What’s in store for housing? Well, it would appear the consensus is catching up to your editor here at Vigilant Investor. Reports CNNMoney:
The battered markets for real estate and home building still have farther to fall, according to a range of economists who spoke Wednesday at a forecast conference sponsored by the National Association of Home Builders. The economists agreed that the problems with home finance markets will continue to hit housing into next year, and that even when there is a recovery, it will be a slow process that will see weakness continue into 2009.
Gee… don’t go out on a limb, now, Ok?
While most said they believed the overall U.S. economy can weather the housing downturn, several saw significant risk of a recession. Mark Zandi, chief economist of Moody’s Economy.com, said that large areas of the country will fall into recession, if they haven’t done so already.
If you read our archives, you’ll find our comments on housing bubbles much in agreement with Peter Schiff long before the December 2006 interview above. What we hope you take from this post is an understanding of the incredulity our camp was exposed to from high profile analysts and pundits all the way down to mainstream opinion makers. It is the same dismissive attitude many applied to warnings about the credit situation prior to the breakup this past summer.Below is a second, later example from mid-August.
Consider Schiff’s comment — that the real problems of the credit crisis were still hidden, and that the economy would eventually pay in terms of real economic consequences — and how he’s dismissed:
We, too, were thinking the credit crisis had barely reared its head — and still think it has a long way to go given all the dislocations massive liquidity injections both enable and encourage. Today, this headline[Merrill Loss Baffles Even Wall Street's Pessimistic Analysts ] affirms we’re not off the mark.
(NOTE / Disclaimer: Our reasons for providing the second video is not to imply approval of of any of the panelists’ recommendations, but rather to illustrate how the misunderstanding of economic issues is prevalent among some of Wall Street’s most prominent commentators. Economics is about the allocation of resources, which in our opinion are dislocated from reality, and this condemnation of sober opinion is all too common.
Today’s news tells us that Merrill suffered massive (unexpected to most pundits) losses in the credit markets, revealing the economic consequences of the giant credit bubble-induced dislocations are only beginning to hit the economy in earnest.
“At least one bank representative suggested that Treasury step in with some money to help bail out the firms, the people who attended say. Mr. Steel told the group that wasn’t an option: Treasurywould only back a private-sector, market-based solution. “We bought the sandwiches, and that’s it,” Mr. Steel told those assembled.”
I’ve seen the “bought the sandwiches only” sentence quoted all over, but this is the only time I’ve come across the sentence prior to it. That makes me feel really confident the taxpayer won’t be backing any of this in some form or another. Of course, stabilizing the credit markets and all the inflated asset values (artificial pricing vs. natural pricing mechanism in the economy) it supports doesn’t fall under the Treasury’s Plunge Protection Team’s authority, right?
Dude has a simple but important observation on SIVs and Sovereign Wealth Funds, over at “Dude… Where’s my Dharma?” SWFs are the recently popular response for foreign nations to diversify their massive U.S. dollar denominated reserves, which continue to build in response to the U.S. propensity to spend and not save (e.g. the gargantuan twin U.S. deficits). Is this a real threat? Check out the link.
Also, for a better understanding of the dynamics that enable the massive deficits and create terrible, depression-threatening dislocations between nations, consider reading PIMCO’s recent white paper on the subject:
We expect that eventually Euro policy makers will worry about loss of exports and work to destroy the gained purchasing power of the Euro, thus inflating away the benefits to European citizens.
Meanwhile, despite official government stats that attempt to convince us otherwise, nearly half of Americans think the U.S. economy is in a recession according to a CNN-Opinion Research Poll. That continues to reaffirm the departure from reality we’ve noticed with many stats, such as CPI and GDP, which purport to explain real inflation and economic growth. We continue to believe that there is a dual economy in the U.S. Those at the high end of wages are doing quite nicely, whereas those on the lower end of the wage scale are having more and more trouble making ends meet with prices of commonly required goods rising far higher than the official CPI — reported at a modest 2.7%.
Some, such as econometrics pro, John Williams, argue that methods used to calculate these figures have been politicized and changed substantially from their more genuine former selves. Per Williams, were we to use older calculations for CPI and GDP, we’d see the numbers closer to 9-10% and -2.5% respectively. Those numbers would confirm the sentiments found in the CNN Research Poll and might even sync up with the abysmally low approval ratings of both Congress and the President.
The short-term credit markets took a blow with the announcement yesterday that the liquidity troubled Cheyne Finance fund would seek protection. While still filled with cash, the fear is — as is so common among all players riding the Mortgage Backed Security (MBS) high wire — that it would be forced to put assets for sale to be marked at prevailing market prices. Such would start a cascading series of margin calls, moves to convert to cash, etc.
Rather than come clean under current conditions, major players are hoping the credit market will fix itself by becoming fluid enough again to support mortgage backed security values closer to 100 cents on the dollar, which is typically how they had been held on the books via mark to model assumptions when leveraging up. They’re they were marked — up until the credit crisis was exposed at Bear Stearns in June. This hope-and-a-prayer approach is all the more like a Hail-Mary football pass given so many players used leverage upon leverage when investing in these assets. A contraction of easy credit to support those values is Kryptonite to their once Super Human returns. Continue Reading »
With that in mind, we found news that Social Security benefits will be raised by 2.3% as the cost of living adjustment nearly laughable. Only, with the average recipient getting only an additional $24 for a total average of $1070 next year, its too pathetic a story.
With our expectations that inflation will only worsen as the credit crisis deepens into recession, those on fixed income and dependent upon politicians for their retirement will be in for a serious wake up call. That’s going to send politicians scrambling for solutions to yet another problem of its own making.
The big news since it broke on Sunday has been the talk of the world’s biggest banks getting together to support their failing SIV business with an $200 billion bailout fund, with the intention of providing ongoing liquidity for the credit markets. This is not just the free market working this out on its own. Reports the NYT:
…In a sign that administration officials are more worried about underlying problems in the markets than they had previously let on, Mr. Paulson and other top Treasury officials are prodding and pushing Wall Street firms and the mortgage industry to come up with solutions — and helping devise some of them as well.
The plan announced Monday involves no money from taxpayers, and it was negotiated primarily between the banks themselves. But it highlighted Mr. Paulson’s growing effort to marry two competing goals of the Bush administration: to stabilize the battered markets for mortgages and housing, but to avoid a government bailout that might encourage investors to take even bigger risks in the future — what economists call “moral hazard.”
“No taxpayer money involved” sounds great, but when it comes to the banking system in the modern world, that does not translate into the banks paying for their own mistakes. Continue Reading »
“The losses of Sentinel Management Group Inc. and its customers “clearly exceed” $200 million and might surpass $350 million because of a “leveraging scheme” and “alleged misconduct” by insiders, according to a report by a forensic accountant examining the Aug. 17 collapse of the Northbrook-based cash-management firm.”
When easy money is flowing from the banking system due to expansive policy, investors (entrepreneurs, homeowners, etc.) grow more careless. That’s part and parcel of an inflationary cycle. The bubble psychology that permeates society sends a signal that everyone is making money and risk is no longer a problem. Continue Reading »
UPDATE: Oops! We crossed our labels in our DJIA and S&P500 vs. Oil Charts. Those are now corrected. If those barrels per unit seemed off before, they’re now corrected! 10-14-2007
In America its very common to think of the dollar in a vacuum. You actually hear pundits dismiss the dollar drop, saying “Who cares! In America we spend dollars.”
Well, while we believe the dollar dropping vs. other currencies has some serious implications for the debt addicted U.S. economy, the dollar has been dropping not just against other currencies. Here are a few sobering charts worth considering when change our measure away from dollar terms.
To maintain trade parity with the U.S., foreign nations choose to print their own currencies so that the dollar does not weaken dramatically against theirs. If they didn’t, the dollar earned from the U.S. would be sold into the marketplace (increasing supply while reducing the demand) in exchange for their own currency (increasing the demand and reducing the supply). That would mean the local currency would grow stronger and the dollar weaker, meaning U.S. consumers would be able to buy less goods from this country.
That’s what many nations have done for decades. In particular, it is was China has been doing.
However, such policy is not without consequences. Functionally, these nations are subsidizing U.S. consumption at the expense of their own citizen’s purchasing power. By constantly printing their own currencies, these nations develop inflation problems — and that’s finally catching up with them. Hence, nations that have supported a strong dollar and low U.S. interest rates are being forced to back away –which not only will further exacerbate the large dollar slide that started earlier this decade, it will also prove problematic for the U.S. economy which has grow blaze in its expectations of perpetually funding a gargantuan debt load at below average costs. When interest rates rise in an economy already burdened by a housing collapse that is leading into a recession, look out!
Hence, we warn our readers to take heed of the news that more small oil nations flush with Petro Dollars can no longer afford to subsidize the U.S. by backing the dollar.
Well, we’ve warned about what’s now going down for a long time. The other shoe is dropping right through the floor — and it’s a Clodhopper!
Just this week we’ve learned from the National Association of Realtors that the number of Americans signing up to buy previously owned homes in August dropped 6.5 percent from July. Over the past year, pending home sales are down over 20%. We also learn from Moody’s that the most recently created (2007) sub-prime mortgage backed bonds contain loans growing delinquent at literally a record pace. But wait — the reckless, loose money caused fiasco is hardly contained to the U.S! Moody’s also reports that loan delinquencies in Spain could grow 15 times by the close of 2008!
We’ve said it before, and we’ll say it again. You can’t borrow your way to prosperity. There is a yin to every yang. What goes up must come down. Every action has an equivalent reaction.
As things become critical in an era where the “pundits” seem to make everything so illogically complicated — we encourage you to find consultants who believe they understand the basic laws of financial physics.
