Posted on 10/23/2008 7:40:57 PM PDT by bruinbirdman
~snip~
The heads of banks and insurance companies are taking writedown after writedown, almost comically declaring after each that they've removed all the cancer and no further trips to the operating room will be necessary. Investors are treating each bailout as the last that will be needed, oblivious to further problems that continue the market's sawtooth pattern along a steeply declining trend.
The deleveraging is occurring in four phases. The first, the collapse in housing, started early last year when the subprime slime, as I dubbed it, came out into the open. Phase two, Wall Street's woes, began in mid-2007, when the demise of two Bear Stearns hedge funds revealed that financial firms were hugely leveraged and invested in overpriced assets of unknown and probably unknowable value.
These two phases are continuing. Housing prices are down 18% and will drop 23% from where they are now to reach the 37% total peak-to-trough falloff I foresee (see chart). Excess inventory, the mortal enemy of prices, now amounts to 1.8 million homes, which is a huge number relative to the net demand (new families minus departures to death and nursing homes), which is only 1.5 million a year. Meanwhile, the shared confidence that glues financial markets together has deteriorated to the point where banks don't want to lend to one another, much less to anyone else. ~snip~
Phase three of the recession, the nosedive in consumer spending, will probably be the deepest since the 1930s. Consumers have relied on their home equity to fund spending well beyond their wages, salaries and other income, and that equity is fading fast, especially for those with mortgages (see chart). The collapse in house prices will, I expect, leave 25 million homeowners stuck with homes collectively worth $1 trillion less than their mortgages. Even including 24
(Excerpt) Read more at forbes.com ...
We were all drunk with spending. The housing asset bubble delayed the collapse in Aggregate Demand from the tech boom bubble.
Consumer Demand will never be as high as it was before with the world bankrolling American spending with financial derivatives and creating invisible money with credit default swaps.
Its time to tighten the belt and hold in for a bumpy ride.
In the 1990s, most conservative/free market economists thought that Bill Clinton's tax hikes would harm the U.S. economy---nothing like this, but there was a consensus. Well, the plunging oil prices and the phenomenal productivity gains of computers offset those hikes by several orders of magnitude.
The impact of lower energy prices, spread throughout the economy has still not been factored in by all those obsessed with housing numbers. Cheap energy covers a multitude of sins.
Last---who knows how long it will last---but just this week existing home sales rose 65%.
What made the 1930s different was that a) government got involved in the economy to a degree not even minutely touched here. Smoot-Hawley, for example, constituted a hit of 5% of GNP on the economy---not to mention Hoover's taxes, FDR's taxes, the minimum wage increases, foreign tariffs shutting off exports, and so on.
Now, I don't put it past Obama to utterly screw this up: if he pulls out of NAFTA, throws on protectionist tariffs, hikes taxes, and starts heaping on the regulation, we could still get there.
there are folks on this forum that want to pull out of nafta.
i get attacked by them all the time.
It’s always darkest just before it goes completely black.
Obama wins and there's no chance. McCain wins and he can take his case to the American people. With Democrats in the House and Senate good luck though.
I know. Short-sighted. Trade barriers were one of the main causes of the worldwide depression in the 30s, and partly to blame for the rise of Hitler.
My point is that economists of the day (as opposed to economic historians) are often wrong because they never see the "next big thing" that is right on top of them.
“Consumer Demand will never be as high as it was before with the world bankrolling American spending with financial derivatives and creating invisible money with credit default swaps.”
It wasn’t just the world- credit cards and mortgage lenders would give money to anyone with a pulse. With Greenspan throwing gas on the fire all along with his cheap money. The recent US economic model of exporting debt while importing actual goods is unsustainable. At some point, even China is going to get tired of buying our Treasury bonds that they know are going to be paid back with cheap dollars.
Not all of us. But we sensible ones get to take the ride with the fools who created all this crap. And our tax dollars will go to bailing them all out. It's infuriating.
Interesting article/thread. Thanks to all posters.
Did anyone see Greenspan in front of Congress today say his "worldview of 40 years" has changed? That he was wrong?
yitbos
They are going to be paid back with greenbacks pegged to the yawn. Or is that vice versa? The commies are stuck. Eventually, the dollar has to be spent in America.
yitbos
there are, according to this article 25 million Americans who own their homes with no mortgages...
So those people will see the paper value of their assets decline but will not lose their investments
Others who behaved sensibly will see their home values decline but will still be able to make the payments...and again, they will not lose their investment
The ones who “took the candy” and did upside down teaser loans or high LTV “liar loans” will lose whatever equity they put into the deal....after sitting in those homes and making no payments for months, and months....will come out the other side with just enough cash to rent a place before their credit score gets hit with the default...they lose their dreams and are back where they started
Who does lose that did not deserve it?
Retirees or near retirees whose 401k’s are 30 to 50% down...but they also are losing a lot of the paper gains and I guess not much of the actual cash put in....unless they are into Bear Stears or some company that is going bankrupt....and they should have diversified....
We are all taking a “hit.”
We will cope as best we can.
I am sorry for it all. I wish the Government had taken the recession in 2002 when everyone was worshipping Greenspan for the “soft landing” that was actually built on some phoney numbers and an emerging housing bubble.
Your point is well taken...sensible ones will get the taxes and the job losses and the civil unrest along with the fools that bought the bubble...but please, calm down and be thankful you had enough sense to stay out of it...
It will be bad for you, for me, but probably a lot worse for a lot more people...people who did not have the education or the experience or training or values or whatever to keep them clear of this mess.
Who on this Board cannot remember the hundreds of postings by ExTexan warning of a housing collapse? I got tired of them....and the arguements....and the bragging about how much the house had appreciated.
We may actually have more to worry about than a recession, and that is, of course the imposition of Socialism and years of Media hammering on the evils of Capitalism....Stay steady in your understanding, your values, your beliefs...and extend compassion to those less fortunate than yourself...they/we need it.
Either trying to grow the economy out of its problem, or using inflation to reduce debt, the only two techniques of the “easy credit” economy since WWII, will not work any more. In fact, they will make the problem worse.
The saying used to be, that “You can only have credit if you don’t need it.” And that truism is now going to return with a vengeance.
Individuals, corporations, the US government and international governments all violated this rule since WWII. Credit should *only* be for those with more than 100% “reliable” collateral. This means that ALL other debts will have to be eliminated before we will be able to return to a stable economy.
The last gasp of this postwar system is happening with the evacuation of liquidity to USG T-Bills. And even with yields approaching zero, all this does is permit the last big splurges of deficit spending. Already the long term T-Bill is at risk of default, the government being close to unable to pay its yield. With one more step, in which the government cannot return the principal, the game is over.
Next year, tax revenues will be down by double digits. By then, the Treasury will no longer have anyone willing to offer it credit, because it cannot guarantee that the capital will be safe. From that point, the US government cannot deficit spend a dime. Large parts of government expenditures must be halted, to provide money for critical parts of the government.
But a balanced budget will not be enough. To do anything positive, spending will have to be slashed even further, to provide hundreds of billions of dollars to get the economy moving again.
Oddly enough, the international credit collapse provides the USG with an opportunity to erase much of its foreign national debt. We can exchange food to those countries dependent on us, in exchange for dept relief.
Large numbers of investment corporations and banks will fail, and there is a severe risk they will try and take down essential national corporations with them. For this reason, the USG should print and have ready guaranteed high denomination paper currency, solely for use by critical industries, and then only with the permission of the government. That is, a guarantee that they cannot go bankrupt.
In denominations from $100k to $10M, this gives critical corporations the ability to continue essential commerce with each other, but insulates them from insolvent leverage corporations who are not permitted to own that currency.
Such a critical corporation could not buy or sell those bills without permission, so could only lose its “normal” money. The rest of its money would be free and clear to use as it saw fit. But the core money could not be touched, protecting them from bankruptcy.
Such money would also be 100% collateral for loans, and companies would be very willing to loan money to get their hands on these bills, because it would be their life insurance as well.
Finally, these high denomination bills would also be exchanged for lower denomination bills that are always in shortage in the economy, and would help keep retail business going as well.
The big four parts of government are Social Security, Medicare, Medicaid, and Defense. Only a small amount of cutbacks can come from discretionary spending. The rest must come from these four.
Add to the equation the repatriation to South of the Border by unknown numbers of illegal aliens.
We’re already seeing stories of those involved in the construction trades taking what they have and returning to Mexico, as construction is significantly down.
The numbers of illegals here are such that they have created their own economy meeting the needs of the Spanish speaking, including grocery chains, but also those businesses well within the barrio.
They add to the economy.
Repatriation will add to the existing housing stock and will further depress auto sales (my daughter and I have a running joke as we have pulled into gas stations in the Inland Empire here in CA, marveling at the expensive rigs that the non-English speaking gas pumpers around us are driving).
Futures markets getting crushed. Stock markets are acting like they did in 1929 with massive swings. Nobody has any clue how to price the market so one day the bulls pump it to the moon and the next day or two it crashes. Anybody in the market right now has a hole in their head, or is oblivious to the insane risk to every company out there. When recession-resistant consumer staples like McDonalds are getting caught in the cross-fire, it is time to get out, unless you have both a brass set and deep wads of money to lose.
You are not investing this market. You are gambling. Go to Las Vegas and take in a show. You won’t win any more there than in this secular bear but at least you will have got a show and some drinks for your money instead of just the shaft.
To anyone in the market right now. Good luck. I think you are flipping nuts.
Deleveraging is a bitch.
Market collapse in 10... 9... 8...
Treasury collapse in 7... 6... 5...
Dollar collapse in 4... 3... 2... 1...
BLASTOFF. Houston, we have meltdown!
It also seems like a necessary woodshed experience for prolifigant America.
My guess is that Social Security will become means-tested for starters, and that there will be an hue and cry to close down military bases in Europe and East Asia.
yitbos
Good point. I remember well, and I read his threads often. Lucky for me, I really haven't made too many foolish mistakes on these matters. Even in a worst case scenario, I believe my mortgage will remain right side up. I believe no matter what I have to do, I'll be able to pay my bills. And I've got cash hoarded away in case of a long term bad season of doom. Meanwhile, I'm taking a small portion of it and buying good stocks on the way down--JNJ, KFT, TCLP. Stuff that people need that will do well on the other side of this mess. I hope to be one of the people they talk about when they say "If you had bought stock after the crash of XX..."
So I figure that's my reward for doing things right. While others are flailing, I'm actually in a position to profit. In some ways, it's a once or twice in a lifetime opportunity. Like Buffett said recently, be fearful when others are greedy, and greedy when others are fearful.
But it's still pretty frustrating. I've never bought into the bubble hype. Wasn't surprised when dotcom burst. Not surprised now. The only thing that surprises me is how stupid people are. A fabulous company gets decked in the market, the price drops, and THEN it gets downgraded?? Isn't that exactly backwards?
We may actually have more to worry about than a recession, and that is, of course the imposition of Socialism and years of Media hammering on the evils of Capitalism....Stay steady in your understanding, your values, your beliefs...and extend compassion to those less fortunate than yourself...they/we need it.
Wise words. Thanks for writing.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.