Fed cuts we get a drop in the USD and major rises in commodities, including oil and grains, which sell worldwide but are priced in USD. Main Street gets the inflationary end of the stick, J6P does not get marvellous rate reductions that will allow him to stay in his overmortgaged house. And Wall Street gets to borrow short term money at lower rates.
Remember, a lot of these shennigans are based on borrowing short term (low rates) to buy long term. That works - as long as you’re able to borrow short term money at low rates, which the Fed rate cuts insures.
Here is a good primer on monetary theory in an easily digestible format. http://www.auburn.edu/~garriro/ppsus.htm
It’s a powerpoint presentation, I recommend the 2006 version “Sustainable and Unsustainable Growth Keynes and Hayek: Head to Head ” which does require 2003 of powerpoint.
And here is some additional reading on the subject. http://www.lewrockwell.com/murphy/murphy119.html
The bottom line is that the financial organizations (typically exlimplified by “Wall Street”) benefit from the newly created dollars before inflation really kicks in to the rest of us (Main Street).
‘The bottom line is that the financial organizations (typically exlimplified by “Wall Street”) benefit from the newly created dollars before inflation really kicks in to the rest of us (Main Street).’
Think of the Fed as a giant perpetual money pump, which uses an inflation tax on Main Street to provide for massive salaries and bonuses on Wall Street, and you will have the basic idea.
Berneke is Wall Street’s bitch. He better come up with the money or he gets a big slap down.
The rate cuts don’t seem to be doing much to help keep oil price inflation contained, as the Fed has signaled a lexicographic preference for shoring up Wall Street interests over maintaining a stable currency.
” FUNDS
Since the Federal Reserve cut U.S. interest rates in
mid-August and central banks pumped billions of dollars into
financial markets to ease a credit crunch, oil prices have
surged close to 40 percent and gold has risen 20 percent.
Investment flows from pension and hedge funds into
commodities including oil have boomed, as has speculative
trading. At the same time, the credit crunch has brought some
other markets, notably the U.S. asset-backed commercial paper
market, to a virtual standstill.”
http://www.reuters.com/article/fundsFundsNews/idUSL0210626220071102
“How the Fed funds rate cuts, which are being touted as a response to the housing market/mortgage crisis, will only help wall street and actually hurt main street.”
Again, I think that they are trying to “thread the needle” on this on, flying through the canyon, trying not to hit inflation on one hand, and unemployment on the other…and the canyon is getting narrower and narrower. I truly believe that they are thinking “well at least we won’t hit either canyon wall *too* hard”.
To bad that the housing/credit bubble made it into a box canyon. Oh well.
Here’s a suggestion:
My perception was that the entire “prosperity” of the US in the past 8 years or so was based on debt. I’m not exaggerating when I say that the entire economy of many areas (Florida, Idaho, Sacramento, Las Vegas) was simply based on people buying and selling houses to each other, and a house valuation Ponzi scheme.
So here’s the question:
Suppose there were no I/O, no-money-down, ARM, teaser-rate mortgages. Suppose you had to put 20% down and could finance no more than, say, 3.33 * your salary.
What would the economy of the United States have been like?
“What would the economy of the United States have been like?’
I don’t think globalism would of gained the foothold that it has in the last 5 to 10 years for starters . The unemployment rate would of been high,therefore it would of needed to be addressed years ago .Americans got sidetracked by the housing boom while the corporations were changing their employment and business models to a global one .
Of course we would not of had the housing boom ,but alot of jobs and industry and spending would not of taken place in the timespan you mentioned .In other words ,we would of had a recession and we would of been 8 to 10 years closer to addressing the real problems in the United States . Wall Street and the corporations would not of gained so much power at the expense of the middle class I believe .Housing and it’s by-products was such a big stimulant in the last 10 years in the United States ,but now we are back to the late 90’s ,except we have inflated housing that is going bust and another stock market correction in the near future .
I could go on and on about how much better it would of been for the middle class had we taken a different course than the one that was taken 10 years ago .
how much is military/security spending artificially pumping up gdp ?
100%.
I know people working on Boeing 787. Jobs on that project are booming. No military spending on that thing.
Of course not.
Not only the 787 but also the 747-8. Just due to retirements there will be a shortage of engineers in the next five years. Note: I’m not saying there won’t be layoffs. And there is going to be a great geographic redistribution of engineering jobs…
Now take a look at the stock markets!
The Yahoo! graph looks like a skydiver…
Got popcorn?
Neil
“great geographic redistribution of engineering jobs”
One of the constants for our generation.
Since when did this board become a political board? I’m sure someon can spin some sort of ridiculous connection between defense spending and the housing bubble, but it still highly irrelevant.
I wish people would stay on topic. If you want to discuss either the excesses of defense spending *OR* the necessity of defense spending, why not go to a political board. There are plenty of them.
Why not keep the topics to something that is at least slightly related to housing?
Flat has a one track mind.
In law school one of my profs talked about “the seamless web” of the law. That is, all of the fields are interconnected. Same thing with politics. Housing is tied to the economy which is tied to the government which is tied to politics which is tied to corporate interests which is tied to defense spending, etc….Heck, GWB was quoted just yesterday about housing.
Government spending on any kind has everything to do with the economy and housing.The National debt directly influences interest rates, which affects housing.
The state of the economy is important too and knowing the percentage of employment tied to jobs that don’t produce an exportable product or improve infrastructure is important. Government jobs can’t last without borrowed money. The fact that our own government has supported efforts to move bank losses off their books with the creation of a super SIV fund opens up the government to charges that it’s not honest with the people.
I don’t think it’s politics I think its facts. Facts that we should all be concerned about.
“The National debt directly influences interest rates, which affects housing.”
The national debt directly influences the rate at which the Fed must run the printing presses to shrink the real value of the national debt down to manageable proportions.
“artificially pumping up gdp”
How much is an easily fudgable and unverifiable GDP ‘deflator’ (a type of inflation estimation) artificially pumping up GDP?
Wall streets part in the housing mess!!!
Merrill Lynch (MER): Better Living Through Cheating.
http://www.247wallst.com/2007/11/merrill-lynch-m.html
There was a WSJ article on here a few weeks backing saying Goldman was doing the same thing. It’s an outrage. A cover to pay bonuses despite the huge losses.
Someone posted an article here about Goldman and that the SEC is looking into them, too, because it seems they’ve just done a little too well of late and might have had the advantage of “insider” information. LMAO! DUH! Hank Paulson is the ultimate “insider”.
Also ,could it be that these firms were trying to delay the buy-back provisions so they didn’t have to buy-back because of the delay . I remember for awhile some builders were paying the mortage for 12 or more months ,which to me was just enought time to exceed the buy-back provision on loans from their in-house “special lenders”. Just a thought .
I have a question for all the inflationists out there. If we are headed back to the 70’s and some kind of south american hyper-inflation, why are interest rates so low and heading lower?
Interest rates are a 70’s-80’s barometer of inflation, as money was truly scarce back then, and people had money in the bank, and more importantly, little or no debt, aside from their house.
We were able to “deflate” our way out of that scenario, by eventually creating the Ponzi Economy that you see today…
We have just the opposite now, money is everywhere and what do our interest rates mean now really, in the scheme of things, when nobody has any money to stick in the bank, as we are sadly, close to broke, and bought everything our heart’s (homes) desired, and owe huge debts?
The FED is doing the only thing they can, trying to reignite the consumer to “spend” more money, with the lure of low interest rates.
The fat lady is approaching the stage…
‘We were able to “deflate” our way out of that scenario, by eventually creating the Ponzi Economy that you see today’
That doesn’t make any sense.
‘money is everywhere and what do our interest rates mean now really, in the scheme of things, when nobody has any money to stick in the bank’
Again.
‘The fat lady is approaching the stage’
These are the sort of things that pass as inflationist arguments. You might have said, look at the price of gold. But I would say, if gold kept up with money supply, it should be over $3,000. Again, why are rates so low?
By “deflate”, I mean inflation of course, in a sarcastic way…
Everything has gone up in price rather dramatically from say 1980, save electronic/computer junk and assorted cheap products made possible by Asian rates of pay.
Houses were $100k in Los Angeles, back then.
Every other country in the world’s interest rates are going up now, ours are going down, how come?
Gold is a relic, a forgotten honest relic that Wall Street has always hated and did it’s best to keep it’s ethics at bay, as it’s much too rare for everybody in the world to use as money.
If you took 1,000 Americans at random, i’d venture to say that only a handful have ever even held a bullion Gold coin in their hands, let alone own any.
Our country will be getting a re-education about it’s magical properties that always show up, when things look their worst.
My guess is that it is because there is too much money hunting profit.
I am only guessing as I do not truly understand this. Which makes it a great topic suggestion.
I would lie if I say I know the answer to your question, Ben, but some possibilities come to mind:
- reduced inflation expectation - Vocker defeated inflation and people have gotten used to the vistory - but expectation can change
- the Asian savings glut, Bernanke’s explanation - Chinese workers save 20-40% of their pay, because of the rotting public infrastructure that let poor people wither and die - China seems on a brink of inflation and those savers will loose - other Asians save similar
- “normal” times mean expontential credit growth, which is, obviously to anybody but economists, unsustainable - the central bank keeps the game of credit creation going a bit longer by reducing interest, because deflation threatens, but rates are obviously bounded by zero
- (fill blank with your own favorite)
I must admit, I really don’t understand inflationary or deflationary forces, at least not these days. I consider myself a deflationist, in the sense that I prefer deflation over inflation, but don’t low interest rates fuel inflation? Seems like that was the fuel for the inflated housing prices. So if interest rates are low and heading lower, wouldn’t we be looking at hyper-inflation?
Inflation has two components SUPPLY and DEMAND for the Federal Reserve Note. You cannot predict inflation solely on supply.
Foreigners have stopped investing in the US and money is leaving our country at record rates. DEMAND for the FRN is falling daily.
Without foreigners reinvesting their trade surplus the Federal Reserve will be forced to monatize the national debt which will greatly increase the supply of dollars.
The failing economy will result in less tax revenue at a time when the social security surplus is turning into a deficit and new social healthcare programs are being introduced every year. This will only accelerate the growth of the national debt.
The main argument for deflation is that record debt defaults will destroy money faster than new money can be created (due to tighter credit standards).
The problem is the losses due to debt default are TOO large for the banks to survive and so the Fed becomes the lender of last resort and pumps money into the banks.
Deflation, if it can be arranged, is the only way to save the FRN; however, it would screw our government because of its huge debt which would only GROW as a % of GDP and so CANNOT be allowed to happen.
p.s.
It’s pretty common for people to look back historically to similar events, and think the same scenario will happen.
France decided to fight World War 1 again, with their Maginot Line preparations, for example.
Didn’t work out so well…
Why Are Rates So Low? I don’t see what the Maginot line has to do with it.
You are “fighting” the last war, thinking interest rates are the end-all be-all determination of how things are financially.
I think we bit off more than we can chew. Big business (IN DROVES) starting sending jobs overseas at which point we should have waited a few years to make decisions based on the fallout. Instead, we moved on to finance an expensive war. Then we moved on to the fallout from the housing blow up. Now the rates are again lowered to salvage the economy, however, the monetary inflation won’t reach J6P’s pocket to help float the economy. Instead, the money will go to fund a war, provide profits for all the money chasing other money, and increase the costs of everday items. Lower interest rates are a great tool at times, however, we’ve abused it and continue to abuse it. Similiar to throwing something against the wall and seeing what sticks. In this situation there isn’t much sticking. IMO
‘You are “fighting” the last war, thinking interest rates are the end-all be-all determination of how things are financially.’
And you are engaging in talk-show economics.
Yields are the price of money. In economics, price and supply are most of what tells you what is happening and why.
There are exacerbating circumstances…
For instance, except for laggards Africa and other assorted 3rds world countries, the rest of the world has caught up with us, or is in process of doing so.
They’ve caught a taste of the good life, and dig it, baby.
They have savings, and their currencies are strong and respected.
Climate change is real and coming, and we are woefully unprepared for the circumstances. A town of 145 in Orme, Tn. has gone bone dry already.
But they’ve got it figured out. 3 times a week, the mayor-volunteer fire chief goes down to a fire hydrant in Alabama and comes back with 20,000 gallons, for his people.
What about a city of 1,450 or 14,500 or 145,000 or 1,450,000 or 14,500,000?
We gonna send the mayor out, to get water for everybody?
And all of this, combined with our fraudy financials is hitting at the same time…
Our brains can’t multi-task all of this news, as it’s all bad news.
We naturally tune out things we don’t want to hear.
A few of us are listening, though…
Because someone is willing to lend here in the face of inflation risks. Who? It seems to be sovereign central banks, for now. If you owe someone a thousand you have a creditor, if you owe someone a quadrillion you have a partner.
Bernanke said it was a global savings glut. I suspect it has more to do with a lack of true yield in the markets, which would suggest deflation at play. Is a 2% (or less) money market really such a great yield in a 4% inflation environment?
There is no good place to put money. This implies the supply of funds exceeds the demand. Why? Maybe the reasons are shifting.
There is all that Chinese and Arab money, created by exports in excess of consumption.
As credit conditions tighten, perhaps the demand for credit is falling, as there are fewer creditworthy borrowers, meaning those with funds are desperately competing to lend to the shrinking number of them. But wealth to be lend — domestic supply of funds — may be shrinking faster than demand.
I have to think that rates have got to go up sometime.
CBs of many nations are following the Fed’s lead in a game of “beggar thy neighbor’s currency.”
I know many, many folks who feel that Treasury debt is “safe”. Anecdotally, these are folks who haven’t looked back for more than 2 or 3 decades, and are generall over 50. They can’t quite seem to grasp the concept of purchasing power.
Specifically, they don’t understand that if $100 dollars today buys product x, but $120 2 years from won’t buy half of product x, you lost quite a bit. If they did, I don’t think you’d see Treasury debt with the yields as they are.
Plus, central banks work in unison. The Fed and Treasury have worked with other banks to attempt to “bail” them out. Based on current rhetoric from other central banks, it would be logical to infer that it is a concerted effort to mitigate the current Fed-and all their member lenders- calamity.
Once folks get past the notion that the Fed is loyal to the Constitution and in some capacity linked to the specific interests of the sovereign (people), then it gets clearer. They are a giant corporation, and it is global.
Treasury debt is “safe” –
- from default, provided the U.S. printing press remains in operation;
- from inflation, unless it turns out to be “higher than expected.”
The yield question is an interesting. The obvious answer is that there is too much money chasing stable return. The real question is why?
My favorite theory is that we are on new ground with the size of the trade deficit. I haven’t yet researched the historical trade deficit (and its ratio to GDP), but I’d guess we have record high dollars overseas. Those dollars are looking for yield. A simple investment for those dollars would be treasuries of varying yields + their derivatives.
The resulting demand would push up bond prices overall.
BTW, I don’t know exactly what you mean by “inflationists”, Ben. Are there people that “believe” it has to go one way or the other like religion? Obviously, the Fed can cause a inflationary instability just as easily as it can create a deflationary instability.
‘Are there people that “believe” it has to go one way or the other like religion?’
Yes. But after hearing that stuff for the past twenty or more years, I am curious why gold isn’t way higher, why rates aren’t over 10%. IMO, things aren’t following the theories, suggesting something else at work, which is deflating the overall economy. Is it globalization? I don’t know, but the fact that the Fed can lower rates at will seems to indicate deflation. Same with treasury yields. BTW, if oil had kept up with inflation all these years, it would be much higher as well.
Well, every so often the religious have a Galileo to contend with. Those parts of religion that disagree with the newly presented facts go away, but in the case of Galileo it took 300 years for it to overcome the stalwarts. Hopefully, the “inflationists” are not so recalcitrant.
As you point out, there is currently room to reduce interest rates. The evidence speaks for itself.
Sorry I mistook your question of inflationism as a question of yield premiums. As an aside, a topic of why the curve is still so flat would be a good one, maybe for another day. That was the direction of my answer above.
Galileo upset the secular intellectuals, academics, and scientists of the day, who tried repeatedly to suppress him. When that didn’t work, they appealed to government and ecclesiastic authorities, who were reluctantly dragged in to support the establishment.
The scientific establishment got frustrated then with the church’s foot-dragging and mollycoddling of Galileo. They wanted harsh action now.
The church persuaded Galileo to partially recant and to tone down his rebelliousness, to quiet those secular idealogues who wanted his head. This was a compromise to get the academics off their back. Galileo agreed. Then he reneged. This happened more than once. It was one thing to spout intellectual ideas (actually formed earlier by Copernicus, himself a Catholic cleric), it was another to make the church look bad, so they then reluctantly appealed to secular authorities who placed Galileo under house arrest. That was the harshest penalty he suffered.
In later years, once the academic and scientific community had accepted Galileo’s ideas, they proceeded to revisionism. Instead of their own numbers being bad guys, they blamed it on the church. This was especially easy in northern European and British communities, who following the reformation, liked to blame all kinds of stuff on the church.
Therefore, to compare the inflationists to Galileo means they have to battle their theory against the established theory of the academic and intellectual community (read, the Ecomonist Estalishment).
Therefore, to compare the inflationists to Galileo
???
Religious dogma is, by definition, dogmatic.
People will hold onto dogma even when presented with evidence to the contrary.
Galileo presented people with evidence different from their worldview.
Ben has presented “inflationists” with evidence different from their worldview.
Now, do we make him recant or do we discuss the data?
Ben has been doing a fantastic job, without resorting to Galileo.
“Now, do we make him recant or do we discuss the data?”
How about M3 for starters?
How about M3 for starters?
Good idea, except we might as well talk about measurable things. Talking about things that are not measurable is not talking about data. And it usually brings out tinfoil hatters.
So how about M2 instead? It’s going up. Now, why aren’t yields?
“inflationists”
To name some,
Bernanke
Greenspan
Miller
Burns
I’m interested in both teams. I think one might win this season and the other one later. Either way, both teams have powerful players in motion.
I think interest rates are low because the best investments these days are the ones where you will loose the least (where you fear you will loose the least). If you are trying to minimize loss, working with borrowed money is unattractive. There are a lot of unattractive non-productive assets out there that look like loosers; houses, construction companies, banks, stocks, my neighbors. I’ve burried some money in Tbills to help keep interest rates low. The FED picked up on this and adjusted their benchmark. LOL.
The FED has to ease in an attempt to keep the big banks breathing, it doesn’t matter how many other bodies are left laying on the field. That’s an inflationary force, but other forces are pushing credit contraction. Right now both these forces are keeping interest rates down.
I’m an inflationist, but i don’t believe they are going to win this season.
‘The FED has to ease in an attempt to keep the big banks breathing’
Just the other day, I posted quotes from Greenspan saying they had lost control of rates 4 years and out. That implies they are pushing on a string, IMO.
I’m sorry, but I try to skip over quotes from Greenspan. An old preacher said “If 5% of what you say is a lie, you are a liar.”
I fail to see how the FED ever directly controlled long term interest rates. Do they have a way of manipulating the Tbill market? I admit I have a pretty naive view of these things.
I don’t think the FED needs to control long term interest rates in order to give the banks the iron lung treatment. Taking MBS as collateral was an interesting move. Maintaing order, if that is their prime directive, doesn’t mean they need to keep markets headed up, just keep them from collapsing suddenly.
I fail to see how the FED ever directly controlled long term interest rates.
That was the item I was alluding to above. It used to be that there was a yield curve where long-term bonds would demand a premium over short term. And the curve would periodically invert, but on balance the curve would revert back to the historical premiums. So by setting the short end of the curve, the Fed would control the long end too.
But something has happened in the past decade to make long-term bond holders not impose a premium.
Is it because there is too much demand for long-term bonds? or too little supply?
I can’t answer even that ridiculously simple question. So forget about actual hard questions like, When does it revert to the historical mean? or Have inflation expectations changed?
I think it is a possibility that both deflation and inflation are coming, in waves. Doesn’t the tide go out before a tsunami hits?
Hope no offense was taken by my disparaging remarks about Greenspan. Nothing he says helps me understand anything, on the contrary.
after reading the comments, the 2% on a tax free with inflation reported in the 1-3 range, expectations are managed to hold consumption steady. Failing to consume less leads to an impalance of return or earnings going forward.
The game appears to be force the consumption lower through lower yields on risk free assets..
How can this possibly work when the masses have been trained to consume all they produce, and more in an effort to live a better lifestyle.
ill just try it one last time,
if you are on a fixed income and it increases by 2% and inflation is at 3%, either you consume less or consume savings….
Ben, if inflation represents increasing avaialibility of money, and interest is the “price” of money, I would expect an inflationary period (all other things held equal) to force down interest rates.
It seems likely to me that during the inflationary/high-interest period that you are speaking about, there were other factors going on. Perhaps, for example, during a recessionary period people save less pushing interest rates up. Ben Bernanke claims global savings are impacting interest rates. This seems plausible to me. The bottom line I think, is that you can’t just say inflation=high-interest just because of what was going on during one period. There were lots of things happening at that time.
My final answer is, although people should not want to lend in a potentially inflationary environment, the share of savers prepared to act on that fact is dropping more slowly than the number of creditworthy borrowers.
Think about it. The world has for the most part been divided into savers who won’t borrow — the Chinese, posters on this blog — and borrowers who do not and cannot pay the money back (most Americans, Brits, Austrialians, businesses reliant on consumer demand, etc.
So all the savers are chasing the shrinking number of borrowers who can and will pay the money back.
So a prediction of your theory would be: The dollar volume of debt should be growing more slowly than money supply? (or perhaps GDP?) That should be testable.
Ben, I good weekend topic if all us chicken littles (me included) are wrong about big recession / drepression. Big drop in housing cost leave plenty of money for other things. As some have noted 1/3 of home owned outright. Fairly small percent of owners nationwide are FBs. Global deflation. Economy might cool down but not crash.
I’m not sure I’m an inflationist or a deflationist. I’d love more talk about that. I was rooting around on the Princeton network a while back, looking through John Nash’s items and I found an interesting paper he’d written on inflation a few years ago. I thought about posting a link to it here, but didn’t. Anyway, one of the points of his paper is that interest rates represent risk (to inflation, among other things). The more risk I see in the future, the higher interest rates I will charge to make sure I get some kind of payback in dollars that mean something. When things are secure, one charges lower interest rates. So, the current situation is a real head-scratcher. They ought to be going sky high, I’d think. My only guess is that all the liquidity out there to be had is somehow coming from the government’s cheap rates and they don’t care about risk of payback - they figure some government agency will take care of it. Who knows.
1. Post the link if you still have it. Nash is a smart guy, but I don’t know too much of his work on inflation.
2. I think you are right: The prevailing view is that risk is perceived as smaller now than in the past. It seems to be the only answer that explains most of the data.
I Have a few inflation/ deflation questions as well……
1. Who would, if any of you, lend your money to with what is going on and what security would you want back and what interest rate would you want? Would ANY one commit to tieing up their funds for say one or more years with all the volatility we are seeing and experiencing?
2. Who, if any of you, would make a long term loan to others in your U.S. Dollars and forego the opportunity of perhaps being willing and able to get out of U.S. Dollars if the Dollar decline continues (which, perhaps it may well do)?
3. Do (any of you) truly think that your dollars are safe in any Bank these days with the current Global Credit Gridlock and if so, why?, and if not, why not?
These questions are just meant for food for thought as it appears that the long awaited inflection point in the RE markets (Globally) may very well be at hand.
An analysis of the ARM reset chart. We are getting close to the top of the first bump, and things are already pretty bad.
Yesterday, someone said that Goldman has another chart that shows a different pattern and that we aren’t as close to that first peak as we thought.
The chart only deals with first resets. What would it look like if subsequent resets were included? The MSM reports seem to indicate anecdotally that people can sometimes handle the first reset with difficulty, but later ones are just too much.
What about the option ARMS? There was a report recently that they are starting to reset earlier than expected because people were making the lowest possible payments and hitting their equity limits. Aren’t the option ARMs a huge part of the second bump of the chart? What happens if they really do kick in ahead of schedule? Is it just more of the same? Something else going to happen?
It would be good to see a current chart. We’ve all been referring to that one chart that came out in January, and talking about the two peaks etc. - but I suspect that the peaks in that chart are somewhat transitory. There are new ARM loans being done all the time still, which would serve to shift things back continuously - the peaks will always be yet to come - we will never reach them. You can only tell when the real peak happened by looking back at when the resets actually happened.
Here’s the link to the Goldman charts (**PDF Altert** — see page 8):
http://tinyurl.com/yp7jvm
Goldman’s chart show the resets peaking in March 2008.
I think the difference in timing between the Goldman and Credit Suisse charts has to do with their respective release dates.
The Credit Suisse charts were released in March 2007, while the Goldman charts were just released in October 2007.
Back in March 2007, subprimes were still alive and kicking giving some of borrowers facing early resets time to refinance and extend their eventual doom. I could be wrong, but I imagine that’s why there is a discrepancy between the charts.
I noticed this on happenstance of daily data mining..
the issue of pushing the time of danger forward creats a false sense of security for the lawdogs to pander to constituancy while cutting backroom deals and floating trial balloons in the press.
What will be the effects of long term drought on the U.S., in terms of housing and population?
http://drought.unl.edu/dm/monitor.html
Historically, these droughts can last for decades in the Southwest. If a typical 20+ year drought plays out, what will happen to Phoenix, Vegas, Souther California, Denver? The Southeast: Tennessee, Florida, Georgia Carolinas? Migration? Regional or bigger economic depression? Food shortages? Or, dare I say it, closing golf courses?
Fore! not against.
Golf had it’s day, go take a hike instead.
Hmm. In the 70s, capping the price of gas lead to gas shortages and long lines at gas stations. Letting the market determine the price of gas eliminated the shortages.
Now, we have governments (state and local) setting the price of water, and we have a water shortage.
Isn’t the solution to let the market decide the price of water?
Conservation rules are nice and all, but ultimately people will use less water when it costs them more to do so.
If they are unwilling to let the market decide the price of water, at the very least, shouldn’t they raise the price? Am I the only one who thinks this is the proper solution?
Well, I guess they could force rationing/apportioning the water, if you’re into that socialist approach to things. Water is generally so cheap and people waste the sh*t out of it - use it like water, if you will. I would think that not only could you conserve it by raising its price, but there is also an opportunity for revenue generation to offset taxes, etc….
The best way to profit from the coming water shortage, is to leave real close to the source, ensuring that you’ll never have a shortage, like Orme, Tennessee, or soon little Atlanta, Georgia…
http://apnews.myway.com/article/20071102/D8SLGBV05.html
‘Conservation rules are nice and all’.
Ya think?
I agree, though, water should not be treated as if it’s free. It most definitely is not ‘free’.
The Great Lakes hold at least 20% of the world’s water supply. Additionally, those states can successfully farm based on a reliable natural water supply-rain. There is a reason these were among the most quickly settled areas west of the Appalachians.
California farming does not have anything like this. Their farming, and likewise that of many of the Great Plains, is based on irrigation and surface water supplies. This is abetted by public works, such as dams. Farmers in those states pay a pittance for their water supply compared to what the US government pays to subsidize those supplies by dams. They would be hurting much more if they actually had to pay what it costs to supply water.
If those states start to experience a severe drought, people will migrate out in droves. You can’t mess with a lack of water.
The Great Lakes states will experience a resurgence. Want to see a bubble? Watch for housing in Cleveland and Detroit and Buffalo an Milwaukee once the water wars really kick-in in 2012. See how Hillary deals with THAT. (hint: pipelines from the Great Lakes are not feasible- not only are those international waters, but the formerly derided rust belt states are not going to be in a generous mood.
“least 20% of the world’s water supply.” Read: Fresh water
Just talked to a friend whose parents live in Athens, Ga.
Bottled water is being sold at cost all over town, and even in fine restaurants, food is served on paper plates.
The drought is hitting hard, there.
I moved to Canada recently from the parched Southwest. Many Canadians are dead certain that the US will go to war with Canada in order to drain the Great Lakes (and somehow divert Canadian rivers south, too).
Don’t know if it’ll happen that soon (2012, by Ronin’s estimate), but it’ll happen.
Contrary to the prevailing wisdom on the coasts, the Great Lakes states do know they’re sitting on a valuable natural resource — expect no replays of the early- to mid-20 century, when Los Angeles, Pheonix and Las Vegas managed to alternately sweet-talk and strong-arm their way into water rights that extended way beyond each cities’ reach.
Next time around, the water-holding regions will keep their cards close to their chest. Arid regions will become more efficient or wither and die.
(And say goodbye to those ridiculously lush desert golf courses. What an abomination.)
(And say goodbye to those ridiculously lush desert golf courses. What an abomination.)
ET-Chicago, I think you might be uninformed about life in the desert climates. Our landscaping consists of rock and a few desert trees and shrubs watered by a drip system on a daily timer. Most of the water used by a household is for cleaning, clothes washing, showering etc. which just runs into the sewer system. It is then processed to the point that it is actually drinkable but is instead used to fill decorative lakes and water lush golf courses, etc. Up north, the treated water is dumped into a river where it makes its way to the ocean.
Arizona and California have millions of acres of irrigated crop land that uses many times more water that land built to housing. The areas of our country that do not require irrigation could feed the country several times over if changes were made to what they planted. IMHO, things have a way of working out.
Water differs from gasoline in that it’s necessary for life itself. Much as (currently being demonstrated a crock) Chicago School economic theory craves commodification of everything, letting the market function as primary determinant veers wildly into the ridiculous.
The market does, over time, set evaluations. But in the short to mid term, the market is nothing more than a computer game with the emotional overtones of a 2 yr old.
I am serious on this:
Discuss removing $ from 401(k) of old job and taking the penalty hit BEFORE the fund is marked down (i.e. 30% AAA MBS - and we know how junky these are).
Do you really lose more $ to uncle sam in penalties and taxes then you would in a decline in a supposed “safe” stable value fund?
Discuss…..
Why wouldn’t you simply roll your 401k into an IRA that invested primarily in cash (or precious metals since they seem popular on this board)?
An even better question: If your money is still in your former employers 401k why haven’t you already moved your money into your own IRA? I wouldn’t leave any cash with a former employer for one second.
Roll it over into an IRA and put it in whatever safe place you want. It can a while - give yourself two weeks to open up the IRA if you don’t already have one, and figure out the rollover procedures for the old 401K. If you are taking the money to a new company, don’t expect the old one to be extremely helpful, but they have to do it. DON’T let them send the check to you, but if they do, put it in the new IRA (already set up) immediately.
I did it two years ago. I already had the IRA set up. It took a while to get the old 401k company to send me an online pin number so I could do the transfer from account to account electronically, but it worked.
Can you take money out of a 401K and put it in an IRA withotu changing jobs? I did so after my last job change, but have put in a bunch of money since.
M.B.A.
You described the wished for “soft landing” loss of 30%, but you know that a really hard landing is possible, as in 100% down, no different from the hedge funds, possibly?
I blew out my 401k in March and my reasoning was this:
I would have to wait 20 years to get tax relief, and our financial system might not last another 20 months.
I decided 60%(after taxes) of something, was better than 100% of nothing.
I put the proceeds into Gold bullion coins, that are sitting in a vault, somewhere outside of this country…
Insane (not!) lad:
this is EXCATLY whatI am talking about… 60% of something is better than god only knows what of XXX in the future.
I am conservative and a bear, but if this whole thig implodes, I would rather have cash than a piece of paper of a locked acocount of decreasing value…. and STILL have to pay taxes later.
That is what I am saying people. You get it - or do others here think I am nuts?
I am in my 40s and have no reason to think that I cannot work for a decade or two more. In addition, my 401(k) in NOT a few g’s. I could pay off my house with half of the take - POST-taxes and penalties.
It is making me think….
p.s.
If you are thinking of bailing out of your 401k, consider this:
It takes 5 working days to get the proceeds from stock sales…
A lot can happen in 5 working days, while you are waiting for that check.
To give you an idea of how rigged the whole shooting works is…
In March I sold about 25 different stocks, well known companies for the most part, and I compared prices the other day.
I would get about 5% less selling them all today, vs. what I sold them for when the market was much “lower”
Fannie Mae went up $5 from when I sold, though.
nobody by the 3 of you w/an opinion on this topic?
c’mon - where are the financial people here?!!!!!
Sorry, but I think taking a 40% hit just because the market is making your nervous is absolutely nuts, especially when you have the option to move money either within the 401k or to roll it into a self-directed IRA.
I’m as bearish at the come. I think we’ll see a 30% devaluation in the S&P, significant unemployment, and a prolonged recession. However, short-term money markets will be fine. FDIC-insured funds will be fine. Government-backed securities will be fine (even if they’ll lose value due to inflation). None of them will keep pace with inflation, but they’ll still be there a decade from now.
On the other hand, if you move your money from a tax-deferred account, you replacing some minute risk is the absolutely certainty of a 40% loss.
Furthermore, you can NEVER put that money back in a tax-deffered account (except $3000 at a time). Once it’s out, it out for good.
Moving your money to cash WITHIN a tax-deferred account is prudent. Taking a guaranteed 40% hit when you don’t have to just based on your intuition that market will collaspe, is nuts.
Everything you say made sense in the past, but i’m projecting into the immediate future, based upon facts presented to me, that tell me that our ENTIRE Financial system was one big fraud…
Make sure your reserve chute is packed~
nobody by the 3 of you w/an opinion on this topic?
c’mon - where are the financial people here?!!!!!
OK, I’ll chime in.
If you’ve done all the math and really believe that the outcome is better by cashing out, than do it.
I know a bunch of people that have this crazy idea that when you turn 65 you lose everything and have to start over - with only the money in your retirement accounts. OK, so they don’t really realize that this is what they are thinking…
I have advocated since I first appeared on Ben’s site a short while ago, that tax rates are the lowest in history. Home owners were arguing they would not sell because of the tax consequences. Stock owners would not sell because of the tax consequences. I personally believe taxes have no where to go but up. Pay the taxes.
It is important to remember that the US is only 25% of the world’s economy and has the worst performing stock markets in the world. My investments in Brazil are up over 70% this year not including currency translations which are up 17%. Investments in India are up over 50%, Canada 55%, China 80% (before I liquidated) and there are more.
I am in favor of selling to invest in anything that offers peace of mind. If I wake up in the middle of the night worrying about a position, it is the wrong position and I get out. I am currently looking at investing in the Republic of Georgia, flat tax of 12%. I will never ever invest again in Russia.
A huge warning if you do not have a place to invest, then do not do it. Do not invest because some mope, like me, made moneys in China or in PMs.
For those of you to young to remember the tax rates when I started out were max 90% on unearned income and dropped to 50% tax rate. This is for Federal Taxes not including state taxes!
I agree with Hoz….I do not have a 401K but I apply the same theory to real estate…15% cap gain is the lowest Fed tax I believe I will ever see….Pay the tax and look for another opportunity with pricipal preservation at the forefront….
For those of you to young to remember the tax rates when I started out were max 90% on unearned income
I have to laugh every time I hear some nutjob talking about how high taxes are in this country. Send them to time and place like the USA mid 1900s! Then they’ll come back loving our tax environment.
USA in the mid-1900s: No state tax. No city tax.
All paid interest was deductible from the fed rate- including that for car loans, as well as sales tax on that carton of ciggies.
No AMT.
And the threshholds for the highest rates were way above average incomes. Tiering has not kept up with inflation- indeed, inflation insures that you now pay a higher rate but have no more earning power.
But this needs to be tempered with the fact that there were many more ways of beating the tax back then that could be implemented by a typical professional (Doctor, Lawyer).
Most (legal) tax-beating schemes now can only be done by corporate execs (deferred income, payment in backdated stockoptions, forgiven loans by the company)
USA in the mid-1900s: No state tax. No city tax.
So what? 90% percent. Ninety!
But this needs to be tempered with the fact that there were many more ways of beating the tax back then that could be implemented by a typical professional
Yeah? How about my grandfather the butcher?
Face it, Hoz is right. Taxes only have one way to go right now.
In 1951 the highest tier for personal income tax was 91% for earnings over 400,000. I can’t imagine how one would compare that in today’s money… 3 or 4 million dollars? If one lacked simple imagination in taking the many deductions available.
It was 94% in 1945 for $200K
It had dropped to the bargain rate of 70% (for 200K) in the late 70s.
Yes, during the war years the marginal threshold was temporarily dropped to 200k. Figure in today’s income an annual income of a few million. Not a lot of butches or barbers in that bracket.
The threshhold went back up after the war. In those days they actually had to pay for wars from somewhere.
Federal tax freedom day came a lot earlier for most Americans in 1950. And they didn’t have state and local income taxes.
And they certainly had more deductions available then- beyond those mentioned there was tax averaging, deduction of all business-related moving expenses, deduction of business expenses (not subject to AGI threshold)…
Why not let them send the check to you? Even if the trustee name is on it, does that trigger taxes?
It’s the timing. I don’t have time to go check the rules on whether the timing (of the money being out long enough to trigger penalties) is based on when mailed or received, but if you never take possession of the funds, no one can ever claim you held it too long. And life just happens…something prevents you from bringing the check to the new institution: a storm, the cat shreds the check, emergency at work, emergency in real life, whatever. Electronic transfer from qualified account to qualified account is the safest.
Don’t depend on the IRS to mitigate the penalty because you have a good excuse. There is a procedure to request mitigation, but why bother with it. Do it the safe way.
I agree. Just have your 401k transfer the funds to the new institution.
Or if its something like Fidelity, call them and tell them you’d like to rollover your 401k to a self-directed account. They’ll be happy to not lose your money.
Hoz,
If tax rates are the lowest now and will likely rise in the future, does it make sense to take IRA monies and recharacterize them into Roth IRAs? I rolled over a couple of old 401ks into IRAs at Vanguard, and I’m thinking of paying the taxes on them now, to move them into Roths, and shield them from future taxes.
I’d love anyone else’s thoughts.
In Chinese numerology…
8 = - 八 - sudden fortune, prosperity
Bring on the $800’s baby
Oh god… You’re right.
Gold is going to $888!
Now what is it in juan?
Got popcorn?
Neil
The chinese gave us the decimal math. They consider it “new math”. 8,000 years ago they used a base 8 system. It is still in use today, but only in the building trades.
Where else can you get a house built on “prosperity”?
what is a more realistic picture of housing prices in relation to income? When you can rent for 1/2 of what it costs you to buy, then why buy?
Why indeed? Of course the presumption when buying is that you intend to live there for longer than one year. In a normal market, buying IS more expensive than renting for the first few years, especially if you add in the opportunity costs of your downpayment*. But with a 30 year fixed loan, your principal + interest was constant, while rents would slowly increase. After several years (maybe 10) they would pass each other. Of course in bubbly parts of FL, rents are going down with prices because of the oversuppy of housing.
* for you youngsters, a downpayment is actual cash that you had to come up with out of savings to buy a house.
“he presumption when buying is that you intend to live there for longer than one year.”
Two years of renting, and so far, we’ve “saved” $48K (yes, that is *not* a missprint, $2K a MONTH) over buying a similar house…even after taking into account the tax credit.
Not to mention that the house we are in would fetch AT LEAST 13% off what it would fetch when we started renting two years ago…and this is based on actual OFFERS on the house.
So the “one year for renting” ‘rule’ is, how they say in Pirates of the Caribbean, “more of a guideline”.
Well currently in bubble areas, the breakeven point is rather longer than the duration of the mortgage. I’m just saying that just because it doesn’t pencil out after a single year doesn’t mean it doesn’t make sense to buy. If anything, a house price where the buyer would break even after one year constitutes something of a concrete floor that the falling knives rarely fall below.
Here’s a great interactive chart that shows when it makes sense to buy vs rent.
http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?_r=1&oref=slogin
Cool! My situation:
Monthly rent = $2300
Home price (at recent comps and current MLS list prices) = $500,000
Assume 0 percent home price appreciation (highly conservative, given that prices are falling at a 10 percent or so annual rate) and 3 percent rent inflation (also highly conservative, given that my rent next year is not going up).
Further assume 0 percent downpayment (to properly reflect opportunity cost of funds) and other assumptions at default values (e.g., 6.25 percent interest rate).
Conclusion? It never makes sense to rent over the next thirty years. Time to keep bubble sitting for another year…
That is a great tool! Two things I see when I plug in my numbers (rent = 2100, price 650,000, appreciation = 2%, rent increases = 4%).
1. At these prices renting is the slam dunk choice. (But we ALL knew that here)
2. It does not take much of an increase in appreciation to change things.
So, having seen this I circle back to a topic we have seen mentioned many times here on HBB. Will this be a long drawn out housing recession with depreciating prices, a quick drop followed by low to 0 appreciation, a series of drop-plateau-drop-plateau steps to the bottom, a quick drop and bounce, or something else?
Here is a chart that shows approximately 12 years from peak to peak historically. And it looks like the curve is down then up with no plateau.
http://tinyurl.com/2e3zs8
“a quick drop and bounce”
I don’t see how one could get that without (1) massive blatant gov’t intervention (currently very politically unpopular) or (2) massive wage inflation.
Under scenario (2), your wages will inflate with the rest of the world’s.
Are you ready for the stock market downward adjustment?
Good topic.
Where do you put your 401k if your choices do not include PM funds?
If the dung is hitting the fan and the USD is headed further south where can your IRA be invested to preserve or profit? Is it madness to try to figure out the options/shorting game at this stage? We know the chick can do it, but can a common schmoe? Are emerging markets going to take a hit too?
Beware of having financial institutions hold your metal for you…
Morgan Stanley sent me out a nice 3 part brochure in May, that had hidden in plain sight, them telling me, that in case of their financial arrears, they would not be responsible for the loss of my stored precious metals, with them.
Ciao!
My heavy metal went elsewhere…
yup. It’s important to understand the difference between allocated and unallocated gold if it’s being held for you at some institution.
Allocated means that specific gold bullion is your’s and is being stored for you at the bank. If the bank goes under you show up at the vault and pick it up.
Unallocated means that you have a claim on the bank for a certain amount of gold but if the bank goes under it’s just one more claim on the bank’s assets during liquidation and you go in the queue with the rest of the creditors.
You can always put your IRA in cash and then get into Forex and bet against the USD. Because forex lets you do interest free leverage and ratios like 200:1 you can have some fun.
I have 85K in savings earning 4-5%
I put 5K in a forex account
Then I shorted the dollar 100K and went long on CAD and EUR
My real leverage is close to 0 (because I have the cash in savings)
So long as the CAD and EUR don’t gain more than 4-5% on the USD I make money.
Based upon long term trends and a shift from the dollar to the Euro as the reserve/oil currency I highly expect for the USD to continue to fall at about 10% per year.
At some point the stupid-stopped-clock strategy of saving in $US will look smart, at which point commodities and Forex investments will stop looking like the obvious strategy they do currently.
Anytime offering 200-1 leverage is very risky. Please take the time to check out your forex dealer carefully.
I like your portfolio strategy. I think you are on the right track to diversifying in the face of a persistent conundrum and a pernicious War on Savers. It makes perfectly good sense to keep a pile of cash in savings, but then spice up your portfolio with a little Mad Money. Obvious strategies like going mostly long into PMs or Forex seem doomed to catch a load of black swan guano when the current Fed-engineered parabolic bubble blowout reverts to the mean.
Is there any chance Mozillo is right?
Give the tanman credit. All the time he was dumping stock, he was telling the world how bad things were going to get. But he was also implying that since he’d been around so long he knew how to handle it, and with all the fly-by-night creditors swept away Countrywide would be the sole survivor and worth more than ever.
Is Chapter 11 around the corner? If does the firm bottom out with 15 cents of shareholder’s equity left and live to fight another day?
I would like to see more thoughts here regarding the disclosure of CFC, WAMU etc. borrowing tens of billions from the Federal Home Loan Banks.
Personally, I was rather bothered by this. IIRC, in August/September the focus was on the Fed discount window, and when there was little/no additional borrowing from it, the implication it seems was that all was fine, move on please. While the “front door” was being watched though, CFC etc. snuck in the back door through the FHLB’s and nabbed a major bucketload of dollars.
Does anyone else have an issue with the FHLB borrowing???
Absolutely. One more example of the Fiat Ponzi Mania Top, and exactly one more reason to cash out and just buy and take delivery of physical gold and silver. I bought more of each last week and took physical possession of same. Eff the effers that do this and continue to do this in the face of the real world.
Impact of oil/gas/heating oil prices on various RE markets.
When CNBC discussed the Exxon Q3 numbers this week, a couple of the staff members commented about their production drop in the face of record crude prices and minimal supply disruption. Mark Haines for one started speculating about the industry’s ability to supply.
Same thing occurred when the weekly inventory numbers came in on the low side.
I think that’s the first time I’ve seen the Peak Oil discussed on that channel where it hasn’t been basically treated as a tinfoil-hat joke.
Peak Oil theory
All the San Diego fires except for one are contained at this point, and the last one (Poomacha) is said to be 85 percent contained.
By what percent is the credit crunch contained?
Zero. Not only is the first derivative still positive, the second derivative is.
When are those trading curbs going away?
http://www.marketwatch.com/tools/marketsummary/
The DJIA has finished with yet another miracle close, up by 27 points after having sold off by double digits earlier in the session. How many miracle closes does it take to convince people that something is rotten in the state of the U.S. stock market?
Does a strong jobs report portend future Fed tightening?
ECONOMIC REPORT
October job growth strongest since May
Payrolls rise by 166,000, while jobless rate is steady at 4.7%
By Rex Nutting, MarketWatch
Last Update: 9:41 AM ET Nov 2, 2007
WASHINGTON (MarketWatch) — Shaking off fears about weakness in housing and credit, the U.S. economy created 166,000 net jobs in October, the best job growth since May, the Labor Department reported Friday.
http://www.marketwatch.com/news/story/october-job-growth-strongest-since/story.aspx?guid=%7BB61446FA%2D7F8A%2D4901%2DB503%2D7ED679C3FB45%7D
How many more $1bn+
writedownslosses will the big banks have to report before the credit crunch is contained?Deutsche’s Mayo estimates $10 bln in Q4 writedowns
By Steve Goldstein
Last Update: 6:57 AM ET Nov 2, 2007
LONDON (MarketWatch) — Deutsche Bank analyst Mike Mayo estimates there will be over $10 billion in new write-downs during the fourth quarter, including $4 billion each at Citigroup (C:Citigroup, Inc Last: 37.12-1.38-3.58% 11:55am 11/02/2007) and Merrill Lynch (MER: Merrill Lynch & Co., Inc Last: 56.01-6.18-9.94%11:55am 11/02/2007) . “Over two to three years, earnings headwinds are 10% to 25% depending on whether current loan losses (55 basis points of loans) increase to historical (85 bp) or to levels that reflect past peak real-estate losses combined with a move back to historical losses in other categories (130 bp),” the broker said.
http://www.marketwatch.com/news/story/deutsches-mayo-estimates-10-bln/story.aspx?guid=%7B27B6C9B1%2D2D52%2D48B4%2DA6F1%2D0D8A4D87F293%7D
“How many more $1bn+ writedowns losses will the big banks”
How many can they fit in between now and 2011?
Have investers lost the faith in the viability of a GSE-sponsored scheme to bail out the housing market (as advocated by Lawrence Summers)? Judging from the plunge in FNM’s share price, this looks like a reasonable hypothesis.
http://www.marketwatch.com/tools/quotes/intchart.asp?symb=FNM&time=12&freq=1&comp=&compidx=aaaaa%7E0&compind=&uf=0&ma=&maval=&lf=1&lf2=&lf3=&type=2&size=1&txtstyle=&style=&submitted=true&intflavor=basic&origurl=%2Ftools%2Fquotes%2Fintchart.asp
Will the fallout at WaMu and First American be contained to fines, or will there be jail time for appraisal fraud perpetrators?
And what are the implications of unraveling of appraisal fraud schemes for post-bubble home price deflation? Mark Zandi is saying the drop will bottom out at 10% nationally (however defined) by the end of 2008, but I don’t believe he has taken into account many of the factors that drove up the market to its bubble top in his estimate (including rampant appraisal fraud and the Ivy Zelman reset schedule, to name two such factors).
First American in mortgage fraud probe
By Ben White in New York
Published: November 1 2007 21:42 | Last updated: November 2 2007 01:18
A major US real estate appraisal company was accused on Thursday of conspiring with one of the country’s biggest banks to inflate home prices in a scheme that New York state officials said helped fuel the mortgage crisis.
Andrew Cuomo, New York attorney-general, filed a lawsuit against First American saying its eAppraiseIT subsidiary gave in to pressure from Washington Mutual, the biggest savings and loans group in the US, to use a preferred list of appraisers who allegedly provided inflated values for homes.
http://www.ft.com/cms/s/0/1a339b84-88c2-11dc-84c9-0000779fd2ac,dwp_uuid=e8477cc4-c820-11db-b0dc-000b5df10621.html
New York Sues First American Unit
In Probe of Home-Loan Appraisals
By AMIR EFRATI
November 2, 2007; Page A4
http://online.wsj.com/article/SB119393091496279165.html?mod=googlenews_wsj
“In one example, New York state said eAppraiseIT lifted its estimate of a property to $2.3 million from $1.6 million after the company was told by Washington Mutual the higher number would help the loan go through.”
Should the overvaluation of New York properties to the tune of 44 percent due to appraisal fraud be taken as an indication of how far NY prices will have to fall to restore post-bubble market equilibrium?
Here’s a question: What is extent to which the bubble will cause a destruction not just of paper wealth, but of hard assets?
By this I mean: Developers abandoning subdivisions and condos in mid-construction, wasting natural resources, forever destroying the land these things were built on and causing eyesores. Foreclosed FB’s putting cement in the toilets and punching holes in the drywall before getting kicked out by the sheriff. Developments with swimming pools, tennis courts, sidewalk allowed to rot becuase they don’t have the HOA fees to pay for upkeep. Increases in property crime.
It’s not just house prices going down. It hurts all of us.
This is an excellent question. I have heard some people say that the abandoned homes (at least the fully built ones) should be bought by the government to be public housing. That may work for a condo building in a formerly “gentrifying” area, but that won’t work in say the neighborhood of an exurb where the neighborhood is partially occupied. They will (understandably) fight this since they won’t want their property values to drop even more.
I have also heard the idea that the government should build more public transportation (subway and commuter rail lines) and knock down houses to get the right of way. I don’t know if the public would go for such a massive spending project. Even if the public did there is no guarantee that only abandoned houses be destroyed so there would be major opposition from homeowners in the way of these subway and rail lines.
I think you are going to end up seeing neighborhoods that are half empty and maybe even fully empty with the homes deteriorating.
They really just need to encourage empty houses to be torn down. Using them for subsidized housing just props up housing prices, esp. on the bottom where people could most use affordable housing.
Your proposal sounds quite wasteful to me. Why tear something down when there might be an end user who would willingly buy it and live in it if it were priced at current market value?
“abandoned homes (at least the fully built ones) should be bought by the government to be public housing”
That would be perfect! The welfare family in a McMansion while I huddle in my tiny rental burning dollars to keep warm.
Why not four homeless guys in a 4BR McMansion?
Increases in property crime? What about crime in the better neighborhoods in general? There have been a lot of rumors about home burgularies here. Theft of cash, jewelry, small items like laptops, collectibles. Over the past couple of months this has been a big underlying topic in neighborhood gosip. Newspapers aren’t commenting nor or the police.
I’m wondering just how valid are the unemployment reports, more people turning to robbing to get money? Has anyone noticed this trend? Or is it just hte general area where I live?
I think the chain goes like this:
Unemployed people use drugs.
Druggies need money and commit burglary.
Also realize that the burglar is most likely to be your neighbors unemployed drug-addict adult child, and not some “outsider.” He won’t be noticed and knows your schedule. This is why, for example, burglary rates aren’t any lower in “gated communities.”
“Unemployed people use drugs.
Druggies need money and commit burglary.”
I’d like to add “The price of drugs is kept artificially high through drug prohibition (aka “The War on Drugs” aka another unwinnable war)”
End the WoD and see burglaries decrease (all things being equal) and gun violence plummet. Discuss.
Mr Bubble
I’m not sure about the unemployment reports. With a lot of recent layoffs (at least the ones I am most familiar with) I have noticed that a lot of the people laid off are people near retirement who just decided to take early retirement or have a severance package that will allow them to do so soon. As they are now retired, they would not be counted as unemployed.
Of course, I know that the plural of anecdote is not data. However, with a large wave of retirements scheduled to happen soon (due to the baby boomers getting older) this does make sense.
The bubble left behind a bevy of California McMansions priced to sell above $500,000 far in excess of the number of Californians with the assets needed to pay for them. And this problem (too many high-end homes relative to the local permanent income distribution) is not limited to California. The fundamental mismatch between the quality of homes supplied by the bubble market versus permanent-income-constrained end-user demand entails major destruction of both paper and real wealth.
Oh to be a fly on the Wall (Street)…
bulletin
CITIGROUP CALLS EMERGENCY WEEKEND BOARD MEETING: REPORT
Citigroup emergency weekend board meeting expected: WSJ
By Wallace Witkowski
Last Update: 4:12 PM ET Nov 2, 2007
SAN FRANCISCO (MarketWatch) — Citigroup Inc. (C: Citigroup, Inc Last: 37.51-1.00-2.60% 3:53pm 11/02/2007)
is expected to hold an emergency board meeting this weekend, the Wall Street Journal reported Friday, citing two people familiar with the matter. It is not clear what the meeting will address, but the subject of further writedowns could come up, the Journal reported.
http://www.marketwatch.com/news/story/citigroup-emergency-weekend-board-meeting/story.aspx?guid=%7B0DFA1FFE%2D1D75%2D43B8%2DA125%2DE7C838FC8546%7D&dateid=39388.6752843981-910603099
I find this scarey in the extreme. Thanks for the warning. If you hear any leaks over the weekend, please let us know about them.
WSJ reports that Ceo Prince will resign Sunday…meeting is to discuss losses in SIVs.
That is great news. What will CEO Prince’s kick in the pants retirement payout look like? North of $100m for a job well done, I am guessing?
Maybe a bit late Ben but what about a topic on how to court small town news reporters who are clearly getting bamboozled by the local real estate industrial complex. Thanks to the blog, I’ve been on the phone with the Albany Times Union reporter regarding this article;
http://timesunion.com/AspStories/story.asp?storyID=634488&category=REGIONOTHER&BCCode=&newsdate=10/31/2007
I orignally set in an e-letter to the editor regarding this article. It was quite terse and promptly got a call from Mr. Churchill…. and yes, he was pissed. I was in deep denial but it began to melt a bit after discussing the hard numbers but I didn’t have them at my fingertips.
So how about dealing with local reporters?
Duh… HE was in deep denial.
Economic slowdown, we barely knew thee…
THURSDAY, NOVEMBER 1, 2007
INVESTORS’ SOAPBOX AM | Online Exclusive
The Bailout Begins
Economic Outlook Group
THE FED IS NOW OFFICIALLY in bailout mode.
It’s not a specific industry that’s being bailed out, but the economy as a whole. True, the latest 25 basis-points cut in the fed-funds rate may look somewhat odd after getting word that growth in the third quarter jumped by a hefty 3.9% pace, following a 3.8% jump in the second period.
However, let’s bear mind that it was exports and consumer spending that offset the collapse in housing and lifted [gross domestic product] during the summer. These lifelines are not likely to remain in upcoming quarters, and we suspect most members of the Federal Open Market Committee are quite concerned about this — even though that worry did not explicitly make it in the latest statement.
http://online.barrons.com/article/SB119386501728978098.html?mod=googlenews_barrons
Got plunge protection?
“Black November Begins With US Federal Reserve’s $41b Citigroup Bailout
Posted by Dan Denning on Nov 2nd, 2007
Anyone under the impression that the carnage in the credit market is fully priced into financial stocks had better take a deep breath before reading on. Remember to breathe.
…
That last phase—the re-rating of asset-backed commercial paper—happened in mid-October. Only now is it filtering down to real-world consequences. Faced with falling asset values and a tight credit market, Citigroup, perhaps, turned to the only source of funding left in the market yesterday: the Fed.
Will this chain of consequences lead to more collateral damage in financial stocks?
Tomorrow is Friday in America. It’s going to be black.”
http://www.dailyreckoning.com.au/citigroup-bailout/2007/11/02/
Bloggers, beware of death threats from infesters who don’t like to hear bad news about the value of their infestments.
From The Times
November 3, 2007
Top US analyst hits back after death threats over Citigroup downgrade
Tom Bawden in New York
Meredith Whitney, the analyst who prompted a $369 billion (£177 billion) plunge in the value of US shares on Thursday by issuing a negative note on Citigroup, hit out at Wall Street’s culture of intimidation yesterday after receiving several death threats from investors in the bank.
Ms Whitney, a CIBC analyst who is married to the former World Wrestling Entertainment champion Death Mask, prompted a near 7 per cent drop in Citigroup’s shares on Thursday, after suggesting that the bank needed to raise more than $30 billion to restore its capital cushion.
She also downgraded her recommendation on Citigroup’s shares to “market underperform” in the note that set off America’s biggest stock market decline since August.
Ms Whitney, Forbes’s second-highest ranked stock picker for 2007, told The Times: “People are scared to be negative, especially when a company has such a wide holding. Clients are not pleased with my call and I have had several death threats.
“But it was the most straightforward call I’ve made in my career and I am surprised my peer analysts have been resistant. It’s so straightforward, it’s indisputable.”
Ms Whitney, whose marriage to John Charles Layfield, the wrestler, 2½ years ago was detailed in The New York Times, said that she has never felt any pressure from the Wall Street firms themselves to be positive. But she said investors could be “nasty and belligerent” if they felt you had lost them a lot of money by influencing the price of their shares.
“No one had the moxie to put in print what I put in print,” she said.
http://business.timesonline.co.uk/tol/business/markets/article2796774.ece
Which subprime-infestor CEO will be next to go?
Citigroup CEO Plans to Resign As Losses Grow
Bank’s Board to Meet With Prince on Sunday;
SEC Queries Accounting
By ROBIN SIDEL, MONICA LANGLEY and GREGORY ZUCKERMAN
November 3, 2007
Citigroup Inc. Chief Executive Charles Prince is planning to resign at a board meeting on Sunday, according to people familiar with the situation, as the bank faces big new losses from distressed mortgage assets.
The move would end the four-year tenure of Mr. Prince, a longtime lawyer and loyal lieutenant of former Citigroup head Sanford Weill, who assembled the financial giant that stands as America’s largest bank by assets. It would make Mr. Prince the second major chief executive in finance to leave his job in a week, following the ouster of Merrill Lynch & Co.’s Stan O’Neal.
http://online.wsj.com/article/SB119403363814780742.html?mod=googlenews_wsj
‘Just a few weeks ago, board members including Robert Rubin, the influential chairman of Citigroup’s executive committee, expressed support for Mr. Prince and said that his job wasn’t in jeopardy. “I think Chuck’s going to be here for a lot of years,” Mr. Rubin said in an interview last month. A spokeswoman for Citigroup declined to comment Friday.’
Prince’s resignation this weekend will leave quite a mark. I don’t expect the NYSE will be able to go through with plans to eliminate trading curbs in the near future given the precarious state of the financial markets in the wake of the resignation of two Wall Street CEOs over the course of a few days. There has never been a better time to buy the dip!
Global overview: Equities rattled by writedowns
By Neil Dennis
Published: November 1 2007 17:22 | Last updated: November 1 2007 21:20
Turbulence hit global financial markets on Thursday as fears of further credit market-related writedowns in the financial sector sent equity and corporate bond investors scurrying for the exits.
S&P 500 financial stocks endured their worst one-day selloff in five years as the sector plunged 4.6 per cent and corporate credit spreads were sharply wider. The Federal Reserve, which on Wednesday had hoped its 25 basis-point rate cut would ease financial conditions, injected $41bn in temporary reserves into the banking system – its biggest such move since September 2001. Meanwhile, the Vix index, a measure of equity market volatility known as Wall Street’s “fear gauge”, rose 25 per cent.
http://www.ft.com/cms/s/0/3a223c08-889e-11dc-84c9-0000779fd2ac.html
As Enron discovered, off-balance-sheet accounts can be highly advantageous.
Federal Reserve says super SIV requires less capital
Fri Nov 2, 2007 5:25pm EDT
…
Promises to lend against assets transferred from a bank to the new fund, known as the Master Liquidity Enhancement Conduit, would qualify as a commitment needing less capital, the Fed said in a letter last week to Citigroup.
“The credit conversion factor that would apply to the notional amount of the M-LEC liquidity facility would be 10 percent,” wrote Norah Barger, the associate director of the Fed’s Division of Banking Supervision and Regulation.
“The effect of the letter is that assets placed in the super-SIV (technically termed M-LEC, or Master Liquidity Enhancement Conduit) would have a capital treatment that is 10 times more favorable than if the same assets were placed on the bank’s balance sheet,” Mike Mayo, an analyst with Deutsche Bank said in a note to clients.
http://www.reuters.com/article/gc06/idUSN0261771720071102
The raging SIV epidemic is 0 percent contained.
Taiwan Regulator: 13 Banks Book NT$4 Billion Loss From SIV Holdings
Dow Jones
November 02, 2007: 03:30 AM EST
TAIPEI -(Dow Jones)- Thirteen Taiwanese banks booked an asset impairment loss of NT$4 billion (US$123 million) from their investments in structured investment vehicles, Financial Supervisory Commission Vice Chairwoman Susan Chang said Friday.
The banks, which Chang declined to name, had combined SIV investments of NT$ 21.8 billion as of Oct. 25, she said. The FSC, Taiwan’s financial regulator, is also investigating whether any local insurer has invested in SIVs, Chang said in a phone interview.
“We are still collecting data,” she said.
http://money.cnn.com/news/newsfeeds/articles/djf500/200711020330DOWJONESDJONLINE000389_FORTUNE5.htm
Cheyne managers shared £101m payout
By James Quinn Wall Street Correspondent
Last Updated: 12:19am GMT 02/11/2007
Hedge fund managers at Cheyne Capital Management shared a £101m pay bonanza just eight months before one of their investment vehicles collapsed.
Staff at the London-based hedge fund, including founders Jonathan Lourie and Stuart Fiertz, shared the cash in the year to December 2006.
Cheyne Finance, a structured investment vehicle (SIV) managed by Cheyne Capital Management, began selling down assets to pay down debt at the end of August, and is now being restructured by administrator Deloitte.
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The vehicle, which at one stage contained $6.6bn (£3.3bn) of investors’ assets, two weeks ago became the first SIV to stop repaying its short-term debt after Deloitte won court backing to declare it in breach of its insolvency tests.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/11/02/cncheyne102.xml
O’Neal seeks refuge on the links
By Christopher Grimes in New York
Published: November 2 2007 23:27 | Last updated: November 2 2007 23:27
Even in this supposed age of increased transparency, there is plenty that remains murky on Wall Street – how to put a value on a CDO or a SIV is one of the great mysteries of the moment.
But some things are becoming clearer than ever in New York’s financial distriuct, including the amount of time that the man who is supposed to be upstairs running the bank spends out on the golf course.
This week, as Stan O’Neal was working out the details of his severance package, the former Merrill Lynch chief executive’s recent golf scores were spreading across the internet.
Mr O’Neal, perhaps the top golfer among the chief executives of the biggest Wall Street banks, might have been happy for everyone to see his scores under normal circumstances, particularly after scoring a 76 on August 12.
Yet the amount of golf he was able to get in looks bad in light of the crisis that was unfolding at Merrill Lynch over the summer.
Mr O’Neal managed 20 rounds at four golf courses in August and September, a period when Merrill was putting the finishing touches on a $3.5bn loss for the third quarter.
http://www.ft.com/cms/s/0/1b26590a-8999-11dc-8dff-0000779fd2ac.html
O’Neal golfs while Merrill burns. Has a nice ring to it!
S&P cuts Axon SIV on NAV plunge, asset sales
Tue Oct 30, 2007 11:28am EDT
NEW YORK, Oct 30 (Reuters) - Standard & Poor’s on Tuesday cut its ratings on Axon Financial Funding, a structured investment vehicle (SIV), and said it may cut them again, citing deterioration in Axon’s net asset value.
S&P slashed Axon’s issuer credit rating eight notches to “BBB,” the second-lowest investment grade, from “AAA.”
KERPLUNK!
http://www.reuters.com/article/bondsNews/idUSN30499020071030
Credit Crunch May Hit Consumers Well Into 2008
By Claire Miller, special to CNBC.com | 02 Nov 2007 | 02:00 PM ET
The complex world of asset-backed securities may be a bit of a blur for the average investor. But the credit crunch that mushroomed from this market will buffet consumers well into 2008, analysts predict.
Tighter credit and tougher loan standards will persist, hurting those who are “marginal” borrowers. And while creditworthy consumers may dodge a direct hit, they will still be affected by the soft real estate market. The stakes are high because restrictive credit conditions often lead to recession.
“There will be an impact on consumers from all this for sure because lending standards have been tightening,” said Richard Berner, chief U.S. economist at Morgan Stanley. “The SIV crisis just sped up the process, making lenders that much more cautious.”
In a ripple effect from the sub-prime mortgage fiasco, Structured Investment Vehicles (SIVs), which are pools of higher-yielding debt, are facing a credit crunch. A portion of some SIV portfolios are invested in sub-prime securities whose values are hard to determine now that the market for these instruments has dried up. That has left the SIVs unable to tap the commercial paper market for short-term funds as investors have become more risk-averse.
http://www.cnbc.com/id/21597004
O-M-G — This may be the big one!
Black-Hole Banking
Neil Weinberg, Bernard Condon and Susan Kitchens 11.12.07
(Henry Paulson
pic)
Citi and other big banks are organizing an SIV bailout. But what else is hidden by their murky accounting?
Investors were shocked recently to discover Citigroup and a handful of other banks were on the hook, morally if not legally, for hundreds of billions of dollars’ worth of a product so esoteric it had many scrambling for their finance dictionaries.
The product, structured investment vehicles, or SIVs, didn’t appear on the banks’ balance sheets. Nor did SIVs show up among the liabilities banks scantily disclose as so-called off-balance-sheet items. In other words, they were a black hole. “There are no regulatory reports, no SEC filings. Everyone’s in the dark,” says Bert Ely, a Cato (nyse: CTR - news - people ) Institute scholar and banking consultant.
http://members.forbes.com/global/2007/1112/032.html
Are there any lingering questions at this point about why the Fed cut rates, despite a 3.9 percent GDP figure? Or should I dredge up a bit more evidence from the global SIV collapse to bolster my point?
Systemic risk’s bite can be deadly.
BUSINESS
SIV Fund Gives Banks An Unnecessary Break
By GEORGE ANDERS
October 24, 2007; Page A2
When Lee Iacocca ran Chrysler in the 1980s, he complained about a double standard for enterprises in trouble.
Ailing industrial companies got no sympathy, he said. Economic Darwinists urged them to make drastic cutbacks or even perish, in the name of market discipline. And it took many months of struggle before Chrysler got U.S. loan guarantees. When banks stumbled, it was a different story — no matter how foolish their mistakes. They were rescued in the name of protecting the global financial system.
(Should banks get rapid help when they stumble? Share your thoughts.)
Some things never change.
Several of the world’s biggest banks are going through strange gyrations to avoid owning up to missteps in the London market for structured investment vehicles. SIVs are funds the banks set up as a way to make money without taking the risks involved onto their balance sheets.
http://online.wsj.com/article/SB119319190211669418.html?mod=googlenews_wsj
Ever hear of water under the bridge?
Poll
Which is more likely by year end?
Dow 14,000
Gold 800
Current poll results
http://www.bernankepanky.com/
———————————————————————————
Dow 13,595.10 27.23
Nasdaq 2,810.38 15.55
S&P 500 1,509.65 1.21
10 YR 4.29% -0.07
Oil $95.93 $2.44
Gold $808.50 $14.80
http://www.marketwatch.com/
WEEKEND EDITION
Jumbo loans still scarce in high-cost areas
California prices could plunge 35%, costing $2.6 trillion in lost wealth
By Rex Nutting, MarketWatch
Last Update: 4:40 PM ET Nov 2, 2007
WASHINGTON (MarketWatch) — Home buyers with the very best credit are still having a difficult time getting mortgages in California, raising concerns that the real estate market in the nation’s most populous state could fall much further, sending home values spiraling lower and toppling the state’s economy into recession.
The drop in home values could cost the typical homeowner as much as $200,000 in lost wealth, for a total hit of $2.6 trillion statewide.
“We could see rapid price declines,” said Dean Baker, an economist with the Center for Economic and Policy Research, who’s been warning about the housing bubble for years. “These are huge numbers,” he said. “Consumption will fall off.”
http://www.marketwatch.com/news/story/story.aspx?guid={923EE799-2A5C-416D-BEAC-E4874C21098F}
Trying link again…
http://www.marketwatch.com/news/story/story.aspx?guid={923EE799-2A5C-416D-BEAC-E4874C21098F}
I seriously suggest anyone thinking about buying a home in California to wait and see if these financial wonks know what they are talking about…
Stretching too far
These middle-class jumbo loans — often combined with “affordability products” such as low teaser rates, interest-only loans and negative-amortization loans — allowed middle-class buyers to push California home prices into the stratosphere.
In the first six months of the year, 31% of all homes purchased in California had an interest-only payment option loan compared with 9% nationally, according to First America. For loans in California that weren’t prime conforming, 57% had an interest-only feature, and 9% were negatively amortizing.
Now, any loan with an “affordability product,” whether it’s to a prime or subprime borrower, isn’t getting written.
In a recent research note, analysts at Goldman Sachs said they believed these loans pushed California home prices to levels 35% to 40% higher than justified by other fundamentals. “We expect home prices to return to normalized levels,” wrote James Fotheringham and his colleagues at Goldman.
If Goldman is right, the typical home-owning household in California has about $200,000 less in home equity than it thought it had. Instead of living in a home that’s worth $589,000, it’s probably worth $380,000.