- Existing home sales fell another 4.3%; consumer confidence was down – and more than expected on housing and credit and job woes;
- Lennar, a major home builder announced its biggest loss in its 53 year history;
- the Case-Shiller/S&P home price index shows an accelerating fall in home prices;
- retail sales – that were weak in August look as weak in September as the ICSC-UBS index shows same store sales now falling for two weeks in a row;
- the Redbook Johnson index shows also serious weakness (sales up only 1.6% on a year over a year basis, i.e. falling in real terms);
- Target and Lowe’s – two major retailers - are now warning of disappointing sales and earnings results.
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Wednesday, September 26, 2007
Money as Debt
Paul Grignon's 47-minute animated presentation of "Money as Debt" tells in very simple and effective graphic terms what money is and how it ... all » is being created. It is an entertaining way to get the message out. The Cowichan Citizens Coalition and its "Duncan Initiative" received high praise from those who previewed it. I recommend it as a painless but hard-hitting educational tool and encourage the widest distribution and use by all groups concerned with the present unsustainable monetary system in Canada and the United States.
Click here to watch this very intriguing video. I highly recommend it.
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Click here to watch this very intriguing video. I highly recommend it.
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Saturday, September 22, 2007
Ron Paul For President!!!
Quick Synopsis on this brilliant statement by Dr. Ron Paul. I can not believe I just heard a politician who actually understands economics and Fed Policy.
* "Helicopter Ben" quit printing money because you are devaluing the dollar! The trade deficit is not improving enough to justify this policy when China and the rest of the gang pay their employees 10 cents a day.
* "Helicopter Ben," why did you bail out the rich aka. Wall Street, Hedge Funds, Banks with this rate cut when they are directly responsible for the current predicament we are in.
* "Helicopter Ben," why did you screw the middle and lower class via this rate cut which will potentially cause deflation or hyperinflation now?
* "Helicopter Ben," where in the hell are you getting your inflation data from? He is getting them from a number that strips out Food and Energy which is the bulk of where the inflation is right now.
* 2% is a bullshit inflation rate!!! My gas is up, my food bill is up my health insurance is up but there is no inflation????
**This is classic smoke & mirrors Fed Policy that benefits the Wall Street country club which lines the pockets of the politicians in DC.
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Friday, September 21, 2007
The Bernanke Dollar Put and Interest Rate Call
Obviously, everyone knows the The Fed cut rates by 50 bps this week AND the discount rate another 50 bps. Until yesterday I thought "Helicopter Ben" was doing a good job to try and clean up the mess Greenputz left him. The aggressive rate cuts yesterday have changed my opinion of The Fed Chairman because of the impact this reckless policy is creating for our economy. I know many of you are feeling good because of the stock market reaction after the cut. This euphoria in the market will not last forever with some of the existing problems related to leverage and easy credit.
Ben Bernanke is called "Helicopter Ben" for the following reason:
In 2002, when the word "deflation" began appearing in the business news, Bernanke gave a speech about deflation. In that speech, he mentioned that the government in a fiat moneysystem owns the physical means of creating money. Control of the means of productionfor money implies that the government can always avoid deflation by simply issuing more money. (He referred to a statement made by Milton Friedmanabout using a "helicopter drop" of money into the economy to fight deflation.) Bernanke's critics have since referred to him as "Helicopter Ben" or to his "helicopter printing press". In a footnote to his speech, Bernanke noted that "people know that inflationerodes the real value of the government's debt and, therefore, that it is in the interest of the government to create some inflation."
If you want to see "Helicopter Ben" actually fly his helicopter click here: He is VERY talented!
Here are some quick definitions so you understand the title of this article. A put option is used for an investor who feels bearish and wants to short or hedge a stock or portofio. So if you think Countrywide, for example, will drop over the next few months you can buy a put instead of shorting the stock. If you think Countrywide will rise over the next few months you can buy a call instead of going long on the stock. Buying puts and calls during certain periods based on where the stock market is positioned is often an excellent risk management strategy for qualified investors and it is cheaper to use options versus buying or shorting the stock outright.
Put option
An option contract that gives the owner the right to sell the underlying stock at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a put option, the contract represents an obligation to buy the underlying stock from the option owner if the option is assigned.
Call option
An option contract that gives the owner the right to buy the underlying security at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a call option, the contract represents an obligation to sell the underlying stock if the option is assigned.
So now you have the basics of Puts and Calls so let me explain what the title of this article means and how it impacts you, Mr. and Mrs. America.
The 50 bp rate cut will now put even more pressure on the US Dollar to the downside. The dollar, which used to be strong a couple of years ago, has been pummelled over the past few years to the downside. The Fed who has been so concerned about inflation in recent meetings SUDDENLY applies an inflationary rate cut that probably will devalue the US Dollar even further. Below is a Point & Figure chart that shows the US Dollar has depreciated from $120 in 2002 to around $80 at the present time. This is a 33% drop in just 5 years! What this means is that if you travel to Europe and buy a house or Big Mac it will cost us Americans much more than it did 5 years ago. It also means that international consumers, in Europe for example, with stronger currencies can get more bang for their Euro if they purchase a house,condo or Big Mac in the United States. The United States should see an improvement with our current trade deficit with countries like China but this has not happened yet even with the dollar falling. So what happens as the dollar falls but real estate does NOT appreciate the way it did back in 2001.
Interest Rate Call?
Just recently, Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.
The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.
There is now a growing danger that global investors will start to shun the US bond markets. The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries.
The danger is that this could now accelerate as the yield gap between the United States and the rest of the world narrows rapidly, leaving America starved of foreign capital flows needed to cover its current account deficit - expected to reach $850bn this year, or 6.5pc of GDP.
The risk is that flight from US bonds could push up the long-term yields that form the base price of credit for most mortgages, driving the property market into even deeper crisis. So if the dollar and bond market collapse "Helicopter Ben" has opened up another can of worms for the entire economy.
Back in August 2007 the Chinese government began a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation. This was described as a "nuclear option" which cold also slam the real estate market and overall economy further by sending longer term rates higher. It is estimated China holds over $900 billion (WITH A B!) in various US Bonds.
Source:Telegraph.co.uk
When we take a look at the 10 year yield (TNX) we see a very interesting picture. Clearly a base has been formed and interest rates have stayed relatively stable after a signifacant decline after the dot com bust. The recent action on the TNX also shows a recent break in the rising trend. In my opinion this downward action on rates presents a very unique opportunity for long term home buyers in Interest Only ARMs that are going to reset in the next couple of years a window to refinance into a less risky mortgage. If there is a selloff in the near future among various Central Banks in China and Saudi Arabia you will see this chart spike back up and really throw the real estate market into a worst case scenario. The effect of this scenario would place more downward pressure on home prices around the country as financing becomes more expensive IF YOU GET A LOAN IN THE FIRST PLACE.
In order for The Fed to ditch the inflation argument/fight and drop rates they must be analyzing some worrisome data on the economy and a potential recession. So now inflation is contained? BS!!!
Gold is taking off. What a beautiful chart IF you are long!
The commodities index (CRB) is moving up and just broke the trend line.
Here are just some recent examples of price rises since the first of the year …
The price of oil is up
The average price of a gallon of unleaded gas is up
Soybean prices are up
Wheat prices are up
Corn is up
Copper prices are up
And lumber prices are up
According to the latest CPI Report the "core" inflation rate only rose 0.2% in August. The kicker is this "core" inflation rate excludes inflationary items such as food and energy. What a worthless economic indicator! The last time I checked when my gas and grocery bill goes up that is inflationary and hurts my wallet. How about you?
So there you go. Our dollar will soon be used as toilet paper around the world and increasing rates via a potential Worldwide Central Bank selloff could be the final straw that breaks the real estate/economy back and accelerate downward pressure on home/condo prices in heavy real estate inventory areas around the country.
I hope I am wrong but this scenario is a possibility.
I will end with this quote from Paul Volcker:
"What I'm really talking about boils down to the oldest lesson of financial policy in Central Banking: A strong sense of monetary and fiscal discipline."
I SAY: "HOW DO WE IMPLEMENT DISCIPLINE IN A NATION ADDICTED TO CREDIT AND BAILOUTS. THIS ADDICTION IS VERY PROBLEMATIC AND OUR FEARLESS GOVERNMENT LEADERS DEMONSTRATE POOR LEADERSHIP ON THIS ISSUE."
THE CURRENT US DEFICIT IS:
U.S. NATIONAL DEBT CLOCK
The Outstanding Public Debt as of 20 Sep 2007 at 05:58:13 PM GMT is:
The estimated population of the United States is 303,037,971
so each citizen's share of this debt is $29,740.81.
The National Debt has continued to increase an average of
$1.42 billion per day since September 29, 2006!
Concerned? Then tell Congress and the White House!
Good Luck!
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Ben Bernanke is called "Helicopter Ben" for the following reason:
In 2002, when the word "deflation" began appearing in the business news, Bernanke gave a speech about deflation. In that speech, he mentioned that the government in a fiat moneysystem owns the physical means of creating money. Control of the means of productionfor money implies that the government can always avoid deflation by simply issuing more money. (He referred to a statement made by Milton Friedmanabout using a "helicopter drop" of money into the economy to fight deflation.) Bernanke's critics have since referred to him as "Helicopter Ben" or to his "helicopter printing press". In a footnote to his speech, Bernanke noted that "people know that inflationerodes the real value of the government's debt and, therefore, that it is in the interest of the government to create some inflation."
If you want to see "Helicopter Ben" actually fly his helicopter click here: He is VERY talented!
Here are some quick definitions so you understand the title of this article. A put option is used for an investor who feels bearish and wants to short or hedge a stock or portofio. So if you think Countrywide, for example, will drop over the next few months you can buy a put instead of shorting the stock. If you think Countrywide will rise over the next few months you can buy a call instead of going long on the stock. Buying puts and calls during certain periods based on where the stock market is positioned is often an excellent risk management strategy for qualified investors and it is cheaper to use options versus buying or shorting the stock outright.
Put option
An option contract that gives the owner the right to sell the underlying stock at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a put option, the contract represents an obligation to buy the underlying stock from the option owner if the option is assigned.
Call option
An option contract that gives the owner the right to buy the underlying security at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a call option, the contract represents an obligation to sell the underlying stock if the option is assigned.
So now you have the basics of Puts and Calls so let me explain what the title of this article means and how it impacts you, Mr. and Mrs. America.
The 50 bp rate cut will now put even more pressure on the US Dollar to the downside. The dollar, which used to be strong a couple of years ago, has been pummelled over the past few years to the downside. The Fed who has been so concerned about inflation in recent meetings SUDDENLY applies an inflationary rate cut that probably will devalue the US Dollar even further. Below is a Point & Figure chart that shows the US Dollar has depreciated from $120 in 2002 to around $80 at the present time. This is a 33% drop in just 5 years! What this means is that if you travel to Europe and buy a house or Big Mac it will cost us Americans much more than it did 5 years ago. It also means that international consumers, in Europe for example, with stronger currencies can get more bang for their Euro if they purchase a house,condo or Big Mac in the United States. The United States should see an improvement with our current trade deficit with countries like China but this has not happened yet even with the dollar falling. So what happens as the dollar falls but real estate does NOT appreciate the way it did back in 2001.
Interest Rate Call?
Just recently, Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.
The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.
There is now a growing danger that global investors will start to shun the US bond markets. The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries.
The danger is that this could now accelerate as the yield gap between the United States and the rest of the world narrows rapidly, leaving America starved of foreign capital flows needed to cover its current account deficit - expected to reach $850bn this year, or 6.5pc of GDP.
The risk is that flight from US bonds could push up the long-term yields that form the base price of credit for most mortgages, driving the property market into even deeper crisis. So if the dollar and bond market collapse "Helicopter Ben" has opened up another can of worms for the entire economy.
Back in August 2007 the Chinese government began a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation. This was described as a "nuclear option" which cold also slam the real estate market and overall economy further by sending longer term rates higher. It is estimated China holds over $900 billion (WITH A B!) in various US Bonds.
Source:Telegraph.co.uk
When we take a look at the 10 year yield (TNX) we see a very interesting picture. Clearly a base has been formed and interest rates have stayed relatively stable after a signifacant decline after the dot com bust. The recent action on the TNX also shows a recent break in the rising trend. In my opinion this downward action on rates presents a very unique opportunity for long term home buyers in Interest Only ARMs that are going to reset in the next couple of years a window to refinance into a less risky mortgage. If there is a selloff in the near future among various Central Banks in China and Saudi Arabia you will see this chart spike back up and really throw the real estate market into a worst case scenario. The effect of this scenario would place more downward pressure on home prices around the country as financing becomes more expensive IF YOU GET A LOAN IN THE FIRST PLACE.
In order for The Fed to ditch the inflation argument/fight and drop rates they must be analyzing some worrisome data on the economy and a potential recession. So now inflation is contained? BS!!!
Gold is taking off. What a beautiful chart IF you are long!
The commodities index (CRB) is moving up and just broke the trend line.
Here are just some recent examples of price rises since the first of the year …
The price of oil is up
The average price of a gallon of unleaded gas is up
Soybean prices are up
Wheat prices are up
Corn is up
Copper prices are up
And lumber prices are up
According to the latest CPI Report the "core" inflation rate only rose 0.2% in August. The kicker is this "core" inflation rate excludes inflationary items such as food and energy. What a worthless economic indicator! The last time I checked when my gas and grocery bill goes up that is inflationary and hurts my wallet. How about you?
So there you go. Our dollar will soon be used as toilet paper around the world and increasing rates via a potential Worldwide Central Bank selloff could be the final straw that breaks the real estate/economy back and accelerate downward pressure on home/condo prices in heavy real estate inventory areas around the country.
I hope I am wrong but this scenario is a possibility.
I will end with this quote from Paul Volcker:
"What I'm really talking about boils down to the oldest lesson of financial policy in Central Banking: A strong sense of monetary and fiscal discipline."
I SAY: "HOW DO WE IMPLEMENT DISCIPLINE IN A NATION ADDICTED TO CREDIT AND BAILOUTS. THIS ADDICTION IS VERY PROBLEMATIC AND OUR FEARLESS GOVERNMENT LEADERS DEMONSTRATE POOR LEADERSHIP ON THIS ISSUE."
THE CURRENT US DEFICIT IS:
U.S. NATIONAL DEBT CLOCK
The Outstanding Public Debt as of 20 Sep 2007 at 05:58:13 PM GMT is:
The estimated population of the United States is 303,037,971
so each citizen's share of this debt is $29,740.81.
The National Debt has continued to increase an average of
$1.42 billion per day since September 29, 2006!
Concerned? Then tell Congress and the White House!
Good Luck!
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Wednesday, September 19, 2007
The Fed and "Helicopter" Ben Bernanke
You saw it here first! Here is actual video of our Fed Chairman Ben Bernanke warming up before the 50 bp rate cut yesterday. Man, he can fly and drop money into the economy like it is going out of style!!
The problem with this rate cut is that The Fed is late as usual. Remember how they thought the housing and lending problems were "contained" not so long ago? Now suddenly The Fed realizes how bad the lending bubble actually is so they had to cut rates by 50 bps. All this does is add liquidity into a banking system that has ZERO trust in the secondary market. Unfortunately, IT WILL NOT HELP. All it may do is delay a recession but I doubt it will prevent it.
In 2001 the Fed started to aggressively cut the Fed Funds rate in early January – at an inter-meeting date – by 50bps and it pushed down the Fed Funds rate all the way from 6.5% to 1.75% by year end. Still, that aggressive Fed easing that continued throughout 2001 did not prevent a hard landing, a short but still painful recession in 2001. Good job, Greenputz!
*The recent rate cut does not help all the investors that purchased AAA CDOs that have turned out to be crap.
*The recent rate cut does not help borrowers upside down in depreciating houses where ARMs are about to reset.
*The rate cut does not help our falling dollar. The dollar will soon be used as toilet paper to wipe our asses because it will be worth nothing.
*The rate cut does not help fight the war on inflation. Watch gold and commodities continue to rise.
Basicly, "Helicopter Ben" is the government's bitch. He is supposed to be independent from outside influences but clearly this is not the case.
The recesssion is the cure I hate to say. A recession is the market reaction and "cleansing effect" to take the crap out of the system. Now certain banks, lenders and hedge funds have more time to lose more money instead of going out of business.
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
The problem with this rate cut is that The Fed is late as usual. Remember how they thought the housing and lending problems were "contained" not so long ago? Now suddenly The Fed realizes how bad the lending bubble actually is so they had to cut rates by 50 bps. All this does is add liquidity into a banking system that has ZERO trust in the secondary market. Unfortunately, IT WILL NOT HELP. All it may do is delay a recession but I doubt it will prevent it.
In 2001 the Fed started to aggressively cut the Fed Funds rate in early January – at an inter-meeting date – by 50bps and it pushed down the Fed Funds rate all the way from 6.5% to 1.75% by year end. Still, that aggressive Fed easing that continued throughout 2001 did not prevent a hard landing, a short but still painful recession in 2001. Good job, Greenputz!
*The recent rate cut does not help all the investors that purchased AAA CDOs that have turned out to be crap.
*The recent rate cut does not help borrowers upside down in depreciating houses where ARMs are about to reset.
*The rate cut does not help our falling dollar. The dollar will soon be used as toilet paper to wipe our asses because it will be worth nothing.
*The rate cut does not help fight the war on inflation. Watch gold and commodities continue to rise.
Basicly, "Helicopter Ben" is the government's bitch. He is supposed to be independent from outside influences but clearly this is not the case.
The recesssion is the cure I hate to say. A recession is the market reaction and "cleansing effect" to take the crap out of the system. Now certain banks, lenders and hedge funds have more time to lose more money instead of going out of business.
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Tuesday, September 18, 2007
August 2007 Foreclosure Report
FORECLOSURE ACTIVITY INCREASES 36 PERCENT IN AUGUST
ACCORDING TO REALTYTRAC™ U.S. FORECLOSURE MARKET REPORT
Foreclosure Filings Up 115 Percent From August 2006
IRVINE, Calif. – Sept. 18, 2007 – RealtyTrac® (www.realtytrac.com), the leading online marketplace for foreclosure properties, today released its August 2007 U.S. Foreclosure Market Report, which shows a total of 243,947 foreclosure filings — default notices, auction sale notices and bank repossessions — were reported during the month, up 36 percent from the previous month and up 115 percent from August 2006. This is the highest number of foreclosure filings in a single month that RealtyTrac has reported since it began issuing the monthly report in January 2005. The national foreclosure rate of one foreclosure filing for every 510 households for the month is also the highest figure ever issued in the report.
RealtyTrac publishes the largest and most comprehensive national database of foreclosure and bank-owned properties, with over 1 million properties from nearly 2,500 counties across the country, and is the foreclosure data provider to MSN Real Estate, Yahoo! Real Estate and The Wall Street Journal’s Real Estate Journal.
“The jump in foreclosure filings this month might be the beginning of the next wave of increased foreclosure activity, as a large number of subprime adjustable rate loans are beginning to reset now,” commented James J. Saccacio, chief executive officer of RealtyTrac. “Another significant factor in the increased level of foreclosure activity is that the number of REO filings (bank repossessions) is increasing dramatically, which means that a greater percentage of homes entering foreclosure are going back to the banks.”
Nevada, California, Florida post top state foreclosure rates
Nevada continued to register the nation’s highest state foreclosure rate, one foreclosure filing for every 165 households — more than three times the national average. The state reported 6,197 foreclosure filings during the month, a 21 percent increase from the previous month and more than triple the number reported in August 2006.
California’s foreclosure rate jumped to second highest among the states thanks to a 48 percent month-over-month spike in foreclosure activity. The state reported 57,875 foreclosure filings during the month, a foreclosure rate of one foreclosure filing for every 224 households — more than twice the national average.
Florida foreclosure activity jumped 77 percent from the previous month, boosting the state’s foreclosure rate from seventh highest to third highest among the states. The state reported 33,932 foreclosure filings, a foreclosure rate of one foreclosure filing for every 243 households.
Other states with foreclosure rates ranking among the nation’s 10 highest were Georgia, Ohio, Michigan, Arizona, Colorado, Texas and Indiana.
Sun Belt, Rust Belt states dominate top foreclosure totals
Seven of the top 10 states in terms of total foreclosure filings in August were located in the Sun Belt, and three of the top 10 states were in the Rust Belt. After California and Florida, Ohio registered the third highest state total, with 17,793 foreclosure filings during the month. The state documented a foreclosure rate of one foreclosure filing for every 281 households, fifth highest in the nation.
Texas, Michigan and Georgia all reported more than 10,000 foreclosure filings for the month, documenting the fourth, fifth and sixth highest state foreclosure totals respectively, followed by Arizona, Colorado, Illinois and Nevada.
Top Metro foreclosure rates in California, Michigan, Florida, Nevada and Ohio
California cities once again accounted for six of the top 10 metro foreclosure rates in August, with the top three spots all taken by California cities. Modesto documented the nation’s highest metro foreclosure rate, one foreclosure filing for every 79 households, followed by Stockton and Merced. Other California cities in the top 10 included Vallejo-Fairfield at No. 5, Riverside-San Bernardino at No. 6 and Sacramento at No. 7.
Detroit posted a foreclosure rate of one foreclosure filing for every 87 households, the nation’s fourth highest metro foreclosure rate and more than five times the national average. Fort Lauderdale, Fla., Las Vegas and Cleveland, Ohio, ranked Nos. 8, 9 and 10.
The RealtyTrac Monthly U.S. Foreclosure Market Report provides the total number of foreclosure filings — both nationwide and by state — over the preceding month. Data is also available at the individual county level. RealtyTrac’s report includes documents filed in all three phases of foreclosure: Default — Notice of Default (NOD) and Lis Pendens (LIS); Auction — Notice of Trustee Sale and Notice of Foreclosure Sale (NTS and NFS); and Real Estate Owned, or REO properties (that have been foreclosed on and repurchased by a bank).
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
ACCORDING TO REALTYTRAC™ U.S. FORECLOSURE MARKET REPORT
Foreclosure Filings Up 115 Percent From August 2006
IRVINE, Calif. – Sept. 18, 2007 – RealtyTrac® (www.realtytrac.com), the leading online marketplace for foreclosure properties, today released its August 2007 U.S. Foreclosure Market Report, which shows a total of 243,947 foreclosure filings — default notices, auction sale notices and bank repossessions — were reported during the month, up 36 percent from the previous month and up 115 percent from August 2006. This is the highest number of foreclosure filings in a single month that RealtyTrac has reported since it began issuing the monthly report in January 2005. The national foreclosure rate of one foreclosure filing for every 510 households for the month is also the highest figure ever issued in the report.
RealtyTrac publishes the largest and most comprehensive national database of foreclosure and bank-owned properties, with over 1 million properties from nearly 2,500 counties across the country, and is the foreclosure data provider to MSN Real Estate, Yahoo! Real Estate and The Wall Street Journal’s Real Estate Journal.
“The jump in foreclosure filings this month might be the beginning of the next wave of increased foreclosure activity, as a large number of subprime adjustable rate loans are beginning to reset now,” commented James J. Saccacio, chief executive officer of RealtyTrac. “Another significant factor in the increased level of foreclosure activity is that the number of REO filings (bank repossessions) is increasing dramatically, which means that a greater percentage of homes entering foreclosure are going back to the banks.”
Nevada, California, Florida post top state foreclosure rates
Nevada continued to register the nation’s highest state foreclosure rate, one foreclosure filing for every 165 households — more than three times the national average. The state reported 6,197 foreclosure filings during the month, a 21 percent increase from the previous month and more than triple the number reported in August 2006.
California’s foreclosure rate jumped to second highest among the states thanks to a 48 percent month-over-month spike in foreclosure activity. The state reported 57,875 foreclosure filings during the month, a foreclosure rate of one foreclosure filing for every 224 households — more than twice the national average.
Florida foreclosure activity jumped 77 percent from the previous month, boosting the state’s foreclosure rate from seventh highest to third highest among the states. The state reported 33,932 foreclosure filings, a foreclosure rate of one foreclosure filing for every 243 households.
Other states with foreclosure rates ranking among the nation’s 10 highest were Georgia, Ohio, Michigan, Arizona, Colorado, Texas and Indiana.
Sun Belt, Rust Belt states dominate top foreclosure totals
Seven of the top 10 states in terms of total foreclosure filings in August were located in the Sun Belt, and three of the top 10 states were in the Rust Belt. After California and Florida, Ohio registered the third highest state total, with 17,793 foreclosure filings during the month. The state documented a foreclosure rate of one foreclosure filing for every 281 households, fifth highest in the nation.
Texas, Michigan and Georgia all reported more than 10,000 foreclosure filings for the month, documenting the fourth, fifth and sixth highest state foreclosure totals respectively, followed by Arizona, Colorado, Illinois and Nevada.
Top Metro foreclosure rates in California, Michigan, Florida, Nevada and Ohio
California cities once again accounted for six of the top 10 metro foreclosure rates in August, with the top three spots all taken by California cities. Modesto documented the nation’s highest metro foreclosure rate, one foreclosure filing for every 79 households, followed by Stockton and Merced. Other California cities in the top 10 included Vallejo-Fairfield at No. 5, Riverside-San Bernardino at No. 6 and Sacramento at No. 7.
Detroit posted a foreclosure rate of one foreclosure filing for every 87 households, the nation’s fourth highest metro foreclosure rate and more than five times the national average. Fort Lauderdale, Fla., Las Vegas and Cleveland, Ohio, ranked Nos. 8, 9 and 10.
The RealtyTrac Monthly U.S. Foreclosure Market Report provides the total number of foreclosure filings — both nationwide and by state — over the preceding month. Data is also available at the individual county level. RealtyTrac’s report includes documents filed in all three phases of foreclosure: Default — Notice of Default (NOD) and Lis Pendens (LIS); Auction — Notice of Trustee Sale and Notice of Foreclosure Sale (NTS and NFS); and Real Estate Owned, or REO properties (that have been foreclosed on and repurchased by a bank).
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Monday, September 17, 2007
The Charleston Market Report - September 2007
September 12 , 2007
HAPPY 1 YEAR ANNIVERSARY TO THE CHARLESTON MARKET REPORT!
I wanted to let everyone know there will soon be a big announcement regarding the future of this website. The Charleston Market Report is about to expand and provide a much higher level of economic and real estate research is all I can tell you right now. I appreciate everyone's support over the past year. You will be the first to get the announcement once I am ready to release it. Stay tuned!
Yes fellow subscribers it has been one year since I started this website. Time sure does fly when you are having fun!
I just wonder how much money has been saved by people refusing to buy overpriced real estate AT THE TOP OF THE MARKET when this site went online?
I just wonder how many mortgage player haters are now working at McDonalds?
I just wonder how many real estate player haters are now working at Burger King?
I just wonder how many appraiser player haters are working anywhere?
It is truly amazing how quickly the business climate has changed in one year. Most of the appraisal, real estate and mortgage business professionals thought I was nuts to say the following on Sept. 14, 2006 in the Post & Courier:
"I think it is a lending bubble. Lending is out of control."
Or how about this quote on Sept. 16, 2006 in the Post & Courier:
"My main worry for the local real estate market here is the possibility of nationwide recession, which could drag down the U.S. real estate market even further."
To all who attacked me for my Constitutional Right called Free Speech I have the following to say to you:
"Kiss my behind where the sun does not shine!"
I feel better now! :)
Thoughts While Bored
Back by popular demand!
1. I now understand why Steve Spurrier is hated by his opponents. He runs a clean program, is 100% no BS and consistently beats his rivals. Go Cocks!
2. Why is there so much drama in the Mount Pleasant County Council? It sounds like an episode of the Sopranos over there in Mt. P. with bribes, bullying, money and real estate. All we need now is for the BaDa Bing to open up in Mt. Pleasant. Not a bad idea. How about it Mt P???
3. Who will be the first city government that has the balls to use Eminent Domain for disputed real estate property? I have a feeling it will be Mt. Pleasant regarding the disputed Shem Creek land owned by Mark Mason and Philip Smith. If Mt. Pleasant does actually use Eminent Domain on this property it will be a bad mistake IMO. Hey Mt. P either pay market value for the property or find somewhere else to build a park! They claim condos will destroy the beauty of Shem Creek. If this is true WHY DID YOU ALLOW THE TIDES CONDOS TO BE BUILT RIGHT ON THE STINKING MARSH BY THE NEW RAVENEL BRIDGE YOU HYPOCRITES!!!! TALK ABOUT AN EYESORE!! I wonder how long it will take The Tides to sink?
4. What ever happened to music videos on MTV?
5. Why are so many idiots involved in the real estate business?
6. How could sellers be dissillusioned about their selling prices for so long?
7. I think Bernanke is doing a good job considering the mess Greenputz left behind.
8. How much longer before the shoe drops on commercial real estate?
9. Which national homebuilder will be the first to go out of biz? Any guesses? The winner gets a free subscription to CMR. Just kidding.
10. How much false profit has been created on Wall Street due to the lax lending on Main Street?
11. Credit = Crack
12. Happy New Year to my fellow MOTs!
13. LENDING BUBBLE, LENDING BUBBLE, LENDING BUBBLE, LENDING BUBBLE, LENDING BUBBLE, LENDING BUBBLE :)
Were You Aware?
*The nation's economy will be so sluggish well into next year that any major hiccup could tip it into recession, UCLA's latest economic forecast predicts. The end of easy credit and a further decline in home construction are sending the economy into a "near-recession," with growth hovering at just above 1% through the first three months of 2008, according to the UCLA Anderson Forecast to be released today.
The forecast presents a gloomier outlook for jobs and the housing market. The nation's unemployment rate will rise to 5.2% by mid-2008, up from the current 4.6%.
And the forecast for housing starts is grim:
The group sees [housing starts] bottoming out at 1 million units annually, down from the previous forecast of about 1.2 million.
Home construction is seen as "barely recovering" to 1.4 million units annually by the end of 2009. By comparison, housing starts peaked with more than 2 million units annually in 2005.
* Is the NAR is run by baboons? They have revised their existing home sales forecast for seven straight months! It is almost like David Lahreah never left.
* Many Realtors were some of the biggest speculators in the latest real estate debacle. Yes, some actually believed they were getting you a great deal by selling you an overpriced condo while there was 3 years worth of inventory and may have also bought one for themself.
* As expected Countrywide is going to lay off 10,000 to 12,000 people. This is just the beginning. There are also reports of a possible 2nd bailout being drawn up. Also, some Countrywide Financial Corp. employees sued the mortgage lender Wednesday, claiming they suffered heavy losses in their 401k retirement accounts after the company failed to warn them about the depth of its financial troubles. Countrywide is in deep doo doo.
* The Wall Street Journal is reporting Greenspan Says Turmoil Fits Pattern
Former Federal Reserve Chairman Alan Greenspan said the current market turmoil is in many ways "identical" to that which occurred in 1987 and 1998, when the giant hedge fund Long-Term Capital Management nearly collapsed.
"The behavior in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock-market crash of 1987, I suspect what we saw in the land-boom collapse of 1837 and certainly [the bank panic of] 1907," Mr. Greenspan told a group of academic economists in Washington, D.C., last night at an event organized by the Brookings Papers on Economic Activity, an academic journal.
Bubbles can't be defused through incremental adjustments in interest rates, Mr. Greenspan suggested. The Fed doubled interest rates in 1994-95 and "stopped the nascent stock-market boom," but when stopped, stocks took off again. "We tried to do it again in 1997," when the Fed raised rates a quarter of a percentage point, and "the same phenomenon occurred."
"The human race has never found a way to confront bubbles," he said.
Greenputz conveniently forgets that he is directly responsible for the current housing AND mortgage problems. This guy is a real SHMUCK! He cut rates 17 times after 9/11 to further inflate a very inflationary housng market. The former Fed Clown also recommended borrowers use ARMs to finance houses when he was Fed Chairman. Somebody please go buy Greenputz a muzzle.
* The imminent Fed rate cut will NOT help the housing market. What it will do is further devalue the dollar and send gold to higher prices. Why does everyone on Wall Street worry so much about the Fed when they are consistently behind the curve with every decision they make? I know the answer but I think everybody focuses way too much on this institution of academics.
* We do not really have a liquidity problem we have a risk/fear problem. Many banks, hedge funds and investors currently hold paper that is worth 10 to 50 cents on the dollar. The problem is many do not know what it is currently worth or are scared to report it to shareholders. If you are an investor and Wall St. was going to selll you this paper but could not tell you what it would be worth in a couple of months would you buy it? No! That is the current problem right now. Nobody trusts the pricing in the secondary market. This is why we have had a mortgage implosion and 154 lenders have gone CAPUT since late 2006. The price of crap is not worth par.
* Want to see a funny website. Go to www.americanhm.com. This is the website for American Home Mortgage, who has already gone CAPUT. The slogan for their bank, American Home Bank, was "Banking was never like this." LOL!!!!!!!!
The Market
The real estate market still sucks. Now the economy is starting to suck as the layoffs begin to mount. Look for unemployment figures to go up and the FED will cut rates to avoid recession. I do not think it will work because of the deep problems related to the lending biz among banks, investors and consumers. The real estate market will worsen as underwriting guidelines have tightened and it is now tougher to get a loan. We are now entering the worst time in the real estate biz (because it is seasonal) starting around Thanksgiving and through the winter months. I believe the real estate market has another 18 months to 2 years before it bottoms out. I hope I am wrong.
The rest of the market commentary comes from one of my favorite economists, (because he is right and very smart) Dr. Nouriel Roubini. Just remember when the economy goes through a downturn there is always tremendous opportunity.
Prepare for the worst everyone because it appears it is not getting any better anytime soon. The market always takes back excess gains when it is inflated and engineered through creative financing. In a nutshell, many of your homes are not worth what you think they are worth. The market determines what your home is worth NOT you, your real estate agent or your appraiser.
The Coming Hard Landing by Nouriel Roubini
The utterly ugly employment figures for August (a fall in jobs for the first time in four years, downward revisions to previous months’ data, a fall in the labor participation rate, and an even weaker employment picture based on the household survey compared to the establishments survey) confirm what few of us have been predicting since the beginning of 2007: the U.S. is headed towards a hard landing.
The probability of a US economic hard landing (either a likely outright recession and/or an almost certain “growth recession”) was already significant even before the severe turmoil and volatility in financial markets during this summer. But the recent financial turmoil - that has manifested itself as a severe liquidity and credit crunch - now makes the likelihood of such a hard landing even greater. There is now a vicious circle where a weakening US economy is making the financial markets’ crunch more severe and where the worsening financial markets and tightening of credit conditions will further weaken the economy via further falls of residential investment and further slowdowns of private consumption and of capital spending by the corporate sector.
The US economic slowdown was already serious since early 2007 and will get worse in the next few quarters for a variety of reasons. A massive housing bubble - where home prices went to stratospheric levels because of a debt-driven asset bubble (a massive rise in mortgage debt of households) - has now turned into the most severe housing recession in the last 30 years and into a house price bust: for the first time since the Great Depression of the 1930s home prices are now falling on a year-over-year basis. Home prices will fall much more in the next two years – by at least 15% - because of five factors that will make the huge excess inventory of new and existing homes – already at historic highs – even larger: first production of new home is still excessive as demand for new homes has fallen more than the now lower supply; the credit crunch in mortgage markets will further reduce the demand for new homes; millions of households will default on their mortgages and go into foreclosure and once the creditor banks will repossess these homes they will dump them in the market adding to the excess supply; about $1 trillion of adjustable rate mortgages will be reset – at much higher interest rates – in the next 12 months: the households that cannot refinance them and/or afford the higher interest rates will sell their homes at distressed prices; and those who bought homes for speculative reasons with little equity will now try to sell their homes as prices are falling. So expect a much faster and deeper fall in home prices for the next two years.
A housing recession alone cannot lead to an economy-wide recession as housing is only 5% of GDP. But now the housing slump is spreading to other parts of the economy: the auto sector is in a recession; the manufacturing sector is sharply slowing down; demand for housing related durable goods (furniture, home appliances) is falling. Moreover, US private consumption – that represents over 70% of aggregate demand – is now under pressure. The US consumer is now saving-less, debt-burdened and buffeted by many negative forces. As long as home prices were rising it made sense for US households to use their homes as their ATM machines, borrow against their rising home equity and spend more than their income (negative savings). But now that home prices are falling there is the beginning of a retrenchment of consumption whose growth rate slowed down from a 4% average until the first quarter of 2007 to a weak 1.3% in the second quarter, even before the summer financial market turmoil.
There are now many negative factors squeezing US consumers and forcing them to retrench spending: falling home values leading to a negative wealth effect; sharply falling home equity withdrawal preventing households from overspending; a credit crunch in mortgages and consumer debt markets rising debt servicing costs for consumers; still high oil and gasoline prices; the beginning of a serious weakening of the labor market – as signaled by today’s employment report and other data - that will significantly reduce income generation in the months ahead. As long as income generation and job generation was robust, one could dismiss the risks of a hard landing; but the signal from today’s employment report is that the only force that was preventing a hard landing (jobs and income generation) is now starting to falter.
Thus, in the next few months you can expect a further slowdown of consumption growth from its already mediocre growth rate of 1.3% in the second quarter. Indeed, after an ok July, retail sales were weak in August: based on the Redbook Johnson and the UBS Securities/ICSC data same store retail sales in August actually fell relative to July; and in real terms such retail sales in August were lower than in August 2006. Thus, the deceleration in consumption in Q3 is already clear in the data.
And if consumption slows down the build-up of inventories of unsold goods will force firms to slow down production, employment and capital spending. Such investment spending by the corporate sector was already weak in the last few quarters in spite of the high corporate profitability. Now you can expect further weakening of such real investment because of expected lower consumption demand, higher credit spreads for the corporate sector, uncertainty about the future given the volatility in the markets. The sharp re-pricing of risk that took place in the summer – with higher credit spreads for a broad variety of instruments – implies much higher borrowing costs for consumers, buyers of homes, corporations and financial institutions. Thus, the slowdown of private consumption and capital spending in residential, non-residential and corporate investment will get more severe.
On top of a weakening of the real economy the current financial markets turmoil will get worse – not better - in the next few months. This was never just a sub-prime problem as the same reckless and toxic lending practices in sub-prime – no down-payment, no verification of income and assets, interest rate only mortgages, negative amortization, teaser rates – were occurring in near prime mortgages, Alt-A loans, piggyback loans, home equity loans, and prime hybrid ARMs. About 50% of all mortgage origination in the last two years was made of this toxic waste and utterly junk lending practices.
And now what started as a credit crunch in the sub-prime mortgage market has spilled over to near prime and prime mortgages and to a variety of other credit markets: money markets, interbank lending markets, asset backed commercial paper, structured investment vehicles (SIVs) of banks, CDO markets, other securitization markets, and the LBO market. All these markets are now literally frozen with a dearth of liquidity, serious refinancing problems and severe credit problems. The mess in the SIV products is particularly serious and dramatic as it is generating severe liquidity and capital problems for both banking and non-banking institutions.
And this liquidity and credit crunch will get worse in the weeks ahead as this financial markets crisis is much more severe than the liquidity crisis of 1998 when LTCM – the largest US hedge fund – almost collapsed. In 1998 you had only a liquidity problem as the economy was strong – growing at 4% plus - and we were still in the rising cycle of the internet boom. Today, in addition to severe liquidity problems in the financial system (a near total freezing of the entire financial system liquidity plumbing), we have serious credit and insolvency problems too. The credit and solvency problems derive from a massive credit boom that lead to excessive borrowing that, in turn fed for a while rising asset prices that are now going bust, in a typical Minsky credit cycle. It is a insolvency problem as you have now millions of US households that are near insolvent and will default on their mortgages; dozens of sub-prime mortgage lenders who have already gone bankrupt; dozen of home building companies that are under distress; many financial institutions in the US and abroad - such as hedge funds and other highly leveraged institutions – that have already gone belly up; and the rise in credit spreads will also lead soon to a rise in corporate defaults that had been artificially low in the last few years given the excessively easy credit conditions. So we do not face only a most severe liquidity crisis; we are also observing a serious credit crisis and credit crunch. And you cannot resolve credit problems – as opposed to liquidity problems – with liquidity injections. That is why the forthcoming cuts in the Fed Funds rate by the Fed will be ineffective in stemming the real and financial problems of the economy.
Indeed, the forthcoming easing of monetary policy by the Fed will not rescue the economy and financial markets from a hard landing as it will be too little too late. The Fed underestimated the severity of the housing recession, its spillovers to other sectors, and the contagion of the sub-prime carnage to other mortgage markets and to the overall financial markets. Fed easing will not work for several reasons: the Fed will cut rate too slowly as it is still worried about inflation and about the moral hazard of perceptions of rescuing reckless investors and lenders; we have a glut of housing, autos and consumer durables and the demand for these goods becomes relatively interest rate insensitive once you have a glut that requires years to work out; serious credit problems and insolvencies cannot be resolved by monetary policy alone; and the liquidity injections by the Fed are being stashed in excess reserves by the banks, not relent to the parts of the financial markets where the liquidity crunch is most severe and worsening. The Fed provided liquidity to banking institutions but it cannot provide direct liquidity to hedge funds, investment banks, other highly leveraged institutions and parts of the credit markets – such as asset backed commercial paper – where the crunch is severe. Thus, the liquidity crunch in most credit markets remains severe, even in the usually most liquid interbank markets.
Unfortunately, financial globalization together with securitization and mushrooming of complex credit instruments has lead to greater opacity and less transparency in the financial system. And this lack of transparency breeds unmeasurable uncertainty rather than priceable risk. Risk can be priced as you have a distribution of probabilities on various events. But unmeasurable uncertainty causes higher risk aversion under conditions of market distress. This generalized uncertainty is now coming from two sources: first, we do not know the size of the overall losses in credit markets: sub-prime alone could lead to losses of $100 billion or much higher depending on how much home prices will fall. And other losses from other illiquid financial instruments remain unmeasured in a world where institutions were marking to model rather than marking to market and where credit rating agencies were mis-rating complex credit instruments. Second, as securitization implies that financial risks have been spread out of banks and to the corners of the global financial system we do not know which firms are holding the toxic waste and thus which firms will go belly up next. It is like walking blind in a minefield where you have no idea of where the mines are. This uncertainty breeds large fear – after the massive greed of the previous credit and asset bubble has now burst – and lack of trust of financial counterparties, even otherwise respected ones: everyone want to hoard liquidity and hold the safest assets as even large financial institutions do not trust each other and are unwilling to lend to each other. This greater opacity of financial globalization and securitization implies that the re-pricing of risk that we have observed in the last few weeks is a permanent rather than a transitory phenomenon. And the sharp spike in the cost of credit will further weaken an already weakened economy. This is thus the first real crisis of the new world of financial globalization and securitization.
Until next month.
~Ciao~
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
HAPPY 1 YEAR ANNIVERSARY TO THE CHARLESTON MARKET REPORT!
I wanted to let everyone know there will soon be a big announcement regarding the future of this website. The Charleston Market Report is about to expand and provide a much higher level of economic and real estate research is all I can tell you right now. I appreciate everyone's support over the past year. You will be the first to get the announcement once I am ready to release it. Stay tuned!
Yes fellow subscribers it has been one year since I started this website. Time sure does fly when you are having fun!
I just wonder how much money has been saved by people refusing to buy overpriced real estate AT THE TOP OF THE MARKET when this site went online?
I just wonder how many mortgage player haters are now working at McDonalds?
I just wonder how many real estate player haters are now working at Burger King?
I just wonder how many appraiser player haters are working anywhere?
It is truly amazing how quickly the business climate has changed in one year. Most of the appraisal, real estate and mortgage business professionals thought I was nuts to say the following on Sept. 14, 2006 in the Post & Courier:
"I think it is a lending bubble. Lending is out of control."
Or how about this quote on Sept. 16, 2006 in the Post & Courier:
"My main worry for the local real estate market here is the possibility of nationwide recession, which could drag down the U.S. real estate market even further."
To all who attacked me for my Constitutional Right called Free Speech I have the following to say to you:
"Kiss my behind where the sun does not shine!"
I feel better now! :)
Thoughts While Bored
Back by popular demand!
1. I now understand why Steve Spurrier is hated by his opponents. He runs a clean program, is 100% no BS and consistently beats his rivals. Go Cocks!
2. Why is there so much drama in the Mount Pleasant County Council? It sounds like an episode of the Sopranos over there in Mt. P. with bribes, bullying, money and real estate. All we need now is for the BaDa Bing to open up in Mt. Pleasant. Not a bad idea. How about it Mt P???
3. Who will be the first city government that has the balls to use Eminent Domain for disputed real estate property? I have a feeling it will be Mt. Pleasant regarding the disputed Shem Creek land owned by Mark Mason and Philip Smith. If Mt. Pleasant does actually use Eminent Domain on this property it will be a bad mistake IMO. Hey Mt. P either pay market value for the property or find somewhere else to build a park! They claim condos will destroy the beauty of Shem Creek. If this is true WHY DID YOU ALLOW THE TIDES CONDOS TO BE BUILT RIGHT ON THE STINKING MARSH BY THE NEW RAVENEL BRIDGE YOU HYPOCRITES!!!! TALK ABOUT AN EYESORE!! I wonder how long it will take The Tides to sink?
4. What ever happened to music videos on MTV?
5. Why are so many idiots involved in the real estate business?
6. How could sellers be dissillusioned about their selling prices for so long?
7. I think Bernanke is doing a good job considering the mess Greenputz left behind.
8. How much longer before the shoe drops on commercial real estate?
9. Which national homebuilder will be the first to go out of biz? Any guesses? The winner gets a free subscription to CMR. Just kidding.
10. How much false profit has been created on Wall Street due to the lax lending on Main Street?
11. Credit = Crack
12. Happy New Year to my fellow MOTs!
13. LENDING BUBBLE, LENDING BUBBLE, LENDING BUBBLE, LENDING BUBBLE, LENDING BUBBLE, LENDING BUBBLE :)
Were You Aware?
*The nation's economy will be so sluggish well into next year that any major hiccup could tip it into recession, UCLA's latest economic forecast predicts. The end of easy credit and a further decline in home construction are sending the economy into a "near-recession," with growth hovering at just above 1% through the first three months of 2008, according to the UCLA Anderson Forecast to be released today.
The forecast presents a gloomier outlook for jobs and the housing market. The nation's unemployment rate will rise to 5.2% by mid-2008, up from the current 4.6%.
And the forecast for housing starts is grim:
The group sees [housing starts] bottoming out at 1 million units annually, down from the previous forecast of about 1.2 million.
Home construction is seen as "barely recovering" to 1.4 million units annually by the end of 2009. By comparison, housing starts peaked with more than 2 million units annually in 2005.
* Is the NAR is run by baboons? They have revised their existing home sales forecast for seven straight months! It is almost like David Lahreah never left.
* Many Realtors were some of the biggest speculators in the latest real estate debacle. Yes, some actually believed they were getting you a great deal by selling you an overpriced condo while there was 3 years worth of inventory and may have also bought one for themself.
* As expected Countrywide is going to lay off 10,000 to 12,000 people. This is just the beginning. There are also reports of a possible 2nd bailout being drawn up. Also, some Countrywide Financial Corp. employees sued the mortgage lender Wednesday, claiming they suffered heavy losses in their 401k retirement accounts after the company failed to warn them about the depth of its financial troubles. Countrywide is in deep doo doo.
* The Wall Street Journal is reporting Greenspan Says Turmoil Fits Pattern
Former Federal Reserve Chairman Alan Greenspan said the current market turmoil is in many ways "identical" to that which occurred in 1987 and 1998, when the giant hedge fund Long-Term Capital Management nearly collapsed.
"The behavior in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock-market crash of 1987, I suspect what we saw in the land-boom collapse of 1837 and certainly [the bank panic of] 1907," Mr. Greenspan told a group of academic economists in Washington, D.C., last night at an event organized by the Brookings Papers on Economic Activity, an academic journal.
Bubbles can't be defused through incremental adjustments in interest rates, Mr. Greenspan suggested. The Fed doubled interest rates in 1994-95 and "stopped the nascent stock-market boom," but when stopped, stocks took off again. "We tried to do it again in 1997," when the Fed raised rates a quarter of a percentage point, and "the same phenomenon occurred."
"The human race has never found a way to confront bubbles," he said.
Greenputz conveniently forgets that he is directly responsible for the current housing AND mortgage problems. This guy is a real SHMUCK! He cut rates 17 times after 9/11 to further inflate a very inflationary housng market. The former Fed Clown also recommended borrowers use ARMs to finance houses when he was Fed Chairman. Somebody please go buy Greenputz a muzzle.
* The imminent Fed rate cut will NOT help the housing market. What it will do is further devalue the dollar and send gold to higher prices. Why does everyone on Wall Street worry so much about the Fed when they are consistently behind the curve with every decision they make? I know the answer but I think everybody focuses way too much on this institution of academics.
* We do not really have a liquidity problem we have a risk/fear problem. Many banks, hedge funds and investors currently hold paper that is worth 10 to 50 cents on the dollar. The problem is many do not know what it is currently worth or are scared to report it to shareholders. If you are an investor and Wall St. was going to selll you this paper but could not tell you what it would be worth in a couple of months would you buy it? No! That is the current problem right now. Nobody trusts the pricing in the secondary market. This is why we have had a mortgage implosion and 154 lenders have gone CAPUT since late 2006. The price of crap is not worth par.
* Want to see a funny website. Go to www.americanhm.com. This is the website for American Home Mortgage, who has already gone CAPUT. The slogan for their bank, American Home Bank, was "Banking was never like this." LOL!!!!!!!!
The Market
The real estate market still sucks. Now the economy is starting to suck as the layoffs begin to mount. Look for unemployment figures to go up and the FED will cut rates to avoid recession. I do not think it will work because of the deep problems related to the lending biz among banks, investors and consumers. The real estate market will worsen as underwriting guidelines have tightened and it is now tougher to get a loan. We are now entering the worst time in the real estate biz (because it is seasonal) starting around Thanksgiving and through the winter months. I believe the real estate market has another 18 months to 2 years before it bottoms out. I hope I am wrong.
The rest of the market commentary comes from one of my favorite economists, (because he is right and very smart) Dr. Nouriel Roubini. Just remember when the economy goes through a downturn there is always tremendous opportunity.
Prepare for the worst everyone because it appears it is not getting any better anytime soon. The market always takes back excess gains when it is inflated and engineered through creative financing. In a nutshell, many of your homes are not worth what you think they are worth. The market determines what your home is worth NOT you, your real estate agent or your appraiser.
The Coming Hard Landing by Nouriel Roubini
The utterly ugly employment figures for August (a fall in jobs for the first time in four years, downward revisions to previous months’ data, a fall in the labor participation rate, and an even weaker employment picture based on the household survey compared to the establishments survey) confirm what few of us have been predicting since the beginning of 2007: the U.S. is headed towards a hard landing.
The probability of a US economic hard landing (either a likely outright recession and/or an almost certain “growth recession”) was already significant even before the severe turmoil and volatility in financial markets during this summer. But the recent financial turmoil - that has manifested itself as a severe liquidity and credit crunch - now makes the likelihood of such a hard landing even greater. There is now a vicious circle where a weakening US economy is making the financial markets’ crunch more severe and where the worsening financial markets and tightening of credit conditions will further weaken the economy via further falls of residential investment and further slowdowns of private consumption and of capital spending by the corporate sector.
The US economic slowdown was already serious since early 2007 and will get worse in the next few quarters for a variety of reasons. A massive housing bubble - where home prices went to stratospheric levels because of a debt-driven asset bubble (a massive rise in mortgage debt of households) - has now turned into the most severe housing recession in the last 30 years and into a house price bust: for the first time since the Great Depression of the 1930s home prices are now falling on a year-over-year basis. Home prices will fall much more in the next two years – by at least 15% - because of five factors that will make the huge excess inventory of new and existing homes – already at historic highs – even larger: first production of new home is still excessive as demand for new homes has fallen more than the now lower supply; the credit crunch in mortgage markets will further reduce the demand for new homes; millions of households will default on their mortgages and go into foreclosure and once the creditor banks will repossess these homes they will dump them in the market adding to the excess supply; about $1 trillion of adjustable rate mortgages will be reset – at much higher interest rates – in the next 12 months: the households that cannot refinance them and/or afford the higher interest rates will sell their homes at distressed prices; and those who bought homes for speculative reasons with little equity will now try to sell their homes as prices are falling. So expect a much faster and deeper fall in home prices for the next two years.
A housing recession alone cannot lead to an economy-wide recession as housing is only 5% of GDP. But now the housing slump is spreading to other parts of the economy: the auto sector is in a recession; the manufacturing sector is sharply slowing down; demand for housing related durable goods (furniture, home appliances) is falling. Moreover, US private consumption – that represents over 70% of aggregate demand – is now under pressure. The US consumer is now saving-less, debt-burdened and buffeted by many negative forces. As long as home prices were rising it made sense for US households to use their homes as their ATM machines, borrow against their rising home equity and spend more than their income (negative savings). But now that home prices are falling there is the beginning of a retrenchment of consumption whose growth rate slowed down from a 4% average until the first quarter of 2007 to a weak 1.3% in the second quarter, even before the summer financial market turmoil.
There are now many negative factors squeezing US consumers and forcing them to retrench spending: falling home values leading to a negative wealth effect; sharply falling home equity withdrawal preventing households from overspending; a credit crunch in mortgages and consumer debt markets rising debt servicing costs for consumers; still high oil and gasoline prices; the beginning of a serious weakening of the labor market – as signaled by today’s employment report and other data - that will significantly reduce income generation in the months ahead. As long as income generation and job generation was robust, one could dismiss the risks of a hard landing; but the signal from today’s employment report is that the only force that was preventing a hard landing (jobs and income generation) is now starting to falter.
Thus, in the next few months you can expect a further slowdown of consumption growth from its already mediocre growth rate of 1.3% in the second quarter. Indeed, after an ok July, retail sales were weak in August: based on the Redbook Johnson and the UBS Securities/ICSC data same store retail sales in August actually fell relative to July; and in real terms such retail sales in August were lower than in August 2006. Thus, the deceleration in consumption in Q3 is already clear in the data.
And if consumption slows down the build-up of inventories of unsold goods will force firms to slow down production, employment and capital spending. Such investment spending by the corporate sector was already weak in the last few quarters in spite of the high corporate profitability. Now you can expect further weakening of such real investment because of expected lower consumption demand, higher credit spreads for the corporate sector, uncertainty about the future given the volatility in the markets. The sharp re-pricing of risk that took place in the summer – with higher credit spreads for a broad variety of instruments – implies much higher borrowing costs for consumers, buyers of homes, corporations and financial institutions. Thus, the slowdown of private consumption and capital spending in residential, non-residential and corporate investment will get more severe.
On top of a weakening of the real economy the current financial markets turmoil will get worse – not better - in the next few months. This was never just a sub-prime problem as the same reckless and toxic lending practices in sub-prime – no down-payment, no verification of income and assets, interest rate only mortgages, negative amortization, teaser rates – were occurring in near prime mortgages, Alt-A loans, piggyback loans, home equity loans, and prime hybrid ARMs. About 50% of all mortgage origination in the last two years was made of this toxic waste and utterly junk lending practices.
And now what started as a credit crunch in the sub-prime mortgage market has spilled over to near prime and prime mortgages and to a variety of other credit markets: money markets, interbank lending markets, asset backed commercial paper, structured investment vehicles (SIVs) of banks, CDO markets, other securitization markets, and the LBO market. All these markets are now literally frozen with a dearth of liquidity, serious refinancing problems and severe credit problems. The mess in the SIV products is particularly serious and dramatic as it is generating severe liquidity and capital problems for both banking and non-banking institutions.
And this liquidity and credit crunch will get worse in the weeks ahead as this financial markets crisis is much more severe than the liquidity crisis of 1998 when LTCM – the largest US hedge fund – almost collapsed. In 1998 you had only a liquidity problem as the economy was strong – growing at 4% plus - and we were still in the rising cycle of the internet boom. Today, in addition to severe liquidity problems in the financial system (a near total freezing of the entire financial system liquidity plumbing), we have serious credit and insolvency problems too. The credit and solvency problems derive from a massive credit boom that lead to excessive borrowing that, in turn fed for a while rising asset prices that are now going bust, in a typical Minsky credit cycle. It is a insolvency problem as you have now millions of US households that are near insolvent and will default on their mortgages; dozens of sub-prime mortgage lenders who have already gone bankrupt; dozen of home building companies that are under distress; many financial institutions in the US and abroad - such as hedge funds and other highly leveraged institutions – that have already gone belly up; and the rise in credit spreads will also lead soon to a rise in corporate defaults that had been artificially low in the last few years given the excessively easy credit conditions. So we do not face only a most severe liquidity crisis; we are also observing a serious credit crisis and credit crunch. And you cannot resolve credit problems – as opposed to liquidity problems – with liquidity injections. That is why the forthcoming cuts in the Fed Funds rate by the Fed will be ineffective in stemming the real and financial problems of the economy.
Indeed, the forthcoming easing of monetary policy by the Fed will not rescue the economy and financial markets from a hard landing as it will be too little too late. The Fed underestimated the severity of the housing recession, its spillovers to other sectors, and the contagion of the sub-prime carnage to other mortgage markets and to the overall financial markets. Fed easing will not work for several reasons: the Fed will cut rate too slowly as it is still worried about inflation and about the moral hazard of perceptions of rescuing reckless investors and lenders; we have a glut of housing, autos and consumer durables and the demand for these goods becomes relatively interest rate insensitive once you have a glut that requires years to work out; serious credit problems and insolvencies cannot be resolved by monetary policy alone; and the liquidity injections by the Fed are being stashed in excess reserves by the banks, not relent to the parts of the financial markets where the liquidity crunch is most severe and worsening. The Fed provided liquidity to banking institutions but it cannot provide direct liquidity to hedge funds, investment banks, other highly leveraged institutions and parts of the credit markets – such as asset backed commercial paper – where the crunch is severe. Thus, the liquidity crunch in most credit markets remains severe, even in the usually most liquid interbank markets.
Unfortunately, financial globalization together with securitization and mushrooming of complex credit instruments has lead to greater opacity and less transparency in the financial system. And this lack of transparency breeds unmeasurable uncertainty rather than priceable risk. Risk can be priced as you have a distribution of probabilities on various events. But unmeasurable uncertainty causes higher risk aversion under conditions of market distress. This generalized uncertainty is now coming from two sources: first, we do not know the size of the overall losses in credit markets: sub-prime alone could lead to losses of $100 billion or much higher depending on how much home prices will fall. And other losses from other illiquid financial instruments remain unmeasured in a world where institutions were marking to model rather than marking to market and where credit rating agencies were mis-rating complex credit instruments. Second, as securitization implies that financial risks have been spread out of banks and to the corners of the global financial system we do not know which firms are holding the toxic waste and thus which firms will go belly up next. It is like walking blind in a minefield where you have no idea of where the mines are. This uncertainty breeds large fear – after the massive greed of the previous credit and asset bubble has now burst – and lack of trust of financial counterparties, even otherwise respected ones: everyone want to hoard liquidity and hold the safest assets as even large financial institutions do not trust each other and are unwilling to lend to each other. This greater opacity of financial globalization and securitization implies that the re-pricing of risk that we have observed in the last few weeks is a permanent rather than a transitory phenomenon. And the sharp spike in the cost of credit will further weaken an already weakened economy. This is thus the first real crisis of the new world of financial globalization and securitization.
Until next month.
~Ciao~
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Showdown with the Fed
I am back after taking a break from the blogging world. Below is an article from www.moneyandmarkets.com. I thought it summed up the screwed up situation the Fed currently finds itself in a very clear manner. We live in very interesting times.
Showdown with the Fed:
A Fictional Debate on the Eve
Of a Monumental Decision
Assembled around a long mahogany table are the nation's most powerful monetary and fiscal policymakers … along with an eclectic group of CEOs from the U.S. industries most severely impacted by the credit crisis — home builders, mortgage lenders and Wall Street bankers.
Federal Reserve Chairman Bernanke, seated at the head of the table, knows that each of the attendees is feeling the compulsion to have the first — or, even better, the last — word. And he recognizes that all believe their single industry is the pivotal factor in bringing the U.S. economy to a momentous fork in the road. So as he opens the meeting, he takes great care not to direct his gaze to one group more than any other.
Bernanke: Over the past month, our staff — and the staff of the Treasury Department — have heard from each of you privately. But despite the staffs' efforts to convey the contradictions in your divergent expectations, those expectations — and demands — continue to escalate.
So this meeting is as much an opportunity for us to hear you as it is for you to hear each other — to witness, first-hand, the conflicting pressures the Federal Open Market Committee, the Treasury Department and other policy-making bodies are experiencing, and to convey to you a better understanding of the severe constraints under which we operate.
From several of the industries represented here today, the bottom-line demand, although never expressed in quite those words, is very simple: You want a bailout.
In effect, you want the government to restore an environment of risklessness … and even recklessness — the very same atmosphere that brought us to this impasse we are here to discuss today.
If that's your true agenda — and I fear it may be — the discussion is likely to be nonproductive. If, however, we can come away from this debate with a better recognition of the complexities and limitations of policymakers, I think it would be a productive outcome.
Pulte Homes: Mr. Chairman, I am volunteering to speak first because the nation's leading home builders — including ourselves, D.R. Horton, Lennar, Centex and others — were the canaries in the coal mine, the first to feel the shifting winds of this storm. Specifically, I'm talking about the downturn in the pace of new home sales which began many months before the subprime mortgage crisis.
That's where it all started. It's from that critical turn in our market that the chain of events unfolded — the decline in home values, the foreclosures, the mortgage meltdown, the credit crunch.
And that's also where I believe a new phase of this crisis is now beginning — where we're on the brink of a second, far more serious decline — which, if allowed to happen, will not only stall the nation's economic engine but could throw it into reverse.
Here's what's happening: Due to overwhelmingly large stockpiles of unsold homes, accompanied by a further, sharper decline in the pace of sales, many in our industry are on the verge of announcing deep discounts in home prices. But they dare not lest it set off a panic in our marketplace.
So what we're doing is to try, in effect, to disguise the real price declines by offering — even showering — home buyers with lavish incentives, freebies if you will.
We're doing our best to hold the line, but we cannot keep that up much longer. Sooner or later, one or more of our members is going to break ranks and start a pattern of cut-throat, competitive price reductions. Those, in turn, are going to precipitate deeper declines in the price of existing homes. And all of this is then going to show up in the national stats compiled by the National Association of Realtors and others.
When homebuyers see those stats, even the few buyers with cash or top credit ratings will be spooked. And they will vanish.
So what I'm saying is that you are right. We are asking for a bailout, and we're doing so unabashedly. Without it, the Fed's prime objective of maintaining economic growth is dead on arrival.
Bernanke: I recognize and understand your passion in this matter. But I hasten to warn you — and everyone here — that overstating the nature of the crisis could have a perverse impact on our response.
Countrywide Financial: Allow me to respond to that, Mr. Chairman. Since last week, I, along with several others in the mortgage industry, have been in intense discussions with the Treasury on this entire matter. And from our various conversations with policymakers, we sense a broad undercurrent of reluctance to provide support to risk-takers in this market.
I understand that. I even agree with the broad, high-level philosophy that it represents. But if there ever was a time when on-the-ground conditions warranted suspending those concerns — setting them aside temporarily — this is it.
So I, too, have no hesitation in using the term "bailout" with reference to what we're asking for.
The reason is this: There's no way — and certainly no time — to quarantine risk-takers. There's no mechanism for separating "legitimate" first-time homebuyers from part-time investors, or to separate part-time investors from all-out speculators. In fact, there have always been blended elements of both investment and speculation in the housing and mortgage marketplace.
Moreover, the urgency of the situation — to save the entire marketplace, to prevent a collapse of the housing and mortgage industries — supersedes, in our view, any longer term, philosophical goals, no matter how much we may all subscribe to such goals.
Please allow me to leave you with this one thought: I know there are conflicting demands on policymakers from different industries represented around the table, from foreign investors, from members of the Federal Open Market Committee. But we need to stop and ask: How will a deeper collapse in home prices — and a broader meltdown in the mortgage market — impact the others in this room? What will that do to the U.S. economy? How would that constrain Fed policymaking?
Freddie Mac: I have asked that same question of our economists who track the impact of housing on the broader economy, and I feel I can answer it without equivocating: If the housing market is allowed to deteriorate much further, the risk of recession, which is already high, would be close to 100%.
Indeed, I don't think it would be an overstatement to affirm that any further housing collapse dooms the U.S. economy to one of its deepest recessions since the Great Depression.
Right now, it's safe to say that large segments of the mortgage market, especially those carried or sponsored by government agencies like ourselves and our colleagues at Fannie Mae, are sound. But how sound will they be if the serious concerns raised by Pulte Homes and Countrywide Financial are not addressed? If their worst fears are confirmed?
Think about it. We're already experiencing the worst credit crisis in decades just because certain segments of the U.S. mortgage market have been wounded. Imagine where we'll be if most, or all, of the mortgage market is wounded, mortally or not!
How can we — or anyone — write, package or underwrite mortgages if subprime high-risk borrowers are defaulting by the millions AND, at the same time, even prime borrowers are putting up homes for collateral which are sinking in value?
Yes, we know that the task of removing risk from the marketplace is not the Fed's role or goal. But that's precisely what we must have nonetheless.
Bernanke: What precisely do you gentlemen have in mind?
[The Fed Chairman asks the question and turns his gaze to three men representing Wall Street's largest investment bankers. The Chairman expects the gentleman who's the most senior among them to voice a dissenting opinion. But it's his junior colleague who speaks next. ]
Bear Sterns: What we want is either a half-point rate cut tomorrow, or if that isn't possible, a quarter-point cut accompanied by a clear indication that more rate cuts are imminent.
To better understand the urgency of this request, compare where we are today in the credit markets to where we were just a couple of months ago when Bear Sterns first evaluated and revealed the difficulties we were having with our two hedge funds in this sector:
First, we are witnessing a far broader-than-expected fall-out from subprime mortgages in other credit markets. Everyone who has ever said it was contained has repeatedly been proven wrong. And every time credit market participants begin to say "fear is fading" and "confidence is returning," another situation blows up.
Look at what happened just late last week in Britain. Northern Rock PLC eclipsed all previous European casualties from the subprime crisis. It suffered a run on deposits, just like our banks did in the early 1930s. And had the Bank of England not acted promptly, God only knows what the consequences might have been!
Do we know who's next? No. But one thing we do know is that nonbank banks can have consumer deposits just like true banks. And like the true banks of yesteryear, nonbank banks are vulnerable to a run on those deposits. Is that what we want? A situation like the 1930s? A situation in which millions of consumers and investors are pulling their money out of hedge funds … then nonbank banks … then other financial institutions? I don't think so.
And that's why we say that, if the Open Market Committee decides not to cut its target rate for Fed funds by a half point tomorrow, it must at least signal its intention to do so incrementally … and quickly.
[A contagious round of nodding spreads around the table, engulfing not only industry representatives but also many of the Fed's staff. However, one not-so-senior staff economist at the Fed shakes his head, and by so doing attracts the stares of nearly all others. Most are a bit outraged that he even dares speak — let alone speak his mind.]
Fed economist: Gentlemen, although you may have read some of my reports, you probably do not know me. But at the risk of being the fly in your ointment, please allow me to add my voice of dissent to this otherwise unanimous discussion.
If you have been watching the financial markets, you have no doubt noticed a few recent events that have immediate bearing on the FOMC's upcoming decision.
First, gold. Gold is a market that our former chairman often paid attention to — not because of its intrinsic monetary importance, but as an early indicator of inflationary expectations in the marketplace. And if he were a part of these discussions today, he'd probably be saying — or at least thinking — that to ignore the inflationary expectations implied in gold's recent surge past $720 per ounce would be a grave error.
Second, crude oil. I don't have to remind you that last week's price surge to $80 per barrel is more than just a sign of inflation. It's an actual source of inflation that propagates and multiplies through the global economy in the form of rising costs for hundreds of products derived from petroleum, in the form of a parallel rise in the cost of nearly all forms of energy, and in the form of the costs required to make or transport millions of products.
Third, the dollar. The dollar's decline is not just a signal of inflation. And it's not just a source of inflation. The dollar's decline — to a 15-year low last week and to a likely all-time low any day — could be precisely the factor that triggers the collapse everyone is trying so hard to avoid.
Where do you think most of the money for the housing boom came from? Who do you think financed the single biggest share of subprime mortgages? Mortgage-backed securities? Mortgage-backed commercial paper?
It was foreign investors, using the hard-earned savings of foreign citizens in foreign currencies.
The foreign investors sold their currencies to buy U.S. dollars. They used those dollars to buy our subprime mortgages, or securities derived from subprime mortgages.
And now, for reasons that should be obvious to everyone, they're trying to get the hell out.
Bear Sterns just pointed out what happened in Britain last week with Northern Rock. You also saw what happened in Germany last month. And you know that this is just the tip of the iceberg.
So now, on top of giving foreign investors more risk for their money, you also want to give them less yield for their money?
So now, with the dollar already falling and with foreign investors already spooked, the proposal on the table is not only to cut U.S. interest rates, but also to do so at double the normal pace?
Don't you see? This is where the chickens come home to roost, where the dots connect back to everything that has been said here today: That foreign money you're turning away was the single largest source that financed the U.S. mortgage bubble, that financed the U.S. housing boom.
So go ahead. Do what you're proposing. Send foreign investors home packing. And then see what that will get you: For every dollar of bailout money you pour into this mess, another two … three … four … or more dollars of foreign financing will be pulled out from this mess.
I rest my case.
Back to Non-Fiction
This meeting never took place and probably never will. But it represents a realistic composite of fervent discussions being held in recent days and leading up to Bernanke's decision tomorrow.
We don't know precisely what they're saying. But we do know this: The lone voices of those warning of the dollar's decline are being drowned out by the din of voices shouting for interest-rate relief.
Bottom line: Count on a rate cut tomorrow. But don't count on it satisfying the demands being made on the Fed.
And after some possible initial cheers from Wall Street, expect a wave of disappointment — first in the foreign currency market, then spreading to the U.S. bond markets and also infecting the U.S. stock market.
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Showdown with the Fed:
A Fictional Debate on the Eve
Of a Monumental Decision
Assembled around a long mahogany table are the nation's most powerful monetary and fiscal policymakers … along with an eclectic group of CEOs from the U.S. industries most severely impacted by the credit crisis — home builders, mortgage lenders and Wall Street bankers.
Federal Reserve Chairman Bernanke, seated at the head of the table, knows that each of the attendees is feeling the compulsion to have the first — or, even better, the last — word. And he recognizes that all believe their single industry is the pivotal factor in bringing the U.S. economy to a momentous fork in the road. So as he opens the meeting, he takes great care not to direct his gaze to one group more than any other.
Bernanke: Over the past month, our staff — and the staff of the Treasury Department — have heard from each of you privately. But despite the staffs' efforts to convey the contradictions in your divergent expectations, those expectations — and demands — continue to escalate.
So this meeting is as much an opportunity for us to hear you as it is for you to hear each other — to witness, first-hand, the conflicting pressures the Federal Open Market Committee, the Treasury Department and other policy-making bodies are experiencing, and to convey to you a better understanding of the severe constraints under which we operate.
From several of the industries represented here today, the bottom-line demand, although never expressed in quite those words, is very simple: You want a bailout.
In effect, you want the government to restore an environment of risklessness … and even recklessness — the very same atmosphere that brought us to this impasse we are here to discuss today.
If that's your true agenda — and I fear it may be — the discussion is likely to be nonproductive. If, however, we can come away from this debate with a better recognition of the complexities and limitations of policymakers, I think it would be a productive outcome.
Pulte Homes: Mr. Chairman, I am volunteering to speak first because the nation's leading home builders — including ourselves, D.R. Horton, Lennar, Centex and others — were the canaries in the coal mine, the first to feel the shifting winds of this storm. Specifically, I'm talking about the downturn in the pace of new home sales which began many months before the subprime mortgage crisis.
That's where it all started. It's from that critical turn in our market that the chain of events unfolded — the decline in home values, the foreclosures, the mortgage meltdown, the credit crunch.
And that's also where I believe a new phase of this crisis is now beginning — where we're on the brink of a second, far more serious decline — which, if allowed to happen, will not only stall the nation's economic engine but could throw it into reverse.
Here's what's happening: Due to overwhelmingly large stockpiles of unsold homes, accompanied by a further, sharper decline in the pace of sales, many in our industry are on the verge of announcing deep discounts in home prices. But they dare not lest it set off a panic in our marketplace.
So what we're doing is to try, in effect, to disguise the real price declines by offering — even showering — home buyers with lavish incentives, freebies if you will.
We're doing our best to hold the line, but we cannot keep that up much longer. Sooner or later, one or more of our members is going to break ranks and start a pattern of cut-throat, competitive price reductions. Those, in turn, are going to precipitate deeper declines in the price of existing homes. And all of this is then going to show up in the national stats compiled by the National Association of Realtors and others.
When homebuyers see those stats, even the few buyers with cash or top credit ratings will be spooked. And they will vanish.
So what I'm saying is that you are right. We are asking for a bailout, and we're doing so unabashedly. Without it, the Fed's prime objective of maintaining economic growth is dead on arrival.
Bernanke: I recognize and understand your passion in this matter. But I hasten to warn you — and everyone here — that overstating the nature of the crisis could have a perverse impact on our response.
Countrywide Financial: Allow me to respond to that, Mr. Chairman. Since last week, I, along with several others in the mortgage industry, have been in intense discussions with the Treasury on this entire matter. And from our various conversations with policymakers, we sense a broad undercurrent of reluctance to provide support to risk-takers in this market.
I understand that. I even agree with the broad, high-level philosophy that it represents. But if there ever was a time when on-the-ground conditions warranted suspending those concerns — setting them aside temporarily — this is it.
So I, too, have no hesitation in using the term "bailout" with reference to what we're asking for.
The reason is this: There's no way — and certainly no time — to quarantine risk-takers. There's no mechanism for separating "legitimate" first-time homebuyers from part-time investors, or to separate part-time investors from all-out speculators. In fact, there have always been blended elements of both investment and speculation in the housing and mortgage marketplace.
Moreover, the urgency of the situation — to save the entire marketplace, to prevent a collapse of the housing and mortgage industries — supersedes, in our view, any longer term, philosophical goals, no matter how much we may all subscribe to such goals.
Please allow me to leave you with this one thought: I know there are conflicting demands on policymakers from different industries represented around the table, from foreign investors, from members of the Federal Open Market Committee. But we need to stop and ask: How will a deeper collapse in home prices — and a broader meltdown in the mortgage market — impact the others in this room? What will that do to the U.S. economy? How would that constrain Fed policymaking?
Freddie Mac: I have asked that same question of our economists who track the impact of housing on the broader economy, and I feel I can answer it without equivocating: If the housing market is allowed to deteriorate much further, the risk of recession, which is already high, would be close to 100%.
Indeed, I don't think it would be an overstatement to affirm that any further housing collapse dooms the U.S. economy to one of its deepest recessions since the Great Depression.
Right now, it's safe to say that large segments of the mortgage market, especially those carried or sponsored by government agencies like ourselves and our colleagues at Fannie Mae, are sound. But how sound will they be if the serious concerns raised by Pulte Homes and Countrywide Financial are not addressed? If their worst fears are confirmed?
Think about it. We're already experiencing the worst credit crisis in decades just because certain segments of the U.S. mortgage market have been wounded. Imagine where we'll be if most, or all, of the mortgage market is wounded, mortally or not!
How can we — or anyone — write, package or underwrite mortgages if subprime high-risk borrowers are defaulting by the millions AND, at the same time, even prime borrowers are putting up homes for collateral which are sinking in value?
Yes, we know that the task of removing risk from the marketplace is not the Fed's role or goal. But that's precisely what we must have nonetheless.
Bernanke: What precisely do you gentlemen have in mind?
[The Fed Chairman asks the question and turns his gaze to three men representing Wall Street's largest investment bankers. The Chairman expects the gentleman who's the most senior among them to voice a dissenting opinion. But it's his junior colleague who speaks next. ]
Bear Sterns: What we want is either a half-point rate cut tomorrow, or if that isn't possible, a quarter-point cut accompanied by a clear indication that more rate cuts are imminent.
To better understand the urgency of this request, compare where we are today in the credit markets to where we were just a couple of months ago when Bear Sterns first evaluated and revealed the difficulties we were having with our two hedge funds in this sector:
First, we are witnessing a far broader-than-expected fall-out from subprime mortgages in other credit markets. Everyone who has ever said it was contained has repeatedly been proven wrong. And every time credit market participants begin to say "fear is fading" and "confidence is returning," another situation blows up.
Look at what happened just late last week in Britain. Northern Rock PLC eclipsed all previous European casualties from the subprime crisis. It suffered a run on deposits, just like our banks did in the early 1930s. And had the Bank of England not acted promptly, God only knows what the consequences might have been!
Do we know who's next? No. But one thing we do know is that nonbank banks can have consumer deposits just like true banks. And like the true banks of yesteryear, nonbank banks are vulnerable to a run on those deposits. Is that what we want? A situation like the 1930s? A situation in which millions of consumers and investors are pulling their money out of hedge funds … then nonbank banks … then other financial institutions? I don't think so.
And that's why we say that, if the Open Market Committee decides not to cut its target rate for Fed funds by a half point tomorrow, it must at least signal its intention to do so incrementally … and quickly.
[A contagious round of nodding spreads around the table, engulfing not only industry representatives but also many of the Fed's staff. However, one not-so-senior staff economist at the Fed shakes his head, and by so doing attracts the stares of nearly all others. Most are a bit outraged that he even dares speak — let alone speak his mind.]
Fed economist: Gentlemen, although you may have read some of my reports, you probably do not know me. But at the risk of being the fly in your ointment, please allow me to add my voice of dissent to this otherwise unanimous discussion.
If you have been watching the financial markets, you have no doubt noticed a few recent events that have immediate bearing on the FOMC's upcoming decision.
First, gold. Gold is a market that our former chairman often paid attention to — not because of its intrinsic monetary importance, but as an early indicator of inflationary expectations in the marketplace. And if he were a part of these discussions today, he'd probably be saying — or at least thinking — that to ignore the inflationary expectations implied in gold's recent surge past $720 per ounce would be a grave error.
Second, crude oil. I don't have to remind you that last week's price surge to $80 per barrel is more than just a sign of inflation. It's an actual source of inflation that propagates and multiplies through the global economy in the form of rising costs for hundreds of products derived from petroleum, in the form of a parallel rise in the cost of nearly all forms of energy, and in the form of the costs required to make or transport millions of products.
Third, the dollar. The dollar's decline is not just a signal of inflation. And it's not just a source of inflation. The dollar's decline — to a 15-year low last week and to a likely all-time low any day — could be precisely the factor that triggers the collapse everyone is trying so hard to avoid.
Where do you think most of the money for the housing boom came from? Who do you think financed the single biggest share of subprime mortgages? Mortgage-backed securities? Mortgage-backed commercial paper?
It was foreign investors, using the hard-earned savings of foreign citizens in foreign currencies.
The foreign investors sold their currencies to buy U.S. dollars. They used those dollars to buy our subprime mortgages, or securities derived from subprime mortgages.
And now, for reasons that should be obvious to everyone, they're trying to get the hell out.
Bear Sterns just pointed out what happened in Britain last week with Northern Rock. You also saw what happened in Germany last month. And you know that this is just the tip of the iceberg.
So now, on top of giving foreign investors more risk for their money, you also want to give them less yield for their money?
So now, with the dollar already falling and with foreign investors already spooked, the proposal on the table is not only to cut U.S. interest rates, but also to do so at double the normal pace?
Don't you see? This is where the chickens come home to roost, where the dots connect back to everything that has been said here today: That foreign money you're turning away was the single largest source that financed the U.S. mortgage bubble, that financed the U.S. housing boom.
So go ahead. Do what you're proposing. Send foreign investors home packing. And then see what that will get you: For every dollar of bailout money you pour into this mess, another two … three … four … or more dollars of foreign financing will be pulled out from this mess.
I rest my case.
Back to Non-Fiction
This meeting never took place and probably never will. But it represents a realistic composite of fervent discussions being held in recent days and leading up to Bernanke's decision tomorrow.
We don't know precisely what they're saying. But we do know this: The lone voices of those warning of the dollar's decline are being drowned out by the din of voices shouting for interest-rate relief.
Bottom line: Count on a rate cut tomorrow. But don't count on it satisfying the demands being made on the Fed.
And after some possible initial cheers from Wall Street, expect a wave of disappointment — first in the foreign currency market, then spreading to the U.S. bond markets and also infecting the U.S. stock market.
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
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