Economics scholar and former Federal Reserve Governor Frederic Mishkin says the shock that continues to rip through the nation’s economy is actually worse than what was felt during the Great Depression.
“The difference is, we have people on the ball,” the Columbia University professor told CNBC.
Mishkin said he was impressed by the way his former colleagues at the Fed handled crises.
“During all these episodes… everybody stayed very cool, calm, and collected,’ he recalled. “Chairman Bernanke is someone who sits down, is very analytical, thinks through, doesn’t get excited, just, ‘Let’s do the job,’ the staff operated that way, the rest of the board operated that way.”
I, for one, sure hope Mr. Bernanke’s problem-solving skills are a lot better than his forecasting abilities.
Anyone recall the following statements from “Helicopter Ben” over the last couple of years?
Housing Bubble
Testimony given at a Congressional Joint Economic Committee hearing in October 2005 (as reported by Nell Henderson of the Washington Post):
Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.
U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, “largely reflect strong economic fundamentals,” such as strong growth in jobs, incomes and the number of new households…
Bernanke’s testimony suggests that he does not share such concerns, and that he believes the economy could weather a housing slowdown.
“House prices are unlikely to continue rising at current rates,” said Bernanke, who served on the Fed board from 2002 until June. However, he added, “a moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year.”
Derivatives
Testimony given at a U.S. Senate hearing, November 15, 2005:
I think, generally speaking, they are very valuable. They provide methods by which risks can be shared, sliced and diced and given to those most willing to bear it. They add, I believe, to the flexibility of the financial system in many different ways.
And, with respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.
Subprime Crisis
Testimony given at a Congressional Joint Economic Committee hearing in March 2007:
At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.
The big question: Can Bernanke and the Fed fix something they never saw coming in the first place?
Sources:
“Top Economist Mishkin: Worse Than the Depression”
Andrew Fisher CNBC, September 23, 2008
“Bernanke: There’s No Housing Bubble to Go Bust”
Nell Henderson Washington Post, October 27, 2005
This morning I came across two pieces which were notable in that they painted a gloomy picture for the U.S. economy going forward. Jonathan Burton of MarketWatch talked about TCW Group’s Jeffrey Gundlach’s economic outlook, and wrote:
An influential investment strategist has a dire forecast for U.S. stocks, credit markets and the continued independence of some of the nation’s top financial institutions.
Jeffrey Gundlach, chief investment officer at Los Angeles-based mutual-fund company TCW Group Inc., told clients on a conference call late Wednesday that the crisis in credit and housing may not abate for several years and is actually getting worse.
In the deteriorating climate he sees unfolding, Gundlach said, the Standard & Poor’s 500 Index could fall another 30%, giant Citigroup could become an “AIG-sized debacle,” Morgan Stanley would merge with a banking company, Wachovia won’t be able to stand alone, default rates on even prime mortgages could soar, and European banks’ woes are just beginning.
“This is no market for old men,” said Gundlach, who also manages TCW’s flagship Total Return Bond Fund . “This is no market for old-school thinking.”
Gundlach based his assessment on a belief that housing prices still face several more years of decline, a protracted slump, he said, not seen since the Great Depression. Moreover, Gundlach said it’s possible that home prices could be sluggish until 2022.
“If it’s like the Depression experience — and it sure is shaping up that way — it could take several years. Maybe we won’t see a bottom in home prices until 2014,” he said.
Burton talked about Gundlach’s credentials for making such statements. He wrote:
As a forecaster, Gundlach didn’t just climb aboard the gloom-and-doom wagon. He was early to spot the cracks that subprime loans were making in the financial system, and among the first to warn that an era of easy money would come to a bad end.
The MarketWatch reporter noted:
Expect loan default rates to rise, Gundlach said, not just in the subprime market, but among the top-drawer prime borrowers as well. The prime default rate could approach 10% from a current 2% before the carnage is over, he said…
Accordingly, financial institutions may suffer write-offs that could surpass $1 trillion before conditions improve, he said…
The breakdown will take a further toll on U.S. stocks, Gundlach added. The S&P 500 will tumble below 800, he said, about 35% below its 1156 close on Wednesday.
Said Gundlach: “None of us have ever seen this, and it’s no market for old men, but risk aversion is the order of the day.”
Someone else who sees massive problems ahead for the American economy is Harvard economic professor and former chief economist of the International Monetary Fund Kenneth Rogoff. He wrote on the Financial Times (UK) website last night:
Were the financial crisis to end today, the costs would be painful but manageable, roughly equivalent to the cost of another year in Iraq. Unfortunately, however, the financial crisis is far from over, and it is hard to imagine how the US government is going to succeed in creating a firewall against further contagion without spending five to 10 times more than it has already, that is, an amount closer to $1,000bn to $2,000bn.
In other words, $1 to $2 trillion. Rogoff continued:
True, the US Treasury and the Federal Reserve have done an admirable job over the past week in forcing the private sector to bear a share of the burden. By forcing the fourth largest investment bank, Lehman Brothers, into bankruptcy and Merrill Lynch into a distressed sale to Bank of America, they helped to facilitate a badly needed consolidation in the financial services sector. However, at this juncture, there is every possibility that the credit crisis will radiate out into corporate, consumer and municipal debt. Regardless of the Fed and Treasury’s most determined efforts, the political pressures for a much larger bail-out, and pressures from the continued volatility in financial markets, are going to be irresistible…
The Ivy League professor talked about the potential fallout from allocating so much money to deal with the escalating financial crisis. He wrote:
It may prove to be possible to fix the system for far less than $1,000bn- $2,000bn. The tough stance taken by regulators this past weekend with the investment banks Lehman and Merrill Lynch certainly helps.
Yet I fear that the American political system will ultimately drive the cost of saving the financial system well up into that higher territory.
A large expansion in debt will impose enormous fiscal costs on the US, ultimately hitting growth through a combination of higher taxes and lower spending. It will certainly make it harder for the US to maintain its military dominance, which has been one of the linchpins of the dollar.
The shrinking financial system will also undermine another central foundation of the strength of the US economy. And it is hard to see how the central bank will be able to resist a period of allowing elevated levels of inflation, as this offers a convenient way for the US to deflate the mounting cost of its private and public debts.
It is a very good thing that the rest of the world retains such confidence in America’s ability to manage its problems, otherwise the financial crisis would be far worse.
Let us hope the US political and regulatory response continues to inspire this optimism. Otherwise, sharply rising interest rates and a rapidly declining dollar could put the US in a bind that many emerging markets are all too familiar with.
A new banana republic?
Sources:
“The worst is yet to come”
Jonathan Burton MarketWatch, September 18, 2008
“America will need a $1,000bn bail-out”
Kenneth Rogoff Financial Times (UK), September 17, 2008
The financial news media has been quiet lately when it comes to covering mortgage resets and their effect on the housing crisis. Too quiet. CNBC’s Ariel Nelson made some noise Thursday when she wrote:
Last year, everyone was worried that the resets on subprime loans would force borrowers into higher interest rates and payments. This element of the housing slide and credit crunch has subsided a bit…
However, the Option ARMs and Interest Only (IOs) loans scheduled to reset in the next few years will add more trouble. These loans represent about 15% of securitized loans and some have negatively amortized, increasing the payments and making refinancing more difficult. According to data from Barclay’s, about $300 billion in option ARMs and $820 billion in IO’s are set to recast. The results could be payment shocks over 80% for option ARMs and over 60% for IOs according to Barclay’s.
Option ARM Recast and Payment Shock Forecast
Source: CNBC
Earlier today, the Mortgage Bankers Association announced that a record 9.2% of American homeowners with a mortgage were either behind on their payments or in foreclosure at the end of June.
Source:
“ARM Resets: Tsunami Ahead”
Ariel Nelson CNBC, September 4, 2008
I love redheads. Just one, mind you— whom I happen to be dating. However, I’ve recently warmed up to a certain red-headed anchor who rose to fame with CNBC but now plies her trade over at the FOX Business Network. Liz Claman wrote a great piece back on August 21 about the recent housing bailout and the likely taxpayer “rescue” of mortgage giants Fannie Mae and Freddie Mac. She bluntly stated on her “Liz-Vision” blog:
Am I the only one completely frustrated right now? All this talk about the ‘inevitable’ government bailout of Fannie Mae and Freddie Mac is making this red-head crazy. The bailout is so far unfounded but the smart money says it’ll likely come to pass. You can’t let these mortgage behemoths fail because they’re pretty much the only ones writing mortgages out there during this time of fear.
Okay fine, I get it, make us all feel guilty for not rushing to put a pillow under Fannie and Freddie’s ‘fermischt’ fannies. But they, along with many people who will be bailed out by the housing bill will be getting the biggest financial ‘do-over’ in a generation. Lenders who signed off on mortgages they had no business granting, homeowners who signed on the dotted line of totally inappropriate mortgage loans they could never keep up with, and companies that allowed it all to happen are getting cozy, comfy pillows thrown under them instead of forcing them to suffer for their sins.
Save for a tiny percentage of people who were victims of predatory lenders, most of these people happily pulled up a chair to the roulette table, gladly took the free drinks and began gambling away. Shouldn’t they have to swallow the bitter medicine now of having made a bad bet?
The author of The Best Investment Advice I Ever Received: Priceless Wisdom from Warren Buffett, Jim Cramer, Suze Orman, Steve Forbes, and Dozens of Other Top Financial Experts, asks another question:
Why then will we, along with the millions of honest, hard-working American homeowners who haven’t defaulted on their mortgages, have to pay out of our pockets to help those who blew it? Believe me, I have no problem helping out those of lesser means, those who perhaps got the short end of the societal stick, folks who try but need the extra help from the rest of us Americans. That’s what makes our country great… we are a society that takes care of each other. I’m grateful for that. But this?
I want to scream…
Reminds me of a line I once heard in a movie…
And her with her freckles and her temper. Oh that red head of hers is no lie!
-Michaeleen Oge Flynn, “The Quiet Man” (1952)
Source:
“Stop Using My Money To Bail Out Gamblers”
Liz Claman FOX Business, August 21, 2008
From the Wall Street Journal’s Real Time Economics Blog yesterday:
U.S. banks continued to tighten their standards on loans to households and businesses in the second quarter, said a Federal Reserve study that also shows that many banks think the credit tightening trend could continue into the first half of 2009…
About 60% of the domestic banks surveyed reported having tightened lending standards to large and middle-market businesses. That’s up slightly from what was reported in the last Fed survey conducted in April and released in May. About 65% of the institutions, a percentage that is also up from the previous survey, also said they had tightened their lending standards on so-called commercial and industrial loans, also known as C&I loans, to small firms over the same period…
In addition, a significant portion of the banks surveyed reported having tightened their lending standards on prime, nontraditional and subprime residential mortgages over the previous three months. About 75% of domestic respondents, which is up from 60% in the previous survey released in May, said they had tightened their lending standards on prime mortgages. Also, six out of seven respondents that originated subprime mortgage loans, which is a higher proportion than what was reported in the previous survey, indicated that they had tightened their lending standards on those loans over the past three months.
Turning to the results of the survey’s consumer lending questions, about 65% of domestic banks indicated that they had tightened their lending standards on credit card loans over the past three months, which is up remarkably from the 30% reported in the survey released in May.
From Reuters’s John Parry earlier today:
U.S. economic growth is expected to slow more sharply in the coming months than previously forecast with employers shedding staff into next year, according to a Philadelphia Federal Reserve survey released on Tuesday.
Economists lowered their forecasts for third-quarter gross domestic product growth to a 1.2 percent annual rate from the previous 1.7 percent estimate, according to the bank’s quarterly Survey of Professional Forecasters.
“Growth in U.S. real output over the next few quarters looks slower now than it did just three months ago,” the Philadelphia Fed said on its Web site.
In the fourth quarter, the U.S. GDP growth forecast was slashed to 0.7 percent growth, from the previous 1.8 percent forecast…
The current survey also forecast the U.S. unemployment rate would be 5.7 percent in the third quarter, above its previous 5.4 percent forecast, then rising to 5.8 percent in the fourth quarter.
“A weaker near-term outlook for the labor market accompanies the outlook for slower output growth,” the Philadelphia Fed said.
From MarketWatch’s Rex Nutting today:
The U.S. economy faces a prolonged period of anemic growth, but that’s no reason to get complacent on inflation, said Dallas Fed President Richard Fisher in an interview with the Dallas Morning News published Tuesday. “I expect that in the second half of this year we will broach zero growth,” he said. Fisher, a voting member of the Federal Open Market Committee who’s been on the losing side on the past five votes on interest rates, said the credit crunch is worse than the S&L crisis of the late 1980s.
Back on January 16, 2008, I wrote a post about an article I had read earlier that day by the Washington Post’s Steven Pearlstein. In “Caught in a Downdraft and Starting to Panic,” the 2008 Pulitzer Prize winner talked about the danger from credit-default swaps. He wrote:
Despite the brave exhortations from the CNBC Squawk Box, we are nowhere near the end of the financial unraveling that is necessary for an economic bottom to be reached…
Looking ahead, the final phase of this unraveling is likely to implicate the giant market in credit-default swaps. Those swaps are essentially contracts that allow sophisticated investors to bet on whether a company, a government entity, or even a securitized package of loans will default on its debt obligations. And they can place these bets whether they own the underlying security or not.
Because these contracts trade on unregulated derivatives markets, nobody knows who holds the losing side of the bets. But it’s a good guess that if defaults rise even to historically normal levels, a big hit will be taken by highly leveraged hedge funds, some of which may be unable to pay off on their bets and simply collapse. That, in turn, would trigger even further losses by banks and other investors that, unlike pure speculators, rely on those instruments to insure against default.
The credit-default swap has become so central to modern global finance that its size — the amount insured, in effect — is estimated at $43 trillion. If the losing side is unable to make good on even a fraction of a percent of those contracts, it could set in motion a financial chain reaction that could easily rival the subprime debacle.
Recently, I’ve noticed increased chatter about credit-default swaps in my research. Just today, I came across the following piece by the Wall Street Journal’s Donna Kardos in the MarketBeat Blog. Kardos wrote:
A growing proportion of U.S. firms are seeing credit-default-swap counterparty risk as a serious threat to global markets, and think another major financial company will go under due amid the global-markets crisis, according to a study by research firm Greenwich Associates.
The study’s results, which say the proportion seeing CDS counterparty risk as a serious threat is approaching 85%, highlight the perceived concern of another financial firm going down. Only 27% of the institutions surveyed think there won’t be another casualty along the lines of Bear Stearns, Greenwich consultant Frank Feenstra said in a statement.
The research firm said of the 146 U.S. and European banks, hedge funds and investors it surveyed, most “believe another major financial-services firm will fail as a result of the ongoing crisis in global markets — and they expect it to happen sooner rather than later.”
Almost 60% of the respondents expect another big financial firm will collapse within the next six months, while another 15% see it happening in six to 12 months.
Think the U.S. housing crisis is nearing an end? Think again, says Vikas Bajaj of the Paris-based International Herald Tribune. Bajaj wrote yesterday:
The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is building with alarming speed.
After two years of upward spiraling defaults, the problems with mortgages made to people with weak, or subprime, credit are showing the first, tentative signs of leveling off.
But with the U.S. economy struggling, homeowners with better credit are now falling behind on their payments in growing numbers. The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A, or alt-A, mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.
So, when should we expect this new tsunami of mortgage defaults to arrive? Bajaj wrote:
While it is difficult to draw precise parallels among various segments of the mortgage market, the arc of the crisis in subprime loans suggests that the problems in the broader market may not peak for another year or two, analysts said…
Bajaj said that prime and alt-A borrowers typically have a 5 to 7-year grace period before having to start making payments toward their principal. By contrast, subprime loan borrowers had a 2 to 3-year introductory period. David Watts, an analyst with CreditSights, told the Tribune that regarding alt-A mortgages:
More delinquencies look like they are on the horizon because so few of them have reset.
Delinquencies in prime and alt-A loans are worrisome for financial institutions because they have more of these types of loans on their books than they do subprime mortgages. Bajaj noted:
During a conference call with analysts last month, James Dimon, the chairman and chief executive of JPMorgan Chase, said he expected losses on prime loans at his bank to triple and described the outlook for them as “terrible.”
Madness, “One Step Beyond” (1980)
YouTube Video Link
The U.S. employment situation looks increasingly bleak. From the CNBC website yesterday:
Planned layoffs at U.S. companies jumped 26 percent in July from June, depicting further deterioration in the labor market, a report showed on Monday.
Planned layoffs at U.S. companies totaled 103,312 in July, compared with June’s 81,755, employment consulting firm Challenger, Gray & Christmas Inc said.
Announced job cuts at U.S. companies last month were the second highest total so far in 2008, more than double the 42,897 a year earlier, the report said.
The transportation industry hurt by sky-high fuel costs accounted for the most planned cuts in July with 17,051. The financial sector battered by the credit crisis followed with 15,517 cuts. Retailers facing a pullback in consumer spending came next with 12,160 layoffs.
Employment data from the first half of the year was also dismal. According to CNBC:
From January to July, planned layoffs totaled 579,260, up 33 percent from the same period a year ago.
The outlook for Wall Street and the financial sector doesn’t look too good either. From the CNBC piece:
Financial companies, in particular mortgage lenders, have been slashing their payrolls, prompted by billions of losses and write-downs tied to soured investments on housing and mortgages.
So far this year, planned layoffs in the mortgage and subprime sector has reached 92,547, already surpassing the 2007 tally of 86,126.
With no end in sight, job hemorrhage in the financial sector could surpass the last year’s record total of 153,105 by the end of October, Challenger predicted.
Keep an eye out for those used Maseratis…
Source:
“Companies Step Up the Pace of Layoffs” Reuters, August 4, 2008
Maria Bartiromo? As my British footballing friends across the pond would say, “Who are yer?” While CNBC’s “Money Honey” was an icon of the nineties stock market boom, Oppenheimer analyst Meredith Whitney, who I refer to as “The Diva of Doom,” is seeing a meteoric rise in popularity as the global economic crisis unfolds. It’s not her looks that are winning over open-minded investors (okay, maybe a wee bit). But her gloomy forecasts, which are turning out to be uncannily correct. CNN Money’s Jon Birger wrote yesterday:
Whitney’s bearishness has deep roots. In fact, she was the first analyst to sound the alarm loudly about subprime mortgages, predicting back in October 2005 that there would be “unprecedented credit losses” for subprime lenders.
Last October, the analyst correctly predicted Citibank would have to cut its dividend.
And now? Well, Whitney is saying U.S. home prices will fall another 33%. From the CNBC website yesterday:
Housing prices will fall more than 30 percent before the market recovers and banks will continue their reluctance to lend until the credit crisis clears up, Oppenheimer analyst Meredith Whitney said on CNBC.
In a wide-ranging interview, Whitney said the housing deterioration will be worse than even the doom-and-gloom predictions that already have circulated regarding the market…
“There’s one obvious area where the bad news isn’t all out yet, and that’s with home prices… Home prices are going to fall much more than people expect,” she said.
“I think it’s going to be well worse than 33 percent, and here’s why: If you look at the futures market, it’s indicating a range right around between 2002-2003 levels, when home ownership rates were actually higher, but fewer people can qualify for a mortgage because you’ve got to put 20 percent down, and that’s a lot of money for people,” she continued. “Furthermore, then you’ve got to find a bank to lend to you, because, Countrywide’s not lending to you.”
Meredith Whitney aka “The Diva of Doom”
In addition to a continuing housing slump, Whitney doesn’t see an end to the credit crunch anytime soon. CNN Money’s Jon Birger wrote yesterday:
The credit crisis is far from over, star analyst Meredith Whitney tells Fortune magazine in its upcoming issue.
Whitney, who audaciously - and correctly - predicted last October that Citigroup would have to cut its dividend, tells the magazine that banks in general today are still facing much bigger credit losses than what they’ve reported so far.
The Oppenheimer & Co. analyst warned last year - and continues to warn today - that the “incestuous” relationship between the banks and the credit-rating agencies during the real estate bubble will have a long-lasting impact on banks’ ability to recover.
How so? The CNN senior writer noted:
For years the ratings agencies, which are paid by the issuers of bonds, gave high marks to securities backed by subprime mortgages. Many of those bonds, of course, turned out to be anything but safe.
With Moody’s and Standard & Poor’s now trying to make up for past wrongs, the pace of downgrades on mortgage securities is quickening.
This is a problem, because every time their portfolios are hit by significant credit downgrades, banks are forced to improve their capital ratios. Often that means issuing reams of new stock, which leads to serious dilution, as shareholders at Citi, Merrill Lynch and Washington Mutual now know.
“You’re going to have this stealth pressure on bank balance sheets until you start to see the ratio of downgrades to upgrades change,” Whitney tells the magazine.
Sources:
“Housing Prices Could Skid Another 33%, Analyst Says” CNBC, August 4, 2008
“Whitney: Credit crunch far from over”
Jon Birger CNN Money, August 4, 2008
From all the action coming out of the nation’s capital today, you’d almost think the various government entities in Washington coordinated efforts against the oil, dollar, and housing bears. Almost.
First, it was crude oil. Senate Democrats, led by Senators Byron Dorgan and Harry Reid, rolled out the “Stop Excessive Speculation Act” to scare off oil speculators, who they blame for high prices.
Crude for August delivery, scheduled to expire Tuesday, dropped $3.09, or 2.3%, to settle at $127.95 a barrel on the New York Mercantile Exchange, the lowest close since June 5.
Ironically, later in the day a task force chaired by the Commodities Futures Trading Commission (the agency assigned with investigating/punishing speculators in the bill) found that fundamental supply-and-demand factors, rather than speculators (as the politicians claimed), were most likely to blame for the high prices. Doh!
Next, dollar bears were targeted. Reuters reported:
The dollar rallied Tuesday, after a Federal Reserve official suggested that U.S. rates may have to rise to stem inflation and a top Treasury official repeated that a strong currency is in the interest of the country.
Treasury Secretary Henry Paulson reiterated on Tuesday that a strong dollar is important to U.S. interests and the underlying strength of the economy, as well as policies aimed at shoring up confidence, would be reflected in currency markets. At the same time, Philadelphia Fed President Charles Plosser said rising inflation could force the Fed to start raising interest rates even before labor and financial markets recover.
Gold for August delivery dropped $15.20 to end at $948.50 an ounce on the New York Mercantile Exchange.
Rising interest rates? Strong dollar policy? Looks a lot like jawboning to me. But don’t take my word for it. On July 15, Reuters ran a piece about legendary investor George Soros. From the interview:
All told, Soros said Ben Bernanke, chairman of the Federal Reserve, is in a bind.
“When he recognized the seriousness of the credit crisis, he acted very radically lowering interest rates and he used the tools that are at his disposal,” Soros said. However, now the “armory” is depleted, he said adding that Bernanke can’t lower interest rates because of the effect it would have on the dollar and he can’t raise interest rates because of the looming recession. Soros said.
“Therefore, his options are limited — he is boxed in.”
And how many times have we heard about this supposed “strong dollar policy” of ours? Actions speak louder than words, right? Back on March 17, Soros’ former partner, Jim Rogers, said during a Bloomberg Television interview:
Now, please, do we even bother reporting that anymore? Poor Hank Paulson, had a reasonable education, and a reasonably-good career, head of Goldman Sachs, now he goes around the world making a fool out of himself. Goes around saying we want a strong dollar, the next day he goes to China and says we want a weak dollar, and then he goes to Japan and says we want a weak dollar. I mean, you have to feel sorry for the guy. At least, I do.
Finally, it was housing naysayers who fell under the gun. From the CNBC website this afternoon:
Treasury Secretary Henry Paulson said America’s housing market could turn a corner and begin recovering within months, but it will take longer to resolve all housing-related problems.
“Obviously, it will go on beyond months with some of the issues in the housing market, but I believe we can get to the point within months where we turn the corner on housing,” Paulson said in a televised interview with Fox Business Network.
Sound familiar to anyone? From my post “Paulson Weighs In On Housing” from July 2, 2007:
Today, U.S. Treasury Secretary Henry Paulson spoke to Reuters about a number of economic issues, including housing. Paulson said the U.S. economy is healthy, despite problems with the subprime mortgage sector. The former chairman of Goldman Sachs stated that the downturn in the housing market is “at or near the bottom. It’s had a significant impact on the economy. No one is forecasting when, with any degree of clarity, that the upturn is going to come other than it’s at or near the bottom.” Beyond subprime mortgage woes, Paulson declared that the financial markets looked sound. He said, “Markets are volatile. I haven’t seen a single thing that surprises me – it’s hard to surprise me.”
DJIA down 1,933 points since then, S&P 500 down 243 points, global credit crunch, $453 billion of write-downs, Bear Stearns, IndyMac, Fannie Mae, Freddie Mac… surprise!
Sources:
“Dollar Jumps on Paulson, Plosser Comments” Reuters, July 22, 2008
“Soros says Fannie, Freddie crisis not the last”
Jennifer Ablan Reuters, July 15, 2008
Jim Rogers Interview
Bloomberg News Video Bloomberg, March 17, 2008
“Paulson: Housing Market Could Turn Corner Soon” CNBC, July 22, 2008
Back on June 13, 2007, I wrote a post entitled “Crash Prophets” and spoke of economist/investment advisor Gary Shilling. Dr. Shilling, who was twice ranked as “Wall Street’s top economist” by polls conducted by Institutional Investor magazine, said last summer that the United States was fast approaching a financial storm. From that post:
He notes, “An unusual confluence of five forces in recent years created a virtual world of financial speculation that departed spectacularly from the real economic world, the ‘grand disconnect’ we’ve called it.” The five forces… are:
1. Global liquidity.
2. Investors’ misguided belief in “20% annual returns each and every year.”
3. Risk desensitization due to recent low volatility and the belief the Fed will “bail them out.”
4. Rampant, aggressive speculation.
5. American consumer spending, highlighted by instant gratification and the inability to save.
And what will trigger the meltdown? According to Farrell, Shilling still sees the subprime debacle as the catalyst.
A year later, and the “crash prophet” is providing his latest financial storm forecast. Yesterday, the president of A. Gary Shilling & Co was the subject of a Newsmax.com piece. According to the Internet news site:
The U.S. is already in a recession that’s unfolding in four stages — and it’s going to get a lot worse, investment advisor Gary Shilling says.
“We’re between the second and third stages right now,” Shilling told a Bloomberg interviewer.
“The first phase was the collapse in housing market, led by subprime slide last year; the second phase was Wall Street, where there was a tremendous amount of over-leverage and investment in assets of questionable if not unknown value and highly illiquid.”
Shilling believes the third phase — a big nosedive in consumer spending — is about to unfold.
Yesterday, Bloomberg reported that prices paid by U.S. consumers jumped in June by the most since 2005 on spiraling costs for fuel and food. The cost of living soared 1.1% after a 0.6% gain the prior month, the Labor Department said. Fed Chairman Ben Bernanke, testifying before Congress Wednesday as part of his semi-annual report on the U.S. economy, warned that consumer spending is “likely to be restrained over coming quarters,” and businesses are “likely to be cautious with their spending in the second half of the year.”
Dr. Shilling told Newsmax:
Once people work through their tax rebates, they’ve run out of borrowing power. Their home equity has disappeared. They’ve been relying on that and on income growth that isn’t happening. With high energy bills and maxed out credit cards, I think consumers are about to go off the cliff….
I look for the biggest decline in consumer spending since the 1930s.
Next up? Phase four, where recession spreads throughout the world.
Oh joy…
Sources:
“Gary Schilling: U.S. In Recession Now” Newsmax.com, July 16, 2008
“U.S. Consumer Prices Climb by the Most Since 2005 (Update1)”
Shobhana Chandra Bloomberg, July 16, 2008
Well, it seemed like a good idea at the time. During the summers of 2005 and 2006, wannabe homeowners opted for adjustable-rate mortgages with smaller initial payments scheduled to reset two to three years out. Now those ARMs are resetting, and many are watching to see if higher monthly payments will add more stress to an already troubled housing market in the United States. The Washington Post’s Renae Merle wrote in the Chicago Tribune yesterday:
The number of homeowners facing an increase in their subprime adjustable-rate mortgage payments will peak this summer, testing the efforts of lenders and others to keep those people out of foreclosure and stabilize the housing market.
The timing reflects the height of subprime lending in the summers of 2005 and 2006, when many borrowers secured loans scheduled to adjust in two or three years. For many, an adjustment means their interest rate will go up 2 to 3 percentage points.
Mark Fleming, chief economist for research firm First American CoreLogic told Merle:
The next six months, the industry, all of the folks that are out there trying to solve this problem, they are going to be very busy. There are a lot of people facing their resets right now. A good share of them don’t have the refinance option.
Merle noted that more than 300,000 such loans will adjust this summer. She wrote:
Lenders, federal officials and housing counselors have worried that borrowers will not be able to afford the higher payments after the reset and will quickly fall into foreclosure. Declining home prices have made it impossible for many of these homeowners to refinance.
It will not be clear for months how many will lose their homes, Fleming said. “A lot of those are resetting now,” he said. “We may not see the impact in foreclosures until the middle of 2009.”
RealtyTrac, an online marketer of foreclosed properties, told CNN Money last week that during the first six months of 2008, 343,159 Americans lost their homes, up 136% from 145,696 recorded during the same period in 2007.
“Progress” continues to be made on the next major bailout. According to Bloomberg tonight:
The U.S. Senate passed a $300 billion plan to help thousands of Americans keep their homes and tighten regulation of Fannie Mae and Freddie Mac in an effort to ease the worst housing slump since the Great Depression.
The legislation, approved 63-5 today, would let an estimated 400,000 struggling homeowners avoid foreclosure by refinancing their subprime mortgages into fixed-rate loans backed by the government. The measure also offers tax incentives to potential homebuyers and sets aside $4 billion to help communities buy foreclosed properties.
Chicago’s Mayor Daley moonlighting as a real estate agent? Yeah, I guess I can see it…
“‘Got House?’ Oh, I’ll give you house!”
Source:
“Senate Approves $300 Billion Plan to Stem Housing Foreclosures”
Brian Faler Bloomberg, July 11, 2008
Caution is not cowardly. Carelessness is not courage.
-Unknown
Here’s one for the traders and investors out there. I came across the following list of reasons yesterday from Bennet Sedacca (with Professor Rob Roy) of the financial website Minyanville.com as to why caution is a must in the markets these days:
1. Stocks are firmly in a downtrend.
2. Corporate spreads are rapidly widening.
3. Everyone I know is saying “All is well, buy America.”
4. European equities are taking out the lows of the year.
5. The capital-raising window is closed.
6. Earnings estimates are too high.
7. While much of the move in financials is done, it should spread to other industries.
8. If the “best of breed” are missing their numbers, what happens to the real dogs?
9. We are entering the worst part of the Presidential cycle.
10. We are at war. On multiple fronts.
11. The consumer is tapped out.
12. Corporate buybacks are gone.
13. Net equity issuance is very high.
14. Oil above $100 is very bearish.
15. The savings rate is 0.
16. The U.S. is actually one of the best performing markets in the world this year.
18. Level III assets continue to grow.
19. “Credit rot” is spreading from sub-prime to prime.
20. The dollar is sinking to new lows.
21. The Federal Reserve’s balance sheet is impaired.
22. Mutual fund equity cash remains low.
23. Individual investors are now taking money from their retirement accounts to survive.
24. The market is technically on the verge of breaking down.
25. We’ve broken the 200-week moving average in the Dow Jones for the first time since 2003.
Sedacca and Roy explained each reason in detail, and offered this advice:
Risks remain high and, as always, being cautious will only lose you opportunity - not capital.
Source:
“25 Reasons To Remain Cautious”
Bennet Sedacca, Professor Rob Roy Minyanville.com, July 1, 2008
