Friday, August 17, 2007

Bank Runs Already?

Earlier than expected:
Anxious customers jammed the phone lines and Web site of Countrywide Bank and crowded its branch offices to pull out their savings because of concerns about the financial problems of the mortgage lender that owns the bank.


At Countrywide Bank offices, in a scene rare since the U.S. savings-and-loan crisis ended in the early '90s, so many people showed up to take out some or all of their money that in some cases they had to leave their names.
Read the article.

Wednesday, August 15, 2007

Immigration - the Other Shoe

If you have been paying attention to all of the turmoil in the financial markets lately, I would like to direct your attention to immigration.

Regardless of how you feel about immigration on a personal level, the policy that the US takes on this issue will have a huge effect on our economy as a whole.

The recent storm in the financial markets was blamed directly on the subprime lending activity that helped to fuel the US housing boom. As has been said, many housing markets now have blood in the water, and depending on what happens with immigration, it could get a lot worse.

Consider that on a global scale, the US has to compete with countries like China and India. Technically, they can't beat us. But one of their huge advantages is a cheap labor force. The fact that they have so many people willing to work for low wages allows them to produce cheap goods that are difficult to compete with.

I don't know the exact figure, but I think China had a trade surplus of 26.9 billion dollars? That is a direct result of being able to produce products inexpensively.

Now, lets look at the US.

US workers are expensive. Compared to China and India, US salaries are high. When you have to pay your people more, you have to charge more for your products and services. As a result, prices go up.

Illegal immigrants... unauthorized workers. Whatever you want to call them. They have the opposite effect. Because they are willing to work less, they have a deflationary effect on the cost of goods and services in the sectors that they are involved in. That means, they make those things cost less.

Let's start bringing it together by looking at housing.

Illegal immigrants make up a large percentage of the workforce in housing. According to, "...93,000 roofing workers—29 percent of the 325,000 roofing work force—were unauthorized, and unauthorized workers make up about 14 percent of the total construction industry work force."

29 percent of roofers are unauthorized. One in three.

Now, imagine what would happen if you had a business, and you had to fire every third employee. That would be devastating. Would you even be able to continue operating as a going concern? Where would you find qualified replacements? And what would the effect be if you had to pay that replacement considerably more?

NOTE - I'm not talking morality here. I am not talking about the rightness and wrongness of paying someone a specific wage, their feelings, the legality of it all, or any of that. What I am concerned with here are the practical effects that legislation might have on the status quo.

This is what I'm interested in - What is really happening right now, and what will happen if that changes?

Well, that's easy. Prices will rise. Production will slow. And the already battered housing market will take another huge hit.

How does this relate to the rest of the world? Well, if you consider that much of the asswhup in the markets lately has been blamed on US subprime lending, you can see that events in the US Housing market do have repercussions for the rest of the world.

And since immigration reform has such massive implications for the US housing market, it is something that bears watching.

Thursday, August 09, 2007


When I decided to post my article yesterday, I had a feeling things were about to go south. But I didn't know it would happen the very next day! Obviously, by now you know that the DOW took a huge hit today, sparking a frenzy of panic as people started to talk about the looming credit crisis:
"Wall Street's deepening fears about a spreading credit crunch sent stocks plunging again Thursday, with the Dow Jones industrials extending their series of triple-digit swings and falling more than 380 points. The catalyst for the market's latest skid: a French bank's announcement that it was freezing three funds that invested in U.S. subprime mortgages." - Yahoo Finance
Another telling quote came later in the article:
"All the things that had been denied up until this point are unraveling. On top of this, retail sales were mediocre, which shows that indeed, the housing collapse is affecting the consumer."
Well, duh. I could have told you that. In fact, I did. Last year. But if you read my post about the stages of grief (see below), you'll see that various experts have been in the denial about the state of things for quite some time.

However, the fact that some of the more visible players are openly talking about the 'housing collapse' in the past tense is a good indication that we are finally moving out of denial. Unfortunately - and perhaps ironically - the next stage is depression.

Either way, a lot of interesting things should play out in the next few weeks.

Stay tuned!

Wednesday, August 08, 2007

It's About That Time

Before I get started, I would like to welcome my visitors from Germany. I lived there for three years, and I have a lot of family over there, so I am glad to see so much traffic coming in from Deutschland. Servus!

At any rate, there have been some interesting developments this week. If you haven't seen it, check out this segment with Jim Cramer from Mad Money. Here's the clip:

Although a lot of people called that a 'meltdown', sometimes you need to do that in order to convey the seriousness of a situation. And that's exactly what we have now - a serious situation.

Jim's right about one thing - a lot of homeowners are going to get smashed in the not-too-distant future. I've talked about the mechanism behind this before, but you can't drain the water out of a lake and not expect the fish to die.

A lot of homeowners are stretched to the limit right now because they borrowed money that they are now unable to pay back. And now they are going to have to deal with the consequences. Unfortunately, so are the rest of us.

It sucks that you can make wise decisions, plan carefully, and still get dragged down by the actions of others. And yet, as easy as it is to sit back and point the finger at them, they aren't alone. Because if you look past the American people, and examine our government as a whole, you will see that the US as a whole is almost in the exact same position.

The government has to borrow billions of dollars EVERY DAY just to meet its obligations. And, most of that money comes from abroad. As long as people keep buying our IOU's, we're good.

But what happens when they stop?

We may end up just like those the homeowners who tread water for a while, then go belly up when there is no longer any money to borrow.

Take the article that just ran in the Telegraph. It talks about China's ability to cripple the dollar simply by liquidating its vast holdings of US debt:

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

If that happens, you can bet money bad things will happen. Like what? Well, we can look at what happened to one of the biggest participants in the Housing Boom, American Home Mortgage:
American Home Mortgage Investment Corp. shares plunged 90 percent after the lender said it doesn't have cash to fund new loans, stranding thousands of home buyers and putting the company on the brink of failure.

Investment banks cut off credit lines, leaving American Home without money yesterday for $300 million of mortgages it had already promised, the Melville, New York-based company said in a statement today. It anticipates that $450 million to $500 million of loans probably won't get funded today, and the lender may have to sell off its assets.

``They can't function without access to capital,'' said Bose George, an analyst with KBW Inc. in New York. ``The company either has to file for bankruptcy or go through some type of rescue or restructuring, and either way will leave almost nothing for the common shareholders.''

No one likes talking about negative things. But, look at what happened. The investment banks cut off credit, American Home Mortgage couldn't meet its obligations, and the common shareholders got screwed.

Now, lets go back to our analogy. If China and the rest of the world are the investment banks, and the US government is American Home Mortgage, who do you think the common shareholders are that are going to get screwed? That's right buddy, you and me.

Welcome to the party! Glad you could make it :)