Monday, November 12, 2007

E-Trade is Hit!

Online trading company E-Trade got slaughtered in trading today. From Bloomberg:
E*Trade Financial Corp. lost more than half its market value after the online brokerage forecast a decline in fourth-quarter earnings and a Citigroup Inc. analyst said the company may go bankrupt.
Why would an online trading company be facing bankruptcy? Any guesses?
Chief Executive Officer Mitchell Caplan's strategy of building E*Trade's bank by tripling loans outstanding backfired as borrowers fell behind on payments and U.S. home prices declined.
That's right... they were betting on the housing market, and they lost big. But is this really surprising? If you make loans to people who can't afford them, are you REALLY surprised when those people can't pay? I'm not.

And the next steps are playing out fairly predictably as well. You've heard of the 'credit crunch' right? Well, that's nothing more than other banks seeing what is happening to E-Trade and saying Fuck That. No more easy loans, no more bad credit.

What does that mean for the economy overall? A quote from another Bloomberg article is telling:
"We are in a danger zone," says Nariman Behravesh, chief economist at Global Insight Inc. and a former Federal Reserve economist. "It would take two shocks to bring the economy to its knees. We got one shock in the form of the credit crunch. Oil could be that second shock."

Friday, November 09, 2007

Signs of the Times

From the New York Times:
Ben S. Bernanke, chairman of the Federal Reserve, told Congress today that the economy is going to get worse before it gets better, a message that got a chilly reception from both Wall Street and politicians.

On a day when stock prices swung wildly, the dollar hit another new low against the euro and further signs emerged that consumers are growing more cautious about spending, Mr. Bernanke warned that the economy is about to “slow noticeably” as the housing market continues to spiral downward and financial institutions tighten up on lending.

Now the funny part... count the number of times they say "recession":

Testifying before the Joint Economic Committee, the Fed chairman said that the two rate cuts in September and October “should” be enough to keep the economy from slipping into a recession. Without being specific, he reinforced statements by other Fed policymakers that the economy would have to show signs of stalling out entirely before they would reduce rates again.

Asked if he saw any risks of a recession, Mr. Bernanke demurred. “We have not calculated the probability of a recession,” he responded. “Our assessment is for slower growth, but positive.”

The Fed chairman’s stance was similar to that of Treasury Secretary Henry M. Paulson Jr. At a meeting today with editors and reporters of The New York Times, Mr. Paulson predicted that the crisis in the mortgage and credit markets would hurt growth but not lead to a recession.

For something that's not going to happen, there sure seems to be a lot of talk about recession. Unfortunately, not everyone agrees. In fact, some very smart people are saying we are already IN recession. One of them is Jim Rogers.In a recent Reuters article, he said:

"The US economy is undoubtedly in recession," Rogers told the Telegraph in Hong Kong in an article published on its Website.

"Many parts of industry are actually in a state worse than recession. If it were not for (Federal Reserve Chairman Ben) Bernanke putting huge amounts of money into the market, the stock market would probably be down much more than it is."

So don't believe the hype. Whether or not people want to acknowledge it, recession is a real possibility, if not a reality. That said, it's not necessarily a bad thing. It's natural for things to expand and contract. For actions to have equal and opposite reactions. And if recession means bringing things more in line with their real value... then bring it on. More on this later.

Tuesday, November 06, 2007


You know that people are starting to see things your way when the amount of hate mail you get slows to a trickle. When I first released my video about the housing bubble in 05, I had tons of people emailing me and telling me how stupid I was.

"What do you know? You have no credentials. You are no expert. By this time next year, you'll be eating crow." Etc. etc. Ad nauseum.

Well, if anyone of my detractors had some crow pie stored away for me, I wouldn't know, because I haven't heard from them lately.

Where are you?

I miss your eloquent and thoughtful missives...


You are correct, sir.

There is no national housing market. But, when someone buys a house in a local market, where does that money come from? The local bank? At the end of the day, the HOUSES might not be aggregated, but the MORTGAGES used to buy them damn sure are. And that is how the contagion spreads.

I guess shortsighted people just take a little longer to see the lights of the oncoming train. The recession is on in 08, and if you don't act to secure yourself, you'll be one of the people smashed by a wave that "no one could see coming."

From the BBC:
A wave of foreclosures and evictions is about to sweep the United States in the wake of the sub-prime mortgage lending crisis.

This could destabilise the US housing market and may also lead to further turmoil in financial institutions, who collectively own $1 trillion (£480.6bn) worth of sub-prime debt.

The effects of this have already been seenin terms of bank failures and currency devaluation. Look at Gold right now. When Gold is high, people are uncertain. Look at the Dollar. It's losing all its value. Any doubt what people are uncertain about? It's the economy, stupid.

Yet people are still trying to manage perceptions:
Chief Executive James Owens said on Tuesday there was a "high probability" for a soft landing for the U.S. economy after a period of slower growth.
Sorry, James, You're Wrong. Just like Leslie Appleton-Young was when she said the same thing about the housing market. There is not going to be a soft landing. There's going to be a crash. And the sooner people learn about it, the sooner they can start preparing for it.