No disputing your analysis CR but my sense is Dr Doom may be a little closer to the actual loss levels, and it's a gut feeling.
If you factor in higher taxes, fuel price increases, food price increases and inflation in general and figure job losses etc etc, we have a far weaker general economy, which will compound bank losses and worsen the housing mess.
The Fed actions, whether ultimately good or bad on balance, have diminished the value of the dollar and this is going to cost consumers in a way that is going to be hard to measure, but very real.
CR, My view is the recession will be less than severe (with unemployment peaking at less than 8%), although I agree the effects - especially related to employment - will probably linger for some time.
You have presented this opinion a few times but I don't remember that you have explained why you think so. May I ask what you think would prevent this recession from being severe? Weak dollar? Stimulus plan? Inflation?
And why 8% of unemployment as a criterion? I'm sure you are aware that the methodology of counting the unemployment has changed and it's not directly comparable to the past. By the way, 8% of unemployment as it is measured in Europe would be quite mild for a recession.
Doesn't your tally of new home sales exclude, at least for the time being, the inevitable cancellations? If so, then new home sales might be below new home starts on the graph.
Oh, I forgot to mention, on Kudlow the new bullish topic being featured is the bank "WRITE UPS" that will be coming along in 2H08. LMAO!!
My jaw drops and hits the keyboard when these bozos get started. I wish I could get that delusional after finishing a bottle of Tequila.
I am more than 100% confident the banks are taking the write ups into account already by only making the most cheerful go-forward assumtions concerning the loss prospects.
barely, first, I respect Roubini - he is very smart and willing to take out of consensus positions.
Roubini may be proven correct and the recession may be the worst since the Great Depression - there is no question there are seriously downside risks - however I just wanted to point out a few areas where he is probably too pessimistic on the data.
Even though I don't think the recession will be as deep as Roubini, I share his view that the subsequent recovery will probably be very sluggish.
I just sold my $1m+ house this week, in a nice part of the SF bay area. I can tell you that April sales are going to look really bad. Buyers are frozen out by the inability to finance, the move-up market really is starting to feel the pinch of the losses on the lower end, and everybody selling is taking a 5% haircut off of already reduced March prices, which were 15% off the peak. I'm predicting we will see another 5-10% drop by this summer.
Then, going to look at a rental, the poor broker had 5 applications in the first 30 minutes. Everybody wants to rent now.
The majority of people selling NEED to get out. The rest seem to be foreclosure related. That kind of motivated inventory is sure to accept price drops, accelerating this whole race to the bottom, which will only make things worse for everybody else.
I can also say that our personal 'consumer confidence' has been impacted by the sudden loss of $150k in equity over the last 12 months.
poszi, I've tried to explain the 8% number before (my definition of a severe recession is based on the rise in the unemployment from the trough to the peak). I'll post something again soon.
As far as the change in methodology for unemployment, this is one of those urban (uh, internet) myths. There has been a change for many of the alternative methods (that include underemployment), but the headline number is calculated as it always was. Here is the discussion of the change.
Yes, I think more people are underemployed now than in earlier periods - but that is not the same as being unemployed.
I would like to second the thoughts of Poszi. The unemployment numbers we see are so 'cooked' that they don't have much at all to do with the actual percentage people without full time employment. It reminds me of inflation figures which exclude food and energy. If you exclude enough things, you can get happy numbers.
For the zillionth time, very few if any are going to be looking at deficiency judgments I've said and said it and will say it again, few deficiency judgments.
Lenders would have to figure out who to pursue and that one fact alone will discourage the judgments. Lenders would have to double or triple their servicers to have enough people to even begin chasing those with assets. And collecting is, I repeat HARD to impossible. People get really good at hiding assets.
CR, how do you explain the recent decline in the participation rate? My impression is that a non-trivial amount of the decline is associated with "phantom" unemployment.
Your right that a lender in California can seek a judicial foreclosure on a recourse loan and perhaps obtain a judgment against a borrower that walks away.
Let me know if it ever happens. I've been in the business a long time and I've never seen it done. I think the circumstances where the lender would see an upside to that strategy would be very rare. Still, we are in uncharted waters, so who knows?
CR, I think the government employment statistics are becoming increasingly irrelevant to the point that they may even become useless for comparison to a decade or more ago. Employment has shifted to self employment/1099ers and those numbers just don't get represented meaningfully. I think the government should just release income tax receipts and find a way to adjust those. It misses the tax cheats (under-the-table) and drug dealers, but they get missed anyway.
Thank you for the explanation on the criterion. I'd be happy to read your more detailed post about it in the future.
Actually, I was more interested in an answer to my first part of the post, i.e, what would prevent the economy from going into a severe recession. I'm asking because it would be important to observe these potential positive developments. Or you simply think that the current and future problems are not going to be bad enough for a severe recession and no particular positive developments are necessary?
Actually, BOTH Roubini and CR will likely prove to be too optimistic.
Niether factor the additional inventory and price declines coming from skyrocketing foreclosure rates. And we had record foreclosures in a strong economy.
Now that the economy is slowing and layoffs are being announced by the thousands at a crack, expect many many more defaults and houses put up for sale adding to record inventory and downward pricing pressure.
Then, as Americans begin to feel insecure in their jobs, you think they are going to be excieted about going out and buying houses?
Slowing demand and rapidly rising distressed inventory.... Not a healthy outlook.
As far as unemployment, we could be at 10% before the end of the summer.
We are facing a credit implosion...an event our nation has never experienced in memorable history as overall credit and money supply has been pretty much steadily expanded for the last 80 years.
In the last seven years, it exploded between toxic mortgages, HELOCs, Private Equity, and ridiculous CRE deals.
Probably 5-7 million jobs were created as a direct and indirect result of easy credit expansion over the past seven years....now that we are delveraging, losing the above number seems very likely.
We could be at 10% unemployment by the end of the summer, 15% by the end of the year if the deleveraging process continues.
For a leveraged person, business, or municipality, deleveraging is simply another word for bankruptcy in a declining asset environment. We gotta a lotta leverage right now.
"Yes, I think more people are underemployed now than in earlier periods - but that is not the same as being unemployed."
Actually, if may be exactly the same. If a person's monthly nut is $3000 dollars a month(let's say income was $3300), and income gets reduced to $2000, that person will soon be insolvent.
A person who is unemployed with no savings is also likely insolvent.
There doesn't seem to be much difference between insolvent and insolvent.
This is a big issue facing America right now and a stealth reason behind a growing number of foreclosures. This also may be a key reason why I think you are underestimating the likely severity of the upcoming recession/depression.
America got used to high wages and easy credit over the past seven years to maintain its lifestyle. Unfortunately when assets and wages decline, debt often stays the same. If you can't meet your nut because you are unemployed or underemployed, the result is exactly the same.....except for maybe which lawyer you are able to afford.
Some great points raised in this thread, particularly the sectoral changes in increased 1099 employment and the hours worked statistic...wondering out loud, is there a way to normalize unemployment to hours worked and/or some estimate of contractor proportion of the employeds?
Watching the interview, I felt that Roubini was holding back. I think that he was very cautious in what he said, because he is no longer 'on the fringe', he can't be as frank as he once was.
Not that he is lying, but he is certainly being careful in the way he words things. It seems to me that he thinks the case for an L shaped recession is becoming more compelling, if not likely. I mean, the IMF just put chances of a global recession at 25%, and we all know how loathe governmental type agencies are about mentioning the R-word. This could turn into a self reinforcing spiral.
The biggest question mark is government action. Politicians are not in the business of choosing the best economic solution, but the best political decision to get them re-elected. Let's pray we don't get another Smoot Hawley.
In Arizona residential mortgage loans are non-recourse regardless of whether there has been a refinance. There were no published cases directly confirming this point last time I checked, but every lender lawyer and real estate lawyer I have talked to agrees that there is no recourse.
Let me know if you want more details on this, but the main point is that you really can't make generalizations covering all the states.
We are going to have a depression, not a recession. Just because the great depression happened as a result of a specific set of circumstances, doesn't mean that a depression cannot occur via another set of circumstances. Consider that we still have a very severe credit crunch. There are synergistic effects of a severe economic slowdown and widespread insolvency or near incsolvency of consumers and banks. These are the necessary ingredients for a depression.
Lawyerliz, yes, Tanta has said the same thing many times. But people should be aware that Roubini's description was inaccurate for many situations.
albrt, everyone should check with their lawyer / tax accountant for their own situation. I don't know about Arizona.
All, I'll post something on employment. There are many many issues - and I agree unemployment is only part of the issue. But it's important to realize the headline number is being counted in a consistent manner.
poszi, I think you have to start from the other direction - what will cause a severe recession? The normal situation is real growth of close to 3% - we start with that and ask what is different each year. As I've been writing about endlessly, there are several drags on the economy now - from residential investment to less MEW (impacting consumer spending) to less business investment (especially in structures).
But does it add up to a severe recession? I don't think so - mostly because I don't see the job losses in manufacturing that we usually see in a severe downturn (exports have been strong because of the weak dollar). IF the rest of the world recouples that might impact exports - but then hopefully oil prices will fall sharply and cushion the downturn.
As I noted a few weeks ago, the worst case would happen if the global economy goes into recession AND oil prices don't fall. That would probably mean a severe recession.
No doubt there are downside risks. Nobody has a crystal ball - but it's still fun to try to predict the future!
CR, middle class people are already walking away. Look at the banks "earnings" reports. They say all credit scores are performing the same and they have growing delinquencies in the "prime" portfolio.
So far we have experienced fallouts of sub-prime. However, Alt-A problem is going to be bigger ( $ volume ) than sub-prime. So, barrage of foreclosure are going to accelerate.
My apologies if this has already been posted. Warren Buffett seems to be in the long and deep camp according to a transcript from a Q&A session with students from Wharton:
How does the current turmoil stack up against past crises?
Buffett: "Well, that's hard to say. Every one has so many variables in it. But there's no question that this time there's extreme leveraging and in some cases the extreme prices of residential housing or buyouts. You've got $20 trillion of residential real estate and you've got $11 trillion of mortgages, and a lot of that does not have a problem, but a lot of it does. In 2006 you had $330 billion of cash taken out in mortgage refinancings in the United States. That's a hell of a lot - I mean, we talk about having $150 billion of stimulus now, but that was $330 billion of stimulus. And that's just from prime mortgages. That's not from subprime mortgages. So leveraging up was one hell of a stimulus for the economy."
Question: If that was one hell of a stimulus, do you think the $150 billion government stimulus plan will make an impact?
Buffett: "Well, it's $150 billion more than we'd have otherwise. But it's not like we haven't had stimulus. And then the simultaneous, more or less, LBO boom, which was called private equity this time. The abuses keep coming back - and the terms got terrible and all that. You've got a banking system that's hung up with lots of that. You've got a mortgage industry that's deleveraging, and it's going to be painful."
Question: The scenario you're describing suggests we're a long way from turning a corner.
Buffett: "I think so. I mean, it seems everybody says it'll be short and shallow, but it looks like it's just the opposite. You know, deleveraging by its nature takes a lot of time, a lot of pain. And the consequences kind of roll through in different ways. Now, I don't invest a dime based on macro forecasts, so I don't think people should sell stocks because of that. I also don't think they should buy stocks because of that."
What I wonder about is the shadow banking system (read leverage) that has been building and building. Not sure what the deleveraging process will look like but my guess is not pretty.
The more I think about it, the worse it gets. We have a negative savings rate, rapidly diminsihing disposable income because of raging price increases in basic necessities and credit constrained by deleveraging. Aotos are already in deep recession. These conditions feed reductions in employment and the housing calamity is only just getting started, as lenders are only beginning to slash prices on FC inventory.
If FHA bailout scheme doesn't happen, or if it's seriously constrained, Roubini will turn out to be bullish.
i think that there are at least a couple of areas where unemployment is seriously under-measured.
the first one is all these real estate agents. I can't tell you how many of them have come in lately, talking about looking for work. None of them are 'unemployed'. they just aren't making any money and they have to pay the bills.
the other one is small business. We were told (in nj) that one of the reasons we weathered the last recession so well is all the jobs created by small business. I googled quickly and the governor said in 2004 that "More than 50% of all jobs come from small businesses. They are the unsung economic workhorse of New Jersey and they need our support to compete."
I can't tell you how many small business owners i've talked to lately are getting ready to go look for a job. This last couple of months has been a tsunami for us. We aren't currently counted as "unemployed" either. We just aren't making any money.
This group of people that can be "employed" but not making any money, has grown by leaps and bounds over the last 5 years as baby boomers have tried to figure out a way to stay working in a world that wants to hire kids.
Anybody i know could have told you in December that we are in a recession. All of these numbers report on the past. The present is that people are hiding out in their homes, trying not to spend a cent, worrying about their future. And small businesses are on a precipice.
The market is already priced in a FHA bailout. The current proposal won't help because is requires the banks to write off at least 30% (hear as high as 50%) of the loan. That would decimate their balance sheet and tank the dollar. I think few people understand the current Fed bailout and assume that the Fed has bailed out the housing market.
My frustration, and this probably sounds odd, is that more people don't walk away from their homes more quickly. Trying to suck it up and hang onto your house just means more money you not paid to your lender and saved for the coming recession/depression.
Let's say you live in California, where statewide prices are dropping 5% per month, according to data between December and January posted on CR. What you could do is plot on a graph at what point you're in negative equity territory, and if it makes sense, just stop paying your mortgage TODAY and wait for the foreclosure tsunami to overtake your house. Take what was your mortgage payment and just dump it in the bubbling commodities market or something that gets a better return. To me, this makes sense as it drives the market to the bottom faster, and also gets interest rates near zero more quickly, also taking the dollar but ultimately making the US cheaper for investment. Comments anyone?
[Tim writes:
The market is already priced in a FHA bailout. The current proposal won't help because is requires the banks to write off at least 30% (hear as high as 50%) of the loan]
So far. I think we'll see something around, 15% and lenders are going to trip over their dicks to get a piece of that.
Zirp, we may see people come to that conclusion. I don't know if i've seen anyone address this, but who, exactly, ARE the people in this predicament?
It would seem to me that they are predominantly youngish, early career, early family, first-time homebuyers, right? The people in the worst mess bought in the last 2-3 years at the peak with nothing down, I would think.
At any rate, if i'm right, this is a group that grew up with the internet. They will understand their options a lot faster than most and news travels fast. If a couple of them stick their toes in the water and it works, it could spread like wildfire.
But, to make the FHA bailout work, there is the complication os second liens in a lagre number of distressed situations. I haven't heard a good explanation of how that can be solved.
Interesting that you seem to describe the Obama voter demographic.
I don't think it's limited to that though....prices in CA are down to 2004 levels already and things continue to get worse. We're looking at pricing approaching 1998-1999 levels in California, it seems to me, once you consider 10% unemployment and overshoot on the way down. That's a lot of buyers since then.
Interesting point L. Moore. At what point is this going to lead to declining population growth? I myself am a California developer being recruited to Dubai, and the likelihood is reasonable that I'm going there. Am I the only one?
I have a commodities trader friend that sees the 2 dollars to the euro by the summer. Was just in South Beach in Miami a few weeks ago and European tourist traffic is off the charts. At some point of dollar devaluation foreign investment will be sense....it's already happening. The question is where. Even Japan in the 90s foreign investment eventually made sense at a certain point.
10% unemployment come November and all hell will break loose. The Republicans will be run out of office wholesale.
I think the R's will work like crazy to prevent that, 10%, from happening.
Cr's prediction of a shallow recession might come true but I have a feeling that the recovery could be very drawn out. To many it will be a "jobless" recovery and will feel like a Depression to many.
I hope that does not come to pass. We all have skin in this game as we all have children and grandchildren who will pay the price even if we are comfortably fixed to weather the economic storm.
Let's not forget that unlike the the case of the 1970's recession, these days the ability to pay a mortgage requires two wage earners. Therefore if the unemployment rate doubles, the foreclosure rate with quadruple.
One way or the other, the best thing for our grandkids is to get asset prices to trade back to fundamental values as soon as possible. That involves a significant percentages of Californians, for example, to walk away from their homes.
"Turn attention to conflict". LOL. I wonder if the investment banks have a war with Iran in their quant models. Think that might blow up a hedge fund or two?
Roubini is an optimist! It's only a matter of time before the wave of alt-a's starts defaulting at the current subprime levels.
We have already discussed that the #1 reason of walking away was not due to the type of loan; it was not having equity in your home. Duhhh. That's alt-a to the tee.
How many 100%, 80/20's, and option arm alt-a's were sold? C'mon let's be real. As more and more people walk away, and more and more people lose their homes, and prices drop more and more, and the media reports it more and more, it's going to get WORSE and WORSE.
Alt-a loans on average are much bigger loans than subprime loans and were sold in much greater numbers. That's a fact! The default rates are starting to go up but are still nowhere near where they will eventually end up. Wait till this year is over and everybody realizes that there is still NO END IN SIGHT.
Next year the shit will really hit the fan. Good luck Mr. or Mrs. President.
I was at an alumni event the other night with many senior management sorts. the dinner/cocktail conversation, of course, was around current financial and economic conditions and what we're seeing in our specific areas. we were all of the same opinion. We keep hearing about how bad it is, and yet when we look at our businesses, the numbers, and extrinsic factors, we're not seeing where the panic is.
None of us are planning massive job adjustments (anything any of us were doing was in the can last year), we're being cautious but not seeing the drop we'd expect if things were going to get severe, and we chuckle at our peers in financial services with the "now it's your turn in the barrel" sort of attitude.
I keep looking for numbers and indicators that set of the "severe" light, but i keep coming up with nothing, and most indicators surprise me to the upside. We all bitch about prices, but it's like the weather now "can you believe the price of x?" but we buy it anyhow. I'm with CR on this one. Sorry but in the real world I'm a part of, this is a business cycle correction with a deflation in housing. Sucks to be you if you're selling, everyone else I know is sitting tight until it blows over. And people are optimitic about that, and attitude steers these cycles more than you think.
Fair enough iPodius, but you're in technology, as I recall. Just about everyone I know in Southern California is in real estate/the building industry (that includes probably hundreds of professionals). And I basically just about don't know anyone who is working right now in SoCal. Lots of those people are underwater in their mortgages. Different view from my desk, iPodius.
Most of these deadbeat debtors can walk and send in jingle mail even if secondary financing was obtained. Many canny borrowers knew the inevitable was coming and made sufficient provision to hide, transfer, or swap assets. Then when they default, they become almost judgment proof. Lender seeking recovery is stuck with devalued property, maintenance and resale costs, and attorney fees for judgment. Although judgment can be renewed -- lender is incurring significant costs without any guaranteed payback. 7 years or BK later, borrower resumes with almost blank slate. Lender is assuming add'l cost and risk to recover pennies on dollar above deflated asset. Bad, Bad, worse -- no solution actually.
Thanks for the reply. I think your scenario is possible but the downside risks are very significant.
Why I think a deep recession is likely? Because the recent recovery was a fiction. I don't mean cooked statistics (although I believe the GDP deflator is conveniently understated by 0.5-1.0% which implies overstated real growth, see this paper (subscription required) for data) but that the growth was in unproductive (or even parasitic) parts of the economy that were supported only by growing indebtedness. The economy has to restructure before it can continue to grow. And restructuring means loss of jobs and loss of this unproductive GDP. However, the government (including Feds) would do anything to stop this restructuring from occurring, prolonging the downturn so a "lost decade" scenario (but no deep recession) is also possible.
I think the extent to which "jingle mail" is a realistic worry, as opposed to a talking point, is crucial. Do we have any feel for the number of mortgages that were not refinanced in California, for example?
Future conditions for getting judgements may be very different from past ones. I predict there will be "home relief" legislation with pro-lender, anti-jingler provisions, tucked into some inconspicuous corner. Of course, a lot depends on what happens in the next elections.
Thanks for the in-depth look at pools held by some banks. I'm surprised at the availability of this information given all the complaints about "transparency" I've heard.
Regarding the first argument, I would add that if foreclosures are adding increasingly and significantly more previously sold houses to the market, starts will be required to fall more than sales for a longer period. Inventories could still be rising!
The jump in Libor rates late this week could be signalling a major shift. My friends in Europe are very concerned that phase three of the credit crunch is unfolding. This was discussed earlier this week by this learned group and should be carefully watched next week. We still do not know what we do not know about the solvency of the big banks.
Some paranoids like myself think banks may be exaggerating the walk-away phenomenon either to shift blame or to create a climate of opinion favorable to new legislation, similar to the bankruptcy changes, but probably done in a more devious way.
"we're being cautious but not seeing the drop we'd expect if things were going to get severe"
That's part of the problem also going forward. Even those that will be OK (which I agree is most of America), are cautious and cutting back. They are definately not buying up real estate right now. Not in large numbers anyway. This makes things slowly worse. The people in trouble add bad statistics to the ecomomy quickly, the people OK and "cautious" don't contribute to growth like before.
EVERYONE I know fits into one of those 2 categories. "In trouble" or "cautious".
Just about everyone I know in Southern California is in real estate/the building industry (that includes probably hundreds of professionals).
Oh I'm sure that sector is horrible out there, and in the same place tech was in 2001. Here RE is very slow, but some people are doing very, very well that I know. And this group was cross-businesses...banking, tech, higher ed, retail, and commercial real estate management.
I think my point is that if you're CA-centric and non-tech, you might have a more pessimistic attitude than if you're not. I think everyone is like my neighbors. I actually live in a pretty working-class area and the house next door was sold over the winter. Young couple not even yet married. He said this was their first house, but they want to trade up (already!). I told them I bought 10 years ago when it was cheap so I stay. He has the, well it sucks now, but we'll wait a few years no big deal.
I think that's just the attitude with most people. I'm not so gloom and doom anymore, but not a grizzly bear. More like a Yogi bear.
In orange county it seems the banks were trying to hold on the price last year. This year they have started to cut brutally. The price on many REO's were cut 10% in Feb, and another 10% in March. I keep an eye on Kerigan Ranch in Yorba Linda -
the first REO just hit the market there lists for 1.2m - over 300k less than any other home listed in the area.
Monterey City seems to be still parting as if it will never end. Homes sales there are keeping the county average up to silly levels. Next door in Salinas the town is quietly desperate. Down in Greenfield I looked at a 4 bedroon/1200 sf place for 500k; three empty houses next to it and US101 with its traffic just yards away. Nah, I can wait.
Meanwhile, the veggies and grapes in the fields are growing fine with plenty of water this year. Do I expect nice salads and wine?
With gas between $4.05 and 4.70 along 101 those on demand delivery trucks just aren't moving like they used to. Come summer we could have veggies rotting in the fields. Gas, housing, food--all in crisis. What to do? Buy Google and Citi?
This year they have started to cut brutally. The price on many REO's were cut 10% in Feb, and another 10% in March.
If they are doing that, that's the most positive sign that there is. Deep cuts mean quicker price corrections. That will help establish a floor as REOs are always seen as cheaper than regular non-stressed sales.
If the gov't really wants to do something to relieve the real estate market, they would pass legislation to make it more difficult to walk away from a mortgage.
The new law: Walk away from a mortgage and the bank will garnish your wages.
The result, jingle mail drops by 80% and the market has a chance to absorb the inventory.
Just curious; Does anybody particpating today in this blog live in a neighborhood where the average price of a home there is at 3 times the average family income of your neighborhood?
I dare to guess not many. That means that prices still have to come down much more. The days of stated income, no ratio, no doc, BS loans are over. It is full doc now.
Buying a home will revert back to the norm. Buyers need a down payment, good credit and income documentation.
Prices will also revert back to the norm . Roughly 3 times incomes. A little more if rates are low, a little less if rates are high.
Im not sure why you are so optimistic CR. You mention before that housing is not as inflated here as in the Japanese bubble. I don't think that is the whole picture. What was total debt for Japan. residential, comercial, credit card, auto's. I doubt Japan had the credit card debt we do now. And oh yes the Derivative Market at that time was ah.. 0. And now is 60 trillion. Considering the derivative market is based on debt, a 10% loss here would wipe out our banking system.
This was why bear sterns was not allowed to go bankrupt - in bankruptcy its assets would be sold and we would now have a price for a lot of paper that everyone would then get to mark to market.
i think this whole mess would be swifter and less painful if you made it easier for them to walk away.
are we really going to tell a young couple and their two little ones that they have to pay for the rest of their lives an extra 200,000 or 300,000 more than their house is worth because the fed didn't do their job and let this all careen out of control?
the very first step we took (taking away the tax consequences of a short sale) was in exactly the opposite direction.
Come summer we could have veggies rotting in the fields. Gas, housing, food--all in crisis. What to do?
I hate to say this LMoore but I went shopping today at Whole Foods. Baby spinich 499/lb (organic!), grape tomates 1.99, strawberries 2.99, blueberries 2.99, mushrooms 2.99...doesn't seem things are rotting, and that isn't expensive, and they tend to be very expensive.
I think the entire supply chain gets squeezed here, as the consumer just won't buy if things are too pricey. So the hit is going to be felt by many. This is why I don't understand current stock prices. Earnings are just going to suck because profit is going to be severely reduced to keep the consumer from shutting down.
well melidere, i'm just stating pricing facts right now. i'm sorry they don't fit what you think. i'm just tired of half-baked posts on how we're headed into a depression because things are so bad. there's the reality i saw today, perhaps yours is different.
Does anybody particpating today in this blog live in a neighborhood where the average price of a home there is at 3 times the average family income of your neighborhood?
Here's some more reality: median prices in my neighborhood are slightly under 4x demographic income as recetly published. So I don't think that's bubbleicious now, and almost in line with historic norm here. Then again, as I've said, we peaked in August 2005, so we've fallen quite a bit since then. I expect the bottom to be somewhere in the q4/q1 2009 timeframe here, and for it to bump along there for a while.
yes, i see the banks have started cutting the price on REO's - some of these houses are now 40% to 50% off peak. Does not mean they are cheap.
Na, IMHO still have at least another 50% to cut from current price.
Hey, wasn't Bear Stearns cheap at $30.
There was some chinese guy who bought 150,000 shares at $60 to $78.
Told his broker to buy 200,000 at $30. Only, got 100,000 (poor guy). On Monday, broker told him to pay up.
He refuesd - so they liquidated his account at $6.00 a share.
Some paranoids like myself think banks may be exaggerating the walk-away phenomenon either to shift blame or to create a climate of opinion favorable to new legislation, similar to the bankruptcy changes, but probably done in a more devious way.
Seeing how conveniently the bankruptcy laws were changed just at the point that this whole thing started to rear its ugly head, I really don't think it's paranoid thinking that they may be setting up for more punitive steps for those who cannot afford their mortgages.
Really? Last time I checked he called a recession in q4 2006, then q1 to q2 2007 and we're still not sure we're even in one now (I will grant it's most likely and if so probably started in Dec 2007). His current call is for 1T in write-downs, which I think may be close to correct. But that's across the board.
ipidius, than you are right to feel OK about everything because your not at risk. Your housing market may come down a little bit more, but nothing to send a panic. Other areas still have a way to go. Like mine.
I don't think anything near a depression is coming. But I do think real estate in many areas (not yours) has a lot to fall yet. And because of that, people are cautious and will spend less going forward.
Like you (I think), I'm surprised at the stock market. The E will come down. It just has to. I can't see it any other way. But yet the market is going up?
Viewing with alarm: I don't know much about LIBOR, but the Banker's Association itself seems to be saying something's wrong. I agree with (I think) CR that the motive for lying to the LIBOR data-gatherers is unclear.
Begin{tinhat} I would have thought a single LIBOR liar would not have a big influence on the overall number, which starts some of us thinking in terms of conspiracies. End{tinhat}
Mal, nice Blake Oh and, btw, if you read the current statements of some of the Fed governors this week, they had increased inflation watch emphasis. I saw an article that finally stated what I have been saying here. When the Fed meeting this month "No rate cut for you!"
Watch what happens to the dollar if they don't cut.
One more excursion into tinhattery: I suspect there are a lot of lameduck legislators (state and federal) who have nothing to lose by giving their banker friends one more favor before getting kicked out.
Like you (I think), I'm surprised at the stock market. The E will come down. It just has to. I can't see it any other way. But yet the market is going up?
doom, there must be tons of fools out there because i couldn't agree more! the E HAS to come down and will. My point about prices (which, of couse as usual, won't be read in the spirit intended because I'm not stocking food in my basement or predicting collapse) was to say...wow. Someone is taking it in the shorts if these are the prices because they are NOT higher than last year.
So like orangeman just said, the pricing pressure is fierce. That means E is going to be weak, as everyone has to accept lower prices to keep the comsumer buying anything.
Stock market up because it will go up no matter what they do.
I made a post a while ago to the wingnuttery segment (which is why i am so endeared to them) as to what the Fed was up to. I actually said they'd cut to 2, but i think i was wrong and they're going to hold this time. If you read BB at all, i think he cut fast and deep (as his theory says) and now they'll pause. The dollar be damned in the short run because it helped exports and kept domestic production from falling off a cliff.
The price to pay was higher commodities and energy, but that will be short term (which is why they don't factor that into their inflation analysis). Once they stop cutting, oil and commodities, and glod will drop. As the eurozone now is facing downside pressure, no matter what Trichet says, he'll be forced to cut a little before q4. That will also provide a bump to the dollar.
So I'd be very cautious with euros, the dollar, glod and commodities now. If the Fed raises before q4, you cuold be on the very wrong side of these.
Right now, outsider, I'd say i'm closer to the truth than Roubini is. I said, shallow but longish recession lasting slightly longer than 2 quarters, inflation-adjusted house prices (here) drop by 28%, the Fed cuts to 2 and no more. My stock market call for the nadir is 11,200. Fundamentals tell me that's where is should be, but hey, I could be wrong as lately it seems to have disconneted to reality. I also said BOE will cut (it has) and ECB will also cut by Q4 but perhaps as early as Q3. Unemployment rate no more than 7.2% and inflation rate will approach or crest at 5%.
Manufacturing here will begin to increase (it has) driven by the weak dollar, but also driven by transportation costs, as we begin to make more things closer to the point of sale.
And no charge for any of this. My contribution to lower inflation
"So I'd be very cautious with euros, the dollar, glod and commodities now. If the Fed raises before q4, you cuold be on the very wrong side of these."
I am chicken shit right now. I am in NOTHING. 100% cash through short term CD's and Fidelity MM accounts.
I have always liked the stock market, but I sold all my positions in the spring last year. Not perfect timing but I'll take it. I think it's too late for commodities on the short term. Maybe if there is a pullback, it may be good to get in because China, India, and emerging markets are just going to continue to grow long term.
But everything is kinda scary right now. Nothing makes sense like it use to. I'll sit back, wait for some dust to settle and get back in. Maybe I'll miss out on a bit of opportunity, but hey, I can sleep good at night now.
ORANGEMAN: "Im not sure why you are so optimistic CR. You mention before that housing is not as inflated here as in the Japanese bubble. I don't think that is the whole picture. What was total debt for Japan. residential, comercial, credit card, auto's. I doubt Japan had the credit card debt we do now. And oh yes the Derivative Market at that time was ah.. 0. And now is 60 trillion. Considering the derivative market is based on debt, a 10% loss here would wipe out our banking system. "
Not all debt is the same. Consider credit card debt. A lot of people who use credit cards and pay on time will have a positive debt. For example, if I charge $1000 every month on a credit card but pay it off on time, the debt will still be $1000. Similarly, some auto loan debt is simply an alternative way of paying for a car. Thirty years ago, people paid, say, $30,000 at once for a car. Now they pay, say, $1000 per month on a lease or some sort of financing scheme.
The problem won't be with total debt but the number of people who can't afford to pay back the debt. That number is going to be small portion of all the credit card, auto loan, student loan, and other, debt. Housing is somewhat different from all these other debt because the amount involved tends to be very large. Lower income people like me can receive far greater leverage on housing debt than anything else. It would be almost impossible for me to borrow $200,000 to buy a car, pay for school, furniture, or whatever, but one can easily get that amount for a housing mortgage. The fact that the mortgage is large also means that any small changes in interest rates, personal incomes, inflation, taxes, etc, adversely affect the housing debt.
The point I'm making is that I--I must note I'm more bullish than most here--really cannot see USA anywhere near where Japan was in 1989. No doubt USA has gone through a massive credit bubble, but the Japanese real estate and stock market bubbles were massive!
As for derivatives, it's a zero-sum game. The only real risk is counterparty risk. The notional amount quoted for derivatives comes nowhere near real potential losses. For example, say I enter into a $1 million derivatives contract with you based on changes in differences between Canadian interest rates and American rates. It is unlikely that either of us would realize a $1m loss unless interest rates go to infinity or something (depending on what we are actually doing). Similarly, let's say I write for you a 5 year CDS (credit default swap) on an ExxonMobil bond for $1 million. It is unlikely for me to take loss equal to the notional value ($1 million). Yes, XOM could go bankrupt and default on its bonds in the next 5 years but highly unlikely. Would you really consider the $1m XOM CDS swap to be risky or not? I would say it's not risky at all. If you add in the likelihood of me hedging my contract or the possibility of taking ownership of the defaulted bond and seizing XOM's assets, the total losses are unlikely to be anywhere near $1m.
I'm not denying that there is room for massive problems, but the risk is nowhere near what the notional derivatives amount indicates.
I really don't think the walk away scenario is nearly as pronounced as one might think merely based on negative equity.
Hope springs eternal, hope for a rebound in valuations, hope for being able to hang on. Its when hope is lost that the walk away scenario begins to play out. It's when you're $10-20k behind on the payments and no way to ever catch up that you begin to think about walking away.
It's when you lose your job and the missed payments start. At that point you're into foreclosure, then, when there is no more option, you leave after the sheriff nails the notice on the front door. (trust me, I 'know' this one from a previous downturn)
One doesn't just walk because the appraisal is 'upside down', no, one walks when hope is lost... even today.
doom you are a very wise man. i am being very cautious right now too. mp said he has started to buy cautiously in financials. i'm sure he is right, but i am still not. i have sold any euro position, backed into mostly cash, and have some holdings, but they are mostly what i know very well.
as i've said, you don't have to buy at the bottom, or sell near the top. just close. stick to that, and you'll do very, very well.
My bet (age 29) is on the pessimistic side (big depression) of many the "older" analysts. There is simply a huge disconect (that they do not see or feel) between the wages and assets of the young and those lucky enough to buy assets or enter the work force a decade or two ago. There is no way in hell most people under thirty can afford property without no doc/no down loans. Thank fully those are gone. And reality will hit very quickly. Now understand that 7 out of 10 people I graduated college with work in construction or real estate. Some did extremely well but ninety percent have been living off of debt. Now they will lose their jobs as well. Simply put, they were and are screwed and will be the puzzle piece that pulls the whole ponzi scheme down to levels that most older boomers can not bear to think about. This is going to deflate very fast and probably won't recalibrate until young nurses, med techs, and doctors transfer oldsters last bits of wealth to their own pockets.
The US economy is not going to be strong for a few years; but I don't think it will be as disastrous as people imply. The main reason, I think, will be because corporate balance sheets are strong.
I remember reading somewhere recently that, going into this recession, corporate balance sheets are stronger than they were in 2000 or 1989 (the prior recessions). Except for those LBO buyout deals, and perpetually struggling industries (e.g. US autos), very few corporations are saddled with large debt. In fact, stock buybacks over the last few years have been very large.
Strong corporate balance sheets is one reason people like me, who are more optimistic (although I think the stock market will likely be flat to negative for the next 2+ years), think that the economy won't be as badly hit as the housing meltdown would imply. In particular, companies will likely be able to (i) absorb more margin erosion (either due to increased commodity prices or weak sales growth), (ii) avoid laying off as many workers as they have in the past.
Another quirk that may help USA is that it is entering a slowdown with a weakening currency. Although US$ asset holders are hurt, the weakening dollar actually makes USA more competitive. Certain industries that have been weak over the last few years should see a huge boost. Areas like tourism and manufacturing should see a big rebound. In the past, manufacturing generally gets clobbered during slowdowns but now it can actually be the opposite. No doubt demand will be weak in autos, industrials, etc, but the weak currency should shield a lot of these companies. Certain industries that export heavily, such as the tech industry, should see a huge boost too. For example, Google just reported strong profit growth this week mainly due to international growth (more than 50% of GOOG's income is foreign). Microsoft, Intel, Texas Instruments, Oracle, et al, should also do quite well.
Having said all that, the world economy will slow down. We can be certain about this because growth has been way too strong in the last few years. That means things won't be as rosy as in the past. But that's not what any of us here seem to be talking about. Instead, most here, including me, are talking about how severe any weakness will be. I don't think it will be too bad (except for those directly tied to the housing industry).
"Meanwhile, the veggies and grapes in the fields are growing fine with plenty of water this year. Do I expect nice salads and wine?
With gas between $4.05 and 4.70 along 101 those on demand delivery trucks just aren't moving like they used to. Come summer we could have veggies rotting in the fields."
Maybe not veggies -- maybe wine grapes. Drove down 101 from the Salinas Valley this summer and saw massive new vineyards from San Ardo on down -- the only agriculture I did see. Who's going to drink that in tough times.
Was talking to a co-worker who works remotely from SLO County; she said they've torn up a lot of row crops to plant those vineyards over the last few years. A good idea at the time for the individual, not so good for society as a whole, as it turns out. Lot of that going around.
I am going to have to disagree with CR. This bust is, I fear, will be FAR deeper than anything in living memory. The core problem is that we have an unprecedented use of negative amortization, option arm, and 100% financed loans than ever before. As a consequence, there are a far higher percentage of home-owners who have no cushion if they should experience any kind of financial hardship.
The issue isn't whether "walking away" becomes socially acceptable for people who are under-water. Neither is the problem with "resets". The problem is that we have a hitherto unknown percentage of fragile home-owners with no equity.
Depreciation just adds to the dillemma by increasing the numbers of home-owners without equity. It's a vicious circle (i.e. the greater the deprecation, the greater the number of people who have no equity, leading to higher numbers of foreclosurs, etc, etc, etc).
What makes our current economic malaise all the more glaring is the sheer scale of the problem, which spans the entire globe! The synchronized nature of our global credit bubble, which had led to booms from Shanghai to Dublin, Saskatoon, Madrid and Seattle, is leading to a systemic credit contraction. With everyone hurting, there won't be anyone left to bail us out.
Anyone with any debt, particularly real-estate mortagages, is going to pray that deflation doesn't strike, and perhaps concoct any number of muddle-through scenarios to comfort themselves, even to the point of self-delusion. About two years ago, the billionaire investor and mutual-fund founder Sir John Templeton predicted that US residential real estate would decline 90% in value from the top. That makes Roubini look like an optimist.
I have to agree with Roubini on this. I have a friend who just finally got foreclosed on a couple of weeks ago in Florida. She hadnt made any payments for six months. It took the bank a long time to get around to foreclosing on her. Its going to get a lot worse before it gets better. I believe people will find it easier and easier to walk away. The more people who do it make it easier IMO. I also believe some people will run up all their available credit since their going to go bust anyway.
Also, I dont think many will consult a lawyer or tax consultant.
I travel back and forth from my place in GA & Fl often and dont see any changes in the home market anytime soon! I agree with Roubini that prices will have to come way down (50% +) in some markets. People are still reluctant to face reality. Employment will get much worse IMO.
Does anybody particpating today in this blog live in a neighborhood where the average price of a home there is at 3 times the average family income of your neighborhood?
Doom -- I do. And I pretty sure I am no where near ipodius either. My neighborhood runs at 3-4 times income (not average income though) and perhaps more shocking, nearly every household is just one income (although most were two when they bought the house, then shifted when kids were born).
Our area was hit hard by the 2001 tech bust and never really boomed, we were flat for several years and then had about 5% appreciation over the last 2-3 years. Now the RE market is going flat again. It is worse in the expanding fringe suburbs but nothing like CA, NV, GA, MI, OH, etc.
If employment holds steady we are okay (crossing fingers!)
"It's very, very, very hard to regulate people. If I were appointed a new regulator - if you gave me 100 of the smartest people you can imagine to work for me, and every day I got the positions from the biggest institutions, all their derivative positions, all their stock positions and currency positions, I wouldn't be able to tell you how they were doing. It's very, very hard to regulate when you get into very complex instruments where you've got hundreds of counterparties. The counterparty behavior and risk was a big part of why the Treasury and the Fed felt that they had to move in over a weekend at Bear Stearns. And I think they were right to do it, incidentally. Nobody knew what would be unleashed when you had thousands of counterparties with, I read someplace, contracts with a $14 trillion notional value. Those people would have tried to unwind all those contracts if there had been a bankruptcy. What that would have done to the markets, what that would have done to other counterparties in turn - it gets very, very complicated. So regulating is an important part of the system. The efficacy of it is really tough."
ipodius, I don't question your current food prices. I'm talking about 3-4 months out when gas prices peak in the summer.
Obviously, food prices, especially fresh foods, are directly effected by transportation costs and intensive labor. If labor can't afford to buy gas to get to the fields then some fields won't get picked. They don't make much money. Migrants balance their costs against the benefits of working here. Most just go home when the negatives override the positives. No one really knows what that break point is. Housing is a big issue for them and Salinas was ranked two years ago as one of the the least affordable cities in the US (based on housing costs compared to income averages). Farmers in this area are on tight schedules for harvesting and if labor becomes scarce because of local cost of living then some fields won't get picked. It's a messy business with food always left in the feilds. The question is, will it be 40 acres or 400k?
I am a big fan of Buffett but he isn't generally good with macro calls. He also doesn't make many macro calls. In any case, I read Buffett's quote as being mildly bearish but I don't see him saying anything as bearish as most people here.
For instance, he pointed out that $150 billion of stimulus, which came from housing, would be gone. That will cause pain for portion of the economy but the US GDP is $13 trillion. The lost stimulus is only around 1.5% of GDP.
Sivaram, true on balance sheets, but what's on your balance sheet only helps you weather a storm to some degree and, in the end, it's the big E that counts. What this means is that corps don't have to slash as much going into this, and can be cautious without dumping large amounts of staff or severely curtailing expenses IF the contraction doesn't last more than 2 quarters.
This, however, does not justify at all current P/E ratios in the market. Forward earning are going to suck as pricing pressure is high. Read deeply the current crop of quarterlies. What do you see? Do you see fincancial arbitrage making the numbers look better? I do. The weak dollar is propping up earnings so how good are the fundamentals underneath? You tell me.
Also Citi is still in big doodoo. I've said this for a while, look for the sale of divisions soon. Also some further consolidation will take place. Do you think JPM raised capital just for it's ratios?
The current market feels like March - April of 2001. Dropped strongly stabilized for a few months then went into the tank all summer. Every day for months as I drove by the brokerage sign flashing -100; -50; -120; -10 .... you get the picture.
If the market cratered when the dollar was strong, debt was low, and the budget balanced, what could possibly be in store with the dollar weak, debt suffocating, and banana republic size budget deficit. In 2001, the trade defict with China was about -83 Billion compared to - 300+ Billion per year now.
I will be pleasantly surprised if Roubini misses by much.
As bad as everyone talks about jobs it is kind of amazing about my bosses son. He sent a resume to a company Wed,they called him Thurs,he is flying in for the interview on Monday.
When he passes the welding test and drug test he was told he could start the next day...And the starting hourly rate was pretty inpressive !!!
Sure; let's put wine on federal price supports and ship the excess to the school lunch program. Hire out-of-work sommeliers to run the wine education program at evry high school. Yee-hah.
Chris, I think that for some people, they see what they want to see. You're in a very non-tech business, and you're seeing labor opportunities. dryfly has been stating that he's seeing it too for a while. I'm seeing tech opportunities up the ying-yang and i'm not talking about all highly skilled programming jobs either, i'm talking blue-collar IT jobs and management jobs too.
I think it is very situational, and also very regional. If you're in the auto-biz, you're probalby sucking wind, the same as retail and RE. But if you're in light and industrial manufacturing, repair, IT, or software, you're seeing good times.
One thing that could save the average joe is a little thing called bankruptcy. My friend just did this and waved good bye to about $35,000. Takes about twenty minutes. The bankruptcy lawyer was apparently the town hero and had opened five offices in the last six months and gone from a one or two day waiting list to three months.
Could people escaping high credit card debt and high mortage payments free up enough cash to save the economy from total collapse?
Have we just seen a major transfer of wealth from banks to debt escapees in the form of possesions bought (cars, computers, student loan repayment, etc..) with debt and kept after bankruptcy and forclose?
Beach Bum, BK has always been a way out, and frankly it is a good one. We have a system that doesn't penalize risk too greatly, and that's a great boom to innovation. If you fail, you can pick yourself up, dust youself off, and start over.
The new BK law made it a little harder to do this by the chapt 13 provision, but a savvy lawyer can probably get you around it. In a lot of cases it makes sense. And frankly if CC companies and idiot banks were willing to lend you into BK then no one should feel like they shouldn't be able to admit they screwed up and file by taking advantage of the offers. Do it while you're young and can recover. The losses will be borne by those who invested in these entities, as it should.
slid, you too are lucky. Prices of homes in your area should hold up. I think there are places where prices are only about 3 times incomes. But they are in the minority. Nationwide, most prices had shot up from 2001 to 2006 much more than their neighborhood incomes.
It did that mainly because income didn't matter back then. We had the stated loans, etc. But now that income matters again, we have to revert to the mean. There is still more pain to come nationwide. And just like the upsides, the downsides tend to overshoot.
"I don't think it will be too bad (except for those directly tied to the housing industry)"
Sivaram Velauthapillai
Siv, I think a large percentage of the consumer spending done over the last half decade was due to the housing boom. Buy on debt, cash out refi to pay debt, buy more on debt. Equity lines of credit, etc. The MEW is closed. This will directly affect some industries, and the rest will be "indirectly" affected. The large companies with huge overseas exposure should do fine with our tanking dollar, but most employment nationwide is done by the smaller companies which depend on the American consumer. The American consumer is nervous and cutting back.
We all bitch about prices, but it's like the weather now "can you believe the price of x?" but we buy it anyhow.
We have no choice. It all comes from the set amount that people earn. Therefore its simple to understand there is less to spend on non-discressionary items. Joe6pac is really getting kicked in the teeth when he or she is down. Cant be a good thing!
Double dip recession the one now with phony half ass recovery in an election year followed by the real deal starting in Q4 with light bulb coming on of tax increases with new administration.
This is not just a reaction to your comments on Mr.Roubini but also for your comment that cancellation rates have peaked.
Under normal circumstances, you might be correct that at some point in time, one must assess the prospect that we are well past the worst point.
Now, in the last six months, information has come on the stagnation of incomes for median families, on the relentless rise in gasoline price and on the fact that average hourly earnings adjusted for inflation has been negative since 2005.
Moreover, we know that reported inflation understates real inflation faced by consumers with all the hedonistic adjustment, substitution effects, etc.
Then, there is the news on the shrinking of aggregate hours worked and hence wage earnings.
All this confirm that the reliance on MEW for current consumption in the recent cycle (2002-2007) must have been much much greater than in the past which standard OLS regression models might not be capturing.
On top of that, if food and energy prices linger at current levels (they do not have to rise further), then EM economies would be facing a much sharper slowdown than is currently anticipated. In fact, EM growth estimates have not been revised since food prices began to spike up and oil held up well above USD100.00 per barrel.
We do not know if the original assumptions that led to more cheery estimates of EM growth have been revised and new estimates of growth arrived at.
So, hopes that weak dollar would lead to a export-led recovery for America have to be tempered.
Both stubborn pessimism of Mr. Roubini and your stubborn optimism that things would be better (noted in many recent posts) have to acknowledge a bigger-than-usual zone of uncertainty and risks.
April 15 Financial Times (Aline van Duyn and Michael Mackenzie):
Tranche warfare has broken out in the $450bn market at the heart of the credit crunch as hard-hit investors scrap over the pools of debts that make up -so-called collateralised debt obligations. Some investors in the differently rated and ranked slices of CDOs - known as tranches - have taken advantage of the - little-noticed terms in the -structuring of such instruments to seize control of the assets and cut off payments to other debt-holders. Such conflicts have resulted in lawsuits as investors question the rights of others, such as senior noteholders who supposedly hold the least risky tranche of a CDO The fights between tranche owners is another example of how little attention investors paid to the exact terms and conditions in the rush to complete CDO deals. It also highlights the potential for stress in the structured finance market, as ratings downgrades of assets backing bonds in turn trigger more losses or ratings downgrades.
April 15 Financial Times (Carola Hoyos and Javier Blas): Russian oil production has peaked, one of the countrys top energy executives has warned, fueling concerns that the worlds biggest oil producers cannot keep up with rampant Asian demand Leonid Fedun, vice-president of Lukoil, Russias largest independent oil company, told the Financial Times he believed last years Russian oil production of about 10m barrels a day was the highest he would see in his lifetime.
We stopped at a new pastry shop after dinner yesterday. I asked the owner about the price of flour. His reply was "It has doubled in the past 7 months." We talked about it, the impact, etc. His eyes told me what we both left unsaid. That he was screwed.
There will be no linear progression in what is coming.
i'm just crying wolf...this recession thing..just a speedbump
April 17 Bloomberg (Dale Crofts): ArcelorMittal, the worlds largest steelmaker, plans to boost prices on some steel shipments in the U.S. by $250 a ton, or about 33% of current prices, to recoup surging costs for energy and iron ore.
CR - this is the first time I am completely, 180 degrees, away from your view.
You say " ruthless default ".
Up to 20 % of the sales have been for spec purposes for the credit. I suspect a good deal of % were on "what-ever" reasons...The reality is if you are under water 20-30% YOU WILL walk away. It simply does not make sense to stay. At any cost.
There is a huge difference between this recession and any we've ever lived through in the U.S. I keep trying to illuminate it, but CR is just dense to understanding it.
There are growing numbers of people now who have just fallen out of the employment scene, into a social services safety net. It's mind-boggling how many. It doesn't mean all of these people don't work. But their medical care, counseling, rehabs, shelters, food stamps, job training, job placement, medication etc. etc. is very costly, and the largest part of the cost falls on state/local govt.
CR, just answer one basic question. We had an excellent post here yesterday that showed how many states are running deficits of 5-10% of annual budgets. You think this is just gonna turn around on a dime? Those states will get solvent against real fast?
You think MBIA and Ambac are just gonna bounce back to solvency?
Jefferson County, Alabama, is gonna find some magic way to pay off their sewer bonds and swap losses?
As I've pointed out since last summer, CR has been consistently too optimistic about the trade deficit. He thought oil would moderate along with import prices. He was dead wrong. The trade deficit just keeps on getting uglier.
The biggest problem with the "slow recovery" scenario is that there's too much debt in the U.S. to tolerate slow recovery. Slow recovery just means more defaults and bank failures. Unless the U.S. economy can find a miracle and return to sustained 3% growth, we're gonna have catastrophic debt defaults and bank failures. FDIC, PGGC, and state insurance guaranty funds are already starting to teeter.
O.K.,
Just for fun before I call it quits...Waterfront lot that is currently listed on the MLS for 59,900. Who is the poor bastard eating a 132k loss ??? Why no one less than Suntrust. The loss will end up around 180k-185k when it is all said and done. Prices are falling back to 2000-2001 for the selling properties right now. And now the purchase history per the county of the property...The 100.00 are transfers.
7 /1986 $6,400
8 /2001 $9,000
5 /2003 $100
6 /2004 $78,800
5 /2005 $192,000
1 /2008 $100 - Return to Suntrust.
Strong corporate balance sheets is one reason people like me, who are more optimistic (although I think the stock market will likely be flat to negative for the next 2+ years), think that the economy won't be as badly hit as the housing meltdown would imply.
Corporate balance sheets of a couple of hundred huge multinational U.S.-based companies are strong.
Below that, corporate balance sheets are a debt-infested nightmare. When I start digging into the balance sheets of mid-cap and small-cap companies, I'm just shocked to see how they leveraged up debt over the past five years, often by buying back stock to pump earnings or by making strange debt-enabled acquisitions, and often by issuing convertible debt with warrants or resets that effectively puts an invisible cap on stock price upside. In a lot of these companies, if the stock price ever were to appreciate 20% from the current price, the shares outstanding would nearly double.
Don't buy the "strong corporate balance sheet" myth without looking closer at the filings.
Anybody who mentions the possiblity of deficiency judgements is either a fool or disingenuous. Can you imagine the expense with just trying to figure out who might have the assets to pursue? Get real.
I went to Calloway's Garden Nursery today - a big mistake to go there on the weekend. It was packed and people were spending money like mad. I bought $175 of roses, bulbs, bone meal, wire hanging basket, etc. Calloway's has a guarantee on its plants should they not survive which is often the case in the Texas heat. Prices are about double other local nurseries and Home Depot in the event you bring a plant back you have already paid for the second plant. The quality is excellent of course at those prices. Calloway's is closing all of its San Antonio area stores. It was a mad house today with Spring in full bloom.
Many years ago I worked for BoA in the Special Assets Department. You are right about California and non-recourse purchase money.
During my trip to Spring training at Vero Beach, this year, I was shocked to see the huge number of homes for sale in Florida. Even in the better areas of the barrier islands, from the Cape Canaveral area toward Port St. Lucie, it seemed every third home had a for sale shingle. Inland, I noticed areas where every home or condo on a block was for sale. Very sobering.
Areas of California's "Inland Empire" area are also highly distressed but SFR in the coastal area around Santa Monica and the South Bay here in CA are not as pressured as Florida.
I was told by a fellow baseball fan that Florida voters recently passed a real property tax change to a system with similarities to CA's Prop 13 (but for primary residents only). I wonder if this is correct and if so, to what degree is this change impacting property sales in Florida?
Thanks
oil and energy is at the source of all we do all we produce.
from the oil drum
"ROME (Rome) - Record oil of $117 a barrel calls for a demand response and a supply response, but for now there is little to stop prices heading still higher, the deputy executive director of the International Energy Agency (IEA) said on Saturday."
i guess with or without a recession...food , energy, steel, all going up thru the roof.
guess it's time for the boomers to re price retirement income expectations.
nothing short of an international energy "Manhattan project" will save the 1st world, and the emerging 2nd world...from a third world existence.
our current leadership is greedy, old school, tired, and clueless.
ipodius: "Sivaram, true on balance sheets, but what's on your balance sheet only helps you weather a storm to some degree and, in the end, it's the big E that counts. What this means is that corps don't have to slash as much going into this, and can be cautious without dumping large amounts of staff or severely curtailing expenses IF the contraction doesn't last more than 2 quarters."
I don't even know if we'll get a contraction for 2 quarters. We may just see very low growth (say 0.5%). The whole housing-induced slowdown has been unfolding for almost a full year now yet the economy is just hitting zero growth now. Corporate earnings still look OK. That's why the stock market has rallied lately. Who knows how things will hold up later in the year but so far things aren't as disastrous as some here would have you believe.
ipodius: "This, however, does not justify at all current P/E ratios in the market."
I suspect that we'll see a sidways bear market. Although P/Es aren't low, they aren't high either (Buffett has said something similar). There isn't a stock market bubble (a point missed by some who equate the present situation to Japan).
There is also the potential for some earnings quirks later in the year or next year. I am not as bearish on the subprime losses as many and think the dumb fair value accounting pushed by the accounts can result in mark-to-market gains in the future. Although I wouldn't invest based on such a speculation (it is not certain), I can see it happening. The accounting profession has been pushing hard to use misleading indices like the markit indices. I personally don't think the losses implied by most of the marks will be borne by the firms.
ipodius: " Forward earning are going to suck as pricing pressure is high. "
The market is discounting a lot of the negatives. This isn't the case for all sectors but it certainly is true for some sectors like financials and consumer discretionary. Many financial companies, not to mention homebuilders, have been rallying on their earnings.
My guess is that the ones that will get clobbered in the future are materials and energy. If commodity prices drop (they tend to during economic slowdowns) watch out.
ipodius: "Also Citi is still in big doodoo. I've said this for a while, look for the sale of divisions soon. "
I don't know much about Citigroup but it doesn't seem to be that badly off (but then again this is coming from some guy who is bullish on the monoline bond insurers ). The new CEO seems to have no intention of selling any major assets and the market seemed satisfied with their earnings call this week. Things may change over the next 6 months but most of the negative issues seem to disclosed.
Every one I talk with is complaining about escalating food and gasoline prices. Meanwhile, natural gas prices have doubled since August, so those utilities will eventually ask for a rate increase. Refineries are only running at 81% capacity and the driving season is just weeks away! Sheesh, I hope they have enough time to ramp up. An active hurricane season in the gulf would certainly cause oil to spike even further. Add in rising unemployment,wage stagnation, and continuing foreclosures, I think we're in for a long, hot summer mixed with a little social acrimony.
I have to say, these slow-news weekends are extremely boring. Sure wish there was another IB, monoline, or homebuilder to speculate on going tits up. We get new and existing home sales data this coming week and the FOMC rate cut decision, but other than that, not much economic news aside from earnings.
Meanwhile, China's market index is off 50%, but investors elsewhere don't seem concerned.
It's the potential for non-linear responses to unforeseen systemic shock that bothers me - while things are stretched a bit tightly - and the longer it drags on without resolution...
Sniglet writes:
I am going to have to disagree with CR. The core problem is that we have an unprecedented use of negative amortization, option arm, and 100% financed loans than ever before. As a consequence, there are a far higher percentage of home-owners who have no cushion if they should experience any kind of financial hardship.
And the Option Arms or pick-a-payment resets don't peak until mid-2010, but could reset sooner if the balance hits a 115% LTV trigger which would be devastating. Oh, and check out the action in the 10-year bond, interest rates are moving up. This housing slump could drag on for a few years.
The ninth largest bank in the U.S. is about to go tits up and you are bored? Read the introduction to NCC's 10-K and look at the balance sheet.
They need about $5b for the writedowns but the market cap is now only $5b. So either the stockholders get diluted by half this week or the regulators let them operate as a zombie bank with inadequate capital to take future hits. The dividend will surely be eliminated, but I don't believe that the regulators will make them mark their residential mortgages to market either, thus the slow bleed.
I don't know much about Citigroup but it doesn't seem to be that badly off (but then again this is coming from some guy who is bullish on the monoline bond insurers ). The new CEO seems to have no intention of selling any major assets and the market seemed satisfied with their earnings call this week. Things may change over the next 6 months but most of the negative issues seem to disclosed.
Sivaram Velauthapillai | Homepage | 04.19.08 - 11:37 pm | #
from yahoo news:
Citigroup to cut 9,000 jobs after posting loss
By Jonathan Stempel and Dan Wilchins Fri Apr 18, 9:20 AM ET
NEW YORK (Reuters) - Citigroup Inc (C.N) posted its second straight quarterly loss on Friday, hurt by more than $16 billion of write-downs and costs related to credit losses, and said it will cut another 9,000 jobs.
Though the $5.11 billion first-quarter loss was larger than expected, analysts and investors expressed optimism that the largest U.S. bank and its new chief executive, Vikram Pandit, were taking necessary steps to move past credit problems and drive down costs.
Citigroup shares rose $2.22, or 9.2 percent, to $26.25 in premarket electronic trading."
Oh I forgot about NCC. I don't suppose the Ben will rush in to save them though.
I was looking at the annual report of a small southern bank the other day. Heavy concentration of CRE and construction loans in their report. Other assets were residential mortgages. Next year, at the latest, will begin reading more and more about the mid to smaller banks failing. I think the head of the FDIC already projected 100 bank failures in the next two years. That's probably bullish for the market somehow.
Maybe I've been reading too many bearish blogs like this one, but you sound like you've been watching too much CNBC...
Earnings have been at record highs in recent years (perhaps a result of a historic credit bubble, no?), and yet the current S&P500 PE ratio of 21 is 50% above the historic average.
With a recession in progress, and a popping credit bubble, earnings will decline in a big way going forward. Frankly, any bright spots in earnings coming out now (CAT, IBM, GOOG) has been largely helped by overseas business and currency exchange gains.
How will overseas earnings look a year from now after collapsing consumer spending (US, UK, and other debt-soaked nations) hits the producing nations with a lag?
Oh yeah, and have you looked at the trend in capital expenditures lately?
Sorry, but we've got serious earnings issues going forward.
And to think 5 years of excess can be wiped out in 2 quarters is pretty absurd.
"Profits in all four of Citigroup's main business lines fell sharply from a year ago, and executives warned that the tough times are likely to drag into next year. Ratings firms put Citigroup's debt on watch for downgrades, but the company's shares rose 4.5%, or $1.08, to $25.11 in 4 p.m. New York Stock Exchange composite trading, as investors expressed relief the numbers weren't worse.
Clyde,
I remember reading a mutual fund report last year and they had a section where they highlighted a few stocks they own and why they were poised for growth. One stock they really liked was NCC, but their logic didn't seem justified at the time, given what was already going on in housing. Honestly, after reading this blog for two years as well as The Big Picture and others, I don't know why anyone thought these kind of banks would not get hurt.
Don't expect other countries to be purchasing your exports to bail you out. Canada, particulary Ontario, where 80% of it's manufacturing was exported to the US is hooped. The spring realestate market is dead with buyers waiting for the big price drop to happen. Manufacturing is dead with unemployment rising. I would expect imports from the US to drop instead of rise, a lot fewer purchases from (CAT, IBM, GOOG) . The way I see it is the US MEW from the last 5-6 years has fueled the entire World economy. Now we are seeing the World wide inflation,that resulted from all that money, eat itself up. The developing economies will have better things to spend their money on than US exports, like food.
"... The government reported that annual unemployment during this recession peaked at only around 6 percent, compared with more than 7 percent in 1992 and more than 9 percent in 1982. But the unemployment rate has been low only because government programs, especially Social Security disability, have effectively been buying people off the unemployment rolls and reclassifying them as ''not in the labor force.''
In other words, the government has cooked the books. It has been a more subtle manipulation than the one during the Reagan administration, when people serving in the military were reclassified from ''not in the labor force'' to ''employed'' in order to reduce the unemployment rate. Nonetheless, the impact has been the same.
Research by the economists David Autor at the Massachusetts Institute of Technology and Mark Duggan at the University of Maryland shows that once Congress began loosening the standards to qualify for disability payments in the late 1980's and early 1990's, people who would normally be counted as unemployed started moving in record numbers into the disability system -- a kind of invisible unemployment. Almost all of the increase came from hard-to-verify disabilities like back pain and mental disorders. As the rolls swelled, the meaning of the official unemployment rate changed as millions of people were left out.
By the end of the 1990's boom, this invisible unemployment seemed to have stabilized. With the arrival of this recession, it has exploded. From 1999 to 2003, applications for disability payments rose more than 50 percent and the number of people enrolled has grown by one million. Therefore, if you correctly accounted for all of these people, the peak unemployment rate in this recession would have probably pushed 8 percent. ..."
The recent NY Times article by Floyd Norris is also worth a look as it highlights "THE unemployment rate is low. The jobless rate is high". The change of the treatment by the military mentioned in the prior article is quite obvious in the second chart (check out rate of change in 1984) referred to there.
The following chart shows the relationship between labor force participation rate and the unemployment rate and you can clearly see that it broke down around 1997 with the unemployment rate still falling significantly but the participation rate peaking. Something isnt quite right as the studies and articles mentioned above point out.
To accept the present unemployment rate as is and actually use it unquestioned in comparisons is in my opinion dangerous and likely leads to the wrong conclusions.
I am not so good on the details but there may be some facts here:
72% of the economy is driven by consumer spending even if only 6% is directly related to housing
A significant chunk of spending across the economy has been driven by the creation of cheap leveraged credit that is now unwinding.
Unless inflation skyrockets there is a finite amount of new money that can be created from nothing by CB's. People wanting cash and will have to compete for it with higher rates.
The US needs 2Billion per day of foreign money to maintain the status quo because of current imbalances.
Dollar devaluation means price inflation which creates more demand for cash that is not available at cheap rates - which means significant hardship for poorer people, working or not.
Federal and state finances seem to be poor. Their ability to spend to encourage demand in a contraction is for many totally impossible. They will instead be part of the problem rather than part of the solution.
A few people are saying the consumer can stop spending and there will be a few difficult years but i cannot yet see how a consumer even mildly slowing down spending will not create total disaster?
Somehow by some means the consumer must keep spending to avoid a very nasty contraction.
What i dont get is how people can be cruisy about the idea of a recession when the driver to get out of recession is not really there for some years to come.
The economy is too consumer based to even allow a recession to develope.
Just curious; Does anybody particpating today in this blog live in a neighborhood where the average price of a home there is at 3 times the average family income of your neighborhood?
I do. median home costs about $150K in my area and median family income is about $50K... plus or minus a little.
And there are a bunch for sale which tells me the ratio will be dropping more.
2/3s of the land mass of the country fits that description (its just that no one lives there).
What i dont get is how people can be cruisy about the idea of a recession when the driver to get out of recession is not really there for some years to come. Once you have one starting what stops it?
Worried | Homepage | 04.20.08 - 12:26 am | #
That's why I don't think this will be a V-shaped or even a U-shaped recession. What will be the catalyst? Certainly not low rates for home purchases. Maybe some massive government sponsored works program for rebuilding the infrastructure...which would blow a huge whole in the budget. But then again, 'deficits don't matter.
I think some people think that the developing nations will pick up the slack and keep us all prosperous, as evidenced by IBM/GOOG/CAT earnings.
But I wonder how China, etc. will do that when their source of revenues (mad consumer spending by the US/UK, etc..) has fallen off a cliff? They have massive overcapacity already...
Any International US company reporting earnings in USD that is not now reporting huge profit increases must be in alot of trouble. The Dollar index fell off a cliff.
But the main benefit to the US is the profits for the owners. The production is some place else.
So is it part of the solution or just more of the problem?
Don't expect other countries to be purchasing your exports to bail you out. Canada, particulary Ontario, where 80% of it's manufacturing was exported to the US is hooped. The spring realestate market is dead with buyers waiting for the big price drop to happen.
My guess is Alberta is in a different position than say mfgrs along the 401 Corridor.
Fact is exports are up some... and growing... but import substitution (using domestic sources here instead of importing those supplies) is increasing A LOT. That is part of the reason why it is so slow on along the 401... automotive is slow in general & imported supplies from high cost countries used in automotive is even slower.
I posted this info yesterday....
the major indices are now sporting these healthy PE ratios:
Dow = 58
Russell2K = 54
Nasdaq = 29
S&P500 = 22
Source is the WSJ(: 404 Not Found public...mod=mdc_h_usshl
Can anybody out there offer a good explanation for why this won't be corrected by stock prices moving downward over the coming year(s)?
Why would the E part of the equation improve from record earnings levels when we are facing massive inflation in business inputs, a credit crunch and a retrenching consumer?
Seriously, I'm looking for a good expanation of how it can happen.
Many assume that the recession is not going to be severe since we are not going to lose many jobs in manufacturing. For this same reason this is going to be depression.
Why?
These peoples thinking is still based on pre 80s period where the manufacturing jobs had huge share of total jobs. Over the 90s and 21s century we lost millions of jobs in manufacturing and came to the state where manufacturing now only contributes less than 25% of overall jobs in US. So, there are not much jobs to be lost in manufacturing and hence the recession is not severe. But they all forget the other side of coin which is now more than 75% of jobs in service sectors. If everyone look at which part of this service sector is adding jobs still is nothing but just only the federal government. All other parts of service sector are losing jobs now and in over all, the service sector is losing jobs. The federal government will start losing jobs once deficit spikes and revenue is shrinking which I think will happen coming financial year.
The loss in service sector jobs will not stop till the people have money to spend on the service sectors. This means that till the individuals debt problem is worked out which is going to take many years. That means the service sector jobs are going to bleed for coming many years.
The recession/depression is not going to turn around till the service sectors works out its fat.
Regarding GDP growth limping, people have to remember that the delta between reporting of reduced inflation from true inflation is counted as GDP growth. When people look back in few years, the growth that we are seeing today is nothing but manipulated inflation counted as GDP growth.
you miss the point - total debt is an issue. The economy can not recover if the banks can not lend. That is what happen in Japan - Japan still has problems because they still have bad debt from their bubble. Also, if the derivative market implodes - many large banks will go under. Citi, Wachovia ...
Probably lose some major brokerages too.
Just to be clear, I don't subscribe to the BRIC-consumers-and-US-exports-will-save-us theory.
ShortCourage | 04.20.08 - 12:57 am | #
I don't think anyone sees mfg saving us - but import substitution & export definitely can soften the blow.
I've said it a thousand times here - MOM has backed it up too - few sectors have multipliers like mfg. For every person tightening a bolt there are ten in the office doing paperwork, design, etc. A small up tick in mfg results in a large up tick in mfg driven service activity.
It won't be enough to make GDP go positive - it could very well be enough to make this recession not terribly unusual (i.e. not depression).
On a personal level I would still plan for the worst and hope for the not-so-bad though - I'd rather be 'surprised' to the up side, not the down side.
In CA, banks will take losses for years to come, and $ 1 tril for US banks is nothing. Each foreclosure is another loss for a bank. We don't even know what their assets ARE!
I personally know 3 people walking away, and this is picking up steam.
Good luck collecting (deficiency) from a guy with a $60K income, who owes $500K on a mortgage.
Actually, total assets of US Banks are 2 trillion. For ever dollar loss, that is 10 dollars less they can lend. That is why, all the Helocs are getting cut. Lending from the Fed does not help - as it is still borrowed money. This is why the banks need to issue more stock.
Sivaram Velauthapillai
can't believe your bullish on the monolines. The banks that have risk sure did not want to give them any money. IMHO - lets patch let up, and check on them in 6 months - that worked for Bear Stearns.
And they are issuing. And they will likely issue even more because the alternative is RTC-II where the equity holders walk away with nothing. There is just too much debt to digest quickly.
The question is "Will the folks buying that stock & providing the fresh equity wait for RTC-II and then buy the same bank equity even cheaper that way?"
If they get a sniff RTC-II is coming you won't be able to feed bank shares to a dog even if you wrap them in bacon first.
I think that is why nobody - no one in the WH, Congress, Fed, presidential candidates - no one - has mentioned RTC-II as the end game.
My guess is we'll know its close to over when we go there. That is exactly what Roubini is talking about. I bet he's right on this point too.
Three things that each by themselves will cause at least a severe recession in the US. Anyone calling for anything less than a severe recession is making an ignorant assumption.
Energy prices.
Interest rates.
War.
People do not understand how intertwined these issues are.
Energy prices and interest rates are inversely related. A supply/demand balance change of US dollar denominated debt will cause interest rates to rise, unless the Fed decides to monetize. If they monetize, the value of the dollar will continue to fall sharply, causing imported energy prices to rise in relation. If they don't monetize, interest rates will rise. #1 or #2 is pretty much guaranteed at this point. In 1980-81 interest rates spiked very high. Even double digit interest rates would cause devastating debt deflation and default throughout the US economy.
Some think we can perpetually "manage" rates AND avoid a persistent devastating decline of the dollar. This idea is usually based on FAITH(belief without reason) that foreign nations will not allow a dollar collapse.
With no driver for wage growth, combined with reduced availability of debt growth, rising essential costs will absolutely eliminate the discretionary spending of everyone "below" the upper/middle class.
The real kicker is medium and long term energy production, and more specifically, the supply for export meeting the demand for import.
The reserve currency status of the dollar combined with our war machine IS the reason we've been able to use 25% of the worlds oil with 5% of the worlds population. While we have fundamental economic strengths that rival any nation on earth(arable land, energy production and other natural resources, human resources...etc), this no longer makes up ever the majority of our economy. There has been and continues to be a severe mis-allocation of resources. The pressure building in so many areas(total debt, external debt, commodity prices, ethics, government spending, distribution of wealth) is extremely unlikely to stay contained.
Schahrzad
only 500k morgage - in Orange County 500k got you 900 sq ft 50 year home on a small lot (Santa Ana).
Some of these homes sold for over 600k. (why not - 125% financing plus a 50k kickback from the owner - who hoo stick it to the bank im off to Mexico.) These homes now sell for 300k. (some after 2nd forclosure on same house - maybe have a 3rd and 4th before we're done). I doubt they are worth more than 100k - 1993 they sold for 40k.
I see in Kerrigan Ranch in Yorba Linda the Banks have taken back several homes now. These all had at least 1mil morgages - some over 2mil.
There is a short sale there now at 1.2mil - still too much - but 300k less than anyone else.
Although the second is titled "Net Exports", since the net is negative, it's the US trade deficit.
These charts correlate so tightly exactly because the Asian mercantilists have been pegging their currencies to the dollar at rates such as to, in essence, force us to buy their exports. In the case of China, they do this by the very straightforward method of the government explicitly setting the exchange rate and printing that number of yuan to exchange for as many dollars as their exporters bring to the bank. The Chinese government then has little choice but to lend those dollars back to us by buying Treasury and GSE securities.
This is basically a monstrous fraud being perpetrated on the people of China by their government, and has numerous pernicious effects.
Among the consequences of those effects was a stock market bubble comparable to the NASDAQ bubble, which is now disintegrating. The Shanghai Composite Index index has been falling with nary a rally for months, and (esp. in percentage rate terms) the decline is accelerating.
Today, China suffers from horrific pollution, an inflation rate much higher than ours, a popped stock bubble, and a variety of other problems.
Remember how quickly the communist regimes of Eastern Europe fell? And with how little warning?
I suspect that China is going to come apart at the seams in the same way the Soviet Union did. And when it does, the mechanisms that pump out the cheap exports to our shores and recycle the dollars back to us are going to break down. If Americans increase their saving rate back toward it's historic average level, the resulting decrease in our imports from China will increase the stresses on the political system there, and hasten the process.
Note that there can be a destructively regenerative feedback loop here -- falling American imports from China increase instability there, disrupting the recycling of dollars back to the US, causing US interest rates to rise, further curbing spending and increasing saving here, suppressing imports still more ...
The low interest rates that have driven American borrowing up and saving down have been a direct result of the Chinese government's having been able to lend its citizens savings to us at rates much lower than would have existed in a free market. If the China goes the way of Eastern Europe and Soviet Union, US interest rates are likely to soar -- the consequences are easy to imagine.
ORANGEMAN: "can't believe your bullish on the monolines. The banks that have risk sure did not want to give them any money. IMHO - lets patch let up, and check on them in 6 months - that worked for Bear Stearns."
Well, I'm a shareholder in Ambac and I still feel like there is a lot of irrational behaviour in the markets. Until I feel the irraitonal pricing is out of the market, I'm going to hold on. One example of irrational behaviour is how tax-emempt municipal bonds were trading at higher yields than taxable Treasuries (makes no sense whatsoever). Another example is how AAA-rated corporations like Berkshire Hathaway have seen their CDS spread triple over the last year even though Berkshire's probability of default hasn't increased 3x IMO. All sorts of weird stuff in auction rate securities. And so on. Ambac has its earnings call next week and we'll get an idea of how bad things are...
As for Bear Stearns, I don't know what happened there. There was some shady backroom stuff and maybe we'll know in 10 years when the parties disclose what was really happening (eg. there was massive shorting by using deeply out-of-the-money short-term put options). The FedRes bailout was also bizarre, with bondholders being made whole while shareholders got, well, $10/share. Apart from the high leverage (30x), I don't think there was anything wrong with it per se. Bear just fell victim to a run on the bank. Most of the rumours that ran the company into the ground were unsubstantiated (no one can still prove that their assets are bad) but that's how all bank runs are. If I"m not mistaken, Bear Stearns was the #1 player in mortgage derivatives so it was always vulnerable.
Rumours are having a huge impact on share prices right now (I suspect it's the norm in bear markets or during trend changes.) The monoline insurers were yanked up and down by rumours (the momentum players profitted immensely). But the biggest example is probably what is happening with the Icelandic banks. The Icelandic banks can easily collapse any minute, not because of large losses or anything (they avoided subprime), but because of rumours of insolvency.
So, I'm not sure what your point is about Bear Stearns. It didn't collapse because it defaulted on its debt; it didn't collapse because its assets had to be written down significantly (this could still have happened but we don't know); it didn't collapse because of fraud; it collapsed because of rumours that it was insolvent.
SHORT COURAGE: "Can anybody out there offer a good explanation for why this won't be corrected by stock prices moving downward over the coming year(s)? Why would the E part of the equation improve from record earnings levels when we are facing massive inflation in business inputs, a credit crunch and a retrenching consumer?"
Well, first of all, the P/E ratios you quoted are likely misleading (although some superbears here can make the case they are not). People like me believe that most of the bank writedowns on subprime losses are out of the way. There will still be future losses but they will be small. If you follow my thinking that these are one-time charges, then the P/E ratio is not as high as your number implies. The forward P/E is around 15 for S&P 500 and DJIA. Even if earnings decline, that is not excessive.
If you ignore these write-downs (or look at forward P/Es), the the US market is one of the cheapest out there. I don't think it is extremely cheap such that one can blindly buy the market, but I do think it is relatively more attractive than most of the world. The risk for investors (particularly foreign ones) is the potential for further US$ decline.
As for a stock market correction, I do think we will have a correction. But it is not going to be so bad. In fact, it will come nowhere near the 2000-2002 correction. In contrast, most bears here are implying that the correction is going to be bad and resemble the early 2000's.
(Of course, the superbears will argue that the writedowns will get bigger or that they will continue to happen for years (like Japan). In that case, the P/E ratio of around 20 is correct but I'm not in that camp)
CR observed in the main post that new home starts are falling below new home sales, and that this is cause for optimism. But I wonder whether the reason for this might be that builders have been able to slash prices far below what most owners of existing homes could afford to accept (due to having bought or refinanced at bubble prices), with the consequence that first-time buyers who in the past would have bought an existing home and enabled a move-up by the previous owner are now more often buying new homes.
I have commented many times in the past on the amazing number of very high-priced McMansions on the market here in the Chicago suburbs. Most of those on the market last summer are still there, and more are nearing completion.
If first-time buyers don't buy existing homes and enable move-ups, who is going to buy these McMansions?
The few that have sold in the last three months have gone for well under the original asking prices, and -- oh, the horror -- today I saw several "Reduced Price" add-ons to for-sale signs.
I believe that the falling prices of these McMansions are going to crush the market pricing structure beneath them. When the million-dollar homes go for $700k, the people who thought they owned $700k homes are going to find themselves owning $500k homes.
"One example of irrational behaviour is how tax-emempt municipal bonds were trading at higher yields than taxable Treasuries (makes no sense whatsoever)."
Why irrational??
Your thinking does not sound right to me and i am a bond ignoramus.
Treasuries are regarded as low risk, yields have to be compared to risk. Treasuries or government bonds have a face value that rises as yields decline and vica versa.
How is it irrational to believe municipal bonds will become valueless or impossible to sell as and when required?
Auction rate securities are the same thing.......mutton dressed up as lamb.
And your thinking on Iceland and other banks is just plain wrong. Iceland is this tiny island in the middle of nowhere and somehow they have convinced people to allow them to become bankers and retailers all over europe. But where did the money come from for all of that? Where did they get all that money??? From selling fish?? From hot pool and midnight sun tourism?? They just never did have it maybe. Is it just a rumour they never did have it??
We are looking at a massive bubble unwinding. Debt will crush the weak.
Roubini was fun for a while last year but I am kind of graduating from him. He seems to have come to the conclusion that his career as a "doom forecaster" is more important that his economics career. Maybe he thinks that because there was almost no economist that predicted things would get this bad, he needs to get on the bearish side of every economist now. Pretty soon he will be saying 10 trillion dollars in losses.
Bob Shiller is another one. I like him but he also has a new and more profitable career as the housing bubble guy. Predicting doom when you are the doom guy is usually enough to get you on TV every night and pay for your retirement.
"By way of analogy, a former district attorney told me that FBI detectives are not the brightest bulbs, but they often get their man by virtue of tenacity. I suspect with a regulator that belief in one's mandate and doggedness can do a lot to level what might otherwise appear to be a very uneven playing field.
But nevertheless accepting Buiter's observations as having some validity, I commented:
The issues you raise regarding how to attract and retain individuals who can stand up to traders and executives and avoid absorbing their charges mindset seems insurmountable, but let me offer a partial solution.
Women whove been in the industry.
I hate bringing up gender (the stereotyping is pervasive) but women have much lower odds of making it to the top and getting the same comp for their work as the boys and they are acutely aware of it. Many of the women I know who are in or have been in the industry dont buy into the culture because they are ever and always outsiders.
Reports from boards in the US and Australia say that women directors are far more inclined to do their homework and ask tough questions than men are. Boards are as clubby as you get. If women arent cowed in those settings, that suggests they might also stand their ground in regulatory roles (the horrific example of Sheila Bair notwithstanding).
Women whove performed well in the City or the Street often find it impossible to work out part-time positions when they want to have children, except in those rare admin jobs that require substantive knowledge. You can get good women on the cheap with well-designed mommie track roles. Regulators should sit up and take notice."
The writer of this post is choosing to ignore compounding facts:
- job loss/industrial consolidation
- higher taxes due to bailouts
- pending nationalization of mortgage industry that will send current account deficit and interest rates to the moon, killing the rest of the housing industry.
When the job loss accelerates this is when things get bad and compound to the negative quickly.
Defining recession
True story. I met a woman who said when younger she was so naive that when she went to doctor and told she was pregnant she laughed and said couldn't be. She admitted to being sexually active but told the doctor: I can't be pregnant because my Mother told me you had to be married to get pregnant and I am still single.
CR this economy is knocked up. No matter what mother Felstein says
I suggest that illegals, black economy workers and 1099 workers are a significant portion of our workforce and are at best undercounted.
I have commented many times in the past on the amazing number of very high-priced McMansions on the market here in the Chicago suburbs. Most of those on the market last summer are still there, and more are nearing completion.
The same exact thing is still going on all around Atlanta. It boggles the mind!
DaveJ writes:
Predicting doom when you are the doom guy is usually enough to get you on TV every night and pay for your retirement.
DaveJ | Homepage | 04.20.08 - 4:40 am | #
The same is true for perma bulls. They far outnumber the bears. Theyre on TV everyday! MSM is keeping the doomer rhetoric way down. IMO
This one is for mp and conjure, if they are watching...
Chrysler LLC's talks on a possible joint venture with China's Chery Automobile Co. are progressing but a China-made car being produced by the alliance is not ready for the U.S. market, Chrysler executives said Sunday.
The Chrysler/Chery "happy cat on wet linoleum" is moving closer. Remember what we (mp, conjure, and I) said: Chysler is China's entry into the US market. Bet on it.
Only good thing I can say about this part of the state is there are a bunch of small lakes around there full of panfish - they shouldn't starve. Bet the same can't be said of IE.
The Chrysler/Chery "happy cat on wet linoleum" is moving closer. Remember what we (mp, conjure, and I) said: Chysler is China's entry into the US market. Bet on it.
ipodius | 04.20.08 - 10:31 am | #
When I read articles like this I chuckle. I wonder if the hedgies running Chrysler have a clue what they are stepping into.
I did a group research paper & presentation on Chery for a class in my masters program (International Marketing)... that was two almost three years ago and we predicted a Chrysler-Cherry marriage then. That was before the break up
We also said it was a bad idea - it was an 1980s solution to a 20XX problem. Who wants more Yugos marked up with Chrysler margins?
There were five of us in the group - the four oldest & most experienced people in the class and one young foreign exchange student (a gunner - he signed on when he saw all us gray hairs gravitating together).
We made a full hour presentation - from Chery's perspective - on how they should enter the US market - all four Ps: product concepts, pricing, promotion & 'place' (channel).
We concluded a marriage with a weak US producer was the wrong way to go. They need organic growth even if it means go slower - follow the Sony & Toyota model from two decades ago, research the market yourself & don't trust the round-eyes to do it for you.
Again - we were challenged with the task of providing a business plan FOR Chery going into the US so we didn't look at if from Chrysler's perspective (needing a cheap product to 'rescue' them).
BTW - it was reviewed by a panel of VERY senior executives - marketing VPs from major Twin Cities companies. They all panned it - just ripped us to shreds. We defended very aggressively - backed every contention and challenge with research we had done (or personal experience - I had 20 plus years in automotive supply chain, another guy had almost 30 years automotive OEM product development).
Not ONE of them had a manufacturing or automotive background - IT, health care & consumer products. Basically mid-market financial IT products, pacemakers, pantyhose-n-toothpaste & consumer electronics. VERY heavy in non-durable retail & services.
Even the prof was lost - she was an adjunct with nothing but retail & int'l chain hotel/restaurant experience. A lot of that but nothing 'metal'.
We were so far over their head it wasn't even funny. The class was chuckling behind their breath.
At first the prof wanted to give us a 'B' on it - she just didn't know what to make of it. A couple of our team members went ballistic. I calmed them down, talked to her & after class submitted full set of appendices (basically the data & our 'work' as a stand alone addendum separate from the paper - I printed out the referenced articles so she didn't have to look anything up - it was all there on a platter for her). Almost 200 pages.
She read it and apologized the next week, gave us an A and told us she would NEVER include an automotive case topic in any of her classes ever again!!!
Chrysler should hire some of us before they get serious with Chery. This looks like world class FUBAR to me.
How do you explain the high p/e ~54 (and moving up) for RUT?
I don't think that small businesses have much international exposure, and I don't think they have huge savings either. They're usually the higher risk investments to justify their ration... but we're headed into a recession.
With a p/e that high, I think I'd rather invest in CDs with CountryWide first... in fact I did, and I hope I don't have to deal with the feds before August.
I'd been long international stocks and tech for the last 5 years, but in the last year I've pulled in everything except for my unhedged foreign treasuries fund (mostly euro/asian). It's doing well, and I hope that the interest rate/currency trade won't cause too much of a whipsaw. I expect the US market to have a Coyote E. moment and a lot of up and down which I don't have time to watch closely.
I just hope that my medium sized tech company doesn't get margins squeezed to much when the OEMs start to hurt. Most folks in the Si Valley still think things are just hunky (and fill the malls), but if you go south or central it looks terrifying.
Bear Stearns problems started last year when Merrill Lynch wanted to know how much its investment was worth. Bear Stearns told them don't ask. - They ask anyway, and 2 of Bears Stearns hedge funds blew up.
Its true Bears Stearns died of a bank run - but they were not allowed to go bankrupt. Bernie's testimony in congress says so - the financial system was at risk in a Bears Stearns Bankruptcy. Why?? There is still a lot of illiquid paper out there that no one knows how to price - and truefully no one wants to know the price. If we don't know the price they don't have to mark it down.
One advantage the monolines have is that when then pay out they pay out over time.
However, with housing crashing, i expect we will start having defaults on municipal bonds. I believe a city in San Matel? California has already defaulted. While times were good cities hired more people and raised salaries - now they don't have enough money.
Without raising masive amounts of capital i don't see how AMBAC and MBIA can survive. We will see.
The American people have long been well-fooled by the establishment, who keep real inflation-corrected asset market price histories well-out-of-sight. See first and last charts here:
Real Dow & Real Homes & Personal Saving & Debt Burden at Real Dow & Real Homes & Personal Saving & Debt Burden
The currently ongoing homes price drop has long been the easily inferrable future, IF you saw the real past!
There may be a contribution here to ... it will become socially acceptable for upside down middle class Americans to walk away from their homes.!
ShortCourage said: "...Can anybody out there offer a good explanation for why this won't be corrected by stock prices moving downward over the coming year(s)?..."
The SP500 has already gone through a correction of around -18.6% peak to trough. Your opinion may be that that's "not enough", but corrections like that are substantial and rare, pricing-in a lot of bad news and pessimism.
WORRIED: "Treasuries are regarded as low risk, yields have to be compared to risk. Treasuries or government bonds have a face value that rises as yields decline and vica versa. How is it irrational to believe municipal bonds will become valueless or impossible to sell as and when required? "
I'm not a bond expert either but municipal bonds rarely ever trade with a higher yield than US Treasuries. The reason is because muni bonds are generally tax-exempt while US Treasuries are taxed fully. Here is an article from USA Today that talked about this issue. Check out the table on the left and you'll see why muni bonds nearly almost always trade at a lower yield.
The reason muni bonds yield skyrocketed is not because of increasing defaults or anything like that. Instead, it was mainly due to the collapse of the monoline bond insurers and the collapse in investor appetitite hence leading to bizarre events.
"Auction rate securities are the same thing.......mutton dressed up as lamb. "
Well, ARS is very general and can consist of almost anything but many of the ARS securities are not risky. Their yields jumped, not because of imminent default risk, but because of the collapse of the monoline bond insurers, the withdrawl from the market of investment banks, and a general avoidance of any risk (even low risk). This is why you see people like Warren Buffett snapping up some of these ARS securities.
"And your thinking on Iceland and other banks is just plain wrong. Iceland is this tiny island in the middle of nowhere and somehow they have convinced people to allow them to become bankers and retailers all over europe. But where did the money come from for all of that? Where did they get all that money??? From selling fish?? From hot pool and midnight sun tourism?? They just never did have it maybe. Is it just a rumour they never did have it??"
We are looking at a massive bubble unwinding. Debt will crush the weak.
"There is nothing irrational about it."
What's irrational is not the debt unwinding but the prices in the market. Obviously you disagree with me and we won't know who is right while we are in the thick of things but let's come back one year from now and see if what these prices revert to what I perceive as rational or if they stay like they have (which means your claim that they are not irrational is correct)...
JOEBLO: "How do you explain the high p/e ~54 (and moving up) for RUT?
I don't think that small businesses have much international exposure, and I don't think they have huge savings either. They're usually the higher risk investments to justify their ration... but we're headed into a recession. With a p/e that high, I think I'd rather invest in CDs with CountryWide first... in fact I did, and I hope I don't have to deal with the feds before August."
I'm just a newbie investor but I wouldn't touch small-caps either. My impression is that small-caps get crushed during economic slowdowns but they also rise the most during booms.
Looking at the Russell 2000 P/E ratio doesn't really say much--unless you were thinking solely in small-caps. It's similar with other narrowly-focused indexes like the NASDAQ (mostly tech and biotech). The small-caps, as well as high growth stocks, tend to have high P/E ratios. S&P 500 is what I usually look at...
"I'd been long international stocks and tech for the last 5 years, but in the last year I've pulled in everything except for my unhedged foreign treasuries fund (mostly euro/asian). It's doing well, and I hope that the interest rate/currency trade won't cause too much of a whipsaw. I expect the US market to have a Coyote E. moment and a lot of up and down which I don't have time to watch closely."
People have been predicting the Coyote moment for decades. Some thought the 1987 crash was worse than the Great Depression and things were going to collapse.
I like your strategy of going to the sidelines last year. The risk for investors is that nearly all assets ran up substantially in the last 10 years. Whether you look at commodities, oil, gold, US treasuries, emerging market bonds, emerging market stocks, US stocks, art, collectibles, real estate, and so on, it all went up quite a bit. Part of this was due to the US$ decline (making everything priced in US$ go up), but part of it is also due to excessive risk taking. This may result in decline in nearly all assets.
Having said all that, I believe that US stocks have far less downside than foreign markets, or other asset classes (like oil or gold). US valuations are not high. They are not cheap either so I wouldn't blindly buy anything. Although this is an unfashionable view right now, foreign markets actually look far more vulnerable than the US markets even though all the problems seem to be in USA right now.
dryfly, thanks for the great story! i'm not sure it is the best for chery either, but it sure is a fantastic ending for cerebus, isn't it? i think that's what drove the deal...those firms don't enter something for the long haul, so who's their exit strategy? surely not to go public...enter chery.
on a side note, for my MBA we had to do a similar thing, but it was an industry profile. as a joke i said "hey, all this crap is boring, let's pick the adult entertainment industry" and i laughed. no one else in my group laughed. they thought it was brilliant. And so we did. and the rest is alumni legend at the school. Escpecially the beginning when a female member of the team gave the intro and said "and now we're going to start with a little video..." it was about cable/satellite communications much to the faculty's relief
orangeman: "One advantage the monolines have is that when then pay out they pay out over time.
However, with housing crashing, i expect we will start having defaults on municipal bonds. I believe a city in San Matel? California has already defaulted. While times were good cities hired more people and raised salaries - now they don't have enough money. Without raising masive amounts of capital i don't see how AMBAC and MBIA can survive. We will see."
The monolines can easily go bankrupt. This isn't the same as investing in Yahoo or Bank of America or something. The situation should be clear by the end of this year, when subprime default performance is better understood. If they take massive losses, they will go into run-off (similar to bankruptcy) and they are not going to raise capital. No one will put more money into them if the losses are massive.
The real question is 'will they?' One advantage they have, as you pointed out, is that they only pay out over time. Some of the CDO principal payments are due in 40 years so if they can stay alive as a going concern, the blow won't be so bad. Another advantage they have is that they tend to have legal rights to divert cash flows to the senior tranches. Of course, no one really knows what hte outcome will be. As Warren Buffet has remarked, you have to read up to 750,000 pages of document to understand one CDO-squared and I doubt anyone even read 1,000 pages.
You mention muncipal bond losses as being problematic in the future but I don't think that is a big concern since municipalities have means of avoiding big losses. Instead, there are other problems that are more worrying. In order they are:
CDO-squareds: Most of the losses so far will come from these.
HELOCs and CESes: This is a huge risk, particularly because recoveries can be zero (in contrast, a typical mortage backed security will have some positive value. Even if house prices drop 50%, there is still 50% of the value there.)
ABS of credit card loans, auto loans and student loans: The monolines, as well as the rating agencies, still think these ABS assets should perform OK but it remains to be seen. Student loans and auto loans will probably be ok but I'm not so sure about credit card loans.
Once the "tainted" monolines get over those three issues, I think they'll be fine... but those aren't trivial threats...
Dryfly - "My guess is Alberta is in a different position than say mfgrs along the 401 Corridor"
True, but there are early signs of more widespread troubles. Housing , which had been holding up reasonably well in most parts of Canada is showing signs of widespread declines in volume and increased supply.
As I recall, Canada is the number one destination for US exports.
There are many unknowns which will still have a say in determining the length of the recession. The economy will not heal easily and it will create a sense of desperation on the part of the government (more so than it has already). I wouldn't rule out geopolitical factors burgeoning the economic crisis into some kind of two headed albatross.
Harsh Realty writes:
Let's not forget that unlike the the case of the 1970's recession, these days the ability to pay a mortgage requires two wage earners. Therefore if the unemployment rate doubles, the foreclosure rate with quadruple.
Harsh Realty | 04.19.08 - 7:55 pm | #
HR: U r super smait guy/gal. Agree 400%!
anoider foist?
No disputing your analysis CR but my sense is Dr Doom may be a little closer to the actual loss levels, and it's a gut feeling.
If you factor in higher taxes, fuel price increases, food price increases and inflation in general and figure job losses etc etc, we have a far weaker general economy, which will compound bank losses and worsen the housing mess.
Agree w/ barely @ 5:30
The Fed actions, whether ultimately good or bad on balance, have diminished the value of the dollar and this is going to cost consumers in a way that is going to be hard to measure, but very real.
CR,
My view is the recession will be less than severe (with unemployment peaking at less than 8%), although I agree the effects - especially related to employment - will probably linger for some time.
You have presented this opinion a few times but I don't remember that you have explained why you think so. May I ask what you think would prevent this recession from being severe? Weak dollar? Stimulus plan? Inflation?
And why 8% of unemployment as a criterion? I'm sure you are aware that the methodology of counting the unemployment has changed and it's not directly comparable to the past. By the way, 8% of unemployment as it is measured in Europe would be quite mild for a recession.
Doesn't your tally of new home sales exclude, at least for the time being, the inevitable cancellations? If so, then new home sales might be below new home starts on the graph.
Oh, I forgot to mention, on Kudlow the new bullish topic being featured is the bank "WRITE UPS" that will be coming along in 2H08. LMAO!!
My jaw drops and hits the keyboard when these bozos get started. I wish I could get that delusional after finishing a bottle of Tequila.
I am more than 100% confident the banks are taking the write ups into account already by only making the most cheerful go-forward assumtions concerning the loss prospects.
I think its going to be a lot worse than what Roubini expects. Hes an optimist.
On the other hand, when I read the post more carefully, maybe not.
barely, first, I respect Roubini - he is very smart and willing to take out of consensus positions.
Roubini may be proven correct and the recession may be the worst since the Great Depression - there is no question there are seriously downside risks - however I just wanted to point out a few areas where he is probably too pessimistic on the data.
Even though I don't think the recession will be as deep as Roubini, I share his view that the subsequent recovery will probably be very sluggish.
Best Wishes.
I just sold my $1m+ house this week, in a nice part of the SF bay area. I can tell you that April sales are going to look really bad. Buyers are frozen out by the inability to finance, the move-up market really is starting to feel the pinch of the losses on the lower end, and everybody selling is taking a 5% haircut off of already reduced March prices, which were 15% off the peak. I'm predicting we will see another 5-10% drop by this summer.
Then, going to look at a rental, the poor broker had 5 applications in the first 30 minutes. Everybody wants to rent now.
The majority of people selling NEED to get out. The rest seem to be foreclosure related. That kind of motivated inventory is sure to accept price drops, accelerating this whole race to the bottom, which will only make things worse for everybody else.
I can also say that our personal 'consumer confidence' has been impacted by the sudden loss of $150k in equity over the last 12 months.
poszi, I've tried to explain the 8% number before (my definition of a severe recession is based on the rise in the unemployment from the trough to the peak). I'll post something again soon.
As far as the change in methodology for unemployment, this is one of those urban (uh, internet) myths. There has been a change for many of the alternative methods (that include underemployment), but the headline number is calculated as it always was. Here is the discussion
of the change.
Yes, I think more people are underemployed now than in earlier periods - but that is not the same as being unemployed.
Best Wishes.
Everybody wants to rent now.
Any hard data in support of this, e.g., rising rents?
I would like to second the thoughts of Poszi. The unemployment numbers we see are so 'cooked' that they don't have much at all to do with the actual percentage people without full time employment. It reminds me of inflation figures which exclude food and energy. If you exclude enough things, you can get happy numbers.
For the zillionth time, very few if any are going to be looking at deficiency judgments I've said and said it and will say it again, few deficiency judgments.
Lenders would have to figure out who to pursue and that one fact alone will discourage the judgments. Lenders would have to double or triple their servicers to have enough people to even begin chasing those with assets. And collecting is, I repeat HARD to impossible. People get really good at hiding assets.
CR, how do you explain the recent decline in the participation rate? My impression is that a non-trivial amount of the decline is associated with "phantom" unemployment.
Your right that a lender in California can seek a judicial foreclosure on a recourse loan and perhaps obtain a judgment against a borrower that walks away.
Let me know if it ever happens. I've been in the business a long time and I've never seen it done. I think the circumstances where the lender would see an upside to that strategy would be very rare. Still, we are in uncharted waters, so who knows?
CR, I think the government employment statistics are becoming increasingly irrelevant to the point that they may even become useless for comparison to a decade or more ago. Employment has shifted to self employment/1099ers and those numbers just don't get represented meaningfully. I think the government should just release income tax receipts and find a way to adjust those. It misses the tax cheats (under-the-table) and drug dealers, but they get missed anyway.
CR, on unemployment, consider that hours worked is currently at 33. That is the lowest ever at the start of a recession.
I think that means it will take a higher number of job losses to have a meaningful cost cutting impact for employers.
That justifies a high level of job losses and a high unemployment rate. Easily over 8%.
CR,
Thank you for the explanation on the criterion. I'd be happy to read your more detailed post about it in the future.
Actually, I was more interested in an answer to my first part of the post, i.e, what would prevent the economy from going into a severe recession. I'm asking because it would be important to observe these potential positive developments. Or you simply think that the current and future problems are not going to be bad enough for a severe recession and no particular positive developments are necessary?
Actually, BOTH Roubini and CR will likely prove to be too optimistic.
Niether factor the additional inventory and price declines coming from skyrocketing foreclosure rates. And we had record foreclosures in a strong economy.
Now that the economy is slowing and layoffs are being announced by the thousands at a crack, expect many many more defaults and houses put up for sale adding to record inventory and downward pricing pressure.
Then, as Americans begin to feel insecure in their jobs, you think they are going to be excieted about going out and buying houses?
Slowing demand and rapidly rising distressed inventory.... Not a healthy outlook.
As far as unemployment, we could be at 10% before the end of the summer.
We are facing a credit implosion...an event our nation has never experienced in memorable history as overall credit and money supply has been pretty much steadily expanded for the last 80 years.
In the last seven years, it exploded between toxic mortgages, HELOCs, Private Equity, and ridiculous CRE deals.
Probably 5-7 million jobs were created as a direct and indirect result of easy credit expansion over the past seven years....now that we are delveraging, losing the above number seems very likely.
We could be at 10% unemployment by the end of the summer, 15% by the end of the year if the deleveraging process continues.
For a leveraged person, business, or municipality, deleveraging is simply another word for bankruptcy in a declining asset environment. We gotta a lotta leverage right now.
FYI: For those interested, I made an mp3 of the interview for on-the-go listening:
http://drop.io/sacrealstats001
How can we measure "fear?" That might be the one component that tips the economy one way or the other.
CR,
Sorry, but I just couldn't leave this one alone.
"Yes, I think more people are underemployed now than in earlier periods - but that is not the same as being unemployed."
Actually, if may be exactly the same. If a person's monthly nut is $3000 dollars a month(let's say income was $3300), and income gets reduced to $2000, that person will soon be insolvent.
A person who is unemployed with no savings is also likely insolvent.
There doesn't seem to be much difference between insolvent and insolvent.
This is a big issue facing America right now and a stealth reason behind a growing number of foreclosures. This also may be a key reason why I think you are underestimating the likely severity of the upcoming recession/depression.
America got used to high wages and easy credit over the past seven years to maintain its lifestyle. Unfortunately when assets and wages decline, debt often stays the same. If you can't meet your nut because you are unemployed or underemployed, the result is exactly the same.....except for maybe which lawyer you are able to afford.
Some great points raised in this thread, particularly the sectoral changes in increased 1099 employment and the hours worked statistic...wondering out loud, is there a way to normalize unemployment to hours worked and/or some estimate of contractor proportion of the employeds?
Watching the interview, I felt that Roubini was holding back. I think that he was very cautious in what he said, because he is no longer 'on the fringe', he can't be as frank as he once was.
Not that he is lying, but he is certainly being careful in the way he words things. It seems to me that he thinks the case for an L shaped recession is becoming more compelling, if not likely. I mean, the IMF just put chances of a global recession at 25%, and we all know how loathe governmental type agencies are about mentioning the R-word. This could turn into a self reinforcing spiral.
The biggest question mark is government action. Politicians are not in the business of choosing the best economic solution, but the best political decision to get them re-elected. Let's pray we don't get another Smoot Hawley.
CR, refis are not always recourse.
In Arizona residential mortgage loans are non-recourse regardless of whether there has been a refinance. There were no published cases directly confirming this point last time I checked, but every lender lawyer and real estate lawyer I have talked to agrees that there is no recourse.
Let me know if you want more details on this, but the main point is that you really can't make generalizations covering all the states.
Until you figure out where solid middle class jobs are going to come from, I'll be in the depression camp.
We are going to have a depression, not a recession. Just because the great depression happened as a result of a specific set of circumstances, doesn't mean that a depression cannot occur via another set of circumstances. Consider that we still have a very severe credit crunch. There are synergistic effects of a severe economic slowdown and widespread insolvency or near incsolvency of consumers and banks. These are the necessary ingredients for a depression.
Lawyerliz, yes, Tanta has said the same thing many times. But people should be aware that Roubini's description was inaccurate for many situations.
albrt, everyone should check with their lawyer / tax accountant for their own situation. I don't know about Arizona.
All, I'll post something on employment. There are many many issues - and I agree unemployment is only part of the issue. But it's important to realize the headline number is being counted in a consistent manner.
poszi, I think you have to start from the other direction - what will cause a severe recession? The normal situation is real growth of close to 3% - we start with that and ask what is different each year. As I've been writing about endlessly, there are several drags on the economy now - from residential investment to less MEW (impacting consumer spending) to less business investment (especially in structures).
But does it add up to a severe recession? I don't think so - mostly because I don't see the job losses in manufacturing that we usually see in a severe downturn (exports have been strong because of the weak dollar). IF the rest of the world recouples that might impact exports - but then hopefully oil prices will fall sharply and cushion the downturn.
As I noted a few weeks ago, the worst case would happen if the global economy goes into recession AND oil prices don't fall. That would probably mean a severe recession.
No doubt there are downside risks. Nobody has a crystal ball - but it's still fun to try to predict the future!
Best to all.
CR, middle class people are already walking away. Look at the banks "earnings" reports. They say all credit scores are performing the same and they have growing delinquencies in the "prime" portfolio.
Pessimists unite.
"Staying Alive" by Doug Wakefield, FSU Editorial 04/18/2008
So far we have experienced fallouts of sub-prime. However, Alt-A problem is going to be bigger ( $ volume ) than sub-prime. So, barrage of foreclosure are going to accelerate.
YouTube - Mr Mortgage - HERE COMES THE ALT-A CRISIS 4-16-08
My apologies if this has already been posted. Warren Buffett seems to be in the long and deep camp according to a transcript from a Q&A session with students from Wharton:
How does the current turmoil stack up against past crises?
Buffett: "Well, that's hard to say. Every one has so many variables in it. But there's no question that this time there's extreme leveraging and in some cases the extreme prices of residential housing or buyouts. You've got $20 trillion of residential real estate and you've got $11 trillion of mortgages, and a lot of that does not have a problem, but a lot of it does. In 2006 you had $330 billion of cash taken out in mortgage refinancings in the United States. That's a hell of a lot - I mean, we talk about having $150 billion of stimulus now, but that was $330 billion of stimulus. And that's just from prime mortgages. That's not from subprime mortgages. So leveraging up was one hell of a stimulus for the economy."
Question: If that was one hell of a stimulus, do you think the $150 billion government stimulus plan will make an impact?
Buffett: "Well, it's $150 billion more than we'd have otherwise. But it's not like we haven't had stimulus. And then the simultaneous, more or less, LBO boom, which was called private equity this time. The abuses keep coming back - and the terms got terrible and all that. You've got a banking system that's hung up with lots of that. You've got a mortgage industry that's deleveraging, and it's going to be painful."
Question: The scenario you're describing suggests we're a long way from turning a corner.
Buffett: "I think so. I mean, it seems everybody says it'll be short and shallow, but it looks like it's just the opposite. You know, deleveraging by its nature takes a lot of time, a lot of pain. And the consequences kind of roll through in different ways. Now, I don't invest a dime based on macro forecasts, so I don't think people should sell stocks because of that. I also don't think they should buy stocks because of that."
The full article is here:
What Warren thinks... - Apr. 14, 2008
What I wonder about is the shadow banking system (read leverage) that has been building and building. Not sure what the deleveraging process will look like but my guess is not pretty.
Best,
PDX
The more I think about it, the worse it gets. We have a negative savings rate, rapidly diminsihing disposable income because of raging price increases in basic necessities and credit constrained by deleveraging. Aotos are already in deep recession. These conditions feed reductions in employment and the housing calamity is only just getting started, as lenders are only beginning to slash prices on FC inventory.
If FHA bailout scheme doesn't happen, or if it's seriously constrained, Roubini will turn out to be bullish.
i think that there are at least a couple of areas where unemployment is seriously under-measured.
the first one is all these real estate agents. I can't tell you how many of them have come in lately, talking about looking for work. None of them are 'unemployed'. they just aren't making any money and they have to pay the bills.
the other one is small business. We were told (in nj) that one of the reasons we weathered the last recession so well is all the jobs created by small business. I googled quickly and the governor said in 2004 that "More than 50% of all jobs come from small businesses. They are the unsung economic workhorse of New Jersey and they need our support to compete."
I can't tell you how many small business owners i've talked to lately are getting ready to go look for a job. This last couple of months has been a tsunami for us. We aren't currently counted as "unemployed" either. We just aren't making any money.
This group of people that can be "employed" but not making any money, has grown by leaps and bounds over the last 5 years as baby boomers have tried to figure out a way to stay working in a world that wants to hire kids.
Anybody i know could have told you in December that we are in a recession. All of these numbers report on the past. The present is that people are hiding out in their homes, trying not to spend a cent, worrying about their future. And small businesses are on a precipice.
Buffet is dead on....Agai
The market is already priced in a FHA bailout. The current proposal won't help because is requires the banks to write off at least 30% (hear as high as 50%) of the loan. That would decimate their balance sheet and tank the dollar. I think few people understand the current Fed bailout and assume that the Fed has bailed out the housing market.
My frustration, and this probably sounds odd, is that more people don't walk away from their homes more quickly. Trying to suck it up and hang onto your house just means more money you not paid to your lender and saved for the coming recession/depression.
Let's say you live in California, where statewide prices are dropping 5% per month, according to data between December and January posted on CR. What you could do is plot on a graph at what point you're in negative equity territory, and if it makes sense, just stop paying your mortgage TODAY and wait for the foreclosure tsunami to overtake your house. Take what was your mortgage payment and just dump it in the bubbling commodities market or something that gets a better return. To me, this makes sense as it drives the market to the bottom faster, and also gets interest rates near zero more quickly, also taking the dollar but ultimately making the US cheaper for investment. Comments anyone?
And helps the Dems in the election this November.
ZIRP-USA, that's not "waiting for the mortgage tsunami to overtake your house," it's drowning it yourself in the bathtub.
[Tim writes:
The market is already priced in a FHA bailout. The current proposal won't help because is requires the banks to write off at least 30% (hear as high as 50%) of the loan]
So far. I think we'll see something around, 15% and lenders are going to trip over their dicks to get a piece of that.
Zirp, we may see people come to that conclusion. I don't know if i've seen anyone address this, but who, exactly, ARE the people in this predicament?
It would seem to me that they are predominantly youngish, early career, early family, first-time homebuyers, right? The people in the worst mess bought in the last 2-3 years at the peak with nothing down, I would think.
At any rate, if i'm right, this is a group that grew up with the internet. They will understand their options a lot faster than most and news travels fast. If a couple of them stick their toes in the water and it works, it could spread like wildfire.
But, to make the FHA bailout work, there is the complication os second liens in a lagre number of distressed situations. I haven't heard a good explanation of how that can be solved.
albrt, everyone should check with their lawyer / tax accountant for their own situation.
I think CR has said this twice in this post, and many times before, and I concur.
Why am I thinking chipmunks?
Melidere-
Interesting that you seem to describe the Obama voter demographic.
I don't think it's limited to that though....prices in CA are down to 2004 levels already and things continue to get worse. We're looking at pricing approaching 1998-1999 levels in California, it seems to me, once you consider 10% unemployment and overshoot on the way down. That's a lot of buyers since then.
I don't have any numbers but here in California some of the walk-aways are not US citizens. They just go home.
Below is a story about Montery County housing.
Shaken foundation by By Zachary Stahl | Page 1 | April 17, 2008 | Monterey County Weekly | County foreclosures are exp
Pulling out of a recession requires new jobs. Where are they coming from?
Interesting point L. Moore. At what point is this going to lead to declining population growth? I myself am a California developer being recruited to Dubai, and the likelihood is reasonable that I'm going there. Am I the only one?
i was hearing reports 6-7 months ago that the planes for brasil and argentina were booked solid with people going home.
things are better there.
Masaccio-
I have a commodities trader friend that sees the 2 dollars to the euro by the summer. Was just in South Beach in Miami a few weeks ago and European tourist traffic is off the charts. At some point of dollar devaluation foreign investment will be sense....it's already happening. The question is where. Even Japan in the 90s foreign investment eventually made sense at a certain point.
10% unemployment come November and all hell will break loose. The Republicans will be run out of office wholesale.
I think the R's will work like crazy to prevent that, 10%, from happening.
Cr's prediction of a shallow recession might come true but I have a feeling that the recovery could be very drawn out. To many it will be a "jobless" recovery and will feel like a Depression to many.
I hope that does not come to pass. We all have skin in this game as we all have children and grandchildren who will pay the price even if we are comfortably fixed to weather the economic storm.
Let's not forget that unlike the the case of the 1970's recession, these days the ability to pay a mortgage requires two wage earners. Therefore if the unemployment rate doubles, the foreclosure rate with quadruple.
harsh, that is so true.
Dilbert-
One way or the other, the best thing for our grandkids is to get asset prices to trade back to fundamental values as soon as possible. That involves a significant percentages of Californians, for example, to walk away from their homes.
dilbert, you bring up a good point on the politics of it.
i don't see what the 'r's' can do to stop the 10%; the only other hope is to turn attention to conflict.
i agree zirp, in the aggregate, but each house is a particular.
this slope of this curve is already a LOT steeper than anything we've seen before, in both directions.
"Turn attention to conflict". LOL. I wonder if the investment banks have a war with Iran in their quant models. Think that might blow up a hedge fund or two?
Roubini is an optimist! It's only a matter of time before the wave of alt-a's starts defaulting at the current subprime levels.
We have already discussed that the #1 reason of walking away was not due to the type of loan; it was not having equity in your home. Duhhh. That's alt-a to the tee.
How many 100%, 80/20's, and option arm alt-a's were sold? C'mon let's be real. As more and more people walk away, and more and more people lose their homes, and prices drop more and more, and the media reports it more and more, it's going to get WORSE and WORSE.
Alt-a loans on average are much bigger loans than subprime loans and were sold in much greater numbers. That's a fact! The default rates are starting to go up but are still nowhere near where they will eventually end up. Wait till this year is over and everybody realizes that there is still NO END IN SIGHT.
Next year the shit will really hit the fan. Good luck Mr. or Mrs. President.
I was at an alumni event the other night with many senior management sorts. the dinner/cocktail conversation, of course, was around current financial and economic conditions and what we're seeing in our specific areas. we were all of the same opinion. We keep hearing about how bad it is, and yet when we look at our businesses, the numbers, and extrinsic factors, we're not seeing where the panic is.
None of us are planning massive job adjustments (anything any of us were doing was in the can last year), we're being cautious but not seeing the drop we'd expect if things were going to get severe, and we chuckle at our peers in financial services with the "now it's your turn in the barrel" sort of attitude.
I keep looking for numbers and indicators that set of the "severe" light, but i keep coming up with nothing, and most indicators surprise me to the upside. We all bitch about prices, but it's like the weather now "can you believe the price of x?" but we buy it anyhow. I'm with CR on this one. Sorry but in the real world I'm a part of, this is a business cycle correction with a deflation in housing. Sucks to be you if you're selling, everyone else I know is sitting tight until it blows over. And people are optimitic about that, and attitude steers these cycles more than you think.
Fair enough iPodius, but you're in technology, as I recall. Just about everyone I know in Southern California is in real estate/the building industry (that includes probably hundreds of professionals). And I basically just about don't know anyone who is working right now in SoCal. Lots of those people are underwater in their mortgages. Different view from my desk, iPodius.
Most of these deadbeat debtors can walk and send in jingle mail even if secondary financing was obtained. Many canny borrowers knew the inevitable was coming and made sufficient provision to hide, transfer, or swap assets. Then when they default, they become almost judgment proof. Lender seeking recovery is stuck with devalued property, maintenance and resale costs, and attorney fees for judgment. Although judgment can be renewed -- lender is incurring significant costs without any guaranteed payback. 7 years or BK later, borrower resumes with almost blank slate. Lender is assuming add'l cost and risk to recover pennies on dollar above deflated asset. Bad, Bad, worse -- no solution actually.
CR,
Thanks for the reply. I think your scenario is possible but the downside risks are very significant.
Why I think a deep recession is likely? Because the recent recovery was a fiction. I don't mean cooked statistics (although I believe the GDP deflator is conveniently understated by 0.5-1.0% which implies overstated real growth, see this paper (subscription required) for data) but that the growth was in unproductive (or even parasitic) parts of the economy that were supported only by growing indebtedness. The economy has to restructure before it can continue to grow. And restructuring means loss of jobs and loss of this unproductive GDP. However, the government (including Feds) would do anything to stop this restructuring from occurring, prolonging the downturn so a "lost decade" scenario (but no deep recession) is also possible.
@doom
You see clearly what other simply cannot or will not. There is still a great deal of fear to peer into the abyss.
I think the extent to which "jingle mail" is a realistic worry, as opposed to a talking point, is crucial. Do we have any feel for the number of mortgages that were not refinanced in California, for example?
Future conditions for getting judgements may be very different from past ones. I predict there will be "home relief" legislation with pro-lender, anti-jingler provisions, tucked into some inconspicuous corner. Of course, a lot depends on what happens in the next elections.
I agree with Roubini. All you have to do is watch this video to see Roubini is right:
YouTube - Mr Mortgage - HERE COMES THE ALT-A CRISIS 4-16-08
Go to the web site he refers to and READ THE DATA
"I think the extent to which "jingle mail" is a realistic worry, as opposed to a talking point, is crucial."
i agree.
have you seen this?
Mish's Global Economic Trend Analysis: WaMu Alt-A Pool Deteriorates Further
melidere
Thanks for the in-depth look at pools held by some banks. I'm surprised at the availability of this information given all the complaints about "transparency" I've heard.
and cr has pointed out that the banks are reporting this themselves,
Calculated Risk: Wachovia: Homeowners just Walking Away
they wouldn't be saying it out loud if they didn't have pretty serious evidence that they weren't going to be able to hide it very long.
Regarding the first argument, I would add that if foreclosures are adding increasingly and significantly more previously sold houses to the market, starts will be required to fall more than sales for a longer period. Inventories could still be rising!
The jump in Libor rates late this week could be signalling a major shift. My friends in Europe are very concerned that phase three of the credit crunch is unfolding. This was discussed earlier this week by this learned group and should be carefully watched next week. We still do not know what we do not know about the solvency of the big banks.
heavens, these guys could give you the address on every house in the pool, i suspect.
it's been a long time, but i think you can get a lot more detail than this.
melidere @ 8:21,
Some paranoids like myself think banks may be exaggerating the walk-away phenomenon either to shift blame or to create a climate of opinion favorable to new legislation, similar to the bankruptcy changes, but probably done in a more devious way.
"we're being cautious but not seeing the drop we'd expect if things were going to get severe"
That's part of the problem also going forward. Even those that will be OK (which I agree is most of America), are cautious and cutting back. They are definately not buying up real estate right now. Not in large numbers anyway. This makes things slowly worse. The people in trouble add bad statistics to the ecomomy quickly, the people OK and "cautious" don't contribute to growth like before.
EVERYONE I know fits into one of those 2 categories. "In trouble" or "cautious".
billy, i simply think that it is the industry's worst fear.
the system is simply not set up to handle all these foreclosures, and they magnify the losses horribly.
Just about everyone I know in Southern California is in real estate/the building industry (that includes probably hundreds of professionals).
Oh I'm sure that sector is horrible out there, and in the same place tech was in 2001. Here RE is very slow, but some people are doing very, very well that I know. And this group was cross-businesses...banking, tech, higher ed, retail, and commercial real estate management.
I think my point is that if you're CA-centric and non-tech, you might have a more pessimistic attitude than if you're not. I think everyone is like my neighbors. I actually live in a pretty working-class area and the house next door was sold over the winter. Young couple not even yet married. He said this was their first house, but they want to trade up (already!). I told them I bought 10 years ago when it was cheap so I stay. He has the, well it sucks now, but we'll wait a few years no big deal.
I think that's just the attitude with most people. I'm not so gloom and doom anymore, but not a grizzly bear. More like a Yogi bear.
In orange county it seems the banks were trying to hold on the price last year. This year they have started to cut brutally. The price on many REO's were cut 10% in Feb, and another 10% in March. I keep an eye on Kerigan Ranch in Yorba Linda -
the first REO just hit the market there lists for 1.2m - over 300k less than any other home listed in the area.
which isn't to say they won't take the angle you're referring to and run with it if it works for them!
Monterey City seems to be still parting as if it will never end. Homes sales there are keeping the county average up to silly levels. Next door in Salinas the town is quietly desperate. Down in Greenfield I looked at a 4 bedroon/1200 sf place for 500k; three empty houses next to it and US101 with its traffic just yards away. Nah, I can wait.
Meanwhile, the veggies and grapes in the fields are growing fine with plenty of water this year. Do I expect nice salads and wine?
With gas between $4.05 and 4.70 along 101 those on demand delivery trucks just aren't moving like they used to. Come summer we could have veggies rotting in the fields. Gas, housing, food--all in crisis. What to do? Buy Google and Citi?
This year they have started to cut brutally. The price on many REO's were cut 10% in Feb, and another 10% in March.
If they are doing that, that's the most positive sign that there is. Deep cuts mean quicker price corrections. That will help establish a floor as REOs are always seen as cheaper than regular non-stressed sales.
If the gov't really wants to do something to relieve the real estate market, they would pass legislation to make it more difficult to walk away from a mortgage.
The new law: Walk away from a mortgage and the bank will garnish your wages.
The result, jingle mail drops by 80% and the market has a chance to absorb the inventory.
Just curious; Does anybody particpating today in this blog live in a neighborhood where the average price of a home there is at 3 times the average family income of your neighborhood?
I dare to guess not many. That means that prices still have to come down much more. The days of stated income, no ratio, no doc, BS loans are over. It is full doc now.
Buying a home will revert back to the norm. Buyers need a down payment, good credit and income documentation.
Prices will also revert back to the norm . Roughly 3 times incomes. A little more if rates are low, a little less if rates are high.
Mine is at least 6 to 8 times still.
Im not sure why you are so optimistic CR. You mention before that housing is not as inflated here as in the Japanese bubble. I don't think that is the whole picture. What was total debt for Japan. residential, comercial, credit card, auto's. I doubt Japan had the credit card debt we do now. And oh yes the Derivative Market at that time was ah.. 0. And now is 60 trillion. Considering the derivative market is based on debt, a 10% loss here would wipe out our banking system.
This was why bear sterns was not allowed to go bankrupt - in bankruptcy its assets would be sold and we would now have a price for a lot of paper that everyone would then get to mark to market.
i think this whole mess would be swifter and less painful if you made it easier for them to walk away.
are we really going to tell a young couple and their two little ones that they have to pay for the rest of their lives an extra 200,000 or 300,000 more than their house is worth because the fed didn't do their job and let this all careen out of control?
the very first step we took (taking away the tax consequences of a short sale) was in exactly the opposite direction.
Come summer we could have veggies rotting in the fields. Gas, housing, food--all in crisis. What to do?
I hate to say this LMoore but I went shopping today at Whole Foods. Baby spinich 499/lb (organic!), grape tomates 1.99, strawberries 2.99, blueberries 2.99, mushrooms 2.99...doesn't seem things are rotting, and that isn't expensive, and they tend to be very expensive.
I think the entire supply chain gets squeezed here, as the consumer just won't buy if things are too pricey. So the hit is going to be felt by many. This is why I don't understand current stock prices. Earnings are just going to suck because profit is going to be severely reduced to keep the consumer from shutting down.
lol
next thing you know he's going to commiserate with us on the price of arugula!
night all
well melidere, i'm just stating pricing facts right now. i'm sorry they don't fit what you think. i'm just tired of half-baked posts on how we're headed into a depression because things are so bad. there's the reality i saw today, perhaps yours is different.
Dr Doom has an enviable prediction record, especially vs the pollyannas. What is your prediction record, CR?
Does anybody particpating today in this blog live in a neighborhood where the average price of a home there is at 3 times the average family income of your neighborhood?
Here's some more reality: median prices in my neighborhood are slightly under 4x demographic income as recetly published. So I don't think that's bubbleicious now, and almost in line with historic norm here. Then again, as I've said, we peaked in August 2005, so we've fallen quite a bit since then. I expect the bottom to be somewhere in the q4/q1 2009 timeframe here, and for it to bump along there for a while.
Thanks Chris, but technically I'm not a Doctor
yes, i see the banks have started cutting the price on REO's - some of these houses are now 40% to 50% off peak. Does not mean they are cheap.
Na, IMHO still have at least another 50% to cut from current price.
Hey, wasn't Bear Stearns cheap at $30.
There was some chinese guy who bought 150,000 shares at $60 to $78.
Told his broker to buy 200,000 at $30. Only, got 100,000 (poor guy). On Monday, broker told him to pay up.
He refuesd - so they liquidated his account at $6.00 a share.
Some paranoids like myself think banks may be exaggerating the walk-away phenomenon either to shift blame or to create a climate of opinion favorable to new legislation, similar to the bankruptcy changes, but probably done in a more devious way.
Seeing how conveniently the bankruptcy laws were changed just at the point that this whole thing started to rear its ugly head, I really don't think it's paranoid thinking that they may be setting up for more punitive steps for those who cannot afford their mortgages.
Dr Doom has an enviable prediction record
Really? Last time I checked he called a recession in q4 2006, then q1 to q2 2007 and we're still not sure we're even in one now (I will grant it's most likely and if so probably started in Dec 2007). His current call is for 1T in write-downs, which I think may be close to correct. But that's across the board.
So I'm not sure his record is all that amazing.
O Rose, thou art sick.
The invisible worm,
That flies in the night
In the howling storm:
Has found out thy bed
Of crimson joy:
And his dark secret love
Does thy life destroy.
(Wm Blake)
ipidius, than you are right to feel OK about everything because your not at risk. Your housing market may come down a little bit more, but nothing to send a panic. Other areas still have a way to go. Like mine.
I don't think anything near a depression is coming. But I do think real estate in many areas (not yours) has a lot to fall yet. And because of that, people are cautious and will spend less going forward.
Like you (I think), I'm surprised at the stock market. The E will come down. It just has to. I can't see it any other way. But yet the market is going up?
Viewing with alarm: I don't know much about LIBOR, but the Banker's Association itself seems to be saying something's wrong. I agree with (I think) CR that the motive for lying to the LIBOR data-gatherers is unclear.
Begin{tinhat} I would have thought a single LIBOR liar would not have a big influence on the overall number, which starts some of us thinking in terms of conspiracies. End{tinhat}
I use my wife as a recession indicator. Starting last Nov. the malls started cutting prices. She told me prices have not been like this sine 98.
Mal, nice Blake
Oh and, btw, if you read the current statements of some of the Fed governors this week, they had increased inflation watch emphasis. I saw an article that finally stated what I have been saying here. When the Fed meeting this month "No rate cut for you!"
Watch what happens to the dollar if they don't cut.
No cut? Dollar up. Gold and commodities down. Stock market up because it will go up no matter what they do.
One more excursion into tinhattery: I suspect there are a lot of lameduck legislators (state and federal) who have nothing to lose by giving their banker friends one more favor before getting kicked out.
Like you (I think), I'm surprised at the stock market. The E will come down. It just has to. I can't see it any other way. But yet the market is going up?
doom, there must be tons of fools out there because i couldn't agree more! the E HAS to come down and will. My point about prices (which, of couse as usual, won't be read in the spirit intended because I'm not stocking food in my basement or predicting collapse) was to say...wow. Someone is taking it in the shorts if these are the prices because they are NOT higher than last year.
So like orangeman just said, the pricing pressure is fierce. That means E is going to be weak, as everyone has to accept lower prices to keep the comsumer buying anything.
Overseas, they're talking tougher on inflation. If we continue to cut, the dollar will get pummeled.
Even so, I'll guess a quarter at this next meeting. Why disapoint?
Stock market up because it will go up no matter what they do.
I made a post a while ago to the wingnuttery segment (which is why i am so endeared to them) as to what the Fed was up to. I actually said they'd cut to 2, but i think i was wrong and they're going to hold this time. If you read BB at all, i think he cut fast and deep (as his theory says) and now they'll pause. The dollar be damned in the short run because it helped exports and kept domestic production from falling off a cliff.
The price to pay was higher commodities and energy, but that will be short term (which is why they don't factor that into their inflation analysis). Once they stop cutting, oil and commodities, and glod will drop. As the eurozone now is facing downside pressure, no matter what Trichet says, he'll be forced to cut a little before q4. That will also provide a bump to the dollar.
So I'd be very cautious with euros, the dollar, glod and commodities now. If the Fed raises before q4, you cuold be on the very wrong side of these.
So Ipodius - What's your track record on your predictions?
Right now, outsider, I'd say i'm closer to the truth than Roubini is. I said, shallow but longish recession lasting slightly longer than 2 quarters, inflation-adjusted house prices (here) drop by 28%, the Fed cuts to 2 and no more. My stock market call for the nadir is 11,200. Fundamentals tell me that's where is should be, but hey, I could be wrong as lately it seems to have disconneted to reality. I also said BOE will cut (it has) and ECB will also cut by Q4 but perhaps as early as Q3. Unemployment rate no more than 7.2% and inflation rate will approach or crest at 5%.
Manufacturing here will begin to increase (it has) driven by the weak dollar, but also driven by transportation costs, as we begin to make more things closer to the point of sale.
And no charge for any of this. My contribution to lower inflation
"So I'd be very cautious with euros, the dollar, glod and commodities now. If the Fed raises before q4, you cuold be on the very wrong side of these."
I am chicken shit right now. I am in NOTHING. 100% cash through short term CD's and Fidelity MM accounts.
I have always liked the stock market, but I sold all my positions in the spring last year. Not perfect timing but I'll take it. I think it's too late for commodities on the short term. Maybe if there is a pullback, it may be good to get in because China, India, and emerging markets are just going to continue to grow long term.
But everything is kinda scary right now. Nothing makes sense like it use to. I'll sit back, wait for some dust to settle and get back in. Maybe I'll miss out on a bit of opportunity, but hey, I can sleep good at night now.
ORANGEMAN: "Im not sure why you are so optimistic CR. You mention before that housing is not as inflated here as in the Japanese bubble. I don't think that is the whole picture. What was total debt for Japan. residential, comercial, credit card, auto's. I doubt Japan had the credit card debt we do now. And oh yes the Derivative Market at that time was ah.. 0. And now is 60 trillion. Considering the derivative market is based on debt, a 10% loss here would wipe out our banking system. "
Not all debt is the same. Consider credit card debt. A lot of people who use credit cards and pay on time will have a positive debt. For example, if I charge $1000 every month on a credit card but pay it off on time, the debt will still be $1000. Similarly, some auto loan debt is simply an alternative way of paying for a car. Thirty years ago, people paid, say, $30,000 at once for a car. Now they pay, say, $1000 per month on a lease or some sort of financing scheme.
The problem won't be with total debt but the number of people who can't afford to pay back the debt. That number is going to be small portion of all the credit card, auto loan, student loan, and other, debt. Housing is somewhat different from all these other debt because the amount involved tends to be very large. Lower income people like me can receive far greater leverage on housing debt than anything else. It would be almost impossible for me to borrow $200,000 to buy a car, pay for school, furniture, or whatever, but one can easily get that amount for a housing mortgage. The fact that the mortgage is large also means that any small changes in interest rates, personal incomes, inflation, taxes, etc, adversely affect the housing debt.
The point I'm making is that I--I must note I'm more bullish than most here--really cannot see USA anywhere near where Japan was in 1989. No doubt USA has gone through a massive credit bubble, but the Japanese real estate and stock market bubbles were massive!
As for derivatives, it's a zero-sum game. The only real risk is counterparty risk. The notional amount quoted for derivatives comes nowhere near real potential losses. For example, say I enter into a $1 million derivatives contract with you based on changes in differences between Canadian interest rates and American rates. It is unlikely that either of us would realize a $1m loss unless interest rates go to infinity or something (depending on what we are actually doing). Similarly, let's say I write for you a 5 year CDS (credit default swap) on an ExxonMobil bond for $1 million. It is unlikely for me to take loss equal to the notional value ($1 million). Yes, XOM could go bankrupt and default on its bonds in the next 5 years but highly unlikely. Would you really consider the $1m XOM CDS swap to be risky or not? I would say it's not risky at all. If you add in the likelihood of me hedging my contract or the possibility of taking ownership of the defaulted bond and seizing XOM's assets, the total losses are unlikely to be anywhere near $1m.
I'm not denying that there is room for massive problems, but the risk is nowhere near what the notional derivatives amount indicates.
I really don't think the walk away scenario is nearly as pronounced as one might think merely based on negative equity.
Hope springs eternal, hope for a rebound in valuations, hope for being able to hang on. Its when hope is lost that the walk away scenario begins to play out. It's when you're $10-20k behind on the payments and no way to ever catch up that you begin to think about walking away.
It's when you lose your job and the missed payments start. At that point you're into foreclosure, then, when there is no more option, you leave after the sheriff nails the notice on the front door. (trust me, I 'know' this one from a previous downturn)
One doesn't just walk because the appraisal is 'upside down', no, one walks when hope is lost... even today.
Since according to every IB CEO the credit crunch is just about over, isn't it time to end the new Treasury swap lending facilities?
doom you are a very wise man. i am being very cautious right now too. mp said he has started to buy cautiously in financials. i'm sure he is right, but i am still not. i have sold any euro position, backed into mostly cash, and have some holdings, but they are mostly what i know very well.
as i've said, you don't have to buy at the bottom, or sell near the top. just close. stick to that, and you'll do very, very well.
My bet (age 29) is on the pessimistic side (big depression) of many the "older" analysts. There is simply a huge disconect (that they do not see or feel) between the wages and assets of the young and those lucky enough to buy assets or enter the work force a decade or two ago. There is no way in hell most people under thirty can afford property without no doc/no down loans. Thank fully those are gone. And reality will hit very quickly. Now understand that 7 out of 10 people I graduated college with work in construction or real estate. Some did extremely well but ninety percent have been living off of debt. Now they will lose their jobs as well. Simply put, they were and are screwed and will be the puzzle piece that pulls the whole ponzi scheme down to levels that most older boomers can not bear to think about. This is going to deflate very fast and probably won't recalibrate until young nurses, med techs, and doctors transfer oldsters last bits of wealth to their own pockets.
The US economy is not going to be strong for a few years; but I don't think it will be as disastrous as people imply. The main reason, I think, will be because corporate balance sheets are strong.
I remember reading somewhere recently that, going into this recession, corporate balance sheets are stronger than they were in 2000 or 1989 (the prior recessions). Except for those LBO buyout deals, and perpetually struggling industries (e.g. US autos), very few corporations are saddled with large debt. In fact, stock buybacks over the last few years have been very large.
Strong corporate balance sheets is one reason people like me, who are more optimistic (although I think the stock market will likely be flat to negative for the next 2+ years), think that the economy won't be as badly hit as the housing meltdown would imply. In particular, companies will likely be able to (i) absorb more margin erosion (either due to increased commodity prices or weak sales growth), (ii) avoid laying off as many workers as they have in the past.
Another quirk that may help USA is that it is entering a slowdown with a weakening currency. Although US$ asset holders are hurt, the weakening dollar actually makes USA more competitive. Certain industries that have been weak over the last few years should see a huge boost. Areas like tourism and manufacturing should see a big rebound. In the past, manufacturing generally gets clobbered during slowdowns but now it can actually be the opposite. No doubt demand will be weak in autos, industrials, etc, but the weak currency should shield a lot of these companies. Certain industries that export heavily, such as the tech industry, should see a huge boost too. For example, Google just reported strong profit growth this week mainly due to international growth (more than 50% of GOOG's income is foreign). Microsoft, Intel, Texas Instruments, Oracle, et al, should also do quite well.
Having said all that, the world economy will slow down. We can be certain about this because growth has been way too strong in the last few years. That means things won't be as rosy as in the past. But that's not what any of us here seem to be talking about. Instead, most here, including me, are talking about how severe any weakness will be. I don't think it will be too bad (except for those directly tied to the housing industry).
"Meanwhile, the veggies and grapes in the fields are growing fine with plenty of water this year. Do I expect nice salads and wine?
With gas between $4.05 and 4.70 along 101 those on demand delivery trucks just aren't moving like they used to. Come summer we could have veggies rotting in the fields."
Maybe not veggies -- maybe wine grapes. Drove down 101 from the Salinas Valley this summer and saw massive new vineyards from San Ardo on down -- the only agriculture I did see. Who's going to drink that in tough times.
Was talking to a co-worker who works remotely from SLO County; she said they've torn up a lot of row crops to plant those vineyards over the last few years. A good idea at the time for the individual, not so good for society as a whole, as it turns out. Lot of that going around.
I am going to have to disagree with CR. This bust is, I fear, will be FAR deeper than anything in living memory. The core problem is that we have an unprecedented use of negative amortization, option arm, and 100% financed loans than ever before. As a consequence, there are a far higher percentage of home-owners who have no cushion if they should experience any kind of financial hardship.
The issue isn't whether "walking away" becomes socially acceptable for people who are under-water. Neither is the problem with "resets". The problem is that we have a hitherto unknown percentage of fragile home-owners with no equity.
Depreciation just adds to the dillemma by increasing the numbers of home-owners without equity. It's a vicious circle (i.e. the greater the deprecation, the greater the number of people who have no equity, leading to higher numbers of foreclosurs, etc, etc, etc).
What makes our current economic malaise all the more glaring is the sheer scale of the problem, which spans the entire globe! The synchronized nature of our global credit bubble, which had led to booms from Shanghai to Dublin, Saskatoon, Madrid and Seattle, is leading to a systemic credit contraction. With everyone hurting, there won't be anyone left to bail us out.
Anyone with any debt, particularly real-estate mortagages, is going to pray that deflation doesn't strike, and perhaps concoct any number of muddle-through scenarios to comfort themselves, even to the point of self-delusion. About two years ago, the billionaire investor and mutual-fund founder Sir John Templeton predicted that US residential real estate would decline 90% in value from the top. That makes Roubini look like an optimist.
I have to agree with Roubini on this. I have a friend who just finally got foreclosed on a couple of weeks ago in Florida. She hadnt made any payments for six months. It took the bank a long time to get around to foreclosing on her. Its going to get a lot worse before it gets better. I believe people will find it easier and easier to walk away. The more people who do it make it easier IMO. I also believe some people will run up all their available credit since their going to go bust anyway.
Also, I dont think many will consult a lawyer or tax consultant.
I travel back and forth from my place in GA & Fl often and dont see any changes in the home market anytime soon! I agree with Roubini that prices will have to come way down (50% +) in some markets. People are still reluctant to face reality. Employment will get much worse IMO.
Does anybody particpating today in this blog live in a neighborhood where the average price of a home there is at 3 times the average family income of your neighborhood?
Doom -- I do. And I pretty sure I am no where near ipodius either. My neighborhood runs at 3-4 times income (not average income though) and perhaps more shocking, nearly every household is just one income (although most were two when they bought the house, then shifted when kids were born).
Our area was hit hard by the 2001 tech bust and never really boomed, we were flat for several years and then had about 5% appreciation over the last 2-3 years. Now the RE market is going flat again. It is worse in the expanding fringe suburbs but nothing like CA, NV, GA, MI, OH, etc.
If employment holds steady we are okay (crossing fingers!)
PDX
thanks for the buffett article
in my opinion here is the money quote..
(ie nobody knows how this plays out.)
"It's very, very, very hard to regulate people. If I were appointed a new regulator - if you gave me 100 of the smartest people you can imagine to work for me, and every day I got the positions from the biggest institutions, all their derivative positions, all their stock positions and currency positions, I wouldn't be able to tell you how they were doing. It's very, very hard to regulate when you get into very complex instruments where you've got hundreds of counterparties. The counterparty behavior and risk was a big part of why the Treasury and the Fed felt that they had to move in over a weekend at Bear Stearns. And I think they were right to do it, incidentally. Nobody knew what would be unleashed when you had thousands of counterparties with, I read someplace, contracts with a $14 trillion notional value. Those people would have tried to unwind all those contracts if there had been a bankruptcy. What that would have done to the markets, what that would have done to other counterparties in turn - it gets very, very complicated. So regulating is an important part of the system. The efficacy of it is really tough."
ipodius, I don't question your current food prices. I'm talking about 3-4 months out when gas prices peak in the summer.
Obviously, food prices, especially fresh foods, are directly effected by transportation costs and intensive labor. If labor can't afford to buy gas to get to the fields then some fields won't get picked. They don't make much money. Migrants balance their costs against the benefits of working here. Most just go home when the negatives override the positives. No one really knows what that break point is. Housing is a big issue for them and Salinas was ranked two years ago as one of the the least affordable cities in the US (based on housing costs compared to income averages). Farmers in this area are on tight schedules for harvesting and if labor becomes scarce because of local cost of living then some fields won't get picked. It's a messy business with food always left in the feilds. The question is, will it be 40 acres or 400k?
Re: Buffett
I am a big fan of Buffett but he isn't generally good with macro calls. He also doesn't make many macro calls. In any case, I read Buffett's quote as being mildly bearish but I don't see him saying anything as bearish as most people here.
For instance, he pointed out that $150 billion of stimulus, which came from housing, would be gone. That will cause pain for portion of the economy but the US GDP is $13 trillion. The lost stimulus is only around 1.5% of GDP.
Sivaram, true on balance sheets, but what's on your balance sheet only helps you weather a storm to some degree and, in the end, it's the big E that counts. What this means is that corps don't have to slash as much going into this, and can be cautious without dumping large amounts of staff or severely curtailing expenses IF the contraction doesn't last more than 2 quarters.
This, however, does not justify at all current P/E ratios in the market. Forward earning are going to suck as pricing pressure is high. Read deeply the current crop of quarterlies. What do you see? Do you see fincancial arbitrage making the numbers look better? I do. The weak dollar is propping up earnings so how good are the fundamentals underneath? You tell me.
Also Citi is still in big doodoo. I've said this for a while, look for the sale of divisions soon. Also some further consolidation will take place. Do you think JPM raised capital just for it's ratios?
The current market feels like March - April of 2001. Dropped strongly stabilized for a few months then went into the tank all summer. Every day for months as I drove by the brokerage sign flashing -100; -50; -120; -10 .... you get the picture.
If the market cratered when the dollar was strong, debt was low, and the budget balanced, what could possibly be in store with the dollar weak, debt suffocating, and banana republic size budget deficit. In 2001, the trade defict with China was about -83 Billion compared to - 300+ Billion per year now.
I will be pleasantly surprised if Roubini misses by much.
sweet bob, more twobuckchuck
ipodius | 04.19.08 - 9:16 pm |
As bad as everyone talks about jobs it is kind of amazing about my bosses son. He sent a resume to a company Wed,they called him Thurs,he is flying in for the interview on Monday.
When he passes the welding test and drug test he was told he could start the next day...And the starting hourly rate was pretty inpressive !!!
Chris
"seriously writes:
sweet bob, more twobuckchuck"
Sure; let's put wine on federal price supports and ship the excess to the school lunch program. Hire out-of-work sommeliers to run the wine education program at evry high school. Yee-hah.
Chris, I think that for some people, they see what they want to see. You're in a very non-tech business, and you're seeing labor opportunities. dryfly has been stating that he's seeing it too for a while. I'm seeing tech opportunities up the ying-yang and i'm not talking about all highly skilled programming jobs either, i'm talking blue-collar IT jobs and management jobs too.
I think it is very situational, and also very regional. If you're in the auto-biz, you're probalby sucking wind, the same as retail and RE. But if you're in light and industrial manufacturing, repair, IT, or software, you're seeing good times.
One thing that could save the average joe is a little thing called bankruptcy. My friend just did this and waved good bye to about $35,000. Takes about twenty minutes. The bankruptcy lawyer was apparently the town hero and had opened five offices in the last six months and gone from a one or two day waiting list to three months.
Could people escaping high credit card debt and high mortage payments free up enough cash to save the economy from total collapse?
Have we just seen a major transfer of wealth from banks to debt escapees in the form of possesions bought (cars, computers, student loan repayment, etc..) with debt and kept after bankruptcy and forclose?
Beach Bum, BK has always been a way out, and frankly it is a good one. We have a system that doesn't penalize risk too greatly, and that's a great boom to innovation. If you fail, you can pick yourself up, dust youself off, and start over.
The new BK law made it a little harder to do this by the chapt 13 provision, but a savvy lawyer can probably get you around it. In a lot of cases it makes sense. And frankly if CC companies and idiot banks were willing to lend you into BK then no one should feel like they shouldn't be able to admit they screwed up and file by taking advantage of the offers. Do it while you're young and can recover. The losses will be borne by those who invested in these entities, as it should.
slid, you too are lucky. Prices of homes in your area should hold up. I think there are places where prices are only about 3 times incomes. But they are in the minority. Nationwide, most prices had shot up from 2001 to 2006 much more than their neighborhood incomes.
It did that mainly because income didn't matter back then. We had the stated loans, etc. But now that income matters again, we have to revert to the mean. There is still more pain to come nationwide. And just like the upsides, the downsides tend to overshoot.
"I don't think it will be too bad (except for those directly tied to the housing industry)"
Sivaram Velauthapillai
Siv, I think a large percentage of the consumer spending done over the last half decade was due to the housing boom. Buy on debt, cash out refi to pay debt, buy more on debt. Equity lines of credit, etc. The MEW is closed. This will directly affect some industries, and the rest will be "indirectly" affected. The large companies with huge overseas exposure should do fine with our tanking dollar, but most employment nationwide is done by the smaller companies which depend on the American consumer. The American consumer is nervous and cutting back.
ipodius writes:
We all bitch about prices, but it's like the weather now "can you believe the price of x?" but we buy it anyhow.
We have no choice. It all comes from the set amount that people earn. Therefore its simple to understand there is less to spend on non-discressionary items. Joe6pac is really getting kicked in the teeth when he or she is down. Cant be a good thing!
Double dip recession the one now with phony half ass recovery in an election year followed by the real deal starting in Q4 with light bulb coming on of tax increases with new administration.
This is not just a reaction to your comments on Mr.Roubini but also for your comment that cancellation rates have peaked.
Under normal circumstances, you might be correct that at some point in time, one must assess the prospect that we are well past the worst point.
Now, in the last six months, information has come on the stagnation of incomes for median families, on the relentless rise in gasoline price and on the fact that average hourly earnings adjusted for inflation has been negative since 2005.
Moreover, we know that reported inflation understates real inflation faced by consumers with all the hedonistic adjustment, substitution effects, etc.
Then, there is the news on the shrinking of aggregate hours worked and hence wage earnings.
All this confirm that the reliance on MEW for current consumption in the recent cycle (2002-2007) must have been much much greater than in the past which standard OLS regression models might not be capturing.
On top of that, if food and energy prices linger at current levels (they do not have to rise further), then EM economies would be facing a much sharper slowdown than is currently anticipated. In fact, EM growth estimates have not been revised since food prices began to spike up and oil held up well above USD100.00 per barrel.
We do not know if the original assumptions that led to more cheery estimates of EM growth have been revised and new estimates of growth arrived at.
So, hopes that weak dollar would lead to a export-led recovery for America have to be tempered.
Both stubborn pessimism of Mr. Roubini and your stubborn optimism that things would be better (noted in many recent posts) have to acknowledge a bigger-than-usual zone of uncertainty and risks.
roubini to optimistic...???
roubini too pessimistic...???
i bet all hell is gonna break loose
excerpt from prudent bear' weekly summary...
April 15 Financial Times (Aline van Duyn and Michael Mackenzie):
Tranche warfare has broken out in the $450bn market at the heart of the credit crunch as hard-hit investors scrap over the pools of debts that make up -so-called collateralised debt obligations. Some investors in the differently rated and ranked slices of CDOs - known as tranches - have taken advantage of the - little-noticed terms in the -structuring of such instruments to seize control of the assets and cut off payments to other debt-holders. Such conflicts have resulted in lawsuits as investors question the rights of others, such as senior noteholders who supposedly hold the least risky tranche of a CDO The fights between tranche owners is another example of how little attention investors paid to the exact terms and conditions in the rush to complete CDO deals. It also highlights the potential for stress in the structured finance market, as ratings downgrades of assets backing bonds in turn trigger more losses or ratings downgrades.
ok
that's not enuf for ya
try this
April 15 Financial Times (Carola Hoyos and Javier Blas): Russian oil production has peaked, one of the countrys top energy executives has warned, fueling concerns that the worlds biggest oil producers cannot keep up with rampant Asian demand Leonid Fedun, vice-president of Lukoil, Russias largest independent oil company, told the Financial Times he believed last years Russian oil production of about 10m barrels a day was the highest he would see in his lifetime.
We stopped at a new pastry shop after dinner yesterday. I asked the owner about the price of flour. His reply was "It has doubled in the past 7 months." We talked about it, the impact, etc. His eyes told me what we both left unsaid. That he was screwed.
There will be no linear progression in what is coming.
ok
you're right
i'm just crying wolf...this recession thing..just a speedbump
April 17 Bloomberg (Dale Crofts): ArcelorMittal, the worlds largest steelmaker, plans to boost prices on some steel shipments in the U.S. by $250 a ton, or about 33% of current prices, to recoup surging costs for energy and iron ore.
First?
Not.
CR - this is the first time I am completely, 180 degrees, away from your view.
You say " ruthless default ".
Up to 20 % of the sales have been for spec purposes for the credit. I suspect a good deal of % were on "what-ever" reasons...The reality is if you are under water 20-30% YOU WILL walk away. It simply does not make sense to stay. At any cost.
There is a huge difference between this recession and any we've ever lived through in the U.S. I keep trying to illuminate it, but CR is just dense to understanding it.
There are growing numbers of people now who have just fallen out of the employment scene, into a social services safety net. It's mind-boggling how many. It doesn't mean all of these people don't work. But their medical care, counseling, rehabs, shelters, food stamps, job training, job placement, medication etc. etc. is very costly, and the largest part of the cost falls on state/local govt.
CR, just answer one basic question. We had an excellent post here yesterday that showed how many states are running deficits of 5-10% of annual budgets. You think this is just gonna turn around on a dime? Those states will get solvent against real fast?
You think MBIA and Ambac are just gonna bounce back to solvency?
Jefferson County, Alabama, is gonna find some magic way to pay off their sewer bonds and swap losses?
As I've pointed out since last summer, CR has been consistently too optimistic about the trade deficit. He thought oil would moderate along with import prices. He was dead wrong. The trade deficit just keeps on getting uglier.
The biggest problem with the "slow recovery" scenario is that there's too much debt in the U.S. to tolerate slow recovery. Slow recovery just means more defaults and bank failures. Unless the U.S. economy can find a miracle and return to sustained 3% growth, we're gonna have catastrophic debt defaults and bank failures. FDIC, PGGC, and state insurance guaranty funds are already starting to teeter.
Wake up, CR, and read your own blog.
Did rich take over where Jas left off?
Mt, CLF
O.K.,
Just for fun before I call it quits...Waterfront lot that is currently listed on the MLS for 59,900. Who is the poor bastard eating a 132k loss ??? Why no one less than Suntrust. The loss will end up around 180k-185k when it is all said and done. Prices are falling back to 2000-2001 for the selling properties right now. And now the purchase history per the county of the property...The 100.00 are transfers.
7 /1986 $6,400
8 /2001 $9,000
5 /2003 $100
6 /2004 $78,800
5 /2005 $192,000
1 /2008 $100 - Return to Suntrust.
How many more should I post ???
Chris
CR, I appreciate your comment about the unemployment number. I was wondering about that.
Corporate balance sheets of a couple of hundred huge multinational U.S.-based companies are strong.
Below that, corporate balance sheets are a debt-infested nightmare. When I start digging into the balance sheets of mid-cap and small-cap companies, I'm just shocked to see how they leveraged up debt over the past five years, often by buying back stock to pump earnings or by making strange debt-enabled acquisitions, and often by issuing convertible debt with warrants or resets that effectively puts an invisible cap on stock price upside. In a lot of these companies, if the stock price ever were to appreciate 20% from the current price, the shares outstanding would nearly double.
Don't buy the "strong corporate balance sheet" myth without looking closer at the filings.
Roubini is an optimist. Both housing and the economy will fare much worse than he thinks.
I can't disagree on this one more.
Low interest debt to the hilt is an enormous long term problem.
Anybody who mentions the possiblity of deficiency judgements is either a fool or disingenuous. Can you imagine the expense with just trying to figure out who might have the assets to pursue? Get real.
I went to Calloway's Garden Nursery today - a big mistake to go there on the weekend. It was packed and people were spending money like mad. I bought $175 of roses, bulbs, bone meal, wire hanging basket, etc. Calloway's has a guarantee on its plants should they not survive which is often the case in the Texas heat. Prices are about double other local nurseries and Home Depot in the event you bring a plant back you have already paid for the second plant. The quality is excellent of course at those prices. Calloway's is closing all of its San Antonio area stores. It was a mad house today with Spring in full bloom.
My mom (who runs a baked goods concern) was telling me about the price of:
Flour TRIPLING in the last 12 months.
Crisco DOUBLING in the last 12 months.
Bottom line: Only the lucky (ipodius) will eat pie. The rest of us pleabs shall dine on crumbs...
Remember in November!
Many years ago I worked for BoA in the Special Assets Department. You are right about California and non-recourse purchase money.
During my trip to Spring training at Vero Beach, this year, I was shocked to see the huge number of homes for sale in Florida. Even in the better areas of the barrier islands, from the Cape Canaveral area toward Port St. Lucie, it seemed every third home had a for sale shingle. Inland, I noticed areas where every home or condo on a block was for sale. Very sobering.
Areas of California's "Inland Empire" area are also highly distressed but SFR in the coastal area around Santa Monica and the South Bay here in CA are not as pressured as Florida.
I was told by a fellow baseball fan that Florida voters recently passed a real property tax change to a system with similarities to CA's Prop 13 (but for primary residents only). I wonder if this is correct and if so, to what degree is this change impacting property sales in Florida?
Thanks
oil and energy is at the source of all we do all we produce.
from the oil drum
"ROME (Rome) - Record oil of $117 a barrel calls for a demand response and a supply response, but for now there is little to stop prices heading still higher, the deputy executive director of the International Energy Agency (IEA) said on Saturday."
i guess with or without a recession...food , energy, steel, all going up thru the roof.
guess it's time for the boomers to re price retirement income expectations.
nothing short of an international energy "Manhattan project" will save the 1st world, and the emerging 2nd world...from a third world existence.
our current leadership is greedy, old school, tired, and clueless.
we are in deep deep trouble.
ipodius: "Sivaram, true on balance sheets, but what's on your balance sheet only helps you weather a storm to some degree and, in the end, it's the big E that counts. What this means is that corps don't have to slash as much going into this, and can be cautious without dumping large amounts of staff or severely curtailing expenses IF the contraction doesn't last more than 2 quarters."
I don't even know if we'll get a contraction for 2 quarters. We may just see very low growth (say 0.5%). The whole housing-induced slowdown has been unfolding for almost a full year now yet the economy is just hitting zero growth now. Corporate earnings still look OK. That's why the stock market has rallied lately. Who knows how things will hold up later in the year but so far things aren't as disastrous as some here would have you believe.
ipodius: "This, however, does not justify at all current P/E ratios in the market."
I suspect that we'll see a sidways bear market. Although P/Es aren't low, they aren't high either (Buffett has said something similar). There isn't a stock market bubble (a point missed by some who equate the present situation to Japan).
There is also the potential for some earnings quirks later in the year or next year. I am not as bearish on the subprime losses as many and think the dumb fair value accounting pushed by the accounts can result in mark-to-market gains in the future. Although I wouldn't invest based on such a speculation (it is not certain), I can see it happening. The accounting profession has been pushing hard to use misleading indices like the markit indices. I personally don't think the losses implied by most of the marks will be borne by the firms.
ipodius: " Forward earning are going to suck as pricing pressure is high. "
The market is discounting a lot of the negatives. This isn't the case for all sectors but it certainly is true for some sectors like financials and consumer discretionary. Many financial companies, not to mention homebuilders, have been rallying on their earnings.
My guess is that the ones that will get clobbered in the future are materials and energy. If commodity prices drop (they tend to during economic slowdowns) watch out.
ipodius: "Also Citi is still in big doodoo. I've said this for a while, look for the sale of divisions soon. "
I don't know much about Citigroup but it doesn't seem to be that badly off (but then again this is coming from some guy who is bullish on the monoline bond insurers
). The new CEO seems to have no intention of selling any major assets and the market seemed satisfied with their earnings call this week. Things may change over the next 6 months but most of the negative issues seem to disclosed.
Every one I talk with is complaining about escalating food and gasoline prices. Meanwhile, natural gas prices have doubled since August, so those utilities will eventually ask for a rate increase. Refineries are only running at 81% capacity and the driving season is just weeks away! Sheesh, I hope they have enough time to ramp up. An active hurricane season in the gulf would certainly cause oil to spike even further. Add in rising unemployment,wage stagnation, and continuing foreclosures, I think we're in for a long, hot summer mixed with a little social acrimony.
I have to say, these slow-news weekends are extremely boring. Sure wish there was another IB, monoline, or homebuilder to speculate on going tits up. We get new and existing home sales data this coming week and the FOMC rate cut decision, but other than that, not much economic news aside from earnings.
Meanwhile, China's market index is off 50%, but investors elsewhere don't seem concerned.
It's the potential for non-linear responses to unforeseen systemic shock that bothers me - while things are stretched a bit tightly - and the longer it drags on without resolution...
Sniglet writes:
I am going to have to disagree with CR. The core problem is that we have an unprecedented use of negative amortization, option arm, and 100% financed loans than ever before. As a consequence, there are a far higher percentage of home-owners who have no cushion if they should experience any kind of financial hardship.
And the Option Arms or pick-a-payment resets don't peak until mid-2010, but could reset sooner if the balance hits a 115% LTV trigger which would be devastating. Oh, and check out the action in the 10-year bond, interest rates are moving up. This housing slump could drag on for a few years.
Yahoo! 404 - Page Not Found
commodity bull or bust?
Well Billy Shears,
The ninth largest bank in the U.S. is about to go tits up and you are bored? Read the introduction to NCC's 10-K and look at the balance sheet.
They need about $5b for the writedowns but the market cap is now only $5b. So either the stockholders get diluted by half this week or the regulators let them operate as a zombie bank with inadequate capital to take future hits. The dividend will surely be eliminated, but I don't believe that the regulators will make them mark their residential mortgages to market either, thus the slow bleed.
Sivaram Velauthapillai wrote:
I don't know much about Citigroup but it doesn't seem to be that badly off (but then again this is coming from some guy who is bullish on the monoline bond insurers
). The new CEO seems to have no intention of selling any major assets and the market seemed satisfied with their earnings call this week. Things may change over the next 6 months but most of the negative issues seem to disclosed.
Sivaram Velauthapillai | Homepage | 04.19.08 - 11:37 pm | #
from yahoo news:
Citigroup to cut 9,000 jobs after posting loss
By Jonathan Stempel and Dan Wilchins Fri Apr 18, 9:20 AM ET
NEW YORK (Reuters) - Citigroup Inc (C.N) posted its second straight quarterly loss on Friday, hurt by more than $16 billion of write-downs and costs related to credit losses, and said it will cut another 9,000 jobs.
Though the $5.11 billion first-quarter loss was larger than expected, analysts and investors expressed optimism that the largest U.S. bank and its new chief executive, Vikram Pandit, were taking necessary steps to move past credit problems and drive down costs.
Citigroup shares rose $2.22, or 9.2 percent, to $26.25 in premarket electronic trading."
why?...just because.
Oh I forgot about NCC. I don't suppose the Ben will rush in to save them though.
I was looking at the annual report of a small southern bank the other day. Heavy concentration of CRE and construction loans in their report. Other assets were residential mortgages. Next year, at the latest, will begin reading more and more about the mid to smaller banks failing. I think the head of the FDIC already projected 100 bank failures in the next two years. That's probably bullish for the market somehow.
Sivaram,
Maybe I've been reading too many bearish blogs like this one, but you sound like you've been watching too much CNBC...
Earnings have been at record highs in recent years (perhaps a result of a historic credit bubble, no?), and yet the current S&P500 PE ratio of 21 is 50% above the historic average.
With a recession in progress, and a popping credit bubble, earnings will decline in a big way going forward. Frankly, any bright spots in earnings coming out now (CAT, IBM, GOOG) has been largely helped by overseas business and currency exchange gains.
How will overseas earnings look a year from now after collapsing consumer spending (US, UK, and other debt-soaked nations) hits the producing nations with a lag?
Oh yeah, and have you looked at the trend in capital expenditures lately?
Sorry, but we've got serious earnings issues going forward.
And to think 5 years of excess can be wiped out in 2 quarters is pretty absurd.
"We are not happy with our financial results this quarter, although they are not completely unexpected given the assets we hold," Mr. Pandit said
from the WSJ re CITIgroup
Citigroup Posts $5.1 Billion Loss - WSJ.com
"Profits in all four of Citigroup's main business lines fell sharply from a year ago, and executives warned that the tough times are likely to drag into next year. Ratings firms put Citigroup's debt on watch for downgrades, but the company's shares rose 4.5%, or $1.08, to $25.11 in 4 p.m. New York Stock Exchange composite trading, as investors expressed relief the numbers weren't worse.
Clyde,
I remember reading a mutual fund report last year and they had a section where they highlighted a few stocks they own and why they were poised for growth. One stock they really liked was NCC, but their logic didn't seem justified at the time, given what was already going on in housing. Honestly, after reading this blog for two years as well as The Big Picture and others, I don't know why anyone thought these kind of banks would not get hurt.
Don't expect other countries to be purchasing your exports to bail you out. Canada, particulary Ontario, where 80% of it's manufacturing was exported to the US is hooped. The spring realestate market is dead with buyers waiting for the big price drop to happen. Manufacturing is dead with unemployment rising. I would expect imports from the US to drop instead of rise, a lot fewer purchases from (CAT, IBM, GOOG) . The way I see it is the US MEW from the last 5-6 years has fueled the entire World economy. Now we are seeing the World wide inflation,that resulted from all that money, eat itself up. The developing economies will have better things to spend their money on than US exports, like food.
"... As far as the change in methodology for unemployment, this is one of those urban (uh, internet) myths. ..."
Here is a good article on the subject:
The Index of Missing Economic Indicators; The Unemployment Myth - The New York Times
"... The government reported that annual unemployment during this recession peaked at only around 6 percent, compared with more than 7 percent in 1992 and more than 9 percent in 1982. But the unemployment rate has been low only because government programs, especially Social Security disability, have effectively been buying people off the unemployment rolls and reclassifying them as ''not in the labor force.''
In other words, the government has cooked the books. It has been a more subtle manipulation than the one during the Reagan administration, when people serving in the military were reclassified from ''not in the labor force'' to ''employed'' in order to reduce the unemployment rate. Nonetheless, the impact has been the same.
Research by the economists David Autor at the Massachusetts Institute of Technology and Mark Duggan at the University of Maryland shows that once Congress began loosening the standards to qualify for disability payments in the late 1980's and early 1990's, people who would normally be counted as unemployed started moving in record numbers into the disability system -- a kind of invisible unemployment. Almost all of the increase came from hard-to-verify disabilities like back pain and mental disorders. As the rolls swelled, the meaning of the official unemployment rate changed as millions of people were left out.
By the end of the 1990's boom, this invisible unemployment seemed to have stabilized. With the arrival of this recession, it has exploded. From 1999 to 2003, applications for disability payments rose more than 50 percent and the number of people enrolled has grown by one million. Therefore, if you correctly accounted for all of these people, the peak unemployment rate in this recession would have probably pushed 8 percent. ..."
The recent NY Times article by Floyd Norris is also worth a look as it highlights "THE unemployment rate is low. The jobless rate is high". The change of the treatment by the military mentioned in the prior article is quite obvious in the second chart (check out rate of change in 1984) referred to there.
OFF THE CHARTS; Many More Are Jobless Than Are Unemployed - NY Times
The following chart shows the relationship between labor force participation rate and the unemployment rate and you can clearly see that it broke down around 1997 with the unemployment rate still falling significantly but the participation rate peaking. Something isnt quite right as the studies and articles mentioned above point out.
http://farm3.static.flickr.com/2320/2426350749_0e637ac942_o.png
To accept the present unemployment rate as is and actually use it unquestioned in comparisons is in my opinion dangerous and likely leads to the wrong conclusions.
My prior post on the subject:
HaloScan.com - Comments
I am not so good on the details but there may be some facts here:
A few people are saying the consumer can stop spending and there will be a few difficult years but i cannot yet see how a consumer even mildly slowing down spending will not create total disaster?
Somehow by some means the consumer must keep spending to avoid a very nasty contraction.
What i dont get is how people can be cruisy about the idea of a recession when the driver to get out of recession is not really there for some years to come.
The economy is too consumer based to even allow a recession to develope.
Once you have one starting what stops it?
Worried
$600 checks from GWB.........
Just curious; Does anybody particpating today in this blog live in a neighborhood where the average price of a home there is at 3 times the average family income of your neighborhood?
I do. median home costs about $150K in my area and median family income is about $50K... plus or minus a little.
And there are a bunch for sale which tells me the ratio will be dropping more.
2/3s of the land mass of the country fits that description (its just that no one lives there).
I used to, but the city where I live prices went up 58% from last year, we are so screwed...........
What i dont get is how people can be cruisy about the idea of a recession when the driver to get out of recession is not really there for some years to come. Once you have one starting what stops it?
Worried | Homepage | 04.20.08 - 12:26 am | #
That's why I don't think this will be a V-shaped or even a U-shaped recession. What will be the catalyst? Certainly not low rates for home purchases. Maybe some massive government sponsored works program for rebuilding the infrastructure...which would blow a huge whole in the budget. But then again, 'deficits don't matter.
Worried,
I think some people think that the developing nations will pick up the slack and keep us all prosperous, as evidenced by IBM/GOOG/CAT earnings.
But I wonder how China, etc. will do that when their source of revenues (mad consumer spending by the US/UK, etc..) has fallen off a cliff? They have massive overcapacity already...
Shortcourage
Any International US company reporting earnings in USD that is not now reporting huge profit increases must be in alot of trouble. The Dollar index fell off a cliff.
But the main benefit to the US is the profits for the owners. The production is some place else.
So is it part of the solution or just more of the problem?
The planktum have to eat too.
Don't expect other countries to be purchasing your exports to bail you out. Canada, particulary Ontario, where 80% of it's manufacturing was exported to the US is hooped. The spring realestate market is dead with buyers waiting for the big price drop to happen.
My guess is Alberta is in a different position than say mfgrs along the 401 Corridor.
Fact is exports are up some... and growing... but import substitution (using domestic sources here instead of importing those supplies) is increasing A LOT. That is part of the reason why it is so slow on along the 401... automotive is slow in general & imported supplies from high cost countries used in automotive is even slower.
I posted this info yesterday....
the major indices are now sporting these healthy PE ratios:
Dow = 58
Russell2K = 54
Nasdaq = 29
S&P500 = 22
Source is the WSJ(
:
public...mod=mdc_h_usshl
404 Not Found
Can anybody out there offer a good explanation for why this won't be corrected by stock prices moving downward over the coming year(s)?
Why would the E part of the equation improve from record earnings levels when we are facing massive inflation in business inputs, a credit crunch and a retrenching consumer?
Seriously, I'm looking for a good expanation of how it can happen.
Worried,
Just to be clear, I don't subscribe to the BRIC-consumers-and-US-exports-will-save-us theory.
Many assume that the recession is not going to be severe since we are not going to lose many jobs in manufacturing. For this same reason this is going to be depression.
Why?
These peoples thinking is still based on pre 80s period where the manufacturing jobs had huge share of total jobs. Over the 90s and 21s century we lost millions of jobs in manufacturing and came to the state where manufacturing now only contributes less than 25% of overall jobs in US. So, there are not much jobs to be lost in manufacturing and hence the recession is not severe. But they all forget the other side of coin which is now more than 75% of jobs in service sectors. If everyone look at which part of this service sector is adding jobs still is nothing but just only the federal government. All other parts of service sector are losing jobs now and in over all, the service sector is losing jobs. The federal government will start losing jobs once deficit spikes and revenue is shrinking which I think will happen coming financial year.
The loss in service sector jobs will not stop till the people have money to spend on the service sectors. This means that till the individuals debt problem is worked out which is going to take many years. That means the service sector jobs are going to bleed for coming many years.
The recession/depression is not going to turn around till the service sectors works out its fat.
Regarding GDP growth limping, people have to remember that the delta between reporting of reduced inflation from true inflation is counted as GDP growth. When people look back in few years, the growth that we are seeing today is nothing but manipulated inflation counted as GDP growth.
Sivaram Velauthapillai
you miss the point - total debt is an issue. The economy can not recover if the banks can not lend. That is what happen in Japan - Japan still has problems because they still have bad debt from their bubble. Also, if the derivative market implodes - many large banks will go under. Citi, Wachovia ...
Probably lose some major brokerages too.
Just to be clear, I don't subscribe to the BRIC-consumers-and-US-exports-will-save-us theory.
ShortCourage | 04.20.08 - 12:57 am | #
I don't think anyone sees mfg saving us - but import substitution & export definitely can soften the blow.
I've said it a thousand times here - MOM has backed it up too - few sectors have multipliers like mfg. For every person tightening a bolt there are ten in the office doing paperwork, design, etc. A small up tick in mfg results in a large up tick in mfg driven service activity.
It won't be enough to make GDP go positive - it could very well be enough to make this recession not terribly unusual (i.e. not depression).
On a personal level I would still plan for the worst and hope for the not-so-bad though - I'd rather be 'surprised' to the up side, not the down side.
Roubini is too optimistic.
In CA, banks will take losses for years to come, and $ 1 tril for US banks is nothing. Each foreclosure is another loss for a bank. We don't even know what their assets ARE!
I personally know 3 people walking away, and this is picking up steam.
Good luck collecting (deficiency) from a guy with a $60K income, who owes $500K on a mortgage.
Roubini is right.
I wish I had an ounce of CR and ipodius' optimism.
Actually, total assets of US Banks are 2 trillion. For ever dollar loss, that is 10 dollars less they can lend. That is why, all the Helocs are getting cut. Lending from the Fed does not help - as it is still borrowed money. This is why the banks need to issue more stock.
Sivaram Velauthapillai
can't believe your bullish on the monolines. The banks that have risk sure did not want to give them any money. IMHO - lets patch let up, and check on them in 6 months - that worked for Bear Stearns.
This is why the banks need to issue more stock.
And they are issuing. And they will likely issue even more because the alternative is RTC-II where the equity holders walk away with nothing. There is just too much debt to digest quickly.
The question is "Will the folks buying that stock & providing the fresh equity wait for RTC-II and then buy the same bank equity even cheaper that way?"
If they get a sniff RTC-II is coming you won't be able to feed bank shares to a dog even if you wrap them in bacon first.
I think that is why nobody - no one in the WH, Congress, Fed, presidential candidates - no one - has mentioned RTC-II as the end game.
My guess is we'll know its close to over when we go there. That is exactly what Roubini is talking about. I bet he's right on this point too.
Three things that each by themselves will cause at least a severe recession in the US. Anyone calling for anything less than a severe recession is making an ignorant assumption.
People do not understand how intertwined these issues are.
Energy prices and interest rates are inversely related. A supply/demand balance change of US dollar denominated debt will cause interest rates to rise, unless the Fed decides to monetize. If they monetize, the value of the dollar will continue to fall sharply, causing imported energy prices to rise in relation. If they don't monetize, interest rates will rise. #1 or #2 is pretty much guaranteed at this point. In 1980-81 interest rates spiked very high. Even double digit interest rates would cause devastating debt deflation and default throughout the US economy.
Some think we can perpetually "manage" rates AND avoid a persistent devastating decline of the dollar. This idea is usually based on FAITH(belief without reason) that foreign nations will not allow a dollar collapse.
With no driver for wage growth, combined with reduced availability of debt growth, rising essential costs will absolutely eliminate the discretionary spending of everyone "below" the upper/middle class.
The real kicker is medium and long term energy production, and more specifically, the supply for export meeting the demand for import.
The reserve currency status of the dollar combined with our war machine IS the reason we've been able to use 25% of the worlds oil with 5% of the worlds population. While we have fundamental economic strengths that rival any nation on earth(arable land, energy production and other natural resources, human resources...etc), this no longer makes up ever the majority of our economy. There has been and continues to be a severe mis-allocation of resources. The pressure building in so many areas(total debt, external debt, commodity prices, ethics, government spending, distribution of wealth) is extremely unlikely to stay contained.
Schahrzad
only 500k morgage - in Orange County 500k got you 900 sq ft 50 year home on a small lot (Santa Ana).
Some of these homes sold for over 600k. (why not - 125% financing plus a 50k kickback from the owner - who hoo stick it to the bank im off to Mexico.) These homes now sell for 300k. (some after 2nd forclosure on same house - maybe have a 3rd and 4th before we're done). I doubt they are worth more than 100k - 1993 they sold for 40k.
I see in Kerrigan Ranch in Yorba Linda the Banks have taken back several homes now. These all had at least 1mil morgages - some over 2mil.
There is a short sale there now at 1.2mil - still too much - but 300k less than anyone else.
A key factor will be what happens with China. Note the correlation of the following two charts:
Personal saving as a percentage of disposable personal income
Net exports of goods and services
Although the second is titled "Net Exports", since the net is negative, it's the US trade deficit.
These charts correlate so tightly exactly because the Asian mercantilists have been pegging their currencies to the dollar at rates such as to, in essence, force us to buy their exports. In the case of China, they do this by the very straightforward method of the government explicitly setting the exchange rate and printing that number of yuan to exchange for as many dollars as their exporters bring to the bank. The Chinese government then has little choice but to lend those dollars back to us by buying Treasury and GSE securities.
This is basically a monstrous fraud being perpetrated on the people of China by their government, and has numerous pernicious effects.
Among the consequences of those effects was a stock market bubble comparable to the NASDAQ bubble, which is now disintegrating. The Shanghai Composite Index
index has been falling with nary a rally for months, and (esp. in percentage rate terms) the decline is accelerating.
Today, China suffers from horrific pollution, an inflation rate much higher than ours, a popped stock bubble, and a variety of other problems.
Remember how quickly the communist regimes of Eastern Europe fell? And with how little warning?
I suspect that China is going to come apart at the seams in the same way the Soviet Union did. And when it does, the mechanisms that pump out the cheap exports to our shores and recycle the dollars back to us are going to break down. If Americans increase their saving rate back toward it's historic average level, the resulting decrease in our imports from China will increase the stresses on the political system there, and hasten the process.
Note that there can be a destructively regenerative feedback loop here -- falling American imports from China increase instability there, disrupting the recycling of dollars back to the US, causing US interest rates to rise, further curbing spending and increasing saving here, suppressing imports still more ...
The low interest rates that have driven American borrowing up and saving down have been a direct result of the Chinese government's having been able to lend its citizens savings to us at rates much lower than would have existed in a free market. If the China goes the way of Eastern Europe and Soviet Union, US interest rates are likely to soar -- the consequences are easy to imagine.
ORANGEMAN: "can't believe your bullish on the monolines. The banks that have risk sure did not want to give them any money. IMHO - lets patch let up, and check on them in 6 months - that worked for Bear Stearns."
Well, I'm a shareholder in Ambac and I still feel like there is a lot of irrational behaviour in the markets. Until I feel the irraitonal pricing is out of the market, I'm going to hold on. One example of irrational behaviour is how tax-emempt municipal bonds were trading at higher yields than taxable Treasuries (makes no sense whatsoever). Another example is how AAA-rated corporations like Berkshire Hathaway have seen their CDS spread triple over the last year even though Berkshire's probability of default hasn't increased 3x IMO. All sorts of weird stuff in auction rate securities. And so on. Ambac has its earnings call next week and we'll get an idea of how bad things are...
As for Bear Stearns, I don't know what happened there. There was some shady backroom stuff and maybe we'll know in 10 years when the parties disclose what was really happening (eg. there was massive shorting by using deeply out-of-the-money short-term put options). The FedRes bailout was also bizarre, with bondholders being made whole while shareholders got, well, $10/share. Apart from the high leverage (30x), I don't think there was anything wrong with it per se. Bear just fell victim to a run on the bank. Most of the rumours that ran the company into the ground were unsubstantiated (no one can still prove that their assets are bad) but that's how all bank runs are. If I"m not mistaken, Bear Stearns was the #1 player in mortgage derivatives so it was always vulnerable.
Rumours are having a huge impact on share prices right now (I suspect it's the norm in bear markets or during trend changes.) The monoline insurers were yanked up and down by rumours (the momentum players profitted immensely). But the biggest example is probably what is happening with the Icelandic banks. The Icelandic banks can easily collapse any minute, not because of large losses or anything (they avoided subprime), but because of rumours of insolvency.
So, I'm not sure what your point is about Bear Stearns. It didn't collapse because it defaulted on its debt; it didn't collapse because its assets had to be written down significantly (this could still have happened but we don't know); it didn't collapse because of fraud; it collapsed because of rumours that it was insolvent.
Safe Haven | Setting the Backdrop for Stage Two
Another gem from Doug Noland.
SHORT COURAGE: "Can anybody out there offer a good explanation for why this won't be corrected by stock prices moving downward over the coming year(s)? Why would the E part of the equation improve from record earnings levels when we are facing massive inflation in business inputs, a credit crunch and a retrenching consumer?"
Well, first of all, the P/E ratios you quoted are likely misleading (although some superbears here can make the case they are not). People like me believe that most of the bank writedowns on subprime losses are out of the way. There will still be future losses but they will be small. If you follow my thinking that these are one-time charges, then the P/E ratio is not as high as your number implies. The forward P/E is around 15 for S&P 500 and DJIA. Even if earnings decline, that is not excessive.
If you ignore these write-downs (or look at forward P/Es), the the US market is one of the cheapest out there. I don't think it is extremely cheap such that one can blindly buy the market, but I do think it is relatively more attractive than most of the world. The risk for investors (particularly foreign ones) is the potential for further US$ decline.
As for a stock market correction, I do think we will have a correction. But it is not going to be so bad. In fact, it will come nowhere near the 2000-2002 correction. In contrast, most bears here are implying that the correction is going to be bad and resemble the early 2000's.
(Of course, the superbears will argue that the writedowns will get bigger or that they will continue to happen for years (like Japan). In that case, the P/E ratio of around 20 is correct but I'm not in that camp)
CR observed in the main post that new home starts are falling below new home sales, and that this is cause for optimism. But I wonder whether the reason for this might be that builders have been able to slash prices far below what most owners of existing homes could afford to accept (due to having bought or refinanced at bubble prices), with the consequence that first-time buyers who in the past would have bought an existing home and enabled a move-up by the previous owner are now more often buying new homes.
I have commented many times in the past on the amazing number of very high-priced McMansions on the market here in the Chicago suburbs. Most of those on the market last summer are still there, and more are nearing completion.
If first-time buyers don't buy existing homes and enable move-ups, who is going to buy these McMansions?
The few that have sold in the last three months have gone for well under the original asking prices, and -- oh, the horror -- today I saw several "Reduced Price" add-ons to for-sale signs.
I believe that the falling prices of these McMansions are going to crush the market pricing structure beneath them. When the million-dollar homes go for $700k, the people who thought they owned $700k homes are going to find themselves owning $500k homes.
This will not be good for the economy.
Sivaram Velauthapillai,
"One example of irrational behaviour is how tax-emempt municipal bonds were trading at higher yields than taxable Treasuries (makes no sense whatsoever)."
Why irrational??
Your thinking does not sound right to me and i am a bond ignoramus.
Treasuries are regarded as low risk, yields have to be compared to risk. Treasuries or government bonds have a face value that rises as yields decline and vica versa.
How is it irrational to believe municipal bonds will become valueless or impossible to sell as and when required?
Auction rate securities are the same thing.......mutton dressed up as lamb.
And your thinking on Iceland and other banks is just plain wrong. Iceland is this tiny island in the middle of nowhere and somehow they have convinced people to allow them to become bankers and retailers all over europe. But where did the money come from for all of that? Where did they get all that money??? From selling fish?? From hot pool and midnight sun tourism?? They just never did have it maybe. Is it just a rumour they never did have it??
We are looking at a massive bubble unwinding. Debt will crush the weak.
There is nothing irrational about it.
Roubini was fun for a while last year but I am kind of graduating from him. He seems to have come to the conclusion that his career as a "doom forecaster" is more important that his economics career. Maybe he thinks that because there was almost no economist that predicted things would get this bad, he needs to get on the bearish side of every economist now. Pretty soon he will be saying 10 trillion dollars in losses.
Bob Shiller is another one. I like him but he also has a new and more profitable career as the housing bubble guy. Predicting doom when you are the doom guy is usually enough to get you on TV every night and pay for your retirement.
YouTube - Radiohead - House Of Cards (Scotch Mist Version)
house of cards
OT, but Yves Smith on Naked Capitalism:
"By way of analogy, a former district attorney told me that FBI detectives are not the brightest bulbs, but they often get their man by virtue of tenacity. I suspect with a regulator that belief in one's mandate and doggedness can do a lot to level what might otherwise appear to be a very uneven playing field.
But nevertheless accepting Buiter's observations as having some validity, I commented:
The issues you raise regarding how to attract and retain individuals who can stand up to traders and executives and avoid absorbing their charges mindset seems insurmountable, but let me offer a partial solution.
Women whove been in the industry.
I hate bringing up gender (the stereotyping is pervasive) but women have much lower odds of making it to the top and getting the same comp for their work as the boys and they are acutely aware of it. Many of the women I know who are in or have been in the industry dont buy into the culture because they are ever and always outsiders.
Reports from boards in the US and Australia say that women directors are far more inclined to do their homework and ask tough questions than men are. Boards are as clubby as you get. If women arent cowed in those settings, that suggests they might also stand their ground in regulatory roles (the horrific example of Sheila Bair notwithstanding).
Women whove performed well in the City or the Street often find it impossible to work out part-time positions when they want to have children, except in those rare admin jobs that require substantive knowledge. You can get good women on the cheap with well-designed mommie track roles. Regulators should sit up and take notice."
Tanta for chief regulator !!!!
The writer of this post is choosing to ignore compounding facts:
- job loss/industrial consolidation
- higher taxes due to bailouts
- pending nationalization of mortgage industry that will send current account deficit and interest rates to the moon, killing the rest of the housing industry.
When the job loss accelerates this is when things get bad and compound to the negative quickly.
Defining recession
True story. I met a woman who said when younger she was so naive that when she went to doctor and told she was pregnant she laughed and said couldn't be. She admitted to being sexually active but told the doctor: I can't be pregnant because my Mother told me you had to be married to get pregnant and I am still single.
CR this economy is knocked up. No matter what mother Felstein says
I suggest that illegals, black economy workers and 1099 workers are a significant portion of our workforce and are at best undercounted.
I
jm writes:
I have commented many times in the past on the amazing number of very high-priced McMansions on the market here in the Chicago suburbs. Most of those on the market last summer are still there, and more are nearing completion.
The same exact thing is still going on all around Atlanta. It boggles the mind!
DaveJ writes:
Predicting doom when you are the doom guy is usually enough to get you on TV every night and pay for your retirement.
DaveJ | Homepage | 04.20.08 - 4:40 am | #
The same is true for perma bulls. They far outnumber the bears. Theyre on TV everyday! MSM is keeping the doomer rhetoric way down. IMO
Tin foil hat stuff
YouTube - AMERICA -- KISS YOUR MONEY GOODBYE. Part 1 of 6
This one is for mp and conjure, if they are watching...
Chrysler LLC's talks on a possible joint venture with China's Chery Automobile Co. are progressing but a China-made car being produced by the alliance is not ready for the U.S. market, Chrysler executives said Sunday.
The Chrysler/Chery "happy cat on wet linoleum" is moving closer. Remember what we (mp, conjure, and I) said: Chysler is China's entry into the US market. Bet on it.
Interesting article on Minnesota's new 'ghost towns' - a frozen Inland Empire is what it is.
Boom To Bust
Only good thing I can say about this part of the state is there are a bunch of small lakes around there full of panfish - they shouldn't starve. Bet the same can't be said of IE.
it doesn't matter. oil is everything. Peak oil folks.
The Chrysler/Chery "happy cat on wet linoleum" is moving closer. Remember what we (mp, conjure, and I) said: Chysler is China's entry into the US market. Bet on it.
ipodius | 04.20.08 - 10:31 am | #
When I read articles like this I chuckle. I wonder if the hedgies running Chrysler have a clue what they are stepping into.
I did a group research paper & presentation on Chery for a class in my masters program (International Marketing)... that was two almost three years ago and we predicted a Chrysler-Cherry marriage then. That was before the break up
We also said it was a bad idea - it was an 1980s solution to a 20XX problem. Who wants more Yugos marked up with Chrysler margins?
There were five of us in the group - the four oldest & most experienced people in the class and one young foreign exchange student (a gunner - he signed on when he saw all us gray hairs gravitating together).
We made a full hour presentation - from Chery's perspective - on how they should enter the US market - all four Ps: product concepts, pricing, promotion & 'place' (channel).
We concluded a marriage with a weak US producer was the wrong way to go. They need organic growth even if it means go slower - follow the Sony & Toyota model from two decades ago, research the market yourself & don't trust the round-eyes to do it for you.
Again - we were challenged with the task of providing a business plan FOR Chery going into the US so we didn't look at if from Chrysler's perspective (needing a cheap product to 'rescue' them).
BTW - it was reviewed by a panel of VERY senior executives - marketing VPs from major Twin Cities companies. They all panned it - just ripped us to shreds. We defended very aggressively - backed every contention and challenge with research we had done (or personal experience - I had 20 plus years in automotive supply chain, another guy had almost 30 years automotive OEM product development).
Not ONE of them had a manufacturing or automotive background - IT, health care & consumer products. Basically mid-market financial IT products, pacemakers, pantyhose-n-toothpaste & consumer electronics. VERY heavy in non-durable retail & services.
Even the prof was lost - she was an adjunct with nothing but retail & int'l chain hotel/restaurant experience. A lot of that but nothing 'metal'.
We were so far over their head it wasn't even funny. The class was chuckling behind their breath.
At first the prof wanted to give us a 'B' on it - she just didn't know what to make of it. A couple of our team members went ballistic. I calmed them down, talked to her & after class submitted full set of appendices (basically the data & our 'work' as a stand alone addendum separate from the paper - I printed out the referenced articles so she didn't have to look anything up - it was all there on a platter for her). Almost 200 pages.
She read it and apologized the next week, gave us an A and told us she would NEVER include an automotive case topic in any of her classes ever again!!!
Chrysler should hire some of us before they get serious with Chery. This looks like world class FUBAR to me.
Sivaram -
How do you explain the high p/e ~54 (and moving up) for RUT?
I don't think that small businesses have much international exposure, and I don't think they have huge savings either. They're usually the higher risk investments to justify their ration... but we're headed into a recession.
With a p/e that high, I think I'd rather invest in CDs with CountryWide first... in fact I did, and I hope I don't have to deal with the feds before August.
I'd been long international stocks and tech for the last 5 years, but in the last year I've pulled in everything except for my unhedged foreign treasuries fund (mostly euro/asian). It's doing well, and I hope that the interest rate/currency trade won't cause too much of a whipsaw. I expect the US market to have a Coyote E. moment and a lot of up and down which I don't have time to watch closely.
I just hope that my medium sized tech company doesn't get margins squeezed to much when the OEMs start to hurt. Most folks in the Si Valley still think things are just hunky (and fill the malls), but if you go south or central it looks terrifying.
joe
Bear Stearns problems started last year when Merrill Lynch wanted to know how much its investment was worth. Bear Stearns told them don't ask. - They ask anyway, and 2 of Bears Stearns hedge funds blew up.
Its true Bears Stearns died of a bank run - but they were not allowed to go bankrupt. Bernie's testimony in congress says so - the financial system was at risk in a Bears Stearns Bankruptcy. Why?? There is still a lot of illiquid paper out there that no one knows how to price - and truefully no one wants to know the price. If we don't know the price they don't have to mark it down.
Billy Shears said: "...That's why I don't think this will be a V-shaped or even a U-shaped recession. What will be the catalyst?..."
Well, if there's no recession there's no need for a catalyst to pull us out of one.
Not a snide or snarky comment, but a serious one.
Sebastia
One advantage the monolines have is that when then pay out they pay out over time.
However, with housing crashing, i expect we will start having defaults on municipal bonds. I believe a city in San Matel? California has already defaulted. While times were good cities hired more people and raised salaries - now they don't have enough money.
Without raising masive amounts of capital i don't see how AMBAC and MBIA can survive. We will see.
The American people have long been well-fooled by the establishment, who keep real inflation-corrected asset market price histories well-out-of-sight. See first and last charts here:
Real Dow & Real Homes & Personal Saving & Debt Burden at
Real Dow & Real Homes & Personal Saving & Debt Burden
The currently ongoing homes price drop has long been the easily inferrable future, IF you saw the real past!
There may be a contribution here to ... it will become socially acceptable for upside down middle class Americans to walk away from their homes.!
ShortCourage said: "...Can anybody out there offer a good explanation for why this won't be corrected by stock prices moving downward over the coming year(s)?..."
The SP500 has already gone through a correction of around -18.6% peak to trough. Your opinion may be that that's "not enough", but corrections like that are substantial and rare, pricing-in a lot of bad news and pessimism.
Sebastia
Get a clue about how bad it is going to be. By year end we will be at full on collapse and Great Depression II. There will be no recovery, ever.
"Without raising massive amounts of capital i don't see how AMBAC and MBIA can survive. We will see."
Fed will give them access to the discount window.
Ed, thanks for those long-term charts. Excellent!
WORRIED: "Treasuries are regarded as low risk, yields have to be compared to risk. Treasuries or government bonds have a face value that rises as yields decline and vica versa. How is it irrational to believe municipal bonds will become valueless or impossible to sell as and when required? "
I'm not a bond expert either but municipal bonds rarely ever trade with a higher yield than US Treasuries. The reason is because muni bonds are generally tax-exempt while US Treasuries are taxed fully. Here is an article from USA Today that talked about this issue. Check out the table on the left and you'll see why muni bonds nearly almost always trade at a lower yield.
The reason muni bonds yield skyrocketed is not because of increasing defaults or anything like that. Instead, it was mainly due to the collapse of the monoline bond insurers and the collapse in investor appetitite hence leading to bizarre events.
"Auction rate securities are the same thing.......mutton dressed up as lamb. "
Well, ARS is very general and can consist of almost anything but many of the ARS securities are not risky. Their yields jumped, not because of imminent default risk, but because of the collapse of the monoline bond insurers, the withdrawl from the market of investment banks, and a general avoidance of any risk (even low risk). This is why you see people like Warren Buffett snapping up some of these ARS securities.
"And your thinking on Iceland and other banks is just plain wrong. Iceland is this tiny island in the middle of nowhere and somehow they have convinced people to allow them to become bankers and retailers all over europe. But where did the money come from for all of that? Where did they get all that money??? From selling fish?? From hot pool and midnight sun tourism?? They just never did have it maybe. Is it just a rumour they never did have it??"
We are looking at a massive bubble unwinding. Debt will crush the weak.
"There is nothing irrational about it."
What's irrational is not the debt unwinding but the prices in the market. Obviously you disagree with me and we won't know who is right while we are in the thick of things but let's come back one year from now and see if what these prices revert to what I perceive as rational or if they stay like they have (which means your claim that they are not irrational is correct)...
JOEBLO: "How do you explain the high p/e ~54 (and moving up) for RUT?
I don't think that small businesses have much international exposure, and I don't think they have huge savings either. They're usually the higher risk investments to justify their ration... but we're headed into a recession. With a p/e that high, I think I'd rather invest in CDs with CountryWide first... in fact I did, and I hope I don't have to deal with the feds before August."
I'm just a newbie investor but I wouldn't touch small-caps either. My impression is that small-caps get crushed during economic slowdowns but they also rise the most during booms.
Looking at the Russell 2000 P/E ratio doesn't really say much--unless you were thinking solely in small-caps. It's similar with other narrowly-focused indexes like the NASDAQ (mostly tech and biotech). The small-caps, as well as high growth stocks, tend to have high P/E ratios. S&P 500 is what I usually look at...
"I'd been long international stocks and tech for the last 5 years, but in the last year I've pulled in everything except for my unhedged foreign treasuries fund (mostly euro/asian). It's doing well, and I hope that the interest rate/currency trade won't cause too much of a whipsaw. I expect the US market to have a Coyote E. moment and a lot of up and down which I don't have time to watch closely."
People have been predicting the Coyote moment for decades. Some thought the 1987 crash was worse than the Great Depression and things were going to collapse.
I like your strategy of going to the sidelines last year. The risk for investors is that nearly all assets ran up substantially in the last 10 years. Whether you look at commodities, oil, gold, US treasuries, emerging market bonds, emerging market stocks, US stocks, art, collectibles, real estate, and so on, it all went up quite a bit. Part of this was due to the US$ decline (making everything priced in US$ go up), but part of it is also due to excessive risk taking. This may result in decline in nearly all assets.
Having said all that, I believe that US stocks have far less downside than foreign markets, or other asset classes (like oil or gold). US valuations are not high. They are not cheap either so I wouldn't blindly buy anything. Although this is an unfashionable view right now, foreign markets actually look far more vulnerable than the US markets even though all the problems seem to be in USA right now.
dryfly, thanks for the great story! i'm not sure it is the best for chery either, but it sure is a fantastic ending for cerebus, isn't it? i think that's what drove the deal...those firms don't enter something for the long haul, so who's their exit strategy? surely not to go public...enter chery.
on a side note, for my MBA we had to do a similar thing, but it was an industry profile. as a joke i said "hey, all this crap is boring, let's pick the adult entertainment industry" and i laughed. no one else in my group laughed. they thought it was brilliant. And so we did. and the rest is alumni legend at the school. Escpecially the beginning when a female member of the team gave the intro and said "and now we're going to start with a little video..." it was about cable/satellite communications much to the faculty's relief
orangeman: "One advantage the monolines have is that when then pay out they pay out over time.
However, with housing crashing, i expect we will start having defaults on municipal bonds. I believe a city in San Matel? California has already defaulted. While times were good cities hired more people and raised salaries - now they don't have enough money. Without raising masive amounts of capital i don't see how AMBAC and MBIA can survive. We will see."
The monolines can easily go bankrupt. This isn't the same as investing in Yahoo or Bank of America or something. The situation should be clear by the end of this year, when subprime default performance is better understood. If they take massive losses, they will go into run-off (similar to bankruptcy) and they are not going to raise capital. No one will put more money into them if the losses are massive.
The real question is 'will they?' One advantage they have, as you pointed out, is that they only pay out over time. Some of the CDO principal payments are due in 40 years so if they can stay alive as a going concern, the blow won't be so bad. Another advantage they have is that they tend to have legal rights to divert cash flows to the senior tranches. Of course, no one really knows what hte outcome will be. As Warren Buffet has remarked, you have to read up to 750,000 pages of document to understand one CDO-squared and I doubt anyone even read 1,000 pages.
You mention muncipal bond losses as being problematic in the future but I don't think that is a big concern since municipalities have means of avoiding big losses. Instead, there are other problems that are more worrying. In order they are:
Once the "tainted" monolines get over those three issues, I think they'll be fine... but those aren't trivial threats...
Dryfly - "My guess is Alberta is in a different position than say mfgrs along the 401 Corridor"
True, but there are early signs of more widespread troubles. Housing , which had been holding up reasonably well in most parts of Canada is showing signs of widespread declines in volume and increased supply.
As I recall, Canada is the number one destination for US exports.
There are many unknowns which will still have a say in determining the length of the recession. The economy will not heal easily and it will create a sense of desperation on the part of the government (more so than it has already). I wouldn't rule out geopolitical factors burgeoning the economic crisis into some kind of two headed albatross.
Harsh Realty writes:
Let's not forget that unlike the the case of the 1970's recession, these days the ability to pay a mortgage requires two wage earners. Therefore if the unemployment rate doubles, the foreclosure rate with quadruple.
Harsh Realty | 04.19.08 - 7:55 pm | #
HR: U r super smait guy/gal. Agree 400%!