Sidetalk

One of the most astute commentators on the economy in Florida and real estate particularly is Mike Morgan. His latest piece is fascinating but makes for a none so cheerful read. He thinks as goes FL goes the rest of the U.S. Is Florida a crystal ball we should all be looking into?

Excerpt: “I was going to call this “Banks March Us Into Depression,” or maybe more fitting is . . . “Complete Collapse of US Banking System.” Folks, that is what we are looking at. I don’t see any way around it. What we’re seeing here in Florida, is your crystal ball. And what happens here, is coming to a town near you . . . soon. This past week I didn’t write anything, because what I am seeing unravel is disturbing to the point I had to question what I was seeing and hearing. So I decided to take as much time as I needed to digest it all, and then put something together for you. So here goes . . .

I could prepare volumes of spread sheets with Bernankesque numbers. I could talk about commodity prices and oil and third world politics and a dozen other metrics that all lead to the same conclusion. But let me give you a ground zero look. That’s what I do best. I will leave the manipulation of the numbers to the folks on Wall Street that do it best. The same folks that have created the precipice they will soon push us off.

I spend a great deal of time dealing with Asset Managers hired by banks stuck with REOs. So as not to re-hash the events leading to the housing crisis, I will not discuss the free-money policies of the past, and I will not discuss the absolute lack of accountability in making the bad loans of the past. Let’s just deal with how the banks are attempting to recover.

Unfortunately, banks are not making a realistic effort to address the crisis. That may be because they cannot. As the banks and builders have announced write down after write down, my mantra has been . . . and continues to be . . . NOT ENOUGH - NOT ENOUGH - NOT ENOUGH. I still believe that. The builders and the banks have underestimated the magnitude of the problem, and they continue to do so. Analysts continue to look at the rear-view mirror and attempt to manipulate numbers based misguided historical assumptions.” Full article floridacrystalball

 Read the article (click) The Madness of Ben Bernanke  The G7 Meeting

The dollar is in a tailspin, the trade deficit is growing and a recession is on the horizon. The American way of life is in serious danger. But the head of the Federal Reserve keeps on pumping easy credit into the system — a crazy policy that will worsen the crisis.   So begins today’s article in Der Spiegel. 

The S&P/Case-Shiller home-price index dropped 10.7 percent from January 2007, after a 9 percent year-on-year decrease through December 2007. The gauge has fallen for 13 consecutive months.

Here’s an inflation-adjusted chart of the CSI:

http://calculatedrisk.blogspot.com/2008/03/real-case-shiller-house-price-index.html

I am certainly not the first to notice that something is going on here.  It is so unusual that it bears repeating.  In my opinion, and I’m not the first one to say this either, we should pay attention and act accordingly.  [Note that I do not offer financial or investment "advice" and you should not rely on my opinions.] The charts look as if the big market players have, and are, running for the hills.  The flight to safety is so remarkable that the repo auctions have been failing, and demand for 13 week Treasury bills is so high that the interest rate has plummeted to essentially zero.  This has not happened for something like 50 years.  Read it and decide what is it telling you?  (chart from March 20, 200

Citi says the “great unwind” has begun: We are now confronted by a broad bloodbath in the credit markets,” Citigroup said. ” The most leveraged paper is falling in value because it is leveraged, and now the least leveraged paper is also falling in value because it is owned by leveraged investors.”   Investors should also avoid hedge funds themselves, along with private equity, Citi added. Both types of investment rely at least partly on borrowed money to generate returns. <snip> Leveraged economies, like the U.S., should also be avoided, in favor of emerging market countries, which have reduced borrowing, the bank advised. “With less capital sloshing around the world, and the dollar falling, the U.S. may have to compete more to finance its deficits. http://www.marketwatch.com/news/story/great-unwind-has-started-avoid/story.aspx?guid=%7B1DC25DFD%2D3543%2D4CF4%2DBE26%2D74EA4B9C9330%7D&dist=hplatest

Henry C. K. Liu in the Asia Times explains the inflation/deflation issue in the best summary I’ve seen lately.  The bottom line:  Using monetary policy (”printing money”) to keep up the current debt bubble will not work, and will cause hyperinflation.  The alternative is to allow the credit bubble to burst, an unavoidable reality in the long term anyway.  Liu’s article gives an accurate, highly readable and concise summary of the inflation/deflation debate as it has unfolded until now.   (more…)

Via John Crudele at the NY Post, serious consideration is being given to Bove’s idea:  give homeowners new mortgages at 1% for 30 years guaranteed by a federal agency, a la Section 8 housing:  “Let’s get back to the simple problem, i.e. too many people cannot pay their mortgages,” says Bove.  “The simple solution is to find a mechanism to pay the mortgages.” Once that happens, he says, the securities these mortgages went into will be able to trade again. And all the other layers of securities built upon these mortgages will also start to regain their value.  What mechanism can be used to pay the mortgages? (more…)

CHICAGO (Reuters) - The credit crunch driven by the U.S. housing crisis appears to have hit another engine of the American economy — small businesses. After years of fast and loose lending, major banks have begun tightening standards for loans to small businesses — often described as the backbone of the jobs market. (more…)

Ours is a consumer driven economy.  Household spending accounts for about 70% of our GDP.  Graph:

Since 1999, American households have been spending more money than they have.  We are running our own deficit spending programs.  Isn’t it beyond obvious that when the credit runs dry, GDP will collapse? See charts and analysis of household deficit spending:householddeficit.pdf

Homeowners aren’t alone in experiencing buyers’ remorse in today’s troubled marketplace. Private-equity firms, too, are finding out their recent investments might not be worth what they paid for them.  Gone are the days when buyout shops could purchase a company, pile on debt for an initial fat payout for themselves and then quickly flip it for a big profit. The credit crisis has put a freeze on debt-laden dealmaking and is causing bond investors to shun the risky debt used to finance the takeovers.
That could jeopardize the returns seen on some deals — which isn’t just the buyout firms’ problem. Investors from pension funds to endowments to financial institutions have plunged big money into private-equity funds.  It’s also a problem for the banks that are stuck with billions of dollars in loans clogging their books that they’ve been unable to sell. (more…)

Interesting observations from the floor of the American Securitization convention courtesy of Housingwire, including analysts who believe that it will be sometime in the 2012 - 2015 time period before housing will recover:

“Much of the the Zelman presentation had data I’ve not seen discussed before, as well. Perhaps the most interesting was a discussion of how birth rates correlate with homeownership as a predictor of overall housing market demand. In particular, weak birth rates in 1991 - 1997 were predicted to correspond to poor housing starts during 2009-2015, confounding any recovery in the overall housing market.

“The economy has yet to feel the full repercussions of the housing downturn,” McGill concluded. (more…)

Way back when he was “just” a Fed Governor, in 2002, Bernanke gave an amazing speech detailing what he would do to prevent or cure deflation.  I read him as saying that he doesn’t think the U.S. will go into deflation because our financial system (banks and household balance sheets) are so healthy (forget that now!).  The other reason he gives is that the Federal Reserve can itself prevent or cure deflation.  Bernanke gives a list of the steps he would take — and it looks as if he’s already several steps down on the list with the TAF auctions.  But never fear, as a bottom line Bernanke thinks we should all be comforted by the fact that if all else fails, he’s got a printing press (oops, a copy machine) to print lots of dollar bills and reinflate the economy. 

It’s true, and worth another close read: 

http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/#f8