I'll take a stab, Alex. He's one of the most visible experts on TV, seems to be an insider, is knowledgeable and a good entertainer. He's been bullish forever, I guess. Now he claims that the sky is falling and throws a fit like nothing I've ever seen on TV (reminds me of myself)...
CR - it's starts funny but gets pretty sad indeed in my book on at least two fronts. Cramer starts by castigating the Bear-Sterns CFO for lousing his couth - as the guys at Edwards Flight Test used to say. And then goes ballistic - in another job they'd be finding him some new underwear for loosing his nerve.
The black humor is that as the re-pricing works its' way 'round leverage works as well down as up - where's Cramer's defense of the market mechanism (& bonuses) now that it's running the other way ?
The real question - aside from amusing myself here, and this is serious, - is how right is he ? How far into other assets classes does this go ? And how far into real economic consequences ?
He's a clown. If someone is such a shrewd investor, he doesn't spend his time making an ass of himself in front of TV cameras. If he pumps a stock, what for the morons who watch him to drive it up (usually takes about 3-4 hours, then short it.
Alex, I've added an update. Cramer's rant is funny - and wrong - and it gives me an opportunity to point out that a credit crunch is driven by nonprice rationing - so cutting the Fed rate wouldn't help much.
Best to all.
P.S. Hilton? Uh, isn't Blackstone buying Hilton? I wonder if that will be another pier loan for someone.
Cramer says BSC shouldn't complain and put on a brave face and then he goes off shouting Armageddon. I just love that people listen to this guy, A fool and his money.
CR is correct, in my opinion, that Cramer is wrong and that this is a credit crunch. That said, the Fed clearly is out of touch. Only a couple of weeks ago Bernanke said that the problems would be "contained" to ARM subprimes, although for a few months now it has been clear that Alt-A hybrids were under stress. Indeed, for some time now the street has been facing up to the fact that it had mispriced risk in the previous year or two. The Fed has not even addressed this. I agree with Cramer that the Fed is out of touch, but I don't think a rate cut would help at this point.
That "lady" happens to be Erin Burnett, a total hottie.
And yes, that was not an act. He almost appeared to be crying at the end. Cramer may be corrupt but he is by all means not incompetent. He, along with everyone else in the industry, knows how bad this can get.
It's not just what he did on CNBC today....has anyone read his blog today?? If not and you have access, run don't walk to read what's on his mind today.
Don't get me wrong, I agree with CR...Cramer is wrong, plus he's an absolute joke. But when Cramer writes the things he wrote today, it gets me REAL CONCERNED about what the markets are about to do....not that we didn't have an inkling!
CR, maybe it is time for a serious weekend discussion of the policy implications of discontinuing the "Greenspan Put" for financial markets. I believe that a lot of financial commitments have been made in light of Bernanke's implicit continuation of the provision of ample liquidity implicit in the "Greenspan Put", and now with the securitization of the housing market, the contagion will spread from the housing market to other markets through the magic of derivatives.
All, it's hard to over emphasize the impact of these pier loans (previous post about Chrysler). I was a customer of First Boston when they got stuck with the Burning Bed pier loan - they needed Credit Suisse to bail them out.
"In August 1989, right before the junk bond market first seized up, First Boston extended a $500 million bridge loan to a New York buyout firm that was taking a company called Ohio Mattress (now known as Sealy) private. When First Boston tried to unload its temporary bridge on the usual suspects, the buyers, unnerved by rising interest rates and the collapse of the main market maker, Drexel Burnham, balked. Liquidity went overnight from a virtual Niagara Falls to a veritable Sahara. First Boston was stuck with its loan, developed its own financial woes, and ultimately was subsumed by Credit Suisse. The deal became known as the "burning bed."
Keith, that is a good piece, but I disagree with his solution. He is recommending the Fed take marked-to-model mortgage backed securities and/or these pier loans at face value as collateral.
He is essentially recommending the "Greenspan put" - now the "Bernanke put" - a policy that rewards people for misjudging risk by bailing them out. I think that would be a mistake.
I don't think we need to "Liquidate labor, liquidate stocks, liquidate farmers. as Treasury Secretary Andrew Mellon suggested at the start of the Depression, but we do need to let some of the excesses of the housing bubble and LBO wave work themselves out.
I finally got the carrier pigeons that power my internet connection to provide me with the full video, and that would be some funny stuff. I can't wait for all of Cramer's buddies to lose their jobs and have to sell their homes in the Hamptons.
Unfortunately, real people will get hurt by the mess that Wall Street made as well.
I'll put it bluntly: if you operate a non-depository mortgage firm (lender or servicer) and don't have a deep-pocketed parent or hedge fund as a sugar daddy you're likely to be out of business by year-end, probably sooner. In the 20-plus years that I've been covering residential finance I haven't seen a financial meltdown this swift since the S&L crisis of the mid-to-late 1980s. One subprime executive who closed his shop a few months ago told me, "This is a liquidity crunch the likes I have never seen." Meanwhile, the mudslide is rolling downhill from Wall Street to mortgage bankers, to loan brokers, and then the consumer. Nomura Securities is winding down its mortgage conduit and three major Wall Street firms are preparing to slash their mortgage desks and or conduits
He is essentially recommending the "Greenspan put" - now the "Bernanke put" - a policy that rewards people for misjudging risk by bailing them out. I think that would be a mistake.
It's great to hear you say this.
I couldn't agree more.
Wall Street is beginning to shake from withdrawal, and Cramer wants the Fed to give the economy another hit of financial crack.
Polonius, Damrau isn't my favorite Queen of the Night, but I will say that that production has the best Rocky Horror Picture Show costume for her I have ever seen.
DDAn - thanks but I think our host makes a couple of key points. Technically we're seeing a squeeze not a crunch as yet. But the leverage problems could spread. Tanta's entry on mark-to-model being standard is a good point but the problem here is 3-fold a) core asset (houses, loans, businesses !!!) needs to perform, b) not be over-leveraged and c) mathstat models need to be based on something besides calm waters and prosperous sees (that's deliberate). Which they're not and not transparant.
CR that Fortune article is a great cite. Tell us more War Stories please.
I would never care to guess if the Dow will go up or down Monday.
But just out of curiosity, can one of you uber-traders tell us what is the theoretical maximum the Dow can fall from its current listing in one day with all of the current trading halts and stops currently in use to keep it from falling to far or too fast (not that it will or would--just curious).
Can someone point me to a link that explains what a credit-crunch is in layman's terms? I think I know what it is, but I can't explain it for crap. I'm trying to educate my buddies that don't care to read.
Those who can't, teach... is a BS statement. I find that if I give a little "class" every now and then I really understand the material a lot better.
Tanta/Polonius - Opera ? Help. Ich sprache nicht Deutsche. But the costume is kinky.
Perhaps an alternative:
Wild World: YouTube
- Broadcast Yourself.
Or (GYST) and pull up your socks (the Right Stuff): YouTube
- Broadcast Yourself.
The music remix is a little schmatlzy but Yeager really did bust the NF-104 and flat spin in from near-space. And Cramer's loosing it over is own game ?
Is there anyplace on the web to get quotes for mortgage backed bonds and related derivative? Also, can individual investors purchase these types of securities?
If Cramer thinks that lowering the fed funds rate will stop the carnage, he is mistaken. It is too late. The lag times are too long the reduced rates will not take hold fast enough. The Fed should have lowered rates six months ago if we were to see any effect during this year.
A credit crunch can only be eased by increasing liquidity which lowering the rates would do. However, with the short end of the yield curve held artificially high by the Feds market intervention, they are squeezing liquidity not enhancing it. So ironically, Bernanke seems to be making the same mistake that the Fed made in 1928 hes just doing it on a much smaller scale.
Hopefully he will see the mistake quickly, rather than exacerbating the credit crunch as the Fed did at the start of the Great Depression.
Dustdevil, there is no agreed upon formal definition. Some people argue a credit crunch is based on nonprice rationing (like tighter lending standards) or regulatory changes.
Bernanke and Lown (1991) define a credit crunch as a decline in the supply of credit that is abnormally large for a given stage of the business cycle. Credit normally contracts during a recession, but an unusually large contraction could be
seen as a credit crunch.
I've seen small credit contractions called "credit squeezes" and other names. Some people I know don't think it's a crunch unless it leads to a recession. Others disagree.
I like a sharp increase in nonprice rationing of credit as the defintion (Owens and Schreft's definition from that same paper). I think that is what we are seeing right now.
"Issuance has fallen off a cliff. Roughly $30 billion or so, was sold monthly this year but in July it was less than $4 billion," said Camurdan. "It's going to be a very slow year and I don't see anything changing for the foreseeable future unless the Fed starts lowering rates," the manager said.
A credit crunch can only be eased by increasing liquidity which lowering the rates would do. However, with the short end of the yield curve held artificially high by the Feds market intervention, they are squeezing liquidity not enhancing it. So ironically, Bernanke seems to be making the same mistake that the Fed made in 1928 hes just doing it on a much smaller scale.
Hopefully he will see the mistake quickly, rather than exacerbating the credit crunch as the Fed did at the start of the Great Depression.
zephyr | Homepage | 08.03.07 - 6:26 pm | #
Well said but...
Its not that lower rates are the "fix".
Rate cuts in 1998 LTCM didnt fix anything but they worked to "anchor" the financial system.
Its never "too late"
As much as I think Cramer is a raving nutmonkey most of the time, today's rant brings up an interesting topic. If it IS that bad out there in the financial sphere (and it just might be, according to the comments from Bare Stern's COO) when do the financial firms start laying off workers? Have they already started? The thing is, when you start cutting those jobs, it hurts much more than your paltry retail layoffs. They count as one job, but they are the equivalent of 10 in income and spending terms and are much more devestating to the outlook.
Does Jimmyboy know something we dont know? Looks like financial sector hiring outside of mortgage is doing ok, but when does it start to hit the IBs? Their stocks are down 20% already and this is just getting started. The fear is now pervasive and spreading, even if people want to believe the skunk is contained in the subprime basement. (Not that I believe that.)
When did it stop being a "repricing of risk" and become a liquidity crunch. Hell, I have some cash.. If the owner of my mortgage came to me with a good offer I'd let them buy out my mortgage -
at a mathematical level, using continuity concepts, I tend to understand a credit crunch as something where the interest rate is infinite - but the market should sort it out.. Heck , if the interest rate out there is infinity I might get off my fat arse and get together a few buddies and some borrowing of our own to lend ( to people who I believe can pay me back ) out a few mil - at a rate substantially better than infinite - and if I can do it, what's a few bil or tril for people in the biz and in the know.
Heaven forbid, could it be that the people who want to borrow aren't trustworthy enough for people to lend to them ?
Im specifically asking about JCs knowledge of bloodletting at IBs. If they start cutting headcount, kiss the economy goodbye (as well as the NYcity RE market)
Im specifically asking about JCs knowledge of bloodletting at IBs. If they start cutting headcount, kiss the economy goodbye (as well as the NYcity RE market)
Geoff | 08.03.07 - 6:54 pm | #
If the FED does not provide liquidity- kiss the economy BUH BYE
A fed funds rate cut will result in a lower dollar and in turn in higher prices on imported goods. This means higher inflation. The remedy against inflation is rate hikes. Thus rate cut leads to higher rates. Much higher rates an no fix
Most seem to agree we are in a credit crunch (or sqeeze), but some people are claiming there is still ample liquidity. (see below) Do they have a point?
Among Crescenzi's positive factors: Corporations are flush with cash and other highly liquid assets, some $1.7 trillion by one account. Banks are well capitalized. Money-supply growth rates are strong worldwide.
Just spoke to a Mortgage guy their company (large A paper) quit doing Jumbo's Period.
Not subprime, Not Alt A, but Prime Jumbos. That my friend is "captain" credit crunch in the makings.
A fed funds rate cut will result in a lower dollar and in turn in higher prices on imported goods. This means higher inflation. The remedy against inflation is rate hikes. Thus rate cut leads to higher rates. Much higher rates an no fix
Matthewdk | 08.03.07 - 6:59 pm | #
See previous post- It's not a "fix".
FED'S mandate is the economy not inflation. Hello
"Roughly $30 billion or so, was sold monthly this year but in July it was less than $4 billion"
And that $30 Billion per month Jan - June was at lending terms so vile the $30 Billion is nearly worthless in less than 12 months. (see the ABX/CDX indices)
Credit Crunch? No way. It's better stated as "End of Product Lifecycle". No more customers. Welcome to Free Markets.
So with the chaos in home mortgage rates, especially the moves in Jumbo loans by a few lenders is there any way that home loan rates don't move up quickly?
Oh sure, they rip off everyone and their mother for billions but as soon as they start getting theirs then they start reaching for Bernanke's ample bosom. Drive a stake through the heart of this beast, if you can find it, raise rates 50 bps.
Credit Crunch? No way. It's better stated as "End of Product Lifecycle". No more customers. Welcome to Free Markets.
Chuck | 08.03.07 - 7:25 pm | #
Well said. Wall Street is having problems "putting a value" on securities. The problem is today there is NO "value". These securities have intrinsic value (even the toxic stuff) but not if you have to sell "today".
"The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.
Today, the Federal Reserves duties fall into four general areas:
conducting the nations monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
supervising and regulating banking institutions to ensure the safety and soundness of the nations banking and financial system and to protect the credit rights of consumers
maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nations payments system "
"to ensure the safety and soundness of the nations banking and financial system and to protect the credit rights of consumers
maintaining the stability of the financial system and containing systemic risk that may arise in financial markets"
"Wachovia Corp. (WB.N: Quote, Profile, Research), the fourth-largest U.S. bank, on Friday said its Vertice lending unit has temporarily stopped making "Alt-A" home loans, a day after the company stopped making such loans through brokers. Vertice was a brand created in March for the combined entities of American Mortgage Network and Wachovia Mortgage Third Party Lending. A spokesman said Vertice will monitor market conditions and reintroduce products as conditions become more favorable. "
"Credit for leveraged buyouts has dried up, with dozens of deals canceled, postponed or repriced. The market for complex derivatives such as collateralized debt obligations has shut down like a "constipated owl," according to bond fund manager Bill Gross."
CR, I think you missed one point of Maverecon's solution. I do not think he was suggesting a loan against a market value. His intention was to hit the owners of the debt where it hurts and force them to significantly over colateralize the loans (to protect the Fed from loss) and pay a hefty rate as well, in effect remind them of the errors of their ways on two fronts. That is the impression I had.
"A fed funds rate cut will result in a lower dollar and in turn in higher prices on imported goods.
not true. most of the imported goods will not rise in price but their makes will just have to get used to lower profits.
I.e. Tyoyota may raise in 1% if the $ fall 10% - which means in yen their selling price will be 9% less than now.
Yal | Homepage | 08.03.07 - 7:50 pm | #
Yal, not true- the increase in raw materials is still pipelining into the import costs. A lot of chinese imports are already seeing 10-15% price increases over last year, with more on the horizon as the wages in China increase and commodity price increase are priced in. After all, they seem to want to make a profit on every shipment, oddly enough. The average manufacturer no longer cares about producing below the marginal costs to make it up on volume and get market share. Nobody else has ever followed the Japanese into that valley of low/nonexistant eternal profits.
Check out Harbor Freight year over year- the sales prices are over last year's regular price in some cases.
that is your rockbottom comparison- same goes for Walmart/Sam's Club.
"The S&P 500 index is now pricing in a recession starting in late 2007 and lasting for most of 2008, led by the financial sector, said David Bianco, chief equity strategist at UBS."
Ummm, is this why they call Crammer the "Jester" of CNBC?
When investors, hedge funds, investment banks and commercial banks start loosing money on their funny paper, derivatives, CDO'S LDO's (etc) a credit contraction will occur and continue no matter what the fed does.
I think it boils down to who wants to buy these debt/credit instruments/funds if they cannot be fairly valued and if it looks like they are continuing to lose value.
Ummm more sellers then buyers, seems like I have heard this before. Looks like those holding the bag will have to hold onto it a little while longer.
This is the borrowing excerpt..{ You'll notice they even offer a "NO QUESTIONS ASKED" loan - who needs CFC huh ? Sure, there's pesky things like collateral.. (sadly they require collateral to secure the loan ) - but
c'mon - they have the nation's money in their pocket - you'd WANT them to require collateral wouldn't you ?
"How do we request an advance from the Discount Window?
Requesting an advance requires a simple phone call to your Reserve Bank.
Please be prepared to supply the following information:
* Name and location (city and state) of your institution.
* Your institution's ABA and telephone number.
* Your name and title. If your institution's borrowing resolution requires that two people request a Discount Window loan, please have a second authorized individual available.
* The type of credit you are requesting.
* The amount of the advance you are requesting.
* The number of days that funds will be needed.
Discount Window staff may request additional information.
Type of Credit
* Primary Credit - No questions asked.
* Secondary Credit - Additional information regarding the financial condition of the institution and the reason for borrowing may be necessary to complete the request.
* Seasonal Credit - Institution must have an approved seasonal line of credit.
"
Too funny, even if I say so myself. Talk about smoke and mirrors a la that DITECH ad - credit crunch - what credit credit ? How about no "brass in pocket"
Mortgage crisis may prompt Fed to cut rates
By Alistair Barr, MarketWatch
Last Update: 6:42 PM ET Aug 3, 2007
"SAN FRANCISCO (MarketWatch) -- The mortgage crisis that's shaking capital markets could encourage the Federal Reserve to cut interest rates, economists said this week."
... "The central bank can do something to help alleviate all this stress," Maury Harris, chief U.S. economist at UBS AG said in a recent interview with MarketWatch.
"Whether widening spreads are good or bad for the stock market depends on the central bank response," he added. "Spreads could come back if the Fed cuts interest rates."
Now do you realize why we have to have a 25% correction=repricing. Because in the stock market you can often be wrong and still make money, like Mr. Cramer. Wrong on Homebuilders, Mortgage lenders, Investment banks, and now this. As long as the likes of Jim Cramer are in the market, we will have disclocations.
While I agree that inflation may not be a serious concern in the event of a severe economic pullback, I completely disagree with you about the Fed's primary mandate.
Do you not recall how Volcker changed this entire era around by bringing long-term inflation and thus borrowing rates down by taking a hard stance against the economy in 1981???
IF the Fed believes that printing dollars right now will stroke inflation, their hands will be tied. And if Bernanke is as serious an inflation fighter as he has always claimed, then down we go economically until they think it's finally safe to cut without causing long-term rates to shoot up.
The last thing the Fed wants at this point is to induce a stagflation-filled liquidity trap. That scenario is much worse in their eyes than short-term economic pain that forces future prudence upon the excessive risk-takers of the world.
And your apology about the doom and gloom calls is graciously accepted assuming you were being sincere.
not true. most of the imported goods will not rise in price but their makes will just have to get used to lower profits.
There's been a lot of talk about the potential benefits to US competitiveness in domestic or international markets based on declining dollar values against the Yuan and the Euro among other currencies. The idea is that this will increase US production, jobs and eventually consumer spending.
Someone pointed out that if you only add 20% value to a product then a 25% reduction in the value of your currency will only enable a 5% drop in your product prices. This will be true in both domestic and global markets.
According to this line of thinking the actual impact of dollar declines on the overall domestic economy will depend at least in part on the percentage of imported products in US retail markets and the percentage of foreign valued added (commodities, parts, compenents, even finished products produced by US owned foreign subsidiaries) in nominal US branded products.
Anybody know where to find this info?
If this isn't the right way to look at it can anyone link to info that provides a better analysis?
Harris is guarding the henhouse. Rate cuts will not help. The growth in US is slower than the rest of the world; hence the foreigners are pulling their money out of US. A rate cut will give the foriegners
an incentive to pull more of their money out of US.
LawFitz said,
"While I agree that inflation may not be a serious concern in the event of a severe economic pullback"
There you go...
"The S&P 500 index is now pricing in a recession starting in late 2007 and lasting for most of 2008, led by the financial sector, said David Bianco, chief equity strategist at UBS."
If the FED does not create liquidity than yes I was sincere.
If they don't-then no. LOL
He just (Fridsy eve.) came to NBC network news in an interview with Brian Wiliams and said that a lot has changed within the last week and among other things home builders should worry alot becasue they may not be able to sell any homes due to mortgage crisis.
IMHO... let's talk about Cramer just for a minute. Like the guy or not , he's wired into some of the big boys.... therefore , the primal screams he makes , are the primal screams all of the big boys ( GS , ML , LEH , JPM , BSC and C.. excuse me if excluded a bank or two but you get the point , right ? ) , would make...... except that their public statements are that things are "contained." So , where are we today ? Subprime is dead. Alt A is dead and anything that is not full doc - conforming and prime can't raise a bid , please correct me if I'm wrong. To those of us who check the ABX , I don't have to refer anyone to the off or on the run series from 6-2 through 7-2 .. it speaks for itself , right ? So let's review for a sec... all of the big boys have substantial exposure for mortgage warehouse lines and related investments / CDOs , CMOS and hedge funds investments . They have massive exposure through the global 500 billion in loan obligations , of which the big boys have a large percent of that , right ? What happens to these guys when the carry trade moves against them , coupled with emerging markets moving more in trend with global markets ? Oh , and what happens when domestic equities retreat in a meaningful way ? What makes you think Lloyd B or Chucky Prince wouldn't have made the same primal screams..... they just do it off camera.....
The idea is that this will increase US production, jobs and eventually consumer spending.
but the problem is that the consumers have been spending like drunken sailors for years now and they haven't been saving. Now's not the time to get people to consume more, it's the time in the cycle when people need to begin to learn how to save again.
Recessions are really good lessons in the importance of saving.
Please raise your hand if you were one of the ones claiming that the business cycle is dead.
The beast is awakened folks. His name is Creative Destruction and he's awfully hungry b/c he was sedated for far longer than he's used to.
This pullback would not be as severe if we had been allowed to have natural pullbacks in '98 and '01. But instead we delayed the inevitable and made this correction more severe. The bigger they are the harder they fall.
"While I agree that inflation may not be a serious concern in the event of a severe economic pullback"
I should've included emphasis on that particular word. Frankly, given pipeline inflation in underlying inputs and globalization holding down wages (a trend to be undermined by a dollar collapse), stagflation may indeed be an issue.
"If the FED does not create liquidity than yes I was sincere.
If they don't-then no. LOL"
LOL. We need pain, friend. There is a lot of fat that needs to be worked off. It's the natural order. We will be better off in the long run. Twinkies from Ben's heli might make us feel a little better now, but may also lead to a devastating heart attack later.
Do not fear Creative Destruction. He's never killed us before. He's ALWAYS made us stronger.
From the MarketWatch article linked above (about how rates should be lowered):
"From the Fed's perspective, if risk perceptions change that's fine," he explained. "But if risk capacity goes down, then they'd be a little bit more worried."
If we're seeing a situation where people aren't willing to risk their capital, won't lowering rates make that worse? Aren't we seeing the repricing of risk? It was underpriced for so long that people all sorts of crazy risks.
Raise rates and encourage people to save instead of speculating.
To all these whiners who think that the Fed rate is too high: I recall that in much of the 70's and 80's the corner bank paid 5.25% on passbook savings accounts.
there's no way Cramer and buddies have all gone short. i think he was sincerely groveling/crying. as much as i think he is a buffoon, i actually believe at heart he cares about small investors but only if their bulls. he clearly got caught on the wrong side of housing. it would be easy to investigate a coordinated short play and if found guilty he could go to jail for a long time for faking this on national TV.
The big banks and hedgies all got huge bonuses last year from selling junk. Screw 'em! They outsource jobs, screw 'em! They created the housing bubble and the dot com bust, screw 'em! They rip off foreigners and pension funds on a daily basis, screw 'em! They've manipulated policy for too long, they don't know how to manage capital, and they mis allocate resources for personal greed. Screw 'em, let them go live on their (ill-gotten) yachts.
So bankers are sitting on paper they can't unload, and are, as a consequence, unable to continue funding LBO's and whatnot, and builders can't continue to add to the existing glut of homes. Why is this a problem?
I agree. I read a paper a while back that gave a very credible position on this CDO, derivative-based, uncollateralized system having 20 times the exposure of LTCM.
I'm sure Cramer read that same piece as well as others and has come up with the same conlclusion. The only act I saw today that was displayed by Cramer was that of genuine imminent fear.
"Corporations are flush with cash and other highly liquid assets"
And that's the whole problem.
The "domestication" of stocks through diversification, index funds, low-load mutual funds, automatic 401k investments, professional cheerleaders disguised as financial media, and the giant consumer investment industry that has grown into a major economic sector in tandem with the greatest bull market in US history (with a brief but now forgotten scare thanks to the magic of "The Maestro") has created what I think I'll arbitrarily call the "Great Swap".
All this machinery has convinced consumers to swap most of their cash and reliable assets (like CDs and government bonds) for high risk securities (stocks, junk bonds) and take on huge amounts of debt to invest in overvalued real estate or to just give some company a claim to that consumers cash flow in exchange for a new Hummer.
This creates a huge imbalance in hard wealth and is similar to the situation that preceded the Great Depression.
When corporations have all the cash in a recession they tend to hoard it to protect themselves. And the risky sorts of assets consumers have (if they have any) tend to wither away in value.
You get the possibility of the under-consumption problem.
Nil , here's the problem to me. Bankers are sitting on paper... up to AAA ( unless it's conforming and be sold to FNM or FRE .) As a result , there presently isn't a secondary or private market for nonconforming loans. Since subprime and ALT are dead , we have now lost 1/3 of the mortgage market -- which builders may feel represents a problem to their business models... the timing of this coincides with housing entering the weaker part of the year for sales. I think for the builders and lenders , they have many more employees and / or independent contractors / or outside contractors than they need... which could be a problem. Worldwide , there's a halt trillion in unfunded LBOs... a lot of banks have obligations to step in if investors don't step in. I would think this would limit what those banks can do moving forward until investors step back in and buy the bonds / loans on offer. Which means LBO activity which has helped to prop up the markets is gone until this pipeline is cleared. IMHO , I see more bad news than good news moving forward for equities. bu that's just me.
Just a thought - Our economy is grow or die... So when do the people here wanting the Fed to either hold off rate cuts or even have them raise rates think the US economy will have contracted enough to allow for monetary easing? Like, say, 12 months of negative growth? 2 years?
We've gone a record 51 months without a 10% correction in the DOW. Such wash outs, although painfull at the time do have some good effects. Lowever home prices are not bad for people in their teens and twenty's and for people like me, who has a daughter who wants to buy her first home in Boston with her husband. After waiting so long for a 10% correction, perhaps we will get a 20%er this time.
A lot of Wall Streeters talk about P/E's and stocks not being expensive. However, nearly all major corrections are about perceived risk and credit crunches. Fisher has been arguing that the market is fine, because credit spreads are still tight. Actually, corporate spreads are still relatively tight, but any one who would bet against them widening seems foolish to me.
Hey after the dislocation, there will be great buying opportunities,OK. So pushing the market down is not such a bad idea for Cramer, for he is a longterm player. He does not have to be short,just cash. I am not covering my shorts for anothet 15% down. I may go neutral after that.
Bill , you understand a 10 percent correction wipes out most leveraged hedge funds if investors file redemption notices , right ? Why don't you think we haven't seen a correction .... the big market forces right now are hedge funds , not individual investors. And they collectively are sweating bullets... IMHO , the next round of redemptions will be much broader than folks presently perceive. I think that will come .as a surprise
my mortgage broker partner and friend is freaking the F out today. his boss told the crew to expect not to make any loans for three months. wowsers.
says that jumbo full doc loans blasted out 2 points in two days, even with the damn ten year at 4.68.
dollar in the crapper
commercial loan spreads moving from 150 to 200, a massive move in just a few days
butchya know, there is much more to this economy than loans and houses
either way, this too shall pass and in its place will be something bigger and better
i'm ready for the bottom, baby, bring it on
question tho:
if flight to quality brings the ten year down, wont there be easier consumer credit? sure, mortgage spreads are blowing out, but are car loans/credit cards/ etc etc etc?
inOrlando: The "official" government numbers show no hint of contraction yet. Now we can dispute their accuracy - some would suggest we're already in recession now and certainly that's possible - but a recession isn't the worst thing that can happen. In fact it can be a very healthy thing if managed well. But stagflation or hyperinflation - these are very seriously bad things.
"The "official" government numbers show no hint of contraction yet."
I am no authority on the Great Depression or any recessions. If I recall from what I've read, the summer of 1929 didn't show economic contraction yet, either, just slowing growth. In retrospect, shouldn't the Fed have begun lowering their rates as soon as the equity markets tumbled in the Fall? Substitute equity with mortgage markets and you have today's crisis. It's the lender of last resort, but it shouldn't have to wait for a major rise in unemployment to take action. It's complicated this time as always, and I don't think the Fed should only lower rates but explain once and for all the housing bubble to the public and its likely economic ramifications.
If I recall from what I've read, the summer of 1929 didn't show economic contraction yet, either, just slowing growth. In retrospect, shouldn't the Fed have begun lowering their rates as soon as the equity markets tumbled in the Fall?
As long as it doesn't cause higher inflation expectations and higher long-term rates, then by all means, they should inject liquidity (aka cut rates, aka fire the printing presses).
HOWEVER, if cutting rates now to avoid a correction is just going to delay the inevitable and make it even worse later, then they should wait.
I'll keep saying it 'til I'm blue in the face... Creative Destruction is a good thing when you are way too fat. And by many measures, we are way too fat.
They can drop the twinkies once we shed a few inefficient pounds, but not while we are going through the natural process of trying to get healthy. Doing so before created the twin bubbles that are rocking us right now.
This is called re-pricing of risk & equities. There is more to give here. The housing market is DEAD. A goner. First HUGE leg down for the CA market in prices. Sales will go way WAY down. Think 20% downpayment and calculate back from there for median home prices. 40%-50% DOWN in price.
Call me a skeptic. I'm convinced Cramer is short. He doesn't care how he makes money, short or long. That was a quick panic spreading opportunity for TV so they could take a little more out of the market before the close.
"I'll keep saying it 'til I'm blue in the face... Creative Destruction is a good thing when you are way too fat. And by many measures, we are way too fat."
This is an economic justice question as much as a financial one. Whom do you think will be the most economically hurt and face substantial unemployment as a result of the deflating housing and mortgage markets? The people who largely benefited, such as Wall Street players, real estate moguls, and the like or the bottom 30% of workers, the working poor? Who will more likely face homeless shelters, the millionaire flippers with negative equity or the people who got pushed out of their apartments because they were converted to condos and had to move further from their work, servicing the people who service the wealthy and weren't able to save hardly anything due to higher rentals? Who pays the most from unemployment is what I'm asking, the 'fat' or the 'other half'?
inOrlando, unfortunately justice and economics do not go (and never have gone) hand in hand.
The answer to your question is that most of those who made imprudent decisions during this upswing (toxic borrowers, non-savers, greed-fueled buyers of clearly overpriced assets, pretty much all those looking for the magic in a bottle quick buck) are in trouble and will feel varying degrees of pain.
Not everlasting pain as that can only be passed by higher powers, but clear pain.
Sometimes lessons are learned the hard way. And those that are ignorant of the lessons of the past are doomed to repeat them.
Personally, I have no sorrow for people who take risk and are burned. You play, you pay.
We've all done it to varying degrees and society cannot bail you out every time.
inOrlando, economic justice was trampled a long time ago. It's just a variation of the trickle-down theory to say that we must save the rich in order to save the poor. And BTW, I know Wall Street analysts and high-tech managers who are out of work already. Concrete reality is already in the dumpster, and the virtual reality that is "the market" is, if anything, a lagging indicator.
I don't like the idea of the FED lowering the rate. My thoughts, on the instinctual level, say that this is doing nothing more than bailing out the super rich and mega corporations. This is why:
Many see bankers, fund managers and CEO's as people with excess wealth. These people have made millions duping the system by falsely portraying what they were selling to pension funds, endowments and various other entities that represent the little guy. Hell, they encouraged and cheer-lead the housing bubble smack into this mess.
Many people are already out of work, and many people are struggling to make ends meet. Many people can afford to go on vacation or play on yachts. Many people have been forced to sell any excess "inventory" at reduced prices. See your local craigslist for boats, jetski's, ATV's and RV's.
If the FED dumps rates to save the economy... I think it will be taken as an attempt to save the mega rich AKA big players. I would expect serious public backlash. There will be no short term relief for those people that are struggling right now.
Additionally, I would expect people to act even more irrationally given what we know about the market place today; Rating agencies, Fund Managers, Manipulation, Subprime Encouragement Etc. People can only take so much before they crack and want to hurt other people... I'm just saying...
What you don't know about bear markets can really hurt. During the 1940's thru 1982, the makt would have a correction(bear mkt)lasting 10-15 months every 3-4 years. It would avg 20+/-% down. We have had only one of those in the past 25 years. That was of course the bear mkt starting in October 2000 which ended 2 years later. This bull mkt started in March 03...it is 4 yrs later. I wonder if we are returning to a more normal historical patterns.
I'd just like to point out that the Fed effectively sets the floor for the unemployment rate via the Fed Funds rate. Lowering the rate doesn't guarantee unemployment goes down, but raising it certainly says it won't.
So when unemployment likely rises above 5%, then 5.5%, then 6% over the coming quarters, when should the Fed cut is what I originally asked? I then merely made an argument that the lower class are hurt much more disproportionately by a rising unemployment rate than those who speculated in real estate over the last decade, so why should they get hammered twice?
InOrlando - They are already hurting, there are a TON of people out of work for good wages. You put too much faith in the BLS stats, probably too much faith in stats in general. My economic indicator in housing centric AZ is;
How many people I see at the gas station getting lunch for the days work vs. How many people call 911 after they get into a fight while intoxicated at a local park on a Wednesday morning.
Last year at this time, the former made me wait an extra 10 - 15 minutes in line for coffee. This year, I'm seeing more fights and Domestic violence than ever before and they have become more severe. I'm not a Cop BTW.
The lower class folks are not going to benefit from a FED rate reduction. They need real inflation, not the CPI BS, to be more inline with wages. They need affordable housing. Hell, I need affordable housing.
Wages across the land are crap. The spread keeps growing and it pisses me off, and I'm WAY better off than 95% of the people I help. The FED does shite for the lower class and its fool hardy to think otherwise.
We need to let the little shits on Wall St. reap what they have sewn. Like most Americans they have WAY to much excess weight to carry around.
R..R..Right Cramer. All we need to do is make it easier for all of those overextended borrowers to catch another big wave of housing speculation with more MEW's. It never should have gotten this far out of line anyway except for the Fed and give away money.
Why should the Fed care about the equity markets? This nation has been shafting the bottom half of the income spectrum.
What we need to do is make it easier to declare bankruptcy and keep your house. That will help the unwinding go in the correct order. Help the little guy and screw the big money.
Now's not the time to get people to consume more, it's the time in the cycle when people need to begin to learn how to save again.
Point taken. I think the question was more about the impact of dollar declines on growth in jobs and income. Paying off debts, building home equity, and selling abroad would certainly be acceptable. How far does the dollar need to fall for US value added to be competitive? How much value added capacity do we retain in this county?
I don't know, but when Sam Molinaro says worst in 20 years, it gets my ears perked.
I have a suspicion that the IB's can't find things to sell. Mortgage stuff unsellable, junk unsellable etc. So wit credit tightening up it can make things uncomfortable.
The big question remains, how long does this go on? The MS note today said they think it is a six-week phenomenon. In other words, we get into September and things settle down. I am still betting that way, but I don't have the same confidence I had a few weeks ago.
The big question remains, how long does this go on? The MS note today said they think it is a six-week phenomenon. In other words, we get into September and things settle down. I am still betting that way, but I don't have the same confidence I had a few weeks ago.
I don't know enough to be real concerned or not... but I agree with you that it is too early to tell if this is a squeeze of for real. We'll know a lot more in a month (I think).
Something we ought to be asking ourselves though is... "What happens next?"
Say it is for real, what would the symptoms look like & where would they show up? I mean few could imagine the sub-prime contagion would infect LBO money this quickly... but it did.
So what's next? And where will it show up in the 'real economy'? When things get bad they always do spread out from Wall Street. CR's been watching retail and prior to that imports... It has to spill out somewhere... so where?
Where would we see signs next? That's the $64 million question, isn't it? How about the rumor that the LBO of Home Depot's Supply Biz ain't going to happen. That'll mess up that compay frr a while. How about a cutback on vacation and biz travel? Airlines/Leisure companies take a hit. Don't absolutely need new clothes, how about dry goods retailers? You can get books at the library, how about Barnes and Noble?
That's off the top of my head. It is also a question you should direct at CR.
OK I am supposed to be outa here, but I have to toss my 2 cents --
LawFitz, InOrlando, NXN, if there were an ounce of evidence that letting a business make a buck by whatever means necessary --and then letting it 'feel the pain' when its greed gets the beter of it -- somehow worked out to be a great blessing to me, the working class, the other classes, our republic, our economy, and even that business's own interests, I'd be snorting that libertarian fairy dust in a second.
Fantasies like this have a way of never working out, except as propaganda. And in this case, the myth of a market inherently honest and wise (that could regulate itself any other way except into the sewer) is the perfect fantasy front for a lot of rich and powerful people to keep up their dishonesty and stupidity--and theft.
That said, the dishonest and stupid shouldn't be bailed out -- they should be handed a bill for all damages --direct and collateral -- and we should be realistic and sober, and hard working enough to craft a way to stop all this 'market pain' from ever taking us to the brink again.
What effect will the little guy and his 401k have on the markets on Monday? After getting rolled in the 2000-2002 purge with a buy and hold mentality and taking it in the teeth as hedgies shorted the market. How many of the boomers will be attemting to rebalance their portfolios to cash because they have hopes of eating in their old age? Flat and declining markets will certainly crimp spending over the long term. The squeezed generation ( aging parents, college tuition, and retirement positioning) are real problems. After having your housing next egg take a twenty percent hit you have to do what you can to protect your 401k and your tuition saving accounts. I am afraid that we have not seen anything yet.
InOrlando - FWIW you can look at the Nat'l Income accts online. For example just took (literally) 90 secs to look at % changes from prior period from 1930 to now. 1930 was down "only" 8.x%. Worst periods in 70s, 80s, were -1.2% in real GDP. Problem was Fed tightened money and you couldn't get fiscal spigot going.
( BEA : Interactive Tables )
Dryfly, Banker: that's the expectation but right now we're only seeing one asset class (real estate crater) and take it's associated derivatives (AKA - "structured products") with it. Bill Gross has a great little newsletter in March on Ten Little Assets in which he points out that carry and leverage applies to many more. CR is right in that this isn't a crunch (yet) but the bad business practices & lack of diligence + lack of model transparency are likely true across all ten. What then ?
Tanta , Barron's has a big piece today on ACA Capital ( 27 percent owned by BSC by the way 1 ) Here are the highlights : 1) ACA has a market cap of 260 million but has insured 15.7 billion of mostly subprime securities. Notably , 9.3 billion of this waste is in mezzanine subprime CDOs ; 2) ACA"s total CDO exposure is 61 billion ( subprime and commercial mortgage debt ) on their capital base of 326 million , which equates to leverage of 180 to one : 3) ACA has been criticized by some as being a warehouse ( or perhaps toilet ) for the risky obligations of big boys such as MER , LEH ,BSC and RBS Greenwich Capital ---billions of such obligations have been parked in ACA by these big boys : 4) If ACA collapses, these risky obligations come cascading back onto the books of the big boys and some of ACA's 25 other counterparties; 5) Barron's further notes a high level of risk of the 9.3 in mezzanine risk exposure being pancaked with just a 7 percent collateral impairment spread across the pool underlying the mezzanine CDOs ( note the mezz CDOs consist of BBB slices of MBS pools ; 6) S&P has forecast 11-14 cumulative losses for 2006 vintage subprime mortgages ; Half of ACA 9.3 billion in mezz guarantees consists of 2006 paper , while the balance is 2005 and 2007 paper that has not performed much better ; Finally , ACA has 5 billion in "high grade" subprime CDOs of which 2/3 is Single A tranches .. a 10 percent collateral loss wipes out the single A tranches and 2/3 of any high grade CDO they are a part of... ACA thus has a 3 billion exposure on this 5 billion exposure.... capped off with about a half billion more risk from CDO squared products which get snuffed with a 4.5 collateral loss. ... The mess just keeps expanding and the opaque risks are becoming visible. I wonder if BSC , MER and LEH will disclose this by way of a 10Q August 9th , which is when I understand 10 Q'a are due for the second quarter ? Thoughts ? ?
If you haven't got a mortgage to struggle to support, and haven't got mutual funds to worry about, but have a bunch of cash, what do you do if you believe the credit crunch is real and getting worse? leave it in the bank? or is there an obvious play?
John asked: "If you haven't got a mortgage to struggle to support, and haven't got mutual funds to worry about, but have a bunch of cash, what do you do if you believe the credit crunch is real and getting worse? leave it in the bank? or is there an obvious play?"
Given your assumptions and the limits of your question, the only obvious play is to leave it in the bank.
Me, I'd re-phrase the questions or ask other ones, since there's no advantage to be gained by doing the obvious because so many other people are acting on it.
Q: How big is this "credit crunch", objectively, compared to other ones? (The subjective views of "talking heads", in any capacity, don't count as evidence. The media's job is to inflame, not inform.)
Q: To what extent has the impact of this credit crunch already been factored-in?
Q: What sectors of the market or the economy are "irrationally" being marked-down by the short-run panic and would make good trades/investments?
Why do people make such a big deal over the antics of this guy?
Oh, how my heart bleeds for all those paper-pushers...
Alex, I though it was funny.
Best Wishes.
I'll take a stab, Alex. He's one of the most visible experts on TV, seems to be an insider, is knowledgeable and a good entertainer. He's been bullish forever, I guess. Now he claims that the sky is falling and throws a fit like nothing I've ever seen on TV (reminds me of myself)...
Oh, OK. Sorry I missed the humor. (Hadn't actually watched it, yet, because I'm still at work.)
He was really upset. That wasn't an act...
What next Paris Hilton quotes?
References to Hoover, armageddon, ...
Simply AWESOME! The lady looks at the camera man at one point and I swear she mouthed, "Help me, this guy is Nucking Futs!"
232 visitors is that a record?
233
CR - it's starts funny but gets pretty sad indeed in my book on at least two fronts. Cramer starts by castigating the Bear-Sterns CFO for lousing his couth - as the guys at Edwards Flight Test used to say. And then goes ballistic - in another job they'd be finding him some new underwear for loosing his nerve.
The black humor is that as the re-pricing works its' way 'round leverage works as well down as up - where's Cramer's defense of the market mechanism (& bonuses) now that it's running the other way ?
The real question - aside from amusing myself here, and this is serious, - is how right is he ? How far into other assets classes does this go ? And how far into real economic consequences ?
"[S]eems to be an insider," is right.
He's a clown. If someone is such a shrewd investor, he doesn't spend his time making an ass of himself in front of TV cameras. If he pumps a stock, what for the morons who watch him to drive it up (usually takes about 3-4 hours, then short it.
But he is entertaining...
Alex, I've added an update. Cramer's rant is funny - and wrong - and it gives me an opportunity to point out that a credit crunch is driven by nonprice rationing - so cutting the Fed rate wouldn't help much.
Best to all.
P.S. Hilton? Uh, isn't Blackstone buying Hilton? I wonder if that will be another pier loan for someone.
DaveL -- Your analysis is spot on. I imagine that the real Cramer we saw there for awhile was right -- that this is serious...
Cramer and his insider buddies have gone short and are now trying to incite panic among retail investors. It will probably work.
250
Cramer says BSC shouldn't complain and put on a brave face and then he goes off shouting Armageddon. I just love that people listen to this guy, A fool and his money.
Good heavens!...what's Cramer going to do if the market experiences a full-fledged crash?
Yep...it's all going to end in tears and Cramerian wails.
CR is correct, in my opinion, that Cramer is wrong and that this is a credit crunch. That said, the Fed clearly is out of touch. Only a couple of weeks ago Bernanke said that the problems would be "contained" to ARM subprimes, although for a few months now it has been clear that Alt-A hybrids were under stress. Indeed, for some time now the street has been facing up to the fact that it had mispriced risk in the previous year or two. The Fed has not even addressed this. I agree with Cramer that the Fed is out of touch, but I don't think a rate cut would help at this point.
That "lady" happens to be Erin Burnett, a total hottie.
And yes, that was not an act. He almost appeared to be crying at the end. Cramer may be corrupt but he is by all means not incompetent. He, along with everyone else in the industry, knows how bad this can get.
Fear will move markets far quicker than greed.
Can Bernanke "cut the rate" without the dollar plunging further?
It's not just what he did on CNBC today....has anyone read his blog today?? If not and you have access, run don't walk to read what's on his mind today.
Don't get me wrong, I agree with CR...Cramer is wrong, plus he's an absolute joke. But when Cramer writes the things he wrote today, it gets me REAL CONCERNED about what the markets are about to do....not that we didn't have an inkling!
Serious, scary stuff.
I thought this guy had a good take. This is what a real economist is like:
Maverecon - Willem Buiter's Blog
do you have a link to what krammer wrote on his blog
Cramer may be wrong about the solution, but what about the scope of the problem?
CR, maybe it is time for a serious weekend discussion of the policy implications of discontinuing the "Greenspan Put" for financial markets. I believe that a lot of financial commitments have been made in light of Bernanke's implicit continuation of the provision of ample liquidity implicit in the "Greenspan Put", and now with the securitization of the housing market, the contagion will spread from the housing market to other markets through the magic of derivatives.
What do you think? Worth a weekend posting?
Thanks for the forum!
Someday this war's gonna end....
All, it's hard to over emphasize the impact of these pier loans (previous post about Chrysler). I was a customer of First Boston when they got stuck with the Burning Bed pier loan - they needed Credit Suisse to bail them out.
"In August 1989, right before the junk bond market first seized up, First Boston extended a $500 million bridge loan to a New York buyout firm that was taking a company called Ohio Mattress (now known as Sealy) private. When First Boston tried to unload its temporary bridge on the usual suspects, the buyers, unnerved by rising interest rates and the collapse of the main market maker, Drexel Burnham, balked. Liquidity went overnight from a virtual Niagara Falls to a veritable Sahara. First Boston was stuck with its loan, developed its own financial woes, and ultimately was subsumed by Credit Suisse. The deal became known as the "burning bed."
These pier loans can be deadly.
Best to all.
Look, the guy is an entertainer. He does his job well. He gets attention.
In the US today, fame trumps all else.
Cramer's blog entries are on thestreet.com (free) and realmoney.com (premium).
thanks for the info
ABX hits the perfecta today- all closed at new lows!!!
This is truly turning into one of those periodic crisis that have always plagued markets.
What is going to happen to housing prices if the Fed does nothing next week and the mortgage markets seize up?
Stay tuned!
Someday this war's gonna end...
Wally,
was "trump" an intentional pun?
Just got my weekly email from Business Week. Guess what's on the cover this week?
BusinessWeek - Business News, Stock Market & Financial Advice
Top Story: Bonfire of the Builders
hmmm..is this a contrary indicator?
Keith, that is a good piece, but I disagree with his solution. He is recommending the Fed take marked-to-model mortgage backed securities and/or these pier loans at face value as collateral.
He is essentially recommending the "Greenspan put" - now the "Bernanke put" - a policy that rewards people for misjudging risk by bailing them out. I think that would be a mistake.
I don't think we need to "Liquidate labor, liquidate stocks, liquidate farmers. as Treasury Secretary Andrew Mellon suggested at the start of the Depression, but we do need to let some of the excesses of the housing bubble and LBO wave work themselves out.
Best Wishes.
No, lama... but there is a great example.
Ya Wally, no one outside of NY had even heard of Trump's father, but he built the entire family fortune.
Cramerdammerung. That's something.
You guys are so going to get Lauritz Melchior tomorrow.
Why wasn't Cramer screaming like this when lenders were handing out $500,000 loans to people with no jobs?
That was the time to do it.
I finally got the carrier pigeons that power my internet connection to provide me with the full video, and that would be some funny stuff. I can't wait for all of Cramer's buddies to lose their jobs and have to sell their homes in the Hamptons.
Unfortunately, real people will get hurt by the mess that Wall Street made as well.
Cramerdammerung
That's wonderful. I promise to listen to Mr Melchior - so I hope the clip isn't too long (-;
ac, classic. I'm waiting for Doomster to send a railing email from the public library some day blaming us all for his failed RE investments.
Why wasn't Cramer screaming like this when lenders were handing out $500,000 loans to people with no jobs?That was the time to do it.
Excellent point...
Tanta, I think Melchior would be stretching the limits of "Rock Blogging" well past their limits...
How about Blue Oyster Cult's "Don't Fear the Reaper" instead?
http://data.nationalmortgagenews.com/columns/hearing/
Paul Muolo column just dropped
I'll put it bluntly: if you operate a non-depository mortgage firm (lender or servicer) and don't have a deep-pocketed parent or hedge fund as a sugar daddy you're likely to be out of business by year-end, probably sooner. In the 20-plus years that I've been covering residential finance I haven't seen a financial meltdown this swift since the S&L crisis of the mid-to-late 1980s. One subprime executive who closed his shop a few months ago told me, "This is a liquidity crunch the likes I have never seen." Meanwhile, the mudslide is rolling downhill from Wall Street to mortgage bankers, to loan brokers, and then the consumer. Nomura Securities is winding down its mortgage conduit and three major Wall Street firms are preparing to slash their mortgage desks and or conduits
Can limits be stretched past their limits?
apparntly, they are still selling R/E in vegas:
http://www.lasvegasrealtor.com/stats/statindex.htm
If you listen carefully, Carmer acknowledge that the heads of the IB banks are aclling to "get on TV" and fix the probelem.
...heads of the IB banks are aclling to "get on TV" and fix the probelem
Kind of like BSC did this afternoon?
After Cramer's tirade, the CNBC disclamer pops up "Cramer's recommendations are not the opinions of CNBC..." LOL!
263
Per Muolo on the meltdown: "the mudslide is rolling downhill".
Melting mud on wheels! MMI hits a new high?
Cramer, this one is for you ('cos I can't be around for rock blog manana):
YouTube - Who's Sorry Now-Connie Francis
274 Visitors Online
He is essentially recommending the "Greenspan put" - now the "Bernanke put" - a policy that rewards people for misjudging risk by bailing them out. I think that would be a mistake.
It's great to hear you say this.
I couldn't agree more.
Wall Street is beginning to shake from withdrawal, and Cramer wants the Fed to give the economy another hit of financial crack.
There's no easy way out of this...
Tanta, I think Melchior would be stretching the limits of "Rock Blogging" well past their limits...
How about Der Hölle Rache then?
YouTube - Diana Damrau as Queen of the Night II
China in the 2000's follows in the steps of Japan in the 1980's . . .
The New York Times - Breaking News, World News & Multimedia
They just can't resist buying overvalued American assets.
Cut rates?! Nuts to you Cramer. Time to pay the party tab.
Polonius, Damrau isn't my favorite Queen of the Night, but I will say that that production has the best Rocky Horror Picture Show costume for her I have ever seen.
So everybody thinks their "Bank of America" account is in a vault somewhere.
No big deal just a credit crunch. Mortgage insider insight at its best
"A fool and his money are soon parted"
DDAn - thanks but I think our host makes a couple of key points. Technically we're seeing a squeeze not a crunch as yet. But the leverage problems could spread. Tanta's entry on mark-to-model being standard is a good point but the problem here is 3-fold a) core asset (houses, loans, businesses !!!) needs to perform, b) not be over-leveraged and c) mathstat models need to be based on something besides calm waters and prosperous sees (that's deliberate). Which they're not and not transparant.
CR that Fortune article is a great cite. Tell us more War Stories please.
A bear market does not one day make.
I would never care to guess if the Dow will go up or down Monday.
But just out of curiosity, can one of you uber-traders tell us what is the theoretical maximum the Dow can fall from its current listing in one day with all of the current trading halts and stops currently in use to keep it from falling to far or too fast (not that it will or would--just curious).
Can someone point me to a link that explains what a credit-crunch is in layman's terms? I think I know what it is, but I can't explain it for crap. I'm trying to educate my buddies that don't care to read.
Those who can't, teach... is a BS statement. I find that if I give a little "class" every now and then I really understand the material a lot better.
Tanta/Polonius - Opera ? Help. Ich sprache nicht Deutsche. But the costume is kinky.
Perhaps an alternative:
Wild World:
YouTube
- Broadcast Yourself.
Or (GYST) and pull up your socks (the Right Stuff):
YouTube
- Broadcast Yourself.
The music remix is a little schmatlzy but Yeager really did bust the NF-104 and flat spin in from near-space. And Cramer's loosing it over is own game ?
giacutter, here are the CIRCUIT-BREAKER LEVELS FOR THIRD-QUARTER 2007
30% is the max for one day.
I'll go way out on a limb: it won't happen on Monday.
Best Wishes.
Is there anyplace on the web to get quotes for mortgage backed bonds and related derivative? Also, can individual investors purchase these types of securities?
If Cramer thinks that lowering the fed funds rate will stop the carnage, he is mistaken. It is too late. The lag times are too long the reduced rates will not take hold fast enough. The Fed should have lowered rates six months ago if we were to see any effect during this year.
A credit crunch can only be eased by increasing liquidity which lowering the rates would do. However, with the short end of the yield curve held artificially high by the Feds market intervention, they are squeezing liquidity not enhancing it. So ironically, Bernanke seems to be making the same mistake that the Fed made in 1928 hes just doing it on a much smaller scale.
Hopefully he will see the mistake quickly, rather than exacerbating the credit crunch as the Fed did at the start of the Great Depression.
The Dow can fall 3,700 points before they close the NYSE for the day.
Trading curb - Wikipedia, the free encyclopedia
(Wikipedia entry is essentially accurate, but its numbers are 1 quarter out of date)
Nasdaq follows the same rules.
You are not authorized to view this page
Dustdevil, there is no agreed upon formal definition. Some people argue a credit crunch is based on nonprice rationing (like tighter lending standards) or regulatory changes.
Here is Bernanke's definition from this paper:
Bernanke and Lown (1991) define a credit crunch as a decline in the supply of credit that is abnormally large for a given stage of the business cycle. Credit normally contracts during a recession, but an unusually large contraction could be
seen as a credit crunch.
I've seen small credit contractions called "credit squeezes" and other names. Some people I know don't think it's a crunch unless it leads to a recession. Others disagree.
I like a sharp increase in nonprice rationing of credit as the defintion (Owens and Schreft's definition from that same paper). I think that is what we are seeing right now.
Best Wishes.
giacutter, here are the CIRCUIT-BREAKER LEVELS FOR THIRD-QUARTER 2007
30% is the max for one day.
I'll go way out on a limb: it won't happen on Monday.
Best Wishes.
Calculated Risk
Thanks, CR.
It looks like 4050 is the absolute limit to fall before a market close.
Since that sort of thing seems to only happen every 60 years or so, you're probably right.
I think there is a good chance it will go up Monday, but I was curious.
Thanks CR ... You are the Shinnizle, Dude!
"Issuance has fallen off a cliff. Roughly $30 billion or so, was sold monthly this year but in July it was less than $4 billion," said Camurdan. "It's going to be a very slow year and I don't see anything changing for the foreseeable future unless the Fed starts lowering rates," the manager said.
Subprime bond deals seen stuck in pipeline
| Reuters
Thats pretty amazing, $26 billion a month switch?
A credit crunch can only be eased by increasing liquidity which lowering the rates would do. However, with the short end of the yield curve held artificially high by the Feds market intervention, they are squeezing liquidity not enhancing it. So ironically, Bernanke seems to be making the same mistake that the Fed made in 1928 hes just doing it on a much smaller scale.
Hopefully he will see the mistake quickly, rather than exacerbating the credit crunch as the Fed did at the start of the Great Depression.
zephyr | Homepage | 08.03.07 - 6:26 pm | #
Well said but...
Its not that lower rates are the "fix".
Rate cuts in 1998 LTCM didnt fix anything but they worked to "anchor" the financial system.
Its never "too late"
As much as I think Cramer is a raving nutmonkey most of the time, today's rant brings up an interesting topic. If it IS that bad out there in the financial sphere (and it just might be, according to the comments from Bare Stern's COO) when do the financial firms start laying off workers? Have they already started? The thing is, when you start cutting those jobs, it hurts much more than your paltry retail layoffs. They count as one job, but they are the equivalent of 10 in income and spending terms and are much more devestating to the outlook.
Does Jimmyboy know something we dont know? Looks like financial sector hiring outside of mortgage is doing ok, but when does it start to hit the IBs? Their stocks are down 20% already and this is just getting started. The fear is now pervasive and spreading, even if people want to believe the skunk is contained in the subprime basement. (Not that I believe that.)
CR, are the chances of a recession later this year still a coin flip?
When did it stop being a "repricing of risk" and become a liquidity crunch. Hell, I have some cash.. If the owner of my mortgage came to me with a good offer I'd let them buy out my mortgage -
at a mathematical level, using continuity concepts, I tend to understand a credit crunch as something where the interest rate is infinite - but the market should sort it out.. Heck , if the interest rate out there is infinity I might get off my fat arse and get together a few buddies and some borrowing of our own to lend ( to people who I believe can pay me back ) out a few mil - at a rate substantially better than infinite - and if I can do it, what's a few bil or tril for people in the biz and in the know.
Heaven forbid, could it be that the people who want to borrow aren't trustworthy enough for people to lend to them ?
-K
Geoff said,
"Does Jimmyboy know something we dont know?"
Ya think?
Jimmy boy and the rest (permabull Cramer included) know a little more than us Blogger's I'm afraid.
No Dis-respect just the facts Maaaaaam.
With even Cramer going bearish, the market has to go up next week.
We'll see.
O-Joe
Does Jimmyboy know something we dont know?
Stuff like this can't help:
NovaStar Suspends Stuff
Im specifically asking about JCs knowledge of bloodletting at IBs. If they start cutting headcount, kiss the economy goodbye (as well as the NYcity RE market)
Im specifically asking about JCs knowledge of bloodletting at IBs. If they start cutting headcount, kiss the economy goodbye (as well as the NYcity RE market)
Geoff | 08.03.07 - 6:54 pm | #
If the FED does not provide liquidity- kiss the economy BUH BYE
zephyr and slowmotion
A fed funds rate cut will result in a lower dollar and in turn in higher prices on imported goods. This means higher inflation. The remedy against inflation is rate hikes. Thus rate cut leads to higher rates. Much higher rates an no fix
Most seem to agree we are in a credit crunch (or sqeeze), but some people are claiming there is still ample liquidity. (see below) Do they have a point?
Is an economic Katrina about to overtake the financial system? - MarketWatch
Among Crescenzi's positive factors: Corporations are flush with cash and other highly liquid assets, some $1.7 trillion by one account. Banks are well capitalized. Money-supply growth rates are strong worldwide.
Just spoke to a Mortgage guy their company (large A paper) quit doing Jumbo's Period.
Not subprime, Not Alt A, but Prime Jumbos. That my friend is "captain" credit crunch in the makings.
zephyr and slowmotion
A fed funds rate cut will result in a lower dollar and in turn in higher prices on imported goods. This means higher inflation. The remedy against inflation is rate hikes. Thus rate cut leads to higher rates. Much higher rates an no fix
Matthewdk | 08.03.07 - 6:59 pm | #
See previous post- It's not a "fix".
FED'S mandate is the economy not inflation. Hello
slooooooooooooooowwwwwmotion - can you give us a bit more info on that. It's not a welcome development.
Lower rates -> dollar tanks -> higher inflation (oil @ $100/barrel anyone?) -> bond market tanks even more -> higher rates
"Cramer and his insider buddies have gone short and are now trying to incite panic among retail investors. It will probably work"
The simplest explanation is often the most briliant. Good job FF
The cut is not about "rates" doesn't anyone get it.
So Everyone,
You probably think the Bear Stearns thing is "contained" huh?
What a switch. I digress.
Sorry to the doom and gloomers I have slammed.
Cal quoted Camurdan:
"Roughly $30 billion or so, was sold monthly this year but in July it was less than $4 billion"
And that $30 Billion per month Jan - June was at lending terms so vile the $30 Billion is nearly worthless in less than 12 months. (see the ABX/CDX indices)
Credit Crunch? No way. It's better stated as "End of Product Lifecycle". No more customers. Welcome to Free Markets.
So with the chaos in home mortgage rates, especially the moves in Jumbo loans by a few lenders is there any way that home loan rates don't move up quickly?
Oh sure, they rip off everyone and their mother for billions but as soon as they start getting theirs then they start reaching for Bernanke's ample bosom. Drive a stake through the heart of this beast, if you can find it, raise rates 50 bps.
Credit Crunch? No way. It's better stated as "End of Product Lifecycle". No more customers. Welcome to Free Markets.
Chuck | 08.03.07 - 7:25 pm | #
Well said. Wall Street is having problems "putting a value" on securities. The problem is today there is NO "value". These securities have intrinsic value (even the toxic stuff) but not if you have to sell "today".
For the record:
"The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.
Today, the Federal Reserves duties fall into four general areas:
conducting the nations monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
supervising and regulating banking institutions to ensure the safety and soundness of the nations banking and financial system and to protect the credit rights of consumers
maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nations payments system "
"maintaining the stability of the financial system and containing systemic risk that may arise in financial markets"
Maybe the Greenspan's copy said "causing."
"to ensure the safety and soundness of the nations banking and financial system and to protect the credit rights of consumers
maintaining the stability of the financial system and containing systemic risk that may arise in financial markets"
Now you get it.
Wachovia unit halts Alt-A home loans
| Reuters
"Wachovia Corp. (WB.N: Quote, Profile, Research), the fourth-largest U.S. bank, on Friday said its Vertice lending unit has temporarily stopped making "Alt-A" home loans, a day after the company stopped making such loans through brokers. Vertice was a brand created in March for the combined entities of American Mortgage Network and Wachovia Mortgage Third Party Lending. A spokesman said Vertice will monitor market conditions and reintroduce products as conditions become more favorable. "
Heh. Did you guys hear this one:
"Credit for leveraged buyouts has dried up, with dozens of deals canceled, postponed or repriced. The market for complex derivatives such as collateralized debt obligations has shut down like a "constipated owl," according to bond fund manager Bill Gross."
From: Economic Katrina
That's a particularly pretty metaphor.
CR, I think you missed one point of Maverecon's solution. I do not think he was suggesting a loan against a market value. His intention was to hit the owners of the debt where it hurts and force them to significantly over colateralize the loans (to protect the Fed from loss) and pay a hefty rate as well, in effect remind them of the errors of their ways on two fronts. That is the impression I had.
"Cramer and his insider buddies have gone short and are now trying to incite panic among retail investors. It will probably work"
Yup!
"A fed funds rate cut will result in a lower dollar and in turn in higher prices on imported goods.
not true. most of the imported goods will not rise in price but their makes will just have to get used to lower profits.
I.e. Tyoyota may raise in 1% if the $ fall 10% - which means in yen their selling price will be 9% less than now.
"A fed funds rate cut will result in a lower dollar and in turn in higher prices on imported goods.
not true. most of the imported goods will not rise in price but their makes will just have to get used to lower profits.
I.e. Tyoyota may raise in 1% if the $ fall 10% - which means in yen their selling price will be 9% less than now.
Yal | Homepage | 08.03.07 - 7:50 pm | #
Yal are pretty smart.
I.e. Tyoyota may raise in 1% if the $ fall 10% - which means in yen their selling price will be 9% less than now.
On the other hand, oil may rise 10%. And imported food. Of course, those don't make up part of the inflation stats anyway...
Yal, not true- the increase in raw materials is still pipelining into the import costs. A lot of chinese imports are already seeing 10-15% price increases over last year, with more on the horizon as the wages in China increase and commodity price increase are priced in. After all, they seem to want to make a profit on every shipment, oddly enough. The average manufacturer no longer cares about producing below the marginal costs to make it up on volume and get market share. Nobody else has ever followed the Japanese into that valley of low/nonexistant eternal profits.
Check out Harbor Freight year over year- the sales prices are over last year's regular price in some cases.
that is your rockbottom comparison- same goes for Walmart/Sam's Club.
Someday this war's gonna end....
"The S&P 500 index is now pricing in a recession starting in late 2007 and lasting for most of 2008, led by the financial sector, said David Bianco, chief equity strategist at UBS."
Now there is a smart cookie. FED be warned.
Ummm, is this why they call Crammer the "Jester" of CNBC?
When investors, hedge funds, investment banks and commercial banks start loosing money on their funny paper, derivatives, CDO'S LDO's (etc) a credit contraction will occur and continue no matter what the fed does.
I think it boils down to who wants to buy these debt/credit instruments/funds if they cannot be fairly valued and if it looks like they are continuing to lose value.
Ummm more sellers then buyers, seems like I have heard this before. Looks like those holding the bag will have to hold onto it a little while longer.
People, people, it's "losing", not "loosing".
What credit crunch ? Just in case BSC, LEH aren't aware of the discount window, there's a HOWTO very simply put at : The Federal Reserve Bank Discount Window & Payment System Risk Website
This is the borrowing excerpt..{ You'll notice they even offer a "NO QUESTIONS ASKED" loan - who needs CFC huh ? Sure, there's pesky things like collateral.. (sadly they require collateral to secure the loan ) - but
c'mon - they have the nation's money in their pocket - you'd WANT them to require collateral wouldn't you ?
"How do we request an advance from the Discount Window?
Requesting an advance requires a simple phone call to your Reserve Bank.
Please be prepared to supply the following information:
* Name and location (city and state) of your institution.
* Your institution's ABA and telephone number.
* Your name and title. If your institution's borrowing resolution requires that two people request a Discount Window loan, please have a second authorized individual available.
* The type of credit you are requesting.
* The amount of the advance you are requesting.
* The number of days that funds will be needed.
Discount Window staff may request additional information.
Type of Credit
* Primary Credit - No questions asked.
* Secondary Credit - Additional information regarding the financial condition of the institution and the reason for borrowing may be necessary to complete the request.
* Seasonal Credit - Institution must have an approved seasonal line of credit.
"
Too funny, even if I say so myself. Talk about smoke and mirrors a la that DITECH ad - credit crunch - what credit credit ? How about no "brass in pocket"
-K
Go get your "six pack", everything is OK joe bloggers.
"Indeed most americans were unaware of the financial crisis (which Secretary Rubin said was one of the worst in a half century) even existed"
Roger Lowenstein "When Genuis Failed"
Is there a link to this video on youtube.com somewhere? My buddy can't see it on his linux machine.
cr,
moved to 80% probability.
you still see a coin flip?
tia
Among Crescenzi's positive factors: Corporations are flush with cash and other highly liquid assets, some $1.7 trillion by one account.
That is what they were saying about homebuilders not too long ago. Things change quickly in these crazy economic times we live in.
And some years, there are NO bonuses...
Thanks for showing up...
"Corporations are flush with cash and other highly liquid assets"
Those CDO's were pretty liquid at one point
Corporations have to SPEND that cash Tony...
More calls for Ben to lower rates.
Mortgage crisis may prompt Fed to cut interest rates - MarketWatch
Mortgage crisis may prompt Fed to cut rates
By Alistair Barr, MarketWatch
Last Update: 6:42 PM ET Aug 3, 2007
"SAN FRANCISCO (MarketWatch) -- The mortgage crisis that's shaking capital markets could encourage the Federal Reserve to cut interest rates, economists said this week."
... "The central bank can do something to help alleviate all this stress," Maury Harris, chief U.S. economist at UBS AG said in a recent interview with MarketWatch.
"Whether widening spreads are good or bad for the stock market depends on the central bank response," he added. "Spreads could come back if the Fed cuts interest rates."
Now do you realize why we have to have a 25% correction=repricing. Because in the stock market you can often be wrong and still make money, like Mr. Cramer. Wrong on Homebuilders, Mortgage lenders, Investment banks, and now this. As long as the likes of Jim Cramer are in the market, we will have disclocations.
Slow Mo,
While I agree that inflation may not be a serious concern in the event of a severe economic pullback, I completely disagree with you about the Fed's primary mandate.
Do you not recall how Volcker changed this entire era around by bringing long-term inflation and thus borrowing rates down by taking a hard stance against the economy in 1981???
IF the Fed believes that printing dollars right now will stroke inflation, their hands will be tied. And if Bernanke is as serious an inflation fighter as he has always claimed, then down we go economically until they think it's finally safe to cut without causing long-term rates to shoot up.
The last thing the Fed wants at this point is to induce a stagflation-filled liquidity trap. That scenario is much worse in their eyes than short-term economic pain that forces future prudence upon the excessive risk-takers of the world.
And your apology about the doom and gloom calls is graciously accepted
assuming you were being sincere.
LF
"More calls for Ben to lower rates."
If by chance our kind hosts read down this far, I would like to say it would be fun to have a thread on the pros and cons of the Fed cutting rates.
not true. most of the imported goods will not rise in price but their makes will just have to get used to lower profits.
Yal, you think OPEC will go along with that?
not true. most of the imported goods will not rise in price but their makes will just have to get used to lower profits.
There's been a lot of talk about the potential benefits to US competitiveness in domestic or international markets based on declining dollar values against the Yuan and the Euro among other currencies. The idea is that this will increase US production, jobs and eventually consumer spending.
Someone pointed out that if you only add 20% value to a product then a 25% reduction in the value of your currency will only enable a 5% drop in your product prices. This will be true in both domestic and global markets.
According to this line of thinking the actual impact of dollar declines on the overall domestic economy will depend at least in part on the percentage of imported products in US retail markets and the percentage of foreign valued added (commodities, parts, compenents, even finished products produced by US owned foreign subsidiaries) in nominal US branded products.
Anybody know where to find this info?
If this isn't the right way to look at it can anyone link to info that provides a better analysis?
Harris is guarding the henhouse. Rate cuts will not help. The growth in US is slower than the rest of the world; hence the foreigners are pulling their money out of US. A rate cut will give the foriegners
an incentive to pull more of their money out of US.
Setser's 8/2 post shows even US investors are diversifying their dollar holdings...
RGE - Falling home bias in the US, rising home bias in Russia?
Who's going to invest in US capacity?
LawFitz said,
"While I agree that inflation may not be a serious concern in the event of a severe economic pullback"
There you go...
"The S&P 500 index is now pricing in a recession starting in late 2007 and lasting for most of 2008, led by the financial sector, said David Bianco, chief equity strategist at UBS."
If the FED does not create liquidity than yes I was sincere.
If they don't-then no. LOL
He just (Fridsy eve.) came to NBC network news in an interview with Brian Wiliams and said that a lot has changed within the last week and among other things home builders should worry alot becasue they may not be able to sell any homes due to mortgage crisis.
if anyone can find the link, please post it.
I am speechless.
IMHO... let's talk about Cramer just for a minute. Like the guy or not , he's wired into some of the big boys.... therefore , the primal screams he makes , are the primal screams all of the big boys ( GS , ML , LEH , JPM , BSC and C.. excuse me if excluded a bank or two but you get the point , right ? ) , would make...... except that their public statements are that things are "contained." So , where are we today ? Subprime is dead. Alt A is dead and anything that is not full doc - conforming and prime can't raise a bid , please correct me if I'm wrong. To those of us who check the ABX , I don't have to refer anyone to the off or on the run series from 6-2 through 7-2 .. it speaks for itself , right ? So let's review for a sec... all of the big boys have substantial exposure for mortgage warehouse lines and related investments / CDOs , CMOS and hedge funds investments . They have massive exposure through the global 500 billion in loan obligations , of which the big boys have a large percent of that , right ? What happens to these guys when the carry trade moves against them , coupled with emerging markets moving more in trend with global markets ? Oh , and what happens when domestic equities retreat in a meaningful way ? What makes you think Lloyd B or Chucky Prince wouldn't have made the same primal screams..... they just do it off camera.....
The idea is that this will increase US production, jobs and eventually consumer spending.
but the problem is that the consumers have been spending like drunken sailors for years now and they haven't been saving. Now's not the time to get people to consume more, it's the time in the cycle when people need to begin to learn how to save again.
Recessions are really good lessons in the importance of saving.
Go ahead Ben which will make the new gilded age in USA a reality or perhaps get closer to just being a bigger version of Mexico.
Please raise your hand if you were one of the ones claiming that the business cycle is dead.
The beast is awakened folks. His name is Creative Destruction and he's awfully hungry b/c he was sedated for far longer than he's used to.
This pullback would not be as severe if we had been allowed to have natural pullbacks in '98 and '01. But instead we delayed the inevitable and made this correction more severe. The bigger they are the harder they fall.
"While I agree that inflation may not be a serious concern in the event of a severe economic pullback"
I should've included emphasis on that particular word. Frankly, given pipeline inflation in underlying inputs and globalization holding down wages (a trend to be undermined by a dollar collapse), stagflation may indeed be an issue.
"If the FED does not create liquidity than yes I was sincere.
If they don't-then no. LOL"
LOL. We need pain, friend. There is a lot of fat that needs to be worked off. It's the natural order. We will be better off in the long run. Twinkies from Ben's heli might make us feel a little better now, but may also lead to a devastating heart attack later.
Do not fear Creative Destruction. He's never killed us before. He's ALWAYS made us stronger.
From the MarketWatch article linked above (about how rates should be lowered):
"From the Fed's perspective, if risk perceptions change that's fine," he explained. "But if risk capacity goes down, then they'd be a little bit more worried."
If we're seeing a situation where people aren't willing to risk their capital, won't lowering rates make that worse? Aren't we seeing the repricing of risk? It was underpriced for so long that people all sorts of crazy risks.
Raise rates and encourage people to save instead of speculating.
To all these whiners who think that the Fed rate is too high: I recall that in much of the 70's and 80's the corner bank paid 5.25% on passbook savings accounts.
there's no way Cramer and buddies have all gone short. i think he was sincerely groveling/crying. as much as i think he is a buffoon, i actually believe at heart he cares about small investors but only if their bulls. he clearly got caught on the wrong side of housing. it would be easy to investigate a coordinated short play and if found guilty he could go to jail for a long time for faking this on national TV.
The big banks and hedgies all got huge bonuses last year from selling junk. Screw 'em! They outsource jobs, screw 'em! They created the housing bubble and the dot com bust, screw 'em! They rip off foreigners and pension funds on a daily basis, screw 'em! They've manipulated policy for too long, they don't know how to manage capital, and they mis allocate resources for personal greed. Screw 'em, let them go live on their (ill-gotten) yachts.
So bankers are sitting on paper they can't unload, and are, as a consequence, unable to continue funding LBO's and whatnot, and builders can't continue to add to the existing glut of homes. Why is this a problem?
idoc-
I agree. I read a paper a while back that gave a very credible position on this CDO, derivative-based, uncollateralized system having 20 times the exposure of LTCM.
I'm sure Cramer read that same piece as well as others and has come up with the same conlclusion. The only act I saw today that was displayed by Cramer was that of genuine imminent fear.
"Corporations are flush with cash and other highly liquid assets"
And that's the whole problem.
The "domestication" of stocks through diversification, index funds, low-load mutual funds, automatic 401k investments, professional cheerleaders disguised as financial media, and the giant consumer investment industry that has grown into a major economic sector in tandem with the greatest bull market in US history (with a brief but now forgotten scare thanks to the magic of "The Maestro") has created what I think I'll arbitrarily call the "Great Swap".
All this machinery has convinced consumers to swap most of their cash and reliable assets (like CDs and government bonds) for high risk securities (stocks, junk bonds) and take on huge amounts of debt to invest in overvalued real estate or to just give some company a claim to that consumers cash flow in exchange for a new Hummer.
This creates a huge imbalance in hard wealth and is similar to the situation that preceded the Great Depression.
When corporations have all the cash in a recession they tend to hoard it to protect themselves. And the risky sorts of assets consumers have (if they have any) tend to wither away in value.
You get the possibility of the under-consumption problem.
This is potentially very bad.
And intractable.
Nil , here's the problem to me. Bankers are sitting on paper... up to AAA ( unless it's conforming and be sold to FNM or FRE .) As a result , there presently isn't a secondary or private market for nonconforming loans. Since subprime and ALT are dead , we have now lost 1/3 of the mortgage market -- which builders may feel represents a problem to their business models... the timing of this coincides with housing entering the weaker part of the year for sales. I think for the builders and lenders , they have many more employees and / or independent contractors / or outside contractors than they need... which could be a problem. Worldwide , there's a halt trillion in unfunded LBOs... a lot of banks have obligations to step in if investors don't step in. I would think this would limit what those banks can do moving forward until investors step back in and buy the bonds / loans on offer. Which means LBO activity which has helped to prop up the markets is gone until this pipeline is cleared. IMHO , I see more bad news than good news moving forward for equities. bu that's just me.
Just a thought - Our economy is grow or die... So when do the people here wanting the Fed to either hold off rate cuts or even have them raise rates think the US economy will have contracted enough to allow for monetary easing? Like, say, 12 months of negative growth? 2 years?
We've gone a record 51 months without a 10% correction in the DOW. Such wash outs, although painfull at the time do have some good effects. Lowever home prices are not bad for people in their teens and twenty's and for people like me, who has a daughter who wants to buy her first home in Boston with her husband. After waiting so long for a 10% correction, perhaps we will get a 20%er this time.
A lot of Wall Streeters talk about P/E's and stocks not being expensive. However, nearly all major corrections are about perceived risk and credit crunches. Fisher has been arguing that the market is fine, because credit spreads are still tight. Actually, corporate spreads are still relatively tight, but any one who would bet against them widening seems foolish to me.
Hey after the dislocation, there will be great buying opportunities,OK. So pushing the market down is not such a bad idea for Cramer, for he is a longterm player. He does not have to be short,just cash. I am not covering my shorts for anothet 15% down. I may go neutral after that.
Bill , you understand a 10 percent correction wipes out most leveraged hedge funds if investors file redemption notices , right ? Why don't you think we haven't seen a correction .... the big market forces right now are hedge funds , not individual investors. And they collectively are sweating bullets... IMHO , the next round of redemptions will be much broader than folks presently perceive. I think that will come .as a surprise
404 Not Found
Cramer realy changing his tune.
well well well
my mortgage broker partner and friend is freaking the F out today. his boss told the crew to expect not to make any loans for three months. wowsers.
says that jumbo full doc loans blasted out 2 points in two days, even with the damn ten year at 4.68.
dollar in the crapper
commercial loan spreads moving from 150 to 200, a massive move in just a few days
butchya know, there is much more to this economy than loans and houses
either way, this too shall pass and in its place will be something bigger and better
i'm ready for the bottom, baby, bring it on
question tho:
if flight to quality brings the ten year down, wont there be easier consumer credit? sure, mortgage spreads are blowing out, but are car loans/credit cards/ etc etc etc?
Edgar, amen brother.
inOrlando: The "official" government numbers show no hint of contraction yet. Now we can dispute their accuracy - some would suggest we're already in recession now and certainly that's possible - but a recession isn't the worst thing that can happen. In fact it can be a very healthy thing if managed well. But stagflation or hyperinflation - these are very seriously bad things.
bofiz,
"The "official" government numbers show no hint of contraction yet."
I am no authority on the Great Depression or any recessions. If I recall from what I've read, the summer of 1929 didn't show economic contraction yet, either, just slowing growth. In retrospect, shouldn't the Fed have begun lowering their rates as soon as the equity markets tumbled in the Fall? Substitute equity with mortgage markets and you have today's crisis. It's the lender of last resort, but it shouldn't have to wait for a major rise in unemployment to take action. It's complicated this time as always, and I don't think the Fed should only lower rates but explain once and for all the housing bubble to the public and its likely economic ramifications.
From InOrlando,
If I recall from what I've read, the summer of 1929 didn't show economic contraction yet, either, just slowing growth. In retrospect, shouldn't the Fed have begun lowering their rates as soon as the equity markets tumbled in the Fall?
EXACTLY
inOrlando,
As long as it doesn't cause higher inflation expectations and higher long-term rates, then by all means, they should inject liquidity (aka cut rates, aka fire the printing presses).
HOWEVER, if cutting rates now to avoid a correction is just going to delay the inevitable and make it even worse later, then they should wait.
I'll keep saying it 'til I'm blue in the face... Creative Destruction is a good thing when you are way too fat. And by many measures, we are way too fat.
They can drop the twinkies once we shed a few inefficient pounds, but not while we are going through the natural process of trying to get healthy. Doing so before created the twin bubbles that are rocking us right now.
This is called re-pricing of risk & equities. There is more to give here. The housing market is DEAD. A goner. First HUGE leg down for the CA market in prices. Sales will go way WAY down. Think 20% downpayment and calculate back from there for median home prices. 40%-50% DOWN in price.
Call me a skeptic. I'm convinced Cramer is short. He doesn't care how he makes money, short or long. That was a quick panic spreading opportunity for TV so they could take a little more out of the market before the close.
LawFitz,
"I'll keep saying it 'til I'm blue in the face... Creative Destruction is a good thing when you are way too fat. And by many measures, we are way too fat."
This is an economic justice question as much as a financial one. Whom do you think will be the most economically hurt and face substantial unemployment as a result of the deflating housing and mortgage markets? The people who largely benefited, such as Wall Street players, real estate moguls, and the like or the bottom 30% of workers, the working poor? Who will more likely face homeless shelters, the millionaire flippers with negative equity or the people who got pushed out of their apartments because they were converted to condos and had to move further from their work, servicing the people who service the wealthy and weren't able to save hardly anything due to higher rentals? Who pays the most from unemployment is what I'm asking, the 'fat' or the 'other half'?
inOrlando, unfortunately justice and economics do not go (and never have gone) hand in hand.
The answer to your question is that most of those who made imprudent decisions during this upswing (toxic borrowers, non-savers, greed-fueled buyers of clearly overpriced assets, pretty much all those looking for the magic in a bottle quick buck) are in trouble and will feel varying degrees of pain.
Not everlasting pain as that can only be passed by higher powers, but clear pain.
Sometimes lessons are learned the hard way. And those that are ignorant of the lessons of the past are doomed to repeat them.
Personally, I have no sorrow for people who take risk and are burned. You play, you pay.
We've all done it to varying degrees and society cannot bail you out every time.
inOrlando, economic justice was trampled a long time ago. It's just a variation of the trickle-down theory to say that we must save the rich in order to save the poor. And BTW, I know Wall Street analysts and high-tech managers who are out of work already. Concrete reality is already in the dumpster, and the virtual reality that is "the market" is, if anything, a lagging indicator.
I don't like the idea of the FED lowering the rate. My thoughts, on the instinctual level, say that this is doing nothing more than bailing out the super rich and mega corporations. This is why:
Many see bankers, fund managers and CEO's as people with excess wealth. These people have made millions duping the system by falsely portraying what they were selling to pension funds, endowments and various other entities that represent the little guy. Hell, they encouraged and cheer-lead the housing bubble smack into this mess.
Many people are already out of work, and many people are struggling to make ends meet. Many people can afford to go on vacation or play on yachts. Many people have been forced to sell any excess "inventory" at reduced prices. See your local craigslist for boats, jetski's, ATV's and RV's.
If the FED dumps rates to save the economy... I think it will be taken as an attempt to save the mega rich AKA big players. I would expect serious public backlash. There will be no short term relief for those people that are struggling right now.
Additionally, I would expect people to act even more irrationally given what we know about the market place today; Rating agencies, Fund Managers, Manipulation, Subprime Encouragement Etc. People can only take so much before they crack and want to hurt other people... I'm just saying...
What you don't know about bear markets can really hurt. During the 1940's thru 1982, the makt would have a correction(bear mkt)lasting 10-15 months every 3-4 years. It would avg 20+/-% down. We have had only one of those in the past 25 years. That was of course the bear mkt starting in October 2000 which ended 2 years later. This bull mkt started in March 03...it is 4 yrs later. I wonder if we are returning to a more normal historical patterns.
I'd just like to point out that the Fed effectively sets the floor for the unemployment rate via the Fed Funds rate. Lowering the rate doesn't guarantee unemployment goes down, but raising it certainly says it won't.
So when unemployment likely rises above 5%, then 5.5%, then 6% over the coming quarters, when should the Fed cut is what I originally asked? I then merely made an argument that the lower class are hurt much more disproportionately by a rising unemployment rate than those who speculated in real estate over the last decade, so why should they get hammered twice?
InOrlando - They are already hurting, there are a TON of people out of work for good wages. You put too much faith in the BLS stats, probably too much faith in stats in general. My economic indicator in housing centric AZ is;
How many people I see at the gas station getting lunch for the days work vs. How many people call 911 after they get into a fight while intoxicated at a local park on a Wednesday morning.
Last year at this time, the former made me wait an extra 10 - 15 minutes in line for coffee. This year, I'm seeing more fights and Domestic violence than ever before and they have become more severe. I'm not a Cop BTW.
The lower class folks are not going to benefit from a FED rate reduction. They need real inflation, not the CPI BS, to be more inline with wages. They need affordable housing. Hell, I need affordable housing.
Wages across the land are crap. The spread keeps growing and it pisses me off, and I'm WAY better off than 95% of the people I help. The FED does shite for the lower class and its fool hardy to think otherwise.
We need to let the little shits on Wall St. reap what they have sewn. Like most Americans they have WAY to much excess weight to carry around.
R..R..Right Cramer. All we need to do is make it easier for all of those overextended borrowers to catch another big wave of housing speculation with more MEW's. It never should have gotten this far out of line anyway except for the Fed and give away money.
Why should the Fed care about the equity markets? This nation has been shafting the bottom half of the income spectrum.
What we need to do is make it easier to declare bankruptcy and keep your house. That will help the unwinding go in the correct order. Help the little guy and screw the big money.
Now's not the time to get people to consume more, it's the time in the cycle when people need to begin to learn how to save again.
Point taken. I think the question was more about the impact of dollar declines on growth in jobs and income. Paying off debts, building home equity, and selling abroad would certainly be acceptable. How far does the dollar need to fall for US value added to be competitive? How much value added capacity do we retain in this county?
Cramer can really get it going can't he?
This guy does have great contacts though. That alone can really make you think.
This guy does have great contacts though. That alone can really make you think.
My thoughts exactly. Somebody got to him and it wasn't to short stocks.
Derivatives in trouble?
Dryfly,
I don't know, but when Sam Molinaro says worst in 20 years, it gets my ears perked.
I have a suspicion that the IB's can't find things to sell. Mortgage stuff unsellable, junk unsellable etc. So wit credit tightening up it can make things uncomfortable.
The big question remains, how long does this go on? The MS note today said they think it is a six-week phenomenon. In other words, we get into September and things settle down. I am still betting that way, but I don't have the same confidence I had a few weeks ago.
The big question remains, how long does this go on? The MS note today said they think it is a six-week phenomenon. In other words, we get into September and things settle down. I am still betting that way, but I don't have the same confidence I had a few weeks ago.
I don't know enough to be real concerned or not... but I agree with you that it is too early to tell if this is a squeeze of for real. We'll know a lot more in a month (I think).
Something we ought to be asking ourselves though is... "What happens next?"
Say it is for real, what would the symptoms look like & where would they show up? I mean few could imagine the sub-prime contagion would infect LBO money this quickly... but it did.
So what's next? And where will it show up in the 'real economy'? When things get bad they always do spread out from Wall Street. CR's been watching retail and prior to that imports... It has to spill out somewhere... so where?
Dryfly,
Where would we see signs next? That's the $64 million question, isn't it? How about the rumor that the LBO of Home Depot's Supply Biz ain't going to happen. That'll mess up that compay frr a while. How about a cutback on vacation and biz travel? Airlines/Leisure companies take a hit. Don't absolutely need new clothes, how about dry goods retailers? You can get books at the library, how about Barnes and Noble?
That's off the top of my head. It is also a question you should direct at CR.
More signs of panic on Wall Street... BSC fires President Warren Spector ! As per today's NY Post ....
OK I am supposed to be outa here, but I have to toss my 2 cents --
LawFitz, InOrlando, NXN, if there were an ounce of evidence that letting a business make a buck by whatever means necessary --and then letting it 'feel the pain' when its greed gets the beter of it -- somehow worked out to be a great blessing to me, the working class, the other classes, our republic, our economy, and even that business's own interests, I'd be snorting that libertarian fairy dust in a second.
Fantasies like this have a way of never working out, except as propaganda. And in this case, the myth of a market inherently honest and wise (that could regulate itself any other way except into the sewer) is the perfect fantasy front for a lot of rich and powerful people to keep up their dishonesty and stupidity--and theft.
That said, the dishonest and stupid shouldn't be bailed out -- they should be handed a bill for all damages --direct and collateral -- and we should be realistic and sober, and hard working enough to craft a way to stop all this 'market pain' from ever taking us to the brink again.
Finally got around to seeing it. That was funny. What a cry baby.
What effect will the little guy and his 401k have on the markets on Monday? After getting rolled in the 2000-2002 purge with a buy and hold mentality and taking it in the teeth as hedgies shorted the market. How many of the boomers will be attemting to rebalance their portfolios to cash because they have hopes of eating in their old age? Flat and declining markets will certainly crimp spending over the long term. The squeezed generation ( aging parents, college tuition, and retirement positioning) are real problems. After having your housing next egg take a twenty percent hit you have to do what you can to protect your 401k and your tuition saving accounts. I am afraid that we have not seen anything yet.
InOrlando - FWIW you can look at the Nat'l Income accts online. For example just took (literally) 90 secs to look at % changes from prior period from 1930 to now. 1930 was down "only" 8.x%. Worst periods in 70s, 80s, were -1.2% in real GDP. Problem was Fed tightened money and you couldn't get fiscal spigot going.
( BEA : Interactive Tables )
Dryfly, Banker: that's the expectation but right now we're only seeing one asset class (real estate crater) and take it's associated derivatives (AKA - "structured products") with it. Bill Gross has a great little newsletter in March on Ten Little Assets in which he points out that carry and leverage applies to many more. CR is right in that this isn't a crunch (yet) but the bad business practices & lack of diligence + lack of model transparency are likely true across all ten. What then ?
Dropping money from helicopters. LOL.
YouTube -
This may have been posted already but I didn't get a chance to read thru all the comments above.
Great video from itulip.
.
Tanta , Barron's has a big piece today on ACA Capital ( 27 percent owned by BSC by the way 1 ) Here are the highlights : 1) ACA has a market cap of 260 million but has insured 15.7 billion of mostly subprime securities. Notably , 9.3 billion of this waste is in mezzanine subprime CDOs ; 2) ACA"s total CDO exposure is 61 billion ( subprime and commercial mortgage debt ) on their capital base of 326 million , which equates to leverage of 180 to one : 3) ACA has been criticized by some as being a warehouse ( or perhaps toilet ) for the risky obligations of big boys such as MER , LEH ,BSC and RBS Greenwich Capital ---billions of such obligations have been parked in ACA by these big boys : 4) If ACA collapses, these risky obligations come cascading back onto the books of the big boys and some of ACA's 25 other counterparties; 5) Barron's further notes a high level of risk of the 9.3 in mezzanine risk exposure being pancaked with just a 7 percent collateral impairment spread across the pool underlying the mezzanine CDOs ( note the mezz CDOs consist of BBB slices of MBS pools ; 6) S&P has forecast 11-14 cumulative losses for 2006 vintage subprime mortgages ; Half of ACA 9.3 billion in mezz guarantees consists of 2006 paper , while the balance is 2005 and 2007 paper that has not performed much better ; Finally , ACA has 5 billion in "high grade" subprime CDOs of which 2/3 is Single A tranches .. a 10 percent collateral loss wipes out the single A tranches and 2/3 of any high grade CDO they are a part of... ACA thus has a 3 billion exposure on this 5 billion exposure.... capped off with about a half billion more risk from CDO squared products which get snuffed with a 4.5 collateral loss. ... The mess just keeps expanding and the opaque risks are becoming visible. I wonder if BSC , MER and LEH will disclose this by way of a 10Q August 9th , which is when I understand 10 Q'a are due for the second quarter ? Thoughts ? ?
pjt - thanks for the link. Outstanding.
Nice video from itulip. All is not lost when clear-headed perspectives such as this are on the "air"...
I've a dumb question.
If you haven't got a mortgage to struggle to support, and haven't got mutual funds to worry about, but have a bunch of cash, what do you do if you believe the credit crunch is real and getting worse? leave it in the bank? or is there an obvious play?
John,
There is NEVER an obvious play and anyone who says there is should be viewed skeptically.
John asked: "If you haven't got a mortgage to struggle to support, and haven't got mutual funds to worry about, but have a bunch of cash, what do you do if you believe the credit crunch is real and getting worse? leave it in the bank? or is there an obvious play?"
Given your assumptions and the limits of your question, the only obvious play is to leave it in the bank.
Me, I'd re-phrase the questions or ask other ones, since there's no advantage to be gained by doing the obvious because so many other people are acting on it.
Q: How big is this "credit crunch", objectively, compared to other ones? (The subjective views of "talking heads", in any capacity, don't count as evidence. The media's job is to inflame, not inform.)
Q: To what extent has the impact of this credit crunch already been factored-in?
Q: What sectors of the market or the economy are "irrationally" being marked-down by the short-run panic and would make good trades/investments?
And like that.
Sebastia
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