You find yourself tasked with being the regional representative of a quasi-governmental agency responsible for promoting the well-being of the US economy. You are asked for your opinion on a situation involving the national housing market that has dramatically negative implications, but you also understand the political and diplomatic intricacies of your current position. How do you respond?
a) Cite your college thesis on the economic implications of chaos theory which demonstrates that any prediction that could result in financial gain is necessarily wrong.
b) Defer to your superiors claiming that you have no authority in this matter.
c) Admit that the situation is complex, and explain that you will have to ponder the current situation for another week to come to a conclusion assuming nothing changes.
d) Refer indignantly to an obscure publication by your favorite author that makes the question irrelevant.
e) Give your honest opinion and admit that the current situation will likely result in a wholesale bloodbath thereby associating your name with nationwide panic and the ensuing economic collapse for generations to come.
This has been an interesting ride. Pardons please from the concave crowd here, but I'd rather be riding busty blonds as watching this paradigm meltdown.
Mish posted this It's all an illusion also Fed's big worry gets revised away A huge spike in wages and salaries in the second quarter proved to be an illusion, according to the latest data from the Bureau of Labor Statistics and the Bureau of Economic Affairs. The revisions released Wednesday show that growth in unit labor costs (and therefore in inflationary pressures) has been much lower than assumed. That's good news on the inflation front.
But they also show that consumers don't have as much money as everyone thought they did ... $100 billion less on an annual basis. That's bad news for growth.
The Fed had been expressing concern that wage pressures were building that would inevitably feed into higher prices. Compensation had surged 12.6% in the first quarter, but that was explained away at the time as a one-time payout of bonuses and stock options to a relatively small group of high-paid executives, many of them on Wall Street.
When the compensation surge repeated in the second quarter, policymakers began to worry that raises were showing up in weekly paychecks as well. That set off some alarm bells at the Fed. A recurring and widespread rise in wages is more inflationary than a one-time bonus given to a selected few.
Compensation up 1.4%, not 7.4%
Need growth for the election, the BLS can help. Need to help out the Fed chairman, the BLS can help.
Dr. Duca's letter is certainly more thoughtful than most of what comes to the "we'll have to wait and see" conclusion. Still, I always get irked when no one wants to raise the question of lender profitability. It's like we know the builders are in for it, but we seem to think that lenders are going to find some turn-key replacement for mortgage lending profits if they ration credit or demand falls, or sail through if they fail to ration, demand stays high, and default/fraud losses pile up. (This replacement, of course, will have to be as "safe" as mortgage lending, or else capital/loss reserve issues will get icky, unless we expect regulators, rating agencies, and stock analysts to be OK with equivalent revenue streams at much greater risk. That'd be good news, eh?)
Duca says:
More recently, tapping home equity has been made easier by newer mortgage products, such as cash-out financing, and declining transaction costs.
What "declining transaction costs" would those be? I no longer have access to the subscription services that give the most reliable data on mortgage financing costs, but from what I see and read I surely doubt costs are down for consumers. They probably are for lenders, but anyone who tells me that that went to the consumer's bottom line instead of the lender's should probably sort my socks. What happened, in my view, is that lenders became increasingly willing--nay, eager--to roll transaction costs into the loan, at the same time they relaxed "minimum cash investment" rules that used to force people to bring at least some money to the closing table, at the same time that the mortgage process got a lot faster, for good and not-so-good reasons, leading media nitwits and at least some consumers to confuse "save time" with "save money." All of that, plus the habit mortgage brokers have of quoting flat fees as a percentage of the loan amount, making them "cheaper" the more money you borrow, gives people the impression that financing costs less when it doesn't.
Maybe Duca has good inside skinny on real transaction costs. All I know is that refinance booms are major profitability problems for lenders: when a fairly young loan prepays, you have to book another loan to break even and two more to make money, your servicing rights become less valuable, your portfolio absorbs the lower net interest margin, and so on. The only way you can offset this is to make money at the point of origination--that means charging up-front fees to borrowers.
So what? So I'm suggesting that record MEW persisted in spite of stable or even increasing transaction costs, which makes it more a "need" than an "opportunistic" trend, and that declining MEW/purchases will hit lenders hard in the pocketbook, which has implications for where the next "financial innovation" bubble is going to get blown.
I am busy sorting you socks, but just wanted to let you know I enjoy your comments. Seeing as this is a financial merry-go-around that few of us can afford to get off, I found your last statement interesting. It is almost as if you expect to see another or modified "financial innovation" occurring.
Thank you, Kett82. I get these coffee-torqued early-morning bouts of commentarrhea from time to time, and everybody is always so polite about it. My tail is wagging.
I'm not exactly making predictions, and I'm not claiming I have any idea what's behind Door Number Three if we do end up playing Let's Make Another Bubble. I would, however, feel a lot more confident that we're going to let this one unwind without substituting another one if I heard people like Duca (not to pick on him particularly, just as an example) talk more up-frontedly about the tough times ahead at Finance High. I'm not comforted by the thought I keep having that regulators, of all people, seem to be buying into the idea that mortgage financing has simultaneously become cheaper to the consumer and more profitable to the lender, and that that state of affairs is sustainable if credit becomes rationed and also if it doesn't. I'm sure dr. strangemoney could explain this to me, but since he apparently can't also understand it for me, I'm back to my socks.
Jobless claims are the real-time indicator I've been waiting to see turn up to make a recession call. Two weeks isn't enough to indicate a trend, but jobless claims always spike quite dramatically at the on-set of a recession. I saw a lot of commentary about when the credit bubble would end yesterday - a question I've been wondering about a lot myself lately. I trade emerging markets debt for a living, which is probably the ultimate indicator of appetite for credit risk, and I can tell you that demand is as voracious and utterly mindless as I've ever seen it, though some of the "smart money" does seem to be saying thanks for the ride and starting to get out. Want an easy indicator for the end of the credit bubble? How about when you go into yahoo finance and you aren't bombarded with ads of dancing bubba's taking out $500k mortgages for $1600 a month? That's going to be my indicator for shorting every risky asset I can get my hands on.
Mr. CR, 357,000 claims. We are nearing the recession line
a spike in claims this time of year is seasonal so let's not get our panties in a bunch. if we see this happening after the new years for a couple of periods then you can start to perspire.
This is way too long, but I don't have the time (or the ability probably) to make it shorter.
I'm not sure I read the same letter as everyone else.
What I got from Duca's letter was nothing short of "Oh man, this is an ugly mess and we don't have the tools to clean it up."
First, I would note that he leads off with a very dark assessment of the situation (for the fed).
"Today, signs of a housing market slowdown are unmistakable."
"Housing prices are rising more slowlyperhaps even beginning to decline outright...
More recent data, however, suggest further deceleration in prices."
And even more significantly this:
"This implies that a slowing of home-price appreciation into the low single digits might shave 1 to 2 percentage points off consumption growth and 0.75 to 1.5 percentage points from GDP growth for a few years."
I don't see how that statement can be read as anything other than dramatically dire. As usual, the caveats from the fed overflow more abundantly than Tanta's overstuffed sock draw (Kett82, could you get on that) but when it comes to the fed, I always find what they acknowledge is more significant than their interpretation of what that means.
Also:
"A recent study by Moodys Economy.com maintains that more than 100 of the nations 379 metropolitan areas, representing nearly half the value of U.S. housing stock, have a significant probability of seeing price declines by the fall of 2007. On the other hand, a Brookings Institution paper argues that there wasnt a bubble in U.S. home prices in 2005."
When it comes to picking sides in any argument, I always start with a strong bias in favor of the party more likely to have money on the line. I think the fed is with me on this.
Finally, the first note says an awful lot about who is behind this. A few months ago Danielle DiMartino was a columnist for the Dallas Morning News. If you're not familiar with her, go back and take a look at some of her columns in the six months before she left for the fed.
But they also show that consumers don't have as much money as everyone thought they did ... $100 billion less on an annual basis. That's bad news for growth. - From Mish via vader.
Still, I always get irked when no one wants to raise the question of lender profitability. It's like we know the builders are in for it, but we seem to think that lenders are going to find some turn-key replacement for mortgage lending profits if they ration credit or demand falls...
So I'm suggesting that record MEW persisted in spite of stable or even increasing transaction costs, which makes it more a "need" than an "opportunistic" trend, and that declining MEW/purchases will hit lenders hard in the pocketbook, which has implications for where the next "financial innovation" bubble is going to get blown. - Tanta
Well all I can say is they better get on it quick. Christmas is almost here and what will we do if all that stuff isn't moved off the shelves and fast.
It's a good thing all those Chinese grad students came over here and went to B School... they are plenty smart and will think of something to replace MEW to keep that liquidity pumping... right*?
What's truly amazing about this fin de credit cycle is that lenders have become notably more aggressive in the face of clearly deteriorating asset quality. Since so much of this is being underwritten outside the regulated banking system, central banks won't be able to offset the credit destruction when this cycle goes into reverse. I agree with Lindsey - these trial balloons are Fedspeak for we know there's a looming problem, but our ability to mop it up will be very limited. Trail balloons will be all we get because (e), nobody wants to be the government official first associated with this mess.
Tanta,
Sorry I don't have the time to help you understand it. I'm terribly busy preparing for my trip to Zurich.
Our method of transferring convertibility risk to other parties was both creative and comic. We simply created a new bond that looked normal in every way except that if Mexico suspended convertibility of the peso, the bond would pay in Mexican pesos, not US dollars. Such a bond, if we could sell it, would effectively transfer all of our convertibility risk to the owner of the bond.
Who would buy such a bond? You might think it would have to be someone who wouldn't mind owning a lot of pesos. We considered such possibilities. A sophisticated hedge fund? A Mexican company? An emerging markets mutual fund? No, none of these. Think of the least sophisticated, sleepiest investor you can. That's right. Morgan Stanley sold its Mexican peso convertibility risk to a small midwestern insurance company.
--Fiasco
I guess I'll keep monitoring prices, MEW and consumption trends
Hey and we'll keep reading them - this thing has been amazing so far. Thanks for all your efforts.
Section VI:
a) Cite your college thesis on the economic implications of chaos theory which demonstrates that any prediction that could result in financial gain is necessarily wrong.
b) Defer to your superiors claiming that you have no authority in this matter.
c) Admit that the situation is complex, and explain that you will have to ponder the current situation for another week to come to a conclusion assuming nothing changes.
d) Refer indignantly to an obscure publication by your favorite author that makes the question irrelevant.
e) Give your honest opinion and admit that the current situation will likely result in a wholesale bloodbath thereby associating your name with nationwide panic and the ensuing economic collapse for generations to come.
dryfly, thanks. And thanks to you and everyone who comments here.
This has been an interesting ride.
Best to all.
This has been an interesting ride. Pardons please from the concave crowd here, but I'd rather be riding busty blonds as watching this paradigm meltdown.
Mish posted this It's all an illusion
also Fed's big worry gets revised away
A huge spike in wages and salaries in the second quarter proved to be an illusion, according to the latest data from the Bureau of Labor Statistics and the Bureau of Economic Affairs. The revisions released Wednesday show that growth in unit labor costs (and therefore in inflationary pressures) has been much lower than assumed. That's good news on the inflation front.
But they also show that consumers don't have as much money as everyone thought they did ... $100 billion less on an annual basis. That's bad news for growth.
The Fed had been expressing concern that wage pressures were building that would inevitably feed into higher prices. Compensation had surged 12.6% in the first quarter, but that was explained away at the time as a one-time payout of bonuses and stock options to a relatively small group of high-paid executives, many of them on Wall Street.
When the compensation surge repeated in the second quarter, policymakers began to worry that raises were showing up in weekly paychecks as well. That set off some alarm bells at the Fed. A recurring and widespread rise in wages is more inflationary than a one-time bonus given to a selected few.
Compensation up 1.4%, not 7.4%
Need growth for the election, the BLS can help. Need to help out the Fed chairman, the BLS can help.
Dr. Duca's letter is certainly more thoughtful than most of what comes to the "we'll have to wait and see" conclusion. Still, I always get irked when no one wants to raise the question of lender profitability. It's like we know the builders are in for it, but we seem to think that lenders are going to find some turn-key replacement for mortgage lending profits if they ration credit or demand falls, or sail through if they fail to ration, demand stays high, and default/fraud losses pile up. (This replacement, of course, will have to be as "safe" as mortgage lending, or else capital/loss reserve issues will get icky, unless we expect regulators, rating agencies, and stock analysts to be OK with equivalent revenue streams at much greater risk. That'd be good news, eh?)
Duca says:
More recently, tapping home equity has been made easier by newer mortgage products, such as cash-out financing, and declining transaction costs.
What "declining transaction costs" would those be? I no longer have access to the subscription services that give the most reliable data on mortgage financing costs, but from what I see and read I surely doubt costs are down for consumers. They probably are for lenders, but anyone who tells me that that went to the consumer's bottom line instead of the lender's should probably sort my socks. What happened, in my view, is that lenders became increasingly willing--nay, eager--to roll transaction costs into the loan, at the same time they relaxed "minimum cash investment" rules that used to force people to bring at least some money to the closing table, at the same time that the mortgage process got a lot faster, for good and not-so-good reasons, leading media nitwits and at least some consumers to confuse "save time" with "save money." All of that, plus the habit mortgage brokers have of quoting flat fees as a percentage of the loan amount, making them "cheaper" the more money you borrow, gives people the impression that financing costs less when it doesn't.
Maybe Duca has good inside skinny on real transaction costs. All I know is that refinance booms are major profitability problems for lenders: when a fairly young loan prepays, you have to book another loan to break even and two more to make money, your servicing rights become less valuable, your portfolio absorbs the lower net interest margin, and so on. The only way you can offset this is to make money at the point of origination--that means charging up-front fees to borrowers.
So what? So I'm suggesting that record MEW persisted in spite of stable or even increasing transaction costs, which makes it more a "need" than an "opportunistic" trend, and that declining MEW/purchases will hit lenders hard in the pocketbook, which has implications for where the next "financial innovation" bubble is going to get blown.
Dear Tanta
I am busy sorting you socks, but just wanted to let you know I enjoy your comments. Seeing as this is a financial merry-go-around that few of us can afford to get off, I found your last statement interesting. It is almost as if you expect to see another or modified "financial innovation" occurring.
Anyway, Thanks!
Mr. CR, 357,000 claims. We are nearing the recession line. A couple more weeks like that and it's over.
Thank you, Kett82. I get these coffee-torqued early-morning bouts of commentarrhea from time to time, and everybody is always so polite about it. My tail is wagging.
I'm not exactly making predictions, and I'm not claiming I have any idea what's behind Door Number Three if we do end up playing Let's Make Another Bubble. I would, however, feel a lot more confident that we're going to let this one unwind without substituting another one if I heard people like Duca (not to pick on him particularly, just as an example) talk more up-frontedly about the tough times ahead at Finance High. I'm not comforted by the thought I keep having that regulators, of all people, seem to be buying into the idea that mortgage financing has simultaneously become cheaper to the consumer and more profitable to the lender, and that that state of affairs is sustainable if credit becomes rationed and also if it doesn't. I'm sure dr. strangemoney could explain this to me, but since he apparently can't also understand it for me, I'm back to my socks.
Jobless claims are the real-time indicator I've been waiting to see turn up to make a recession call. Two weeks isn't enough to indicate a trend, but jobless claims always spike quite dramatically at the on-set of a recession. I saw a lot of commentary about when the credit bubble would end yesterday - a question I've been wondering about a lot myself lately. I trade emerging markets debt for a living, which is probably the ultimate indicator of appetite for credit risk, and I can tell you that demand is as voracious and utterly mindless as I've ever seen it, though some of the "smart money" does seem to be saying thanks for the ride and starting to get out. Want an easy indicator for the end of the credit bubble? How about when you go into yahoo finance and you aren't bombarded with ads of dancing bubba's taking out $500k mortgages for $1600 a month? That's going to be my indicator for shorting every risky asset I can get my hands on.
a spike in claims this time of year is seasonal so let's not get our panties in a bunch. if we see this happening after the new years for a couple of periods then you can start to perspire.
Hi Richardm, you are correct, but the seasonal spike in claims is met with a seasonal downward adjustment. The 350K+ was actually higher.
i hear ya charts. might be the start of something but as you said we'll need more data to define a trend.
This is way too long, but I don't have the time (or the ability probably) to make it shorter.
I'm not sure I read the same letter as everyone else.
What I got from Duca's letter was nothing short of "Oh man, this is an ugly mess and we don't have the tools to clean it up."
First, I would note that he leads off with a very dark assessment of the situation (for the fed).
"Today, signs of a housing market slowdown are unmistakable."
"Housing prices are rising more slowlyperhaps even beginning to decline outright...
More recent data, however, suggest further deceleration in prices."
And even more significantly this:
"This implies that a slowing of home-price appreciation into the low single digits might shave 1 to 2 percentage points off consumption growth and 0.75 to 1.5 percentage points from GDP growth for a few years."
I don't see how that statement can be read as anything other than dramatically dire. As usual, the caveats from the fed overflow more abundantly than Tanta's overstuffed sock draw (Kett82, could you get on that) but when it comes to the fed, I always find what they acknowledge is more significant than their interpretation of what that means.
Also:
"A recent study by Moodys Economy.com maintains that more than 100 of the nations 379 metropolitan areas, representing nearly half the value of U.S. housing stock, have a significant probability of seeing price declines by the fall of 2007. On the other hand, a Brookings Institution paper argues that there wasnt a bubble in U.S. home prices in 2005."
When it comes to picking sides in any argument, I always start with a strong bias in favor of the party more likely to have money on the line. I think the fed is with me on this.
Finally, the first note says an awful lot about who is behind this. A few months ago Danielle DiMartino was a columnist for the Dallas Morning News. If you're not familiar with her, go back and take a look at some of her columns in the six months before she left for the fed.
One more thing,
The negative amortization chart alone is enough to scare the crap out of any thinking person.
charts and Richard, it's just one week, and last week was a holiday too, but the 4-week average is 325K - a move above 350K would definitely be scary.
Kudos to charts for predicting the claims number!
Best to all.
But they also show that consumers don't have as much money as everyone thought they did ... $100 billion less on an annual basis. That's bad news for growth. - From Mish via vader.
Still, I always get irked when no one wants to raise the question of lender profitability. It's like we know the builders are in for it, but we seem to think that lenders are going to find some turn-key replacement for mortgage lending profits if they ration credit or demand falls...
So I'm suggesting that record MEW persisted in spite of stable or even increasing transaction costs, which makes it more a "need" than an "opportunistic" trend, and that declining MEW/purchases will hit lenders hard in the pocketbook, which has implications for where the next "financial innovation" bubble is going to get blown. - Tanta
Well all I can say is they better get on it quick. Christmas is almost here and what will we do if all that stuff isn't moved off the shelves and fast.
It's a good thing all those Chinese grad students came over here and went to B School... they are plenty smart and will think of something to replace MEW to keep that liquidity pumping... right*?
*dryfly's voice trembling
"...should probably sort my socks."
LOL! As soon as I read this, I knew the author was Tanta.
What's truly amazing about this fin de credit cycle is that lenders have become notably more aggressive in the face of clearly deteriorating asset quality. Since so much of this is being underwritten outside the regulated banking system, central banks won't be able to offset the credit destruction when this cycle goes into reverse. I agree with Lindsey - these trial balloons are Fedspeak for we know there's a looming problem, but our ability to mop it up will be very limited. Trail balloons will be all we get because (e), nobody wants to be the government official first associated with this mess.
Tanta,
Sorry I don't have the time to help you understand it. I'm terribly busy preparing for my trip to Zurich.
Our method of transferring convertibility risk to other parties was both creative and comic. We simply created a new bond that looked normal in every way except that if Mexico suspended convertibility of the peso, the bond would pay in Mexican pesos, not US dollars. Such a bond, if we could sell it, would effectively transfer all of our convertibility risk to the owner of the bond.
Who would buy such a bond? You might think it would have to be someone who wouldn't mind owning a lot of pesos. We considered such possibilities. A sophisticated hedge fund? A Mexican company? An emerging markets mutual fund? No, none of these. Think of the least sophisticated, sleepiest investor you can. That's right. Morgan Stanley sold its Mexican peso convertibility risk to a small midwestern insurance company.
--Fiasco