An Economic Pillar on the Verge of Collapse

Washington Post ^ | December 6, 2006 | Steven Pearlstein

[GodGunsGuts]

An Economic Pillar on the Verge of Collapse

By Steven Pearlstein Wednesday, December 6, 2006; D01

It's been more than a year since we've heard from those who denied there was a housing bubble.

Since then, the industry boosters, along with the "soft-landing" crowd over at the Federal Reserve, have coalesced around the idea that maybe the market got a bit frothy after all, but now the correction is almost complete, the unsold inventory's been worked off and the worst is behind us.

But just when you're feeling hopeful again, you get reports like yesterday's Wall Street Journal piece reporting that delinquency rates are suddenly soaring on all those loosey-goosey subprime mortgages. They are starting to cause real heartburn for pension funds and other investors who bought securities backed by those mortgages on the theory that they were no more risky than a Treasury bond.

"We are a bit surprised by how fast this has unraveled," Thomas Zimmerman, head of asset-backed securities research at UBS, told the Journal, removing his head from the sand. Trust me, Tom, you ain't seen nothin' yet. After the subprime loans come the 100 percent, interest-only loans, followed by the meltdown in the overbuilt multi-family housing sector....

[GodGunsGuts]

[RobRoy]

The article from which it came>

http://www.financialsense.com/fsu/editorials/willie/2006/1207.html

[RobRoy]

Point taken. I agree.

[Mase]

First, I am of the firm belief that both the GDP and the CPI are manipulated

Well of course you believe this. There is no other way to justify your constant doom without placing tin foil tightly around your head and telling yourself over and over again that the government fudges their information and the millions of people who manage the financial markets world wide are too stupid to recognize this....except those geniuses at Financial Sense, John Williams and you. Is that what you're trying to sell here? I'll bet snake oil salesmen like John Williams have a few books to sell you that will convince you of just how smart you are for believing in this stupidity.

that in 2005 "the use of adjustable-rate mortgages increased thereby increasing total mortgage debt

This chart of our debt to income ratio, through 2005, clearly shows that we can't pay our bills and that economic collapse is imminent. ROFL!

Frim the chart below it looks like that minuscule increase in our debt to income ratio in 2005 really caused American households to become delinquency on all of their household loans (it includes mortgages)..... No, wait. Delinquencies actually decreased. Maybe the San Fran Fed was right and we do have the income to pay the for the small increases in our debt. Never mind.

"The findings of the latest Survey of Consumer Finances show a modest slowing in the growth of real median household income and net worth from 2001 to 2004, compared with 1998 to 2001

A modest slowdown after a recession? The horror!! (insert Captain Obvious photo here).

nearly half of all families did not save any portion of their income over the previous year. Over time, this is expected to become a serious liability for those families."

Really? None of those families who didn't save, according to the Fed, didn't contribute to a 401K and IRA or some other investment? That's hard to believe since almost 60% of American workers today are invested in the markets. Since 1997, we've cashed in about $4 trillion in capital gains. That's more than the previous 20 years combined. Too bad the government doesn't count that as savings. They do however, count the tax on those capital gains against the rate of saving. If you were really learning anything from the people here, who bother to educate you, you'd know the many flaws in the method in which the government calculates the savings rate in this country.

Rising household asset values by themselves provide an incomplete and misleading picture and should not encourage us to ignore the danger signal associated with low rates of saving and investment in our future prosperity."

If you bother to look at the rate of saving in this country, as calculated by the government, you'll find that our saving rate rises dramatically during recessions. During the great depression we had one of the highest rates of saving ever. Our savings rate was almost 12% during the 1982 recession. I guess Americans would rather earn 10% in the market and pay capital gains taxes rather than earn 5% in passbook savings and pay regular income tax.

I'm giving you the link to the Fed Flow of Funds Report below. Go to page 110 and prove to us that our net worth isn't increasing from sources other than our home equity. This is the new release that shows our household net worth continues to expand, even though the housing market is contracting, and that our net worth is at an all time high of more than $54 trillion.

Fed Flow of Funds

Real Estate represents a huge percentage of household wealth and is now in serious decline

Quantify serious decline if you dare. What is it today in terms of percentages? Now compare that with home values in 2001 and tell us again about just how huge that decline is.

Quite simply, Americans are tapped out...and they have zero savings to fall back on.

You made me slog through your post of epic proportion only to find that you've done absolutely nothing to support your claim that we're doomed economically or that housing prices are going to plummet 40% because Americans can't afford the increased payments that adjustable rates are going to bring. My previous post proves beyond any doubt that you are, as Bugs Bunny would say, all out of bullets.

Got gold?

Got sense?

[GodGunsGuts]

Thanks. It's a very good article. So good, in fact, that I was thinking about posting it separately.

[RobRoy]

>>They won't look at the increased equity position; <<

And there is the rub. Equity only counts when it is actually realized - when you sell. Even owners of tulips had incredible "equity" until the pyramid reached saturation. Then it disappeared.

Same with real estate. It is not the panacea some would have us believe. Frankly, there is LOTS of it. It is not a limited resource - yet.

The real estate pyramid scheme has already hit saturation in the US and other countries as well. It is reaching that point in still other western countries. Real estate prices already hit apogee early this year. In some areas the rocket is just beginning its long descent. In others it is already in freefall.

I'm not really sure when the next stage will kick in, but time will tell just how far things had to drop for it to happen.

The argument is no longer, will it drop, the argument is now, just how far. That is already a major change in the discourse of just a few months ago.

[RobRoy]

Actually, after I posted that link, I was thinking maybe you already had.

I tend to not post these articles because, frankly, there are just so many of them. It is easier to just do the simple google news searches on the various keywords and post the myriad of links. The picture is actually quite clear. And it aint rocket science.

[Toddsterpatriot]

It's a very good article.

This was the best part.

The housing decline, with a 10% annualized decline in the last six months, will drag the USEconomy, and worsen the current recession. We in the United States have been in a recession for five years, if you wish to live in the world of reality.

OMG. STFU! A 5 year recession and this clown is the only one who knows the truth. Just subscribe and he'll save you.

[GodGunsGuts]

I like those articles because they post analysis and charts, as opposed to just news. I only post them every once in a while to provide some context to what's in the news.

[Mase]

A 5 year recession and this clown is the only one who knows the truth.

LOL! That site is a laugh riot. They even have the audacity to call themselves Financial Sense University. I'll bet they offer degrees, online of course, in goldbuggery. Too bad they didn't graduate from CSU (Common Sense University) prior to attending FSU.

[RobRoy]

Here is an interesting quote:

“It’s tough to make predictions,” Yogi Berra is supposed to have said, “especially about the future.” Actually, his remark makes perfect sense to economists, who sometimes have trouble making predictions about the present. And this is one of those times.

We’re now two-thirds of the way through the fourth quarter of 2006, so you might think we’d already know how the quarter is going. Yet, economists’ assessments of the current state of the U.S. economy, never mind the future, are all over the place.

And here’s the bad news: This kind of confusion about what’s going on is what typically happens when the economy is at a turning point, when an economic expansion is about to turn into a recession, or vice versa. At turning points, the various indicators that usually tell us which way the economic wind is blowing often point in different directions, so that both optimists and pessimists can find data to support their position.

The last time things were this confused was early in 2001, when most economists failed to realize that the United States was sliding into recession. If that sounds ominous, it should: The bond market, which has a pretty good record of forecasting recessions, is pointing toward a serious economic slowdown next year.

Full text here: http://www.kansascity.com/mld/kansascity/business/16189657.htm

[Marysecretary]

Hubby is allergic to wood smoke but we do have two woodstoves in the house that we never use. One is an older Ben Franklin stove (looks nice in the living room--smile) and the other is a good Jotul. I want to have that one checked out because you never know when you need one around here. We live in Central New York and it can get mighty cold and windy. (I wouldn't live anywhere else, though.)

[RobRoy]

Another good'n. http://www.theaustralian.news.com.au/story/0,20867,20895599-643,00.html

The last bit:

Thiel has wagered all his clients' money on his conviction that aftershocks from the go-go 90s will jar the US.

His vision of the future isn't pretty. The housing bubble will collapse and economic growth will stall, he says.

An oil shock will add to the pain.

Few money managers are prepared for the turbulence ahead, Thiel says, but Clarium is ready.

"The hedge fund's mission is to make sense of an extraordinary moment in time in the world -- a time of retail sanity amid wholesale madness," Thiel says.

[GodGunsGuts]

If the changes to the GDP and CPI were done for political reasons, and if the real GDP is much lower and the real CPI much higher, then we are indeed in a recession...like it or not.

[Toddsterpatriot]

and if the real GDP is much lower and the real CPI much higher, then we are indeed in a recession.

Yes. You just have no proof...like it or not.

[GodGunsGuts]

==Yes. You just have no proof...like it or not.

This will help get you started. Feel to take it apart piece by piece :o)

http://www.financialsense.com/stormwatch/2005/0624.html

[Toddsterpatriot]

Feel to take it apart piece by piece :o)

Tell you what, get a respected economist who agrees with your guy, and I'll take the respected economist apart.

[RobRoy]

If home prices were included in the CPI it would be much higher. It only includes rent (or "rent equivalent" for homeowners).

I pay $1,600 a month rent for a home that is valued at just over $500k. It is still my major monthly investment. But what would a house payment on such a residence be? Hint: more. ;)

Add to that the fact that I have been a renter now for 8 years and rents have stayed flat or even gone down slightly while home prices have LITERALLY DOUBLED OR MORE.

I don't trust the CPI.

[Toddsterpatriot]

Add to that the fact that I have been a renter now for 8 years and rents have stayed flat or even gone down slightly while home prices have LITERALLY DOUBLED OR MORE.

Great. Now if I owned my house for the last 8 years and prices doubled, has my cost of living doubled? My mortgage is fixed, has my payment doubled?

[RobRoy]

>>Great. Now if I owned my house for the last 8 years and prices doubled, has my cost of living doubled? My mortgage is fixed, has my payment doubled?<<

In certain tax districts, probably. ;)

Actually, I seriously wish I had (I mean, "could have")bought. After the divorce it simply was not possible. And paying $3,400 a month in child support also limited my options. But the problem is not those who bought a house eight, or even three years ago and have been paying down their loan and increasing equity - unless this thing gets REALLY bad. It is those who recently bought, or refinanced and their reasonableness formula depended on ever-increasing home prices. They will be hurt - some now, and the rest in the next 12-24 months. And if enough of them go down, they take the market with them.

Time will tell.