Surviving the Crash

Ron Paul vs Bernanke

2009-05-05T16:36:00.000-07:00

Ron Paul is the business...

Black Man Becomes President. Texas Secedes from the Union.

2009-04-15T02:25:00.000-07:00

I am joking about the title. But the issues raised are no laughing matter. On an individual level, people are angry. Later this day, Tea Parties all across the country will take place to protest the government's so-called stimulus.

At the state level, Texas is seeking to assert sovereignty in the face of what they believe to be an oppressive Federal government. They are basically saying that the government is using stimulus money to get a grip on the states.

This same concern is echoed by a small but growing number of corporations, who see the stimulus as a power grab and clandestine nationalization of the private sector.

If you read this blog, you know that I have never favored bailouts of any kind. Free markets work only if they are left alone. Unfortunately, we don't have free markets. In fact, we are closer to communism right now than at any other time in this nation's history.

Back from Vacation

2009-04-12T17:31:00.000-07:00

I was on a self imposed blog vacation, but now I am back and have updated the Bank Closure Map with the latest closings.

In addition to banks, a lot of large credit unions are starting to fall. Right now, there are 50 sunk banks on the map, and we're not even close to done. Will we hit 100?

Stay tuned to find out.

The Bank Closure Map

Eisenhower Farewell Speech

2009-03-20T00:21:00.000-07:00

Conspiracy Thursday - Obama: Broken Promises

2009-03-19T03:22:00.000-07:00

Nothing like a little conspiracy theory to break up the monotony. Check out this documentary. It's from the same people that pounded Bush while he was in office.

AIG Bonuses... Why are you Surprised?

2009-03-17T15:46:00.000-07:00

Everywhere you look, there is OUTRAGE about the bonuses that AIG executives will receive. OUTRAGE, I Tell You. IT IS OUTRAGEOUS!

For all of you that think this is outrageous, please do sit down and shut up.

What is outrageous is that the company got bailed out in the first place. It is outrageous to live in a country where the free market is dead. It is outrageous to have a leadership willing to sell its constituency down the river.

The ENTIRE PURPOSE of these bailouts is to make sure that the rich people that own these corporations, their bonds, their stocks, do not lose THEIR money. Any talk of helping the american tax payer is just a thinly veiled lie.

We are drowing in debt. How can the solution be to create more debt?

The only way this thing stops is if people are forced to SUFFER THE CONSEQUENCES of their actions. As long as we live under a government that shields people from personal responsibility, we won't have any responsible people.

Of course these executives are going to take their money and run. Outrageous? IT'S OBVIOUS. These parasites have been feeding off the system forever. It's the only way they know how to live.

Do you really think that someone who has been irresponsible their entire life will suddenly become responsible when it's YOUR money?

The reason free markets work is because when the hosts die, the parasites are flushed out as well. But in this case, we are not letting the diseased hosts die. We are keeping them on life support. And then we act surprised when the parasites keep feeding.

Cramer vs Stewart Video

2009-03-13T20:11:00.000-07:00

Jon Stewart Interviews Jim Cramer
Uploaded by gaijinhito

Audit the Fed

2009-03-13T19:44:00.000-07:00

Ron Paul is proposing a bill to Audit the Fed. Sign the petition today! Click below...

AUDIT THE FED!

Obama - Broke

2009-03-08T15:58:00.000-07:00

Instead of posting about yet another failed bank, I thought I would take a more creative approach to convey my opinion of the current administration's efforts to resolve the financial crisis.

I came up with this, my version of Shepard Fairey's iconic Obama image. I affectionately entitle it, "Broke."

More Banks

2009-03-02T15:51:00.000-08:00

If you check the Bank Closure Map, you will see that two more banks closed this weekend. I probably should have listed Citi and Bank of America as well... oh well. I'm sure we'll have plenty of time to get to them.

Silverton Falls. Bank or Citi Next?

2009-02-22T15:23:00.000-08:00

Another bank went bust this weekend. This time, it was Silverton Falls Bank of Silverton, OR.

This closing was actually kind of sad, because unlike other institutions, this one fought hard to stay alive. But, ultimately, it wasn't enough. Undercapitalized and with no way to improve their cash situation, regulators closed it.

Only one bank closing this weekend was surprising. In light of last weekends record four closings, I thought we'd see more.

On the other hand, the elephants have entered the room once again, as Bank of America and CitiBank are now denying there is anything to worry about.

When there is nothing to worry about, there is nothing to talk about. But when people start telling you not to worry - watch out.

Bank Closures Accelerating

2009-02-14T03:50:00.000-08:00

Today is Friday the 13th. So, it is strangely appropriate that the FDIC closed 4 more banks today, bringing the grand total for the year to 13 failed banks.

That's a lot of failed banks.

In 2005, there were 0 bank failures.
In 2006, there were 0 bank failures.
In 2007, there were 3 bank failures.
In 2008, there were 25 bank failures.
In 2009, there have been 13 bank failures so far.

In two months, we have racked up over half the number of failures we had all of last year. And last year was a bad year.

To look at it another way, in 2007, a bank failed every 4 months. In 2008, about two banks failed each month. But right now, we are looking at over 8 banks failing each month.

If that number holds, we could be looking at 100 banks this year. But the year has just gotten started, and the list of 'sick' banks has way more than 100 names on it.

Four closures (pun intended) in a day sets a modern record. But, if things take a turn for the worse, we could end up seeing a lot more damage each weekend than that.

Another Three Bite the Dust

2009-02-01T16:41:00.001-08:00

Three more banks failed this weekend.

Ocala National Bank out of Florida was seized because it was about to run out of money. Regulators cited 'unsafe and unsound' lending practices as one of the reasons that the bank was closed.

Suburban Federal Savings Bank of Crofton, Maryland became the first Maryland bank casualty since 1993. According to reports, the bank implemented an aggressive lending program that required little to no proof of the borrower's salary or ability to pay.

It is a BIG surprise this bank failed. Luckily, they found a buyer.

MagnetBank out of Utah wasn't so fortunate. Closed because it was declared insolvent, the FDIC asked over 320 different bidders to purchase the bank, with not one of them interested. That's pretty bad.

But even though the bank is closed, the depositors will be getting checks in the mail, courtesy of the US gov. Don't you love picking up the bill for incompetent (at best) management?

More info at Bank Closure Map.

1st Centennial Bank Closes

2009-01-23T19:45:00.001-08:00

Another bank has failed. If you check the Bank Closure Map you will see that 1st Centennial Bank of Redlands, California was closed by state regulators today.

Although the Federal Government has tried to use the bailout money to stem the seizure of banks, it looks like that is not going to be enough to hold the dam. Small banks like this one are the canaries in the coal mine.

Look for the floodgates to burst if Citi or Bank of America get nationalized. And, if some reports are to be believed, they are already looking like they are or will be soon.

First Bank Failures of 2009

2009-01-17T15:29:00.001-08:00

The first bank closings of the new year are finally upon us. National Bank of Commerce, an Illinois bank, and Bank of Clark county, a Washington bank, have both been closed by regulators over the weekend.

Considering the state of the economy, the failure activity has been remarkably low. The bank closure map that details the locations of all the bank closings in the US shows that only a few banks have closed each month for the past year.

If you look at the map, you'll notice that a lot of the activity so far is centralized in the upper right hand portion of the map. But, don't be fooled. A LOT of banks are about to go down.

I thought it would happen last year. But, apparently, the dam is still holding. But, it can't last forever. Let's see how the distribution progresses in 2009, especially with what is happening with BoA and Citi right now.

All Your Offshore Accounts Are Belong To US(a)

2009-01-09T02:16:00.001-08:00

Finally! At least it's not just my pockets uncle sam is diggin into nowdays. Reuters just published this little gem:

Under pressure from the U.S. tax authorities, Swiss wealth management giant UBS is closing all the offshore accounts of its rich U.S. clients, the New York Times said on Friday.

UBS, which the U.S. authorities says helped wealthy Americans hide cash in offshore bank accounts, will shut about 19,000 offshore accounts, the paper said, quoting unnamed U.S. clients.

A UBS spokesman in Switzerland was not immediately available to comment on the report.

The Swiss bank, one of the hardest-hit in the credit crisis, decided in July last year to stop offering offshore accounts to U.S. citizens after it was targeted by the U.S. tax investigation which challenges Switzerland's famous banking secrecy laws.

As part of the investigation, U.S. authorities indicted UBS's wealth management chief last year.

Where's My Money?

2008-12-22T17:22:00.000-08:00

Ridiculous.

It's something any bank would demand to know before handing out a loan: Where's the money going?

But after receiving billions in aid from U.S. taxpayers, the nation's largest banks say they can't track exactly how they're spending the money or they simply refuse to discuss it.

Full Story

Bailout for MADOFF INVESTORS???

2008-12-15T21:55:00.000-08:00

OH NO THEY DIDNT!!!

Meanwhile, a federal judge on Monday threw a lifesaver to investors who may have been duped, saying they need the protection of a special government reserve fund set up to help investors at failed brokerage firms.

U.S. District Judge Louis L. Stanton ordered that clients of Madoff's private investment business seek relief under a federal statute created to rescue cheated investors. Stanton also ordered that business be liquidated under the jurisdiction of a bankruptcy court and named attorney Irvin H. Picard as trustee to oversee that process.

Funny Quote

2008-12-14T01:08:00.000-08:00

"What this Bernie Madoff did privately is no worse than what Hank Paulson and Ben Bernanke are doing publicly to the U.S. taxpayers. In a sad way, Madoff should be admired for having been able to accomplish such a swindle without the help of the U.S. Congress." - the Snarkmeister

Ron Paul on the Bailouts

2008-12-12T20:37:00.000-08:00

Ron Paul is the man.

Hands and Cookie Jars

2008-12-12T11:10:00.000-08:00

Bloomberg is reporting some interesting news in a piece entitled Fed Refuses to Disclose Recipients of $2 Trillion :

The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.

Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.

The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.

“If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez, a senior managing director at New York-based ICP Capital LLC, which oversees $22 billion in assets.

If I were the Fed, I wouldn't want us to know the real deal either. A big part of the economy is a con game. By that, I mean a confidence game, where our confidence in the system is the essential ingredient for the entire thing to work.

If you have a minute, go listen to Wizards of Money for some thought food.

Auto Bill Dies, Most Banks Bankrupt

2008-12-12T01:17:00.001-08:00

The good news...the auto bailout died in the Senate. A lot of the media coverage is calling this a bad thing. If the media knew about business, maybe all the newspapers wouldn't be going bankrupt.

Regardless, it is not my responsibility to make sure that failing businesses stay afloat. Free markets work when they are left alone. Freedom of failure is an essential element. Yay Senate!

Following that is this great quote from Jim Rogers:

"Without giving specific names, most of the significant American banks, the larger banks, are bankrupt, totally bankrupt," said Rogers, who is now a private investor.

"What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent," he said. "What's happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics."

Taking the assets from the competent and giving them to the incompetent. That's a great way to spell B-A-I-L-O-U-T. Why give more money to people who couldn't handle it the first time? Seems obvious to me... you reward incompetence, you get more incompetence.

Bailouts Delenda Est.

Bailout Nation

2008-11-25T02:02:00.000-08:00

Wow.

Citi is getting bailed out now?

Ridiculous.

A voracious government and a nation of sheep.

Who is being led to the slaughter?

No Bailouts for Car Manufacturers

2008-11-18T16:13:00.000-08:00

Are you serious? We are now considering bailing out the auto makers? Ridiculous. A quote:

"We are willing to provide full financial transparency, and welcome the government as a stakeholder -- including as an equity holder," Robert Nardelli, the head of Chrysler, said in his testimony.

"The Government" is YOU and ME. That's our money.

I'm not afraid of your bogeyman.

If your business can't survive on its own, it is a bad business and it deserves to fail.

NO BAILOUTS.

Starbucks Profit Down 97%

2008-11-10T16:39:00.001-08:00

At least there is SOME good economic news coming out of Wall Street. If the credit crisis manages to take out Starbucks, it may have all been worth it.

Starbucks 4th-quarter profit falls 97 percent on costs for closing stores, slow US sales

Fewer U.S. customers and venti-sized costs for closing poorly performing stores led to lower sales and profit in the fourth quarter at Starbucks Corp., the company said Monday.

The quarter's results came at the end of a transition year for the coffee retailer, in which former Chief Executive Howard Schultz took back the reins of the company to again fill the CEO and chairman posts. Full Article

Nouriel Roubini Speaks

2008-10-27T03:11:00.000-07:00

Interesting article about the (other) guy who predicted this entire melt down:

While the economic sun was shining, most other economists scoffed at Roubini and his predictions of imminent disaster. They dismissed his warnings that the sub-prime mortgage disaster would trigger a financial meltdown. They could not quite believe his view that the US mortgage giants Fannie Mae and Freddie Mac would collapse, and that the investment banks would be crushed as the world headed for a long recession.

Yet all these predictions and more came true. Few are laughing now.

...

What does his objectivity tell him now? No end is yet in sight to the crisis.

Read the article

Funny Quote from Chavez

2008-10-16T14:15:00.001-07:00

Socialist Venezuelan President Hugo Chavez mocked George W. Bush as a "comrade" on Wednesday, saying the U.S. president was a hard-line leftist for his government's intervention of major private banks in the U.S. financial crisis.

Chavez, who calls capitalism an evil and ex-Cuban leader Fidel Castro his mentor, ridiculed Bush for his plan for the federal government to take equity in American banks despite the U.S. right-wing's criticism of Venezuelan nationalizations.

"Bush is to the left of me now," Chavez told an audience of international intellectuals debating the benefits of socialism. "Comrade Bush announced he will buy shares in private banks."

Bailout Knockout

2008-10-07T01:04:00.000-07:00

Your company is bankrupt. Your stockholders are wiped out. You get to keep 480 million dollars. Is that fair?

"This is Our Katrina"

2008-10-06T14:46:00.000-07:00

“It really is a financial tsunami, and it could go either way,” said the multimillionaire telecommunications mogul who ran for the U.S. Senate in 2006. “It took Japan 20 years to recover from their buying binge. How long does it take us to work through excessive leverage? That could take years not months. This is our Katrina.” - Ned Lamont

The self importance of these jerks is unbelievable. Financial Crisis != Katrina. Financial Crisis != Tsunami. Gamblers who lose != Victims. Entire Story.

Senate Passes the 700 Billion Dollar Bailout

2008-10-01T21:55:00.000-07:00

After one spectacular failure, the $700 billion financial industry bailout found a second life Wednesday, winning lopsided passage in the Senate and gaining ground in the House, where Republicans opposition softened.

Senators loaded the economic rescue bill with tax breaks and other sweeteners before passing it by a wide margin, 74-25, a month before the presidential and congressional elections.

I should post the exchanges I've had with my representatives. Not only is the free market no longer free. Representatives no longer represent. Phones have been off the hook against this bailout.

And they continue to buy the Fear, Uncertainty and Doubt that they are being fed by the same people that got us in to this mess.

Sad.

Jack and the Beanstalk

2008-09-30T13:18:00.000-07:00

I was reading an article about lawmakers who voted for the bailout, when I came across this:

Some of those who voted for the bailout said they did so in possible conflict with the districts they represent.

McNerney, a wind engineer and political neophyte before his election to Congress in 2006, said his district opposed the bailout but he felt it was best for the economy.

"People's jobs are a great deal dependent on this," he said, as well as "their home loans and all of their livelihood." Yahoo Biz

I hate to break it to you, but you are not our daddy. You were not elected to decide what is best for us. You are a representative. You were elected to represent.

Get it?

You don't make the decision on your own.

You don't decide what is in our best interest.

You represent the will of the people in your district.

It's like Jack in the Beanstalk syndrome. Your momma sends you to the market to sell the cow. But instead of doing what you are told, you decide it would be a much better idea to buy a handfull of magic beans.

And maybe that works out in fairy tale land. But, in the real world, when officials do what they please IN SPITE OF the will of the people, they become tyrants.

And it doesn't rightly matter if you believe that you are doing it in 'our best interest.' You did not get elected to decide my best interest. You got elected to represent my will, and the will of the people in my community.

So, to all the representatives out there that think they know what is best for me. Pretty please with sugar on top, stop thinking and start listening.

If your constituents are telling you not to vote for the 60DD4MN3D bailout, then don't vote for it.

Oppose the Bailouts

2008-09-28T12:20:00.000-07:00

I have already contacted all my representatives. Now, I am contacting everyone else I can to help oppose the bailout plan.

Our politicians are not leaders. They are cowards that have been bullied by the spectre of Fear, Uncertainty and Doubt. The Treasury and the Fed are using the threat of massive devastation to get these spineless politicians to spend yet more of our money.

And yet, the Treasure and the Fed have NO CLUE what the market will do. If they did, we would not be in this mess. They are the ones that GOT US HERE in the first place.

It is the definition of insanity to keep doing the same things and expect to get different results. The current economic situation is the result of failed policies that the government is now seeking to prop up with more taxpayer money.

Do not let them.

Maybe we can't stop the deal from happening, but we can't just sit back and take it either. So, take a few minutes out of your day and contact your representatives.

Find Representatives
Find Senators

Let them know you oppose the plan. And, if they don't listen... well, we can deal with that next.

Ron Paul on the Bailouts

2008-09-28T12:13:00.001-07:00

Wamu Becomes Largest Bank Failure Ever

2008-09-26T01:08:00.000-07:00

From the Portland Business Journal:

"J.P. Morgan Chase bought the bulk of Washington Mutual’s banking operations Thursday in a deal orchestrated by federal regulators who had seized control of the troubled thrift.

In a sign of the bank’s worsening condition, regulators said WaMu had lost $16.7 billion in deposits since Sept. 15.

Saying WaMu had insufficient liquidity to meet its obligations and was “in an unsafe and unsound condition to transact business,” the federal Office of Thrift Supervision closed the bank and appointed the Federal Deposit Insurance Corp. as receiver. The FDIC held a bidding process that ended in the sale to J.P. Morgan.

Regulators, who termed this the largest U.S. bank failure ever, said there will be no effect on the bank’s depositors, but it appeared the WaMu shareholders would be wiped out as a result of the deal."

Anatomy of a Blowup

2008-09-24T17:49:00.000-07:00

Great insights from an incredible mind...

Figure 1 My classical metaphor: A Turkey is fed for a 1000 days—every days confirms to its statistical department that the human race cares about its welfare "with increased statistical significance". On the 1001st day, the turkey has a surprise.

Original Article

CEO Murdered After Firing Workers

2008-09-23T11:56:00.000-07:00

Corporate India is in shock after a mob of sacked workers bludgeoned to death the chief executive who had dismissed them from a factory in a suburb of Delhi.

Read the full story

Seeking Alpha Gets it Right

2008-09-16T23:38:00.001-07:00

Capitalism punishes bad risk. These jokers took bad risk in spades, so they should be wiped out. The common shareholders should be left with nothing. If this was a good deal for the taxpayers, this would have been a private transaction. The very fact that the Fed is involved speaks loudly to us that no private company believes that this is a prudent loan.

Go to the site and read the entire story.

No Bailouts. No Rescues.

2008-09-15T21:06:00.000-07:00

One good thing about the Lehman bankruptcy is the fact that the government did not stop it.

Free markets can work if you let them. But, as in the case of Fannie Mae and Freddie Mac, the US government has shown that it is more than willing to let the taxpayer take the bullet for private businesses in the face of a free market firing squad.

Well, I hope the Lehman decision is a sign of things to come. A lot of big names are on the chopping block, AIG and Wamu being the top two that come to mind.

And while they scurry about trying to get financing to cover their shortfalls, I hope that the government remains content to sit quietly on the sideline and let's nature take its course.

Lehman Bankrupt

2008-09-15T12:32:00.000-07:00

Another one bites the dust. Some interesting links:

Affect on the Dollar
On Bankruptcy Law
Schadenfreud

More later.

Rogers Blasts USA as "More Communist Than China"

2008-09-08T16:36:00.000-07:00

Boo ya! Finally someone telling it like it is.

"America is more communist than China is right now. You can see that this is welfare of the rich, it is socialism for the rich… it's just bailing out financial institutions"

"This is madness, this is insanity, they have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents. I'm not quite sure why I or anybody else should be paying for this"

Watch the video

Fannie Mae and Freddie Mac Quick Analysis

2008-09-08T02:55:00.000-07:00

What does the seizure of Fannie Mae and Freddie Mac really mean? Here are some quick thoughts...

RIP FREE MARKET
If any of you were under the illusion that we live in a free market economy, this should be the nail in the coffin. Free markets don't step in and save struggling companies. They let them die and use the corpses as reminders to other companies to make smarter decisions.

But no, not us. We encourage bad behaviour and fiscal irresponsibility by stepping in to save companies that could not survive on their own.

5cr3w the Taxpayer
I have a business proposition for you. I will start a company. If I make money, I will keep all the profit. BUT, if I LOSE MONEY, then you will assume my debts. Sound good?

Well, that's exactly what is happening to us right now with this seizure. Fannie and Freddie were private companies. That means that they lent the money privately, and kept the profits privately.

But now they are in trouble and the GOVERNMENT has taken over. That means that Johnny and Sue Taxpayer, You and I, are now responsible for the debts incurred by these irresponsible companies.

Read it again, I am not making it up: They have a business. They make money. They keep it. They lose money, now its our responsibility and we pay for it.

Bondholders Win
The takeover shelters bondholders while potentially hurting stockholders. Considering the influence that bond holders have over fiscal and monetary issues, especially the valuation of currency, this is a very interesting area that I'd like to look at more later.

However, in the near term, this take over bodes well for bondholders at the expense of stockholders.

Smaller Banks In Bigger Trouble Now
Let's look at the stockholder / bond holder thing in more depth. Bond holders own debt in a company. Companies sell bonds and promise to pay the money back later. A bond is like an IOU.

Stockholders own shares in a company. If the company goes up in value, the value of their shares go up, making them money. They also get paid money in the form of a dividend.

Simple stuff.

Okay, so, let's look at what happens. If these companies fail, they can't pay back their debts and the stock is worth nothing. So, everybody loses their money.

On the other hand, with this take over, the stocks lose value and the dividends get eiliminated, but the companies still exist, so they can pay back their debts. So, the stock holders lose, but the bond holders win.

Now, the question is, who are the stock holders?

In particular, a lot of banks held shares in these companies. But, these banks are now faced with holding a lot of paper worth a whole lot of nothing. Worse, the dividends that the stocks were going to pay have probably been completely lost.

It's a lot like people who live month to month finding out that they won't be getting a paycheck next week.

So, even though we have been expecting bank failures en masse (See the Bank Closure Map), the exact mechanisms on how they would happen were unclear. But, with the seizure of Fannie Mae and Freddie Mac, very clear lines are now drawn for many more banks to go under.

HERE IT COMES - Fannie Mae and Freddie Mac SEIZED!!!!!

2008-09-08T02:43:00.000-07:00

We knew it was going to happen, but we weren't sure when. Well, the big dominos are starting to fall now.

In its most dramatic market intervention in years, the U.S. government seized two of the nation's largest financial companies, taking direct responsibility for firms that provide funding for around three-quarters of new home mortgages.

Full Article

Financial Tsunami

2008-09-05T04:24:00.000-07:00

The U.S. government needs to start using more of its money to support markets to stem a burgeoning "financial tsunami," according to Bill Gross, manager of the world's biggest bond fund.

Full Story

Check out the Bank Closures Map

2008-08-31T02:18:00.000-07:00

I'm going to be tracking all of the bank closings in an online map... Right now, it just shows the bank and the date of its closing. However, I will be adding bells and whistles to it moving forward. Without further ado, the Bank Closure Map:

Click Here to Visit the Map

Innovative Way to Prevent Foreclosure

2008-08-13T15:57:00.000-07:00

Nice:

Authorities said a son held Bergen County sheriff's officers at gunpoint as they tried to evict his 88-year-old mother from her foreclosed home.

Full Story

Detroit House Sells for One Dollar

2008-08-13T10:41:00.000-07:00

"The fact that a home on the city's east side was listed for $1 recently shows how depressed the real estate market has become in one of America's poorest big cities.

And it still took 19 days to find a buyer. "

...

"The home, at 8111 Traverse Street, a few blocks from Detroit City Airport, was the nicest house on the block when it sold for $65,000 in November 2006, said neighbor Carl Upshaw. But the home was foreclosed last summer, and it wasn't long until "the vultures closed in," Upshaw said. "The siding was the first to go. Then they took the fence. Then they broke in and took everything else."

The company hired to manage the home and sell it, the Bearing Group, boarded up the home only to find the boards stolen and used to board up another abandoned home nearby.

Scrappers tore out the copper plumbing, the furnace and the light fixtures, taking everything of value, including the kitchen sink.

"It about doesn't make sense to put the family out," Upshaw said. "Once people are gone, you're gonna lose the house in this neighborhood."

Entire story here

Bank Runs - Tip of the Iceberg

2008-07-14T14:55:00.000-07:00

Most of you know that IndyMac ate it over the weekend. And while this was surprising to a lot of people, we were discussing bank runs a while back. Today, a lot of bank stocks took a huge hit on the stock market.

Washington Mutual was the biggest loser, dropping over 30% of its value. But, if you take into account the recent private equity infusion that it received, that number is actually well over 50%.

Unfortunately, this is just the tip of the iceberg. Look for a lot more banks to fail in the near future.

Credit Crash Alert

2008-06-18T08:26:00.000-07:00

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

Full Article

Interesting Graphic

2008-05-28T01:24:00.000-07:00

Vultures Circling

2008-04-30T12:09:00.000-07:00

Nice Business Week article up right now about Vulture Investors. A few nice excerpts:

While Wall Street panicked over the fate of Bear Stearns (BSC) in mid-March, hedge fund manager Philip A. Falcone enjoyed a notably successful week. The founder of Harbinger Capital Partners made tens of millions of dollars on an earlier wager that Bear and other financial stocks would collapse.

...

Falcone is a Midas of Misery. With $19 billion—nearly 760 times the grubstake he started out with seven years ago—he is snapping up troubled assets in bankruptcy, shorting distressed bonds, and using huge stock positions to agitate for change at underperforming companies. His holdings read like a who's who of market castoffs: media companies, utilities, and steelmakers. Last year Harbinger netted $11 billion, thanks in large part to Falcone's gutsy bet against all things subprime. His personal windfall of $1.7 billion made him one of the highest-paid hedge fund managers in 2007.

Check it out

Surprise (not)

2008-04-22T17:24:00.000-07:00

The number of California homes lost to foreclosure in the first quarter surged 327% from year-ago levels -- reaching an average of more than 500 foreclosures per day -- DataQuick said in a report, warning that the widening foreclosure problem could "spread beyond the current categories of dicey mortgages, and into mainstream home loans."

If a rising tide lifts all boads, what about a receding tide?

Finally

2008-04-08T21:17:00.000-07:00

Former Federal Reserve Chairman Alan Greenspan said on Tuesday the U.S. economy was in recession, and said it would be appropriate to tap public funds to resolve the mortgage-related crisis that has helped pull the economy under.

Next question.

Rock vs Hard Place

2008-04-08T13:16:00.000-07:00

The Fed reminds me of the Oracle at Delphi. No one really knew how it worked. But, people believed that it has special powers, that the priests of the temple could see the future, and that they could help avert disaster by appeasing the gods.

The Oracle worked because people believed in it. Unfortunately, in order to retain its powers, it had to carefully manage people's beliefs. When your power rests on being right, you have to be very careful what you say. You either don't say anything, you say things cryptically, or you are so vague that anything that happens could be interpreted as affirmation.

Unfortunately, when you have to ACT, you don't have the luxury of equivocating or obfuscating. That's the problem the Fed faces right now. To wit:

On the one hand, the Fed has been urgently moving to prevent the trio of economic woes—housing, credit and financial_ from plunging the country into a deep recession. On the other hand, with soaring energy prices and high food costs, policymakers realize that they can't afford to let inflation get out of control, either.

To attenuate the credit crisis (Recession, ie, Rock), they are printing more money. But printing more money makes prices go up (Inflation, ie, Hard Place). You ever try to run without sweating? It looks ridiculous, and it's way too slow. But that's what the Fed is doing right now.

It only works if you believe in it

2008-04-02T01:34:00.000-07:00

Wall Street began the second quarter with a big rally Tuesday as investors rushed back into stocks, optimistic that the worst of the credit crisis has passed and that the economy is faring better than expected.

When I first read that, I thought it was an April Fool's joke. But I guess they were serious. Oh well, I still got a chuckle out of it. But I must say, the powers that be are getting awfully careless about their Fnords.

That's more like it

2008-03-31T22:56:00.000-07:00

Good article on Bloomberg today... some of the better tidbits:

``The sad truth,'' [Charles R. Morris] writes, ``is that subprime is just the first big boulder in an avalanche of asset writedowns that will rattle on through much of 2008.''

Expect the landslide to cascade through high-yield bonds, commercial mortgages, leveraged loans, credit cards and -- the big unknown -- credit-default swaps, Morris says. The notional value for those swaps, which are meant to insure bondholders against default, covered about $45 trillion in portfolios as of mid-2007, up from some $1 trillion in 2001, he writes.

It goes on to talk about how we got into this mess, and looks at possible responses. That's actually the best part of the article:

Morris points to two previous episodes of lost market confidence.
The first was the 1970s inflationary trauma that prompted investors to suck money out of the stocks and bonds that finance business. Confidence returned only after Fed chief Paul Volcker slew runaway inflation by ratcheting up interest rates.

The other precedent is the popped 1980s Japanese asset bubble. In that case, politicians and finance executives tried to paper over their troubles. Two decades later, Japan still hasn't recovered, Morris writes.

We should be as bold as Volcker, he suggests: Face the scale of the mess, take a $1 trillion writedown and shore up regulatory measures. His recommendations include forcing loan originators to retain the first losses; requiring prime brokers to stop lending to hedge funds that don't disclose their balance sheets; and bringing the trading of credit derivatives onto exchanges.

What he fears is that the U.S. will instead follow the Japanese precedent, seeking to ``downplay and to conceal. Continuing on that course will be a path to disaster.''

He's right... we need to take the lumps, sooner rather than later. But, it doesn't seem likely to happen. BOHICA.

On Inmates and Asylums

2008-03-29T02:37:00.000-07:00

The Treasury Department will propose on Monday that Congress give the Federal Reserve broad new authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.

Don't for a second imagine that this is a good thing. Free markets work best when market forces are allowed to act. When the housing bubble was expanding out of control, there were no calls to stop the gains. People raked it in hand over fist. But now that its popped, all anyone wants to do is stop the losses.

Why?

The very act of trying to minimize these losses will result in the eventual destruction of the system. You can't have a market that only expands. Contraction is necessary. Vital, even.

You know what it is called when something just grows and grows out of control? It's called cancer. And the housing bubble cancer has metasticized into the global economy. Do you think that preventing it from shrinking is going to help the host organism? Absolutely not. Instead, it is more likely to speed its demise.

I don't understand why this is so complicated. People...

1) used money they didn't have
2) to buy things they couldn't afford and now they
3) can't pay for it.

How is anyone surprised by this?

Protecting people from the consequences of bad behavior only encourages more bad behavior. The only way to make things better is to let people suffer the consequences of their actions regardless.

Evolution is a hell of a theory, and survival of the fittest is a hell of a sieve. If we just let these forces work in the market, the people that got us into this mess would get eliminated and those that remained would be wiser and stronger as a result.

California Dreaming

2008-03-26T11:08:00.000-07:00

Finally, some good news...

Signs of distress are piling up in the California housing market, where prices are falling at three times the national rate of decline.
--Statewide, median sales prices fell by a stunning 26% in February, with home prices dropping at a rate of nearly $3,000 a week, the California Association of Realtors reports. Further, the CAR says the Fed's interest rate-cutting campaign "will have little near-term direct effect on the housing market."

I've been waiting to buy a house here in Cali since I moved here from Hawaii in 2005. Hopefully that 3k a week dip will persist for a while so I can buy something at a reasonable price.

Good News Amidst Turmoil, or, The Dairy Queen of 2k10

2008-03-20T11:56:00.001-07:00

Back when I was a kid, Dairy Queen was the shizzle. I remember singing that song, "Let's all goooooo.... to the Dairy Queen!" and getting all excited about getting a dipped cone. Ah, the magic of childhood.

Unfortunately, the magic didn't last. Fast forward in time, most of the Dairy Queens I saw as an adult were shells of their former glory. Anachronisms painted the wrong shade of brown.

I bring it up because I've often hoped that Starbucks would someday share Dairy Queen's fate. I walk around these franchises, oh so cool, and I think, in 20 years, these things will be like Dairy Queen's. Embarassing reminders of a pretentious past, set in dated shades of forest green.

Looks like that time is coming.

Starbucks share's have been dropping faster than a Starbuck's addict's bank account lately. Which is great, because amidst all of the bad news regarding the economy, it's nice to finally have a ray of light.

People act like depression, recession, and inflation are all bad things. But if the economic trouble that we are facing ends up killing Starbucks, they might just be worth it.

Inflation

2008-03-17T14:59:00.001-07:00

It's happening right now. By reducing rates, the Fed is in effect printing more money to save these companies. By printing more money, they are devaluing the currency. And by devaluing the currency, they are accelerating the decline.

There's no easy way out.

The years of bullshit in the housing market have come due, and now its time to pay for it. But the fundamental mistake is thinking you can pay for make believe gains with more make believe money. This quote sums it up best:

Former US Treasury secretary Lawrence Summers says the Fed's shower of liquidity cannot cure a bankruptcy crisis caused by a tidal wave of property defaults.
"It is like fighting a virus with antibiotics," he said.

Exactly. Continuing that line...

But even if you think the Fed has no choice other than to take dramatic action, the critics are also right in warning that this comes at a serious cost and it may backfire.
The imminent risk is that global flight from US Treasury and agency debt drives up long-term rates, the key funding instrument for mortgages and corporations. The effect could outweigh Fed easing.
Overall credit conditions could tighten into a slump (like 1930). It's the stuff of bad dreams
...
The race to the bottom must soon begin. Half the world will be slashing rates this year to stave off credit contraction. The dollar will have a lot of company. Small comfort.

And that is the point. No amount of inflation is going to stave off reality. The race to the bottom must begin SOON. So, stop wasting time with half measures and get on with taking the dose. The sooner this thing crashes, the sooner we can start rebuilding.

Let Stearns Burn

2008-03-14T17:30:00.001-07:00

The shit is starting to hit the fan now, and Bear Stearns is the latest turd to make impact.

"Bear Stearns Cos., teetering on the brink of collapse from a lack of cash, got emergency funding from the Federal Reserve and JPMorgan Chase & Co. in the largest government bailout of a U.S. securities firm."

This really pisses me off.

If these companies freely take profits when times are good, then they should freely take the lumps when things go bad. If it puts them out of business, so be it. Maybe the next crop of companies will take note and make wiser decisions.

Buyer Sues Agent

2008-01-23T00:17:00.000-08:00

While stock markets across the globe bleed, I found this interesting story about a home owner suing her real estate agent.

Marty Ummel believes she paid too much for her house. So do millions of other people who bought at the peak of the housing boom.
What makes Ummel different is that she is suing her agent, saying it was all his fault.
...
The defendant in the Ummel case is Mike Little, a veteran agent with ReMax Associates. He will argue that Marty Ummel, who brought the case with her husband, Vernon, is trying to shift the blame for the couple's own failures of research and due diligence.
"They simply didn't do what is expected of a knowledgeable, sophisticated buyer, and are now looking for someone other than themselves to take responsibility," Roger Holtsclaw, an agent who was hired by Little as an expert witness, said in a court deposition. -Seattle Post Intelligencer, January 21, 2008

Taking responsibility. That's going to be a central theme in the years to come. And it looks like the lessons are now beginning, both on a macro and a micro scale.

First Losses Ever

2007-12-20T15:06:00.000-08:00

Bear Stearns takes first loss ever...

Bear Stearns Cos. said Thursday a bigger-than-expected writedown in its mortgage portfolio caused the nation's fifth-largest U.S. investment bank to post the first loss in its 84-year history.

It took a $1.9 billion writedown in the quarter ended Nov. 30 as its mortgage-backed securities continued to lose value amid the global credit crisis. That was much larger than the $1.2 billion it expected in November.

Morgan Stanley takes first loss ever...

Morgan Stanley posted its first quarterly loss ever Wednesday after taking an additional $5.7 billion write-down related to subprime mortgages. The investment bank also said it would sell a $5 billion stake to China Investment Corp., a sovereign wealth fund, to shore up its capital.

E-Trade is Hit!

2007-11-12T16:40:00.000-08:00

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."

Signs of the Times

2007-11-09T07:52:00.000-08:00

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.

Recession

2007-11-06T15:59:00.001-08:00

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 DUMBASS THER IS NO NATIONAL HOUSING MARKET SO THEIR BY DEIFNITION CANNOT BE A NATIONAL HOUSING BUBBLE"

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.

Home Sales Fall

2007-10-24T10:22:00.000-07:00

US existing home sales fell 8.0 percent in September as a persistent housing slump continued to weigh on the property market and the world's biggest economy, an industry group said Wednesday.
The National Association of Realtors (NAR) said in a monthly snapshot that sales of existing homes and apartments tumbled to a seasonally adjusted rate of 5.04 million units in September from 5.48 million in August.
The drop was worse than expected. Most economists had only expected sales to decline to around 5.25 million.
Stripping out apartment sales, sales fell to their lowest level since January 1998.
August's sales pace meanwhile was revised down from an original tally of 5.50 million properties.
The depth of the housing depression was underlined by an annual reading which showed sales of homes and apartments across the United States have plummeted a hefty 19.1 percent from September 2006.
Sales activity has slowed dramatically and dragged down prices in many areas in the past 12 months in a market downturn which has also forced many mortgage lenders out of business.

from http://www.breitbart.com/article.php?id=071024152444.1bd2qxem&show_article=1

Coming to a City Near You

2007-09-18T20:32:00.000-07:00

As many of you probably are aware, Northern Rock is crumbling as we speak. What is Northern Rock? It used to be the fifth largest mortgage lender in England. However, concerns over its liquidity have caused people to pull their money out of in droves.

The lines can be seen in the picture below:

The government last night issued an emergency pledge to Northern Rock savers that their money is safe, after a third day of queues outside branches threatened to spread across the banking system. - The Guardian

But what is interesting are reports that a large chunk of the people seeking to withdraw their money are doing so online. This, from another report:

"A friend of mine works for the Northern Rock in their IT section," wrote Jeremy Bradshaw, of London, on the BBC website. "Apparently they have been told to deliberately limit access to online accounts in an attempt to stop customers withdrawing their cash." - Telegraph

Preventing a virtual bank run by intentionally crashing the servers? Sounds like a movie plot. But, regardless of how this is being spun, the situation is clear: the US Housing Bubble is now causing casualties overseas.

How can the US housing market be blamed for tanking one of the biggest mortgage lenders in England? Forbes explains:

The problems in the credit markets originated in the United States, where, at the tail end of a multiyear housing boom, mortgage loans were made to many unqualified buyers. As housing prices stopped rising and low introductory mortgage rates ended, buyers began defaulting on their loans. Many of the loans backed bonds that were sold to investors around the world, and the result has been an avoidance of all kinds of risk, especially regarding asset-backed securities. - Forbes

A bit wordy. The Scotsman has a more digestable version:

Unlike most banks, which get their money from customers making deposits into savings accounts, Northern Rock is built around its mortgage business.

It raises most of the money it provides for mortgages via the wholesale credit market - primarily by selling the debt on in the form of bonds.

Following the widespread losses made by investors in loans to United States homebuyers with poor credit history, the so-called sub-prime loans, banks and investors who have had their fingers burned have become wary of buying any mortgage debt, including Northern Rock's.

Therefore, the bank is not seeing the flow of money that it would normally enjoy - and needs to keep its business going.

However you say it, it is clear that the problems in the US market are being felt worldwide.

And yet, Northern Rock is not the first such casualty. In an International Herald Tribune article, we hear of a bank in Germany that was proclaimed the "First EU Victim of US Subprime Woes":

A small German bank on Monday became the first European victim of gambles in securities issued by the tottering subprime mortgage business in the United States. The news raised the possibility that a contagion may reach further into European markets than had been anticipated.

Aside from the fact that both Germany and Britain have been hit, this article is interesting for two more reasons. The first? This little gem:

Since the bank had said only 10 days ago that its investment portfolio was in good shape, the announcement riled credit markets Monday in Europe.

A bank lying about its financial condition? Wow, never would have seen that coming. Luckily, the banks in the states would never do that to us :)

And the other thing? A single word from the first paragraph: CONTAGION.

I won't get in to what financial contagion is right now. But, remember the term, because you will be seeing it again. In the meantime, keep an eye on what is going on with Northern Rock. Not only does it show us how serious the situation is. It is also a sign of things to come.

Bank Runs Already?

2007-08-17T10:10:00.000-07:00

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.

Immigration - the Other Shoe

2007-08-15T12:13:00.000-07:00

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 professionalRoofing.net, "...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.

Prescient?

2007-08-09T16:39:00.000-07:00

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!

It's About That Time

2007-08-08T15:53:00.000-07:00

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 :)

New Century Goes Bankrupt

2007-04-02T14:29:00.000-07:00

The first canary just died in the coal mine. In case you missed it:

New Century Financial Corp., overwhelmed by rising defaults from borrowers with poor credit records, became the largest subprime mortgage lender ever to fail as it filed for bankruptcy today.
New Century plans to sell most of its assets within 45 days, said the Chapter 11 filing in federal court in Wilmington, Delaware. About 3,200 people, more than half the workforce at the Irvine, California-based company, will be fired. New Century said it already agreed to sell its mortgage billing and collections unit to Carrington Capital Management LLC for $139 million.

There will be more to come. The question is: When? Stay tuned.

Denial

2006-11-07T03:39:00.000-08:00

It took a while, but we are in full fledged denial now. The number of contradictory reports that come through the news desk every day is boggling. On the one hand, you have the NAR putting out ads saying "it's a great time to buy or sell a home." But, every other report being filed is filled with accounts of people being hurt by the current market.

Lets look at a couple of the more recent ones.

There was recently a report about 5 Bubble Proof cities. Cited in the report:

SF
NY
Boston
LA
Seattle

Each one of these supposedly "Bubble Proof" cities has had numerous reports about trouble in the housing market. Lets start with San Francisco. Here are just a FEW of the excerpts from my news site:

The resale housing market continued to weaken in the third quarter with unit sales decreasing 31 percent across the Bay Area, year-over-year, according to a report released today by Prudential California Realty.

The sizzle has fizzled from the Bay Area housing market. Homes take longer to sell, buyers can negotiate concessions such as roof repairs, and the year-over-year median house price has fallen for the first time since the dot-com bust. Compared to a year ago, the Bay Area's median home price fell by 0.8 percent, or $5,000, in September to $611,000, according to a report released Tuesday by Data-Quick Information Systems.

It could take years for the wobbly housing market in the Bay Area and the rest of the country to regain its footing, but full-scale declines in the price of homes seem less likely, a top Federal Reserve official said Monday.

Boston Realtors were gloating for a few days last month. I distinctly remember seeing all those anti-bubble reports come across my screen. I remember thinking, "Really?" But those links don't even WORK now. The best I can do is find an article from Business Week referencing the report:

The Bay State Realtors picked a curious time -- given that interest rates are rising, and many housing markets are starting to soften -- to issue a report predicting that Boston housing was going to keep rising ever-upward in coming years. The report -- titled ``Refuting the Bubble'' -- claims Bay State home prices likely ``will continue to rise rather than decline in the coming months and years,'' according to this account in the Boston Herald.

I REALLY wanted to get the original article, because the realtors were so damned cocky about it. But when I searched the BostonHerald.com, I couldn't find it. What I DID find was a lovely piece entitled "Dark days for home sales: Weakest Sept. in decade." Among the jucier tidbits in it:

Massachusetts is facing what looks like its worst autumn real estate market since 1996, with no clear signs that prices are bottoming out.
“I think we still have some more to go on the downside,” economist John Bitner of Boston-based Eastern Bank said yesterday after the Massachusetts Association of Realtors reported housing’s weakest September in a decade.
MAR said just 3,435 Massachusetts houses changed hands last month - a 23.9 percent plunge from September 2005 and the lowest September volume since 1996.

I won't bore you with news from NY, LA or Seattle. Needless to say, none of them are thriving. And these are the supposedly "bubble proof" cities.

It hasn't always been like this.

For a long time, the news reports were fairly consistent for specific regions of the country. Certain places would be reporting losses. Others would report that they were holding strong. There was at least uniformity in the signal.

But in the last few weeks, the amount of contradictory information coming out of the various news outlets has been growing. It is clear that not everyone is seeing the same reality. Some people, like NAR, think that now is a great time to buy. But, the people who actually have to do the buying seem to disagree.

If NAR thinks now is such a great time to buy a house, why don't all of their agents buy one? Remember during the boom when every realtor was also a wannabe flipper / developer? If the good times are indeed back, why not get a second bite at the apple? If every realtor out there bought a property, surely that would stimulate the market. It would be a great show of faith in the product. And, if the market goes up like they say, they will BANK.

Boy, how they could show us plebes how little we know about the housing market.

Of course, it will never happen.

They won't buy any houses. They'll just tell YOU to do it. Because they are not stupid. But they think you are. They know the market sucks. They know buying is a HUGE risk. And they don't want to be the sucker left holding the bag. So, next time your agent tells you how now is a great time to buy a house, give yourself a good laugh and ask them how many houses they have bought lately.

The Vultures Circle

2006-10-23T03:39:00.000-07:00

A lot of stories about mortgage fraud are coming out this week. The incredulous tone of the articles would be funny if it were tongue-in-cheek. But, the fact that they are serious about it makes me shake my head. Is anyone surprised that applicants lied on their loan applications? Is it really a shock that mortgage brokers encouraged them to do it?

The housing market was a sure thing, and everyone wanted in on the action. So people lied a little on their applications. It wouldn't matter. In a few months, the appreciation on the properties would more than make that lie a reality. So, it wasn't really lying. It was more like pre-stating the facts... Enron style corporate accounting for the everyman.

Only, the market tanked, and all of a sudden people started losing money. Smiling faces turned into pointing fingers. And blame had to be assessed. So who would be left holding the bag?

Well, you know the saying. Sh*t rolls down hill. So, it's more than likely that the lenders will sue the mortgage brokers, the mortgage brokers will sue the borrowers, and the borrowers will sue... no one because they will be too broke to afford it.

Well, that's maybe not entirely true. One angle that I expect to hear much more about in the coming months is appraisal fraud. When I lived in Hawaii, I frequently heard mortgage brokers talking about how 'their guy' could 'make it appraise.' You hear a lot of sniffling about adjustable rate mortgages, but inflated appraisals are responsible for a lot of the problem as well.

Unfortunately, if people dont even read the terms of their loan carefully enough to understand them, do you really think they will request a copy of the appraisal? Probably not.

The point being, expect to hear more and more stories of fraud and litigation as this bubble continues to burst. The lawyers and the crooks are the vultures of our times, and when they start circling, you can bet it's not a sign of good things to come.

The Five Stages of Grief

2006-10-17T16:22:00.000-07:00

We're hearing talks of soft landings again. It's amazing how readily people will accept evidence that supports either their hopes or fears. The September data has a lot of people optimistic again. But month to month variations dont change the fundamentals that underlie the problem.

It made me think of the five stages of grief. You know: Denial. Anger. Bargaining. Depression. Acceptance.

There is a lot of denial going on right now. You can see it in the quotes that we've assembled below, or in the stories coming out of the mill. Stories that say things like, "Well, THOSE people can't afford their houses, but here in thats not the case." Unfortunately, that type of thinking no longer applies. There may not be a national housing market, but there is a national economy, and what happens in one part of it affects the rest.

There is also a lot of anger. Much of it is in the form of, "Poor Johnny and his family are facing foreclosure. Evil lenders tricked them into taking out a loan they didn't understand and couldn't afford. Now, they can't pay the note and will be out on the street. Those evil !"

But, with the recent resurgence in "soft landing" speak, and the soothing cooing tones coming out of the Fed, it appears that we have entered the bargaining phase. "Yes, yes... we had a little boo boo... but it's going to be all better, see?"

I don't buy it. You can look at all the numbers you want. I still don't believe it. I remember when I did a lot of day trading. I spent a lot of time learning technical analysis, and I was totally infatuated with numbers, charts, lines, graphs, candles, and all the rest of that stuff. I thought I had reached a decent level of proficiency, too.

Then, I read a saying by a wise old investor. "I never met a rich technical analyst." I objected. I knew lots of them! But, rich is relative. And in this guy's world, none of the people I knew even existed. He meant wealthy. And his point was that you can draw all the lines you want, and look at all the numbers you want. But at the end of the day, you can't escape the fundamental analysis. In the long term, fundamentals always win.

I didn't want to believe it at the time. But since then, I have seen that there is wisdom in his words. At the end of the day, up is up, down is down, and at some point, you have to pay the piper.

But we're not quite there yet. Remember, bubbles last longer than people think they will. The people who predicted a stock market bust had already been laughed out of a job by the time it actually hit in 1929. But crashes last longer than people think, as well. So, I would take the news of the bubbles demise with a grain of salt.

Up to the Minute Housing News and Information

2006-10-12T14:15:00.000-07:00

If you are interested in getting up to the minute, unbiased coverage of the housing market, check out Crash Feedbacc. Updated around the clock by yours truly for your viewing pleasure. Mahalos!

Housing Bubble vs. Great Depression Deathmatch

2006-10-12T14:13:00.000-07:00

Click the links on the right to read the quotes. Mahalos!

Alan G or Ali G?

2006-10-09T15:15:00.000-07:00

"There is a good chance of coming out of this in good shape, but average housing prices are likely to be down this year relative to 2005. I don't know, but I think the worst of this may well be over"

Someone must have shown Alan G. the housing video, because it looks like he's asking to be included. I know I'm not an 'expert' on these things, like A to the G, but the fact that the mortgage activity was up does not necessarily mean that all is well. He's basing this, in part, on some recent reports by the MBA saying mortgage activity is up. From the MBA web site:

The refinance share of mortgage activity increased to 44.5 percent of total applications from 43.9 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 29.8 percent of total applications from 28.8 percent the previous week.

Now, if you add those together, you see that ARM and refi activity accounted for 74.3% of the total applications. Does that sound like a healthy market to you?

NO!

That looks like a lot of people in trouble. I expected the refi activity... after all, a bunch of people are getting reset now on their ARMs, and their payments are blowing up. They want to take advantage of the low rates in order to try to stay afloat. But the ARMs? A bit surprising. ARMs are a big part of the reason that people are in trouble to begin with. But, as they say, desperate times call for desperate measures.

Anyway, if I'm reading the article correctly, the fact that almost 75% of activity was in refi and ARM products does not sound like the end of the bubble. It sounds like an indicator that the ish is about to hit the fan.

When? Who knows. Bubbles ALWAYS last longer than people predict. But, don't believe the hype... just because mortgage activity is up does not mean all is well. The type of activity is a key indicator of the underlying conditions, and if we are seeing refi's and ARM's products blowing up, then you can be sure more and more people are feeling the squeeze, getting desperate, and trying to stay above water.

Alan G or Ali G? Either way, the joke is on us. At least we know that MC Greenspan does a mean Irving Fisher impersonation.

Critical Milestone Reached

2006-10-04T01:18:00.000-07:00

As everyone has probably heard by now, the DOW closed at 11,727.34, beating the record set way back in the dot com days. Maybe its me, but things sure don't feel as prosperous as they did back then. Still, breaking this record is psychologically important, if for no other reason than to finally put the bust behind us.

I read "The Next Great Bubble Boom" a while back, and even though the timing on some of those predictions was off, it looks like a lot of the calls made in the book by Dent are starting to happen. Oil is down, the Dow just peaked... and housing is flat at the moment. What does all that mean?

Well, if the book is to be believed, there won't be an overall crash just yet. But, there will be significant gnashing of teeth in certain segments of the housing market. Fundamentally, I believe that a crash of some sort is unavoidable. However, the timing of the crash is the hard thing to predict.

If you look back at the great depression, there were a lot of economists who predicted a great depression. The thing was, they were too early by several years. By the time the depression actually hit, they had all but been laughed out of a job by the people making money in stocks.

Still, it was little vindication for them to say, "I told you so" when the market finally did collapse. By then, everyone could see it for themselves, and it didn't matter.

Jump to the present.

There are a lot of people that look at the present situation and just think, "This can't last." Negative spending rates, current account deficit, you name it. But, something to keep in mind is that bubbles often last much longer than anyone thinks they can. Long enough to lure people into one last false sense of security.

The overall housing picture is not going to improve any time soon. But luckily for us, if the stock market keeps performing, we won't have to worry about it. We'll be able to turn our attention away, once again, and push the eventual settlement date down the road a bit further.

That might be good, or it might be bad. Me personally, I like to settle my debts up a soon as possible. It hurts more, but costs you less in the long term. Unfortunately, we have a nation that thinks the opposite. Play Now, Pay Later. Well, looks like the stock market might let us play for a little while longer.

And the smart people out there will take advantage of the respite and use it to get their homes in order.

The Market Wont Save Us

2006-10-02T10:35:00.000-07:00

I've received a lot of emails from optimistic people who think the strength of the US stock market will somehow save the drooping housing market. Unfortunately, I dont see that happening. Although a strong stock market would have overall positive effects on the greater economy, the fundamentals involved with the housing bust can't be overcome by new highs on the exchange floor.

Think back to when the tech bubble burst. Did a booming housing market save it? Nope. All the speculators just jumped from one bubble to another. That's the same thing that's going to happen again. When / If A new record is set on the DOW, a new round of speculators will ride whatever wave ensues. But the bagholders in the housing market will still be holding their bags.

Some of the cash might find its way back to the market, but not before a lot of people get wiped out financially. So, don't count on the stock market to save the day when it comes to housing. Housing has had its day, and that day is ending. Remember, it took six years for tech to bounce back, and housing couldn't save it. Expect similar time frames for housing, regardless of what the stock market does.

The Availability of Money and the Causes of Crash

2006-09-26T00:56:00.000-07:00

How is money made?

Did you say by working? You're wrong. Maybe by selling goods or services? Wrong again. You don't make money when you work. You don't make money when you sell things. In fact, YOU don't make money. At all. Ever.

Working, or selling stuff, allows money to be TRANSFERRED from one place to another. When you go to your job and work, you do not create any money. The money already exists. It exists in your employers account. And in exchange for your work, it is transferred into yours.

Working does not create money. Working only transfers money.

Selling does not create money. Selling only transfers money.

I apologize if I'm being didactic, but this point cannot be stressed enough. It is absolutely key to understanding the nature of the problem facing the economy right now. Our day to day activities do not create money. They only transfer it around.

So, where does the money come from? Well, where do you keep YOUR money? Obviously, the bank.

Unlike us plebes, banks DO create money. And I don't mean print it. Forget all that green stuff in your wallet. Tangible currency represents only a tiny, tiny fraction of the actual money supply. The vast majority of 'real money' doesn't really exist at all. It's just numbers in a computer somewhere.

Banks create money. In theory, they can only create a certain amount of it. And that amount is supposed to be governed by the Federal Reserve. But the Federal Reserve can only do so much. In fact, they only have three major buttons they can push.

The first is the funds rate. This is how much banks charge each other for overnight loans. Next is the discount rate. This is how much a bank pays to borrow money from the Fed. And finally, the reserve requirements. This is supposed to determine how much money a bank can invent. With these three buttons, the Fed is supposed to guide our economy down the wide path of prosperity. But what happens, when the road starts to curve?

So, we're driving along and all of a sudden, the tech bubble bursts. We swerve to avoid a wreck, only to get hit by a bunch of terrorists flying airplanes into buildings. We swerve again. The Fed is worried about a crash. So, to avoid it, they do the only thing they can do. They start pushing their buttons. They start pushing buttons 1 and 2, lowering the rates and effectively telling the banks to get out there and Loan. More. Money.

What they don't realize is that button #3 is broken. The reserve rate that is supposed to limit how much banks can lend no longer functions. Thanks to new funding sources, most of the loans created by banks have nothing to do with their reserves. They can invent money at will. So the banks are unleashed with no way to control them, while the Fed helplessly watches and mashes buttons.

With nothing to stop them, the banks go nuts. Money is cheap and widely available. The banks are practially giving it away for free. And the people can't get enough. The table is set, the guests are seated. The housing boom begins.

Jump a few years into the future.

Housing is a runaway train, and the someone needs to put the breaks on it. They now realize button 3 is jacked, so they go back to pushing buttons 1 and 2 over and over again, raising the rates. Stop lending! They are practically screaming now. But the banks listen! They stop inventing money... and the magic money machine STOPS.

But do all those loans that the banks made disappear, too? Nope. Those are still on the books. And people still need to pay for them. But look at what just happened... they turned off the machine. There's no more money available.

The money supply dried up!

So, let's ask another simple question. What happens when the demand for something (money) remains the same, but the supply shrinks? Welcome to Surviving the Crash.

An ARM and a Leg

2006-09-24T02:08:00.000-07:00

Although there are a few reports of stability and improvement from around the country, the majority of the news coming in right now about the housing market has not been good. Take this quote from a recent article in the Pioneer Press...

As the housing boom ends, experts worry that rising interest rates and slowing home values will push thousands more Minnesotans out of their houses.

The article then continues to talk about a family that lost their home, and how many others are following suit

But soon, the Schlenners will move on, like the more than 4,200 Twin Cities-area homeowners who have lost their homes to foreclosure so far this year. That's a low figure, compared with other cities, but a steep increase for the seven-county area, which is on pace to double last year's record number of foreclosures.

The trend is clear, foreclosures are on the rise, and the middle to lower middle class is going to be hit hardest. Most of us understand this in individualistic terms. Yes, some people will lose their homes. But, what about the cumulative effect that these kinds of losses can have on a community? What happens when entire swaths of neighborhoods get foreclosed?

The surge of home losses has shocked city and state officials, startling some veteran city planners and foreclosure-prevention pros. Community activists say pockets of foreclosures in the core cities have reached crisis proportions, threatening years of community development. In St. Paul, it's left city code-enforcement workers struggling to keep tabs on a mushrooming crop of empty properties. More than 800 houses in St. Paul are now officially vacant, double last year's list.

This is not going to be a unique experience. In fact, if you plotted a density map of foreclosures and layered it over a map of ARM lending hot spots, I bet you'd find a nice correlation. In the meantime, the people who got lured into spending beyond their means are going to get increasingly desperate to hold on to their gains.

Unfortunately, it's going to be a losing battle for most. If you can't pay the note now, you probably won't be able to pay it later. All you can really do is buy more time. But, to do that, you will have to go deeper into debt. And, I think that's exactly what a lot of people are about to do.

For the people who can afford it, or who are not locked in to tightly, I think we will see a lot of refinancing as people try to get OUT of the ARMs race. People who can successfully do this may be able to dodge a bullet - for now. But people who can't afford to do that will have fewer options.

Most will probably try to go deeper into debt just to stay afloat. But, will the money be there for them? I doubt it. Forget the fact that the money supply is vastly smaller than it was when this boom got started. How are you going to get a home equity loan when your home is worth less now than it was when you bought it?

It's hard to see an easy way out of this. And it's NOT from a lack of trying. All the talk of soft landings a few months back was a collective game of wishful thinking. But, you don't hear that kind of talk now. At some point, reality has to set in. And, it looks like we're about to get a heavy dose of reality.

* photo by Ben Garvin, Pioneer Press

Check out my NEWS SITE!!!

2006-09-21T04:38:00.000-07:00

I slaved, I toiled... and I finally finished my 24 hour a day, algorithmically driven CRASH NEWS SITE! You will NOT find more comprehensive coverage than this, folks. If you enjoy keeping up to date, don't settle for daily updates. Get your news served up hot and fresh as it breaks! Bookmark http://crash.feedba.cc now for all the latest economic news.

Assessing Option ARM Risk

2006-09-13T16:51:00.000-07:00

Check out this article from Bankrate.com. It discusses 5 ways to asses the risk of your option ARM. If you're not familiar with these products...

An option ARM is an adjustable-rate mortgage that gives the borrower four choices of a payment each month. The borrower can pay the amount necessary to pay the loan off in 15 years or in 30 years. The borrower can pay only the interest charged in the previous month. Or the borrower can make a minimum payment that doesn't even cover the interest, so that the loan balance increases.

For the unwary, they are financial quicksand. When you hear the experts talking about 'exotic loan products', this is what they mean. Borrower beware!

Senate Banking Hearing Statements

2006-09-13T13:26:00.000-07:00

Here are the statements from the Senate Banking Hearings:

David Seider sees the crash bottoming out middle next year:

The downswing in home sales and housing production should bottom out around the middle of next year before transitioning to a gradual recovery that will raise housing market activity back up toward sustainable trend by the latter part of 2008.

He also acknowledges that prices may drop:

National average house price appreciation is likely to be quite limited in the near term. Indeed, some decline is a distinct possibility, and the rate of price appreciation should remain below trend for some time.

But as we move along, we start getting into deeper waters:

However, much of this negative impact should be offset by strengthening activity in other sectors of the U.S. economy, keeping GDP growth reasonably close to a sustainable trend-like performance.

Let me paraphrase: Housing is out of gas, and something else needs to step up to the plate and carry us for a while. It's easy to say, but hard to do, considering how much overall impact the housing boom has had on jobs, wealth, and growth.

He makes an interesting prediction:

It’s likely that the bulk of the downswing in home sales and housing production will occur this year, with market activity stabilizing around mid-2007 and moving back up toward trend by late 2008.

Again, let's paraphrase: The bubble has popped, like everyone said it would. But, the recovery will only take a year or two. Put a star by this one, I have a feeling we'll be adding it to the quote list later on.

More soon...

Housing Bubble vs. Great Depression VIDEO

2006-09-13T12:34:00.000-07:00

Here is the updated, new and improved, higher quality version of the Housing Bubble vs Great Depression video. Enjoy!

They are taking notice on the Hill...

2006-09-13T02:43:00.000-07:00

Reuters is running a story about the Housing Market and Innovative Mortgage Products:

U.S. lawmakers will question some leading government and industry economists about the perils of a possible 'housing bubble' in a Wednesday hearing.

It goes on to say:

Next week, the same committee will hold a hearing on the growth of innovative mortgage products that have mushroomed along with the housing sector.

I'll be watching this fairly closely. It's interesting to see politicians starting to set expectations in their talking points. Jack Reed (D-RI) used the phrase "Bumpy Landing". I'm not an expert on etymology, but it will be interesting to see if that "Bumpy Landing" morphs into "Crash Landing" soon, and then is simply truncated to "Crash."

The list of people slated to speak is fairly interesting. Among the Housing Experts are:

Mr. Richard Brown, Chief Economist, Federal Deposit Insurance Corporation
Mr. Patrick Lawler, Chief Economist, Office of Federal Housing Enterprise Oversight
Mr. Dave Seiders, Chief Economist, National Association of Homebuilders
Mr. Tom Stevens, President, National Association of Realtors

If you've been following this blog, you'll recognize some of those names. Dave Seiders made a few contributions to our Great Depression vs. Housing Bubble article. And Patrick Lawler's office is responsible for the OFHEO index that we discussed in our Housing Heating Up Overseas + Flawed Index article. Not that the index itself is bad... it's just that it is a lagging indicator, and so for predictive purposes, it's completely useless.

At any rate, if you missed Dancing With the Stars yesterday, tune in to CSPAN... there will probably be a lot of dancing going on during these hearings.

Meeting Notes

2006-09-12T20:15:00.000-07:00

Seems I've been focused a lot on the housing bubble lately. It IS fascinating to me, especially watching it unfold in my local area. But, I want to assure you all that I am by no means fixated on just housing.

I don't have time to talk about currencies and monetary policy at this point, but I promise to do that in a future article. I am also planning to blog about my personal finances, and how I went from debt-full to debt-free in a few months. In the meantime, Thank you for visiting! I hope that you return (and bring your friends), and I wish you great success in all your endeavors. Best wishes!

No Housing Bubble?

2006-09-12T18:21:00.000-07:00

Interesting article stating that there is no Housing Bubble. Interesting in that it is based on a lot of false premises. Some of the key arguments:"The greatest pain will be felt by the biggest speculators and the most overzealous people participating in unorthodox loan programs."

"real estate is a finite resource."

"There is a need for more housing, period!"
I don't know if I agree. It's true, the speculators and bad credit loans will get pinched. But I look at them like the canaries in the coal mine. It's not that they will get hit WORSE than anyone else. It's just that they will get hit FIRST. And the wave that takes them out will by no means stop after it hits them. It will keep rolling on.

Consider this statement about US economic growth over the past few years:

Consumer spending and residential construction have accounted for 90 percent of the total growth in the American GDP over the last four years, and more than 40 percent of all private-sector jobs created since 2001 have been in housing-related sectors, including construction and mortgage brokering.

You can't attribute that kind of growth to a few speculators and mortgage brokers. Housing has been driving this train for a while now, and when it stops... or even slows down... it is going to hurt. Consider recent reports on how residential home builders are shedding employees:

U.S. homebuilders and residential specialty trade employers cut 21,200 jobs in May, June and July, usually the peak building months, according to the most recent preliminary numbers from the Labor Department. The statistics, adjusted for seasonal variations, also showed a significant job loss in March.

They aren't the only ones. Think about how many new realtors have been spawned in the past few years. Or the number of mortgage brokers. Or the number of lending products. The housing market is part of a vast ecosystem that has created a great deal of wealth in this country in the past few years. And when it tanks, believing that only the people on the outermost fringes will get hurt could be a fatal mistake.

Housing Heating Up Overseas + Flawed Index

2006-09-12T02:30:00.000-07:00

A story in the recent Economist about Housing Prices just reinforces what we already know. The US housing market is 'cooling'. They don't want to come right out and say it's crashing, but considering the index that they use, they don't really have to.

You see, the "OFHEO index is thought to be more reliable because it tracks price changes in successive sales of the same houses." And that sounds very nice and good. But there is a fundamental flaw in an index of that sort.

Unlike a stock market, where there is massive liquidity, you can't just unload a house and sell it. Houses are not as liquid as stocks. Wasn't that the great selling point that realtors used over and over during the boom? Well, it's a double edged sword.

When housing markets collapse, the values of the homes don't immediately start dropping. Instead, the entire market chokes up and grinds to a halt.

A disconnect forms between the sellers of the houses and the buyers. The buyers, faced with numerous options, float lowball offers knowing that the seller is behind the eight ball. They have no sense of urgency. They know they can wait the sellers out.

The sellers, on the other hand, refuse the offers, trying desperately to hang on to the paper profits they have already counted in their minds. They don't want to admit that they mistimed the market. So, they decide to sit on their property and wait. It's the old buy and hold strategy. Unfortunately, the only thing they are holding is the bag.

The Mexican Standoff is now in full swing. Both sides think they can wait the other side out. Housing sales stop happening. Inventory piles up. All of a sudden, your comps are not from houses that have sold a few weeks ago, they are from houses that sold last year. It starts to get hard to establish the value of a house.

Nothing happens.

Open houses are exactly that... open houses. Empty. The prospects are nowhere to be seen. Time passes. Now, the weaker parts of the boom herd start to go down. The people with ARMs and the like. Or the flippers, who swam in with the tide and got trapped on the beach.

They can't afford to wait things out. They see their losses mounting with each passing day. They will be the first to cut and run. And that's when the bleeding will start. But, the OFHEO index won't show any of that.

You see the problem, right? The index is based on consecutive home sales. But what happens if nothing is selling? The index goes blind. It goes blind until the panic sets in, and the prices get low enough to coax the buyers off the sidelines. It's a great indicator during a fast paced market. But it sucks when things slow down or stop.

Still, there seems to be good news. The real estate game seems to be in full effect in many European countries. So, if you can't bring yourself to stop playing with fire at home, maybe it's time to take your chances abroad. After all, having lived through this market, you should be an expert by now. Best luck, and much success!

Housing Bubble vs. Great Depression Quotes

2006-09-11T16:44:00.000-07:00

"Stock prices have reached what looks like a permanently high plateau."

- Irving Fisher, Ph.D. in economics, Oct. 17, 1929

"Home sales are coming down from the mountain peak, but they will level out at a high plateau -- a plateau that is higher than previous peaks in the housing cycle.”

- David Lereah, Chief Economist, National Association of Realtors

"There will be no interruption of our permanent prosperity."

- Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928

"It's impossible for prices to go down this year."

- Gary Watts, Spokesman Orange Country Association of Realtors

"I have no fear of another comparable decline."

- Arthur W. Loasby (President of the Equitable Trust Company), quoted in NYT, Friday, October 25, 1929

“I don't worry about new home sales,”

- James Glassman, JP Morgan Chase Economist

"In most of the cities and towns of this country, this Wall Street panic will have no effect."

- Paul Block (President of the Block newspaper chain), editorial, November 15, 1929

"There is no national housing market, so there can't be a national house-price bubble."

- Michael Youngblood, Managing Director, Friedman Billings Ramsey & Co

"I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future."

- E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928

“If you own your own home free and clear, people will often refer to you as a fool. All that money sitting there, doing nothing.”

- Anthony Hsieh, CEO Lending Tree

"Buying of sound, seasoned issues now will not be regretted"

- E. A. Pearce market letter quoted in the New York Herald Tribune, October 30, 1929

"I think investors will have a good reason to come out here and buy again."

- Jeromith Sutton, 2006, NAR Investment Advisor

"...despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression..."

- Harvard Economic Society (HES), November 2, 1929

"We're now in the 'middle innings' of the current economic expansion, and the next economic recession is not yet in sight.”

- David Seiders, Chief Economist, National Association of Home Builders, Jan 2006

"For six years American business has been diverting a substantial part of its attention, its energies and its resources on the speculative game... Now that irrelevant, alien and hazardous adventure is over."

- Business Week, November 2, 1929

"Speculators and people who bought homes with (adjustable-rate mortgages) in 2004 are in a lot of trouble and they're trying to get out,"

- Steve Bottfeld, a senior analyst with research firm Marketing Solutions 2006

"This crash is not going to have much effect on business."

- Arthur Reynolds, Chairman of Continental Illinois Bank of Chicago, October 24, 1929

"We may see a blip up in foreclosures and delinquencies."

- Leslie Appleton-Young, Chief Economist, California Association of Realtors

"For the immediate future, at least, the outlook (stocks) is bright."

- Irving Fisher, Ph.D. in Economics, in early 1930

"...housing activity will remain healthy for some time to come."

- David Lereah, NAR’s chief economist, October 28, 2005

"Financial storm definitely passed."

- Bernard Baruch, cablegram to Winston Churchill, November 15, 1929

"There is no bubble to burst,"

- Jim Folkman, VP of the Home Builders Association of Central New Mexico

"The end of the decline of the Stock Market will probably not be long, only a few more days at most."

- Irving Fisher, Professor of Economics at Yale University, November 14, 1929

"I'd say this is another very important signal that the economic soft patch we were all worried about is pretty much confined to March"

- David Seiders, Chief Economist, National Association of Home Builders

"Hysteria has now disappeared from Wall Street."

- The Times of London, November 2, 1929

"These long-run worries, there's an element of truth to them, but I think frankly the fears are exaggerated.”

- James Glassman, JP Morgan Chase Economist

"... a serious depression seems improbable"

- Harvard Economic Society, November 10, 1929

"The idea that we're going to see a collapse in the housing market seems to me improbable”

- John Snow, Secretary of the Treasury

"Gentleman, you have come sixty days too late. The depression is over."

- Herbert Hoover, responding to a delegation
requesting a public works program
to help speed the recovery, June 1930

"People who talk about a bubble are blowing smoke,"

- Michael Carney, Real Estate Economist
California State Polytechnic University Pomona.
Thursday, February 10, 2005

"This is the time to buy stocks."

- R. W. McNeel, market analyst, New York Herald Tribune, October 30, 1929

"There was never a "bubble", so there is nothing to "burst".

- Jeromith Sutton, 2006, NAR Investment Advisor

"There may be a recession in stock prices, but not anything in the nature of a crash."

- Irving Fisher, leading U.S. economist , New York Times, Sept. 5, 1929

"When I hear [about a housing bubble] I get the sense that people aren't connecting the dots.”

- James Glassman, JP Morgan Chase Economist

"There is nothing in the situation to be disturbed about."

- Secretary of the Treasury Andrew Mellon, Feb 1930

"I think the bloom is off the rose, but there is no doom and gloom."

- Alan Nevin, Chief Economist, California Building Industry Association.

"Unless we are to have a panic -- which no one seriously believes, stocks have hit bottom."

- R. W. McNeal, financial analyst in October 1929

"The national media is reporting a housing bubble. Don't believe it.”

- Dale Akins, President, Market Edge

"While the crash only took place six months ago, I am convinced we have now passed through the worst -- and with continued unity of effort we shall rapidly recover."

- Herbert Hoover, President of the United States, May 1, 1930

"I'm calling it a soft landing -- a return to what is considered to be more normal market conditions,"

- Leslie Appleton-Young, Chief Economist, California Association of Realtors

"Maybe we need something new. That's all I'm prepared to say"
"I'm sorry I ever made that comment."
"When I get my new term, I'll let you know."

- Leslie Appleton-Young, Chief Economist, Cal. Assoc. Realtors
When asked about her "Soft Landing" prediction

"...good stocks are cheap at these prices."

- Goodbody and Company market letter quoted in The New York Times, Friday, October 25, 1929

"Existing-home prices have not collapsed. They've come down to a more normal pace..."

- Larry Murphy, President SalesTraq, Real Estate Trend Tracker

"[1930 will be] a splendid employment year."

- U.S. Dept. of Labor, New Year's Forecast, December 1929

“The continuing shortages of housing inventory are driving the price gains. There is no evidence of bubbles popping.”

- David Lereah, NAR’s chief economist, August 2005

"The former great periods of prosperity in America averaged eleven years. On this basis we now have three more years to go before the tailspin."

- Stuart Chase (American economist and author), NY Herald Tribune, November 1, 1929

"I'm so mad at my neighbor. I bought my new home here in Ashburn last summer and plan to sell it next year (after holding two years to avoid taxes) to make a nice return on my investment. The problem is my neighbor is trying to sell his house (very similar to mine) right now and he keeps lowering his asking price. Each time he lowers his price, I see my potential profits next year getting squashed. Doesn't he realize he's hurting the comps for all of his neighbors by doing this? I don't think he is acting very "neighborly" by doing this. I want to say something to him and tell him he should stop putting his interests ahead of his neighbors. It's people like him who are ruining the market for the rest of us. If he would just refuse to lower his price, we could maintain our comps and everyone would benefit. What can I do to stop him?"

- Question during a real estate chat held by the Washington Post.

"The spring of 1930 marks the end of a period of grave concern...American business is steadily coming back to a normal level of prosperity."

- Julius Barnes, head of Hoover's National Business Survey Conference, Mar 16, 1930

“What the market is doing is going through a correction, which it really needed. It’s getting down to where it’s reasonable."

- Ted Martinez, representative to the National Homebuilders Association

"I am convinced that through these measures we have reestablished confidence."

- Herbert Hoover, December 1929

"We are really on track for a soft landing. There are no balloons popping.”

- David Lereah, NAR’s chief economist, December 2005

"All safe deposit boxes in banks or financial institutions have been sealed... and may only be opened in the presence of an agent of the I.R.S."

- President F.D. Roosevelt, 1933

"One of the reasons we think this market will start to run out of gas at some point is that you've essentially created as much gold from straw as you can from this financial alchemy,"

- Scott Simon, mortgage chief at California bond house Pimco.

"...there are indications that the severest phase of the recession is over..."

- Harvard Economic Society (HES) Jan 18, 1930

"... the outlook continues favorable..."

- HES Mar 29, 1930

"... the outlook is favorable..."

- HES Apr 19, 1930

"...by May or June the spring recovery forecast in our letters of last December and November should clearly be apparent..."

- HES May 17, 1930

"... irregular and conflicting movements of business should soon give way to a sustained recovery..."

- HES June 28, 1930

"... the present depression has about spent its force..."

- HES, Aug 30, 1930

"We are now near the end of the declining phase of the depression."

- HES Nov 15, 1930

"Stabilization at [present] levels is clearly possible."

- HES Oct 31, 1931

"The retreat in housing-market activity that's now under way amounts to a simmering-down process...rather than a classic cyclical contraction that could spiral down for some time."

- David Seiders, Chief Economist, National Association of Home Builders, Jan 2006

"Buying of sound, seasoned issues now will not be regretted"

- E. A. Pearce market letter quoted in the New York Herald Tribune, October 30, 1929

"Housing is still the best investment, without question"

- Stan Sieron, Illinois Association of Realtors President

It's About That Time...

2006-09-11T15:41:00.000-07:00

Grab your popcorn, kiddies, and hit CTRL+D! Some economic asswhup of biblical proportions is about to go down, and this blog is your front row seat ;)