Economic Despair

Showing posts with label bubble. Show all posts
Showing posts with label bubble. Show all posts

It is all good....



Cramer gets Bernanke to wake up and cut rates.



Sub prime doesn't matter, yeah right....



Bear Stearns is fine, three days later it crashes

.....from 2005....

For the last several years as housing prices have increased all across the country we have heard incessant warnings from analysts and commentators that Americans are becoming irrationally exuberant in snapping up new homes at ever-higher prices.

The "housing bubble," as it is now called, may be about to pop, the same doomsayers predict. Paul Krugman of the NYTimes, one of the worst prognosticators in the business with a Ph.D. in economics, now sees sure signs of the bubble leaking air, or "hissing," as he terms it, because homes that not long ago were selling in 24 hours after they came onto the market are now sitting there for two or three weeks before being snapped up!! Holy Smokes!!

Of course we should be reaching a new equilibrium in housing prices, but unless Greenspan & Company drive interest rates up in order to induce a housing recession, there really is nothing to worry about.

Every now and then in this "free space" I provide for my memos on the margin and Supply-Side University lessons, I reprint a letter I have previously sent to my Wall Street clients, who pay me as much as $25,000 per year, not including bonuses, for the independent research Polyconomics provides. I'm sure my clients will not mind me sharing my June 15 letter with you -- as they know I am doing my best to influence our government policy makers to follow my advice. As far as I know, Poly has been the only outfit in the business that has correctly identified the reasons for the several trillion dollar increase in real property dollar prices in recent years. If you noticed, on the left side of this website, there is a new box advertising the client newsletter we have for ordinary people, at an affordable cost. Check it out

With the financial system going into meltdown, who is talking about the financial mess the US government is now facing? Good time for a fiscal stimulus, I'd say.

The U.S. government turned in a $175.56 billion budget deficit for February, a record for any month, as federal spending grew but a slowing economy caused receipts to fall 12.1 percent from a year earlier, the U.S. Treasury said on Wednesday.

The February gap marked a 46.3 percent increase over the previous all-time single-month deficit of $119.99 billion in February 2007 and soundly exceeded Wall Street economists' consensus estimate of a $160.0 billion deficit in a Reuters poll.

February receipts fell to $105.72 billion from $120.31 billion in February 2007, the Treasury said, as both corporate and individual income tax payments slowed. February outlays grew 17.1 percent to $281.29 billion, a record for February, from $240.30 billion in February 2007, the Treasury said.

We are looking into the abyss....

The Federal Reserve’s unusual decision to provide emergency assistance to Bear Stearns underscores a long-building concern that one failure could spread across the financial system. Wall Street firms like Bear Stearns conduct business with many individuals, corporations, financial companies, pension funds and hedge funds. They also do billions of dollars of business with each other every day, borrowing and lending securities at a dizzying pace and fueling the wheels of capitalism.

The sudden collapse of a major player could not only shake client confidence in the entire system, but also make it difficult for sound institutions to conduct business as usual. Hedge funds that rely on Bear to finance their trading and hold their securities would be stranded; investors who wrote financial contracts with Bear would be at risk; markets that depended on Bear to buy and sell securities would screech to a halt, if they were not already halted.

Check out this great piece on asset bubbles......

"All these crises are different. But many have shared common features. They begin with capital inflows from foreigners seduced by tales of an economic El Dorado. This generates low real interest rates and a widening current account deficit. Domestic borrowing and spending surge, particularly investment in property. Asset prices soar, borrowing increases and the capital inflow grows. Finally, the bubble bursts, capital floods out and the banking system, burdened with mountains of bad debt, implodes.

With variations, this story has been repeated time and again. It has been particularly common in emerging economies. But it is also familiar to those who have followed the US economy in the 2000s.

When bubbles burst, asset prices decline, net worth of non-financial borrowers shrinks and both illiquidity and insolvency emerge in the financial system. Credit growth slows, or even goes negative, and spending, particularly on investment, weakens. Most crisis-hit emerging economies experienced huge recessions and a tidal wave of insolvencies. Indonesia’s gross domestic product fell more than 13 per cent between 1997 and 1998. Sometimes the fiscal cost has been over 40 per cent of GDP (see chart).

More on the Case-Shiller numbers from the International Herald Tribune

Across much of the nation, home values are dropping — even those backed by solid mortgages — and banks are repossessing more every day. Most experts say the dive won't hit bottom for another year and only after excess inventory is sharply reduced and credit markets improve.

More government intervention may be needed, too, if the free market system doesn't work quick enough.

"The housing value crisis is spreading and deepening," said David Abromowitz, a senior fellow at the Center for American Progress. "It has gone way beyond subprime borrowers stretched too far with bad loans and now has clearly extended into the housing markets more broadly."

U.S. home prices dropped 8.9 percent in the final quarter of 2007 compared with a year ago, according to the Standard & Poor's/Case-Shiller home price index released Tuesday. That marked the steepest decline in the index's 20-year history.

.....it is really that bad..... oh boy.....I never realized it was that bad......

Check out the Northern Virginia bubble fallout blog.

The mainstream media has just discovered what the Fed has been up to....

NEW YORK (Reuters) - Banks in the United States have been quietly borrowing "massive amounts" from the U.S. Federal Reserve in recent weeks, using a new measure the Fed introduced two months ago to help ease the credit crunch, according to a report on the web site of The Financial Times.

The newspaper said the use of the Fed's Term Auction Facility (TAF), which allows banks to borrow at relatively attractive rates against a wide range of their assets, saw borrowing of nearly $50 billion of one-month funds from the Fed by mid-February.

Talking about being a little late...

BOSTON - Regulators are trying to punish Wall Street for mortgage finance practices that expanded home ownership and spread risk among a host of new players — but also may have duped borrowers and investors who supplied cash to fuel a housing boom that's turned bust.

A handful of state securities regulators and a couple foreclosure-blighted cities have fired the opening shots with lawsuits trying to prove that investment banks and big lenders are guilty of more than just bad business decisions and failing to foresee looming mortgage troubles. Some regulators say greed and fraud underlie much of the subprime mortgage mess that has spread across the broader housing market, triggering a spike in foreclosures.

We just can't keep away from those asset bubbles. Now it is treasuries....

NEW YORK: U.S. government bonds and emerging market equities have benefited as investors have sought refuge from the housing and credit crises, but the surge in popularity of the two asset classes is inflating a dangerous bubble that is likely to burst.

Last year, U.S. Treasuries benefited tremendously from the flight from risk as the credit crisis began. But the sector's popularity took off when the Federal Reserve started cutting interest rates aggressively last September to support the economy. It has reduced its target for the federal funds rate by 2.25 percentage points, to 3 percent.

Short-maturing U.S. Treasury securities have returned nearly 7 percent since August, while 10-year Treasury notes have posted returns of more than 11 percent, according to Merrill Lynch data. Not coincidentally, the Standard & Poor's 500, Dow industrial and Nasdaq Composite indexes in 2007 posted their worst annual returns in four years.

Things are never as we expect. Who would have imagined that people would just walk away from the overvalued homes. No wonder the ratings agency models have had nervous breakdowns.

Fitch Ratings, while telling investors last Friday to expect additional "widespread and significant downgrades" on $139 billion worth of subprime loans, has cited a new factor in their "worsening performance."

"The apparent willingness of borrowers to 'walk away' from mortgage debt," the analysts noted, "has contributed to extraordinary high levels of early default" on loans issued during the 18 months before the mortgage bubble burst. It expects losses to reach 21% of initial loan balances for subprime mortgages issued in 2006 and 26% for those issued in early 2007.

Such behavior, where not precipitated by willful fraud, shows that American homebuyers supposedly duped by their lenders aren't so dumb. They're perfectly capable of acting rationally without political interference.

Now it is a credit crunch by numbers; good zipcodes and bad'uns. Where do you live?

Critics call it the new redlining: Many of the country's largest mortgage lenders are imposing loan restrictions in entire counties or Zip codes that they rank as risky or "declining."

On Jan. 25, Countrywide Bank sent mortgage brokers a list that categorized hundreds of counties as "soft markets" with rankings from 1 to 5, in ascending order of perceived risk. In areas rated 4 and 5 -- roughly 100 counties in metropolitan areas nationwide -- Countrywide said it will now require down payments that are 5 percentage points higher than from most applicants. If a loan program had previously allowed a minimum 5 percent down payment, applicants in these areas will now be required to come up with 10 percent.

An additional 970-plus counties are rated more moderate risks, in categories 1 to 3, with down payment increases of 5 percentage points if an appraisal report indicates there is an "oversupply" of houses for sale or a marketing time of more than six months.

Other national lenders have distributed their own proprietary "declining markets" lists. GMAC-ResCap, based in Minneapolis, even has a Web site where loan officers can type in a Zip code to learn how risky the company ranks the area. The general public is not supposed to see the site, but a mortgage company executive provided me with access.

In late January, a Zip code for McLean -- a high-income, high-cost residential community and home of mortgage investment giant Freddie Mac -- was rated D, or high-risk, on the Web site. The upscale residential neighborhood in Northwest Washington where Fannie Mae, another mortgage investor, has its headquarters was rated at an elevated risk of C.

Time to clip the credit cards. They are getting way too expensive...

Credit-card issuers have drawn fire for jacking up interest rates on cardholders who aren't behind on payments, but whose credit score has fallen for another reason. Now, some consumers complain, Bank of America (BAC) is hiking rates based on no apparent deterioration in their credit scores at all.

The major credit-card lender in mid-January sent letters notifying some responsible cardholders that it would more than double their rates to as high as 28%, without giving an explanation for the increase, according to copies of five letters obtained by BusinessWeek. Fine print at the end of the letter—headed "Important Amendment to Your Credit Card Agreement"—advised calling an 800-number for the reason, but consumers who called say they were unable to get a clear answer. "No one could give me an explanation," says Eric Fresch, a Huron (Ohio) engineer who is on time with his Bank of America card payments and knows of no decline in the status of his overall credit.

Here is an interesting story; a survey shows that most homeowners have difficulty believing that house prices have fallen. Funny that they had no problem believing that house prices had increased during the bubble.

NEW YORK (CNNMoney.com) -- Despite numerous reports showing home values in historic decline, more than three out of four homeowners believe their own home has not lost value in the past year, according to an online survey.

The survey was conducted by Harris Interactive for Zillow.com, a Web site that gives estimated home values. The survey of 1,619 homeowners found 36% believe their home has increased in value, and another 41% believe their value has stayed the same. Only 23% believe their home has lost value.

"This survey reveals that despite the data to the contrary, people either aren't paying attention to their housing market or are in denial about their own home's value," said Stan Humphries, Zillow.com vice president of data & analytics. Zillow's own estimates are that home values declined 5% on average last year, with many markets posting much steeper declines.

I rmember when TOLL shares were going through the roof. Now, all I am left with are the memories.

BOSTON (MarketWatch) -- Toll Brothers Inc. doesn't see any end in sight to the U.S. housing market's woes as the luxury home builder said Wednesday that first quarter home-construction revenue fell 22% compared to the same period last year. "The housing market remains very weak in most areas. Based on current traffic and deposits, we are not yet seeing much light at the end of the tunnel," said Robert Toll, chairman and CEO also said its backlog fell to $2.4 billion, down 42% from the first quarter of fiscal 2007, as the number of signed contracts on homes fell 46% from last year. In addition, the average price of a house sold by Toll fell, while the average price of canceled houses rose. Joel Rassman, Toll's chief financial officer, said in a press release: "With conditions still weak in most markets, we expect to continue to face challenging times ahead. We are still in the midst of finalizing our first-quarter impairment analysis."

Jim Jubak lashes into the Fed. Well worth a read....

Do the members of the Federal Reserve think we're stupid? Do they think we don't understand that their quick fix for the economy and the financial markets in 2008 is going to completely unravel in 2009?

Do they think we can't see that they're setting up the economy and the financial markets for a replay of the bust-to-boom-to-bust cycle that followed the bursting of the stock market bubble in 2000, in which easy money created a housing bubble that has now burst?

The Fed's actions of the past five months are going to lead to higher inflation or higher interest rates (and a slowing economy again) in 2009. Apparently the Fed doesn't think we can read between the paragraphs of its Jan. 30 press release and see that coming.

The credit crunch continues; the CDO market is still stuck in the mud.

Feb. 5 (Bloomberg) -- Buying and selling of collateralized debt obligations based on mortgage bonds, high-yield loans or preferred shares has ground to a near-halt, traders said at the securitization industry's largest conference.

The slowdown of the more than $2 trillion CDO market follows record downgrades in mortgage-linked securities last year. Some AAA rated debt lost all its value. CDOs, which have fueled unprecedented bank writedowns since mid-2007, repackage assets into new securities with varying risks.

Lighter trading volumes for asset-backed bonds and larger- than-typical differences between the prices at which they can be bought and sold have made valuing holdings difficult and dissuaded investors from purchasing the debt, said Sanjeev Handa, head of global public markets at TIAA-CREF.

Demand for new CDOs has stalled, with just one created in the U.S. so far this year, according to JPMorgan. The creation of CDOs dipped about 10 percent last year to $494.7 billion, according to the company. The figures include only issuance for which investor money was collected upfront.