Many commercial real estate owners are saying, "Why wait until tomorrow what we can do today?" So, they are walking away from their properties. Click here to learn more.
I'm not going to write about the moral or immoral implications of walking away from homes or commercial real estate if property is "underwater"--meaning, worth less than the mortgage. Mainly, it has nothing to do with morality. It has everything to do with one's own balance sheet. And, today, an owner's balance sheet is saying "save money."
So, why wait until tomorrow what they can do today? Meanwhile, the U.S. Government says, "Why wait until today what we can do tomorrow." In 2009, Ben Bernanke and Tim Geithner exposed their "toolbox" full of "tools" that include printing money (i.e. giving banks free money), accounting manipulations (i.e. mark-to-model from mark-to-market) and, of course, the old "pretend and extend" on those toxic, undervalued assets.
One recent tool to come out of the toolbox was on Thursday, the day before Christmas, when Treasury announced it took off caps that limited available capital to Fannie Mae and Freddie Mac at $200 billion each. Obviously, those loans are bleeding losses over there.
While the Fed's strategy is to "delay and pray," paint a pretty picture, hope for valuation returns sooner than later, gamble with U.S. currency expansion within a deflating economy to stimulate economic growth among 10 percent-plus unemployment, they hope that human nature acts against nature to nurture themselves excessively (as they have in the past thirty years).
Mish's Global Economics Trends Analysis describes the deception well in The Most Redeeming Feature of Capitalism is Failure. It says that somebody has to fail to have capitalism.
However, property owners who walk away will stop the party right now...or will they?
If owners say, "Go ahead. Foreclose. It's not worth it." Extend and pretend is over. Banks write down the losses now.
Normally, that might be the case. But the hubris and arrogance of Bernanke and Geithner, respectively, will not allow this to happen. Here's a scenario for 2010:
XYZ Bank: They walked away from the property. We have to take it back. Now we have to write these loans down as losses.
Bernanke: No you don't.
XYZ Bank: Yes we do. We have to foreclose on it.
Geithner: No you don't. We have a whole set of tools that will help you out.
XYZ Bank: Tools?
Bernanke: Yes. I'll print more money so you can keep it in capital reserve. When the value returns to this property, then you won't need to worry about it.
XYZ: But the value is never going to return to this property. It was well overinflated.
Bernanke: The value will return, don't worry about it.
XYZ Bank: Sure, like in 2020!
Bernanke: Don't worry about it.
Geithner: Look--just do that, we have accounting rules so you won't have to write this down. Everyone will still think your bank is completely solvent. Plus, with all the free money we're giving to Wall Street, somewhere in the range of $18 trillion, we're propping up the market.
FIVE YEARS LATER--A run on the market.
Bernanke getting trampled.
Bernanke: Don't panic. Everything's fine.
(Or, he could be like Alan Greenspan in Redskins owner Dan Snyder's box during the Dallas game last night stuffing his face while food banks expand following the burst from the bubble he helped to create).
Geithner: You fucked up. You trusted us.
(Just a reminder, Tim. The new year...it's about that time to get ready to pay taxes. Remember? You might want to just hire an accountant this time).
Have a Happy and Healthy New Year in 2010. Let's hope we do see declining unemployment and liquidity in the system from the Animal House--I mean, White House crowd. Maybe Santa can bring that to the U.S. by next year....I don't think any real person can do it.
Monday, December 28, 2009
Saturday, December 19, 2009
Retail, Snow and Congress--Look for More Unemployment
Anyone in the Northeast affected by the snowstorm--particularly in the Washington, D.C. area where people are still employed--will not likely make it out for the last major shopping weekend before Christmas. What does this mean?
In all likelihood, potential consumers will be doing what my wife and I are doing (other than shovelling snow and watching movies). They'll be on the computer and purchasing items online, paying slightly more for faster shipping. (Incidentally, it just goes to show how many people are purchasing gifts online. I ordered a DVD that took about two weeks to arrive through normal shipping. Usually, it would be about five business days).
With D.C. shut down, much like it was back in 1979 during Washington's Birthday weekend, bricks and mortar retailers will likely get hit in an already poor holiday retail season. Inventory has been ordered with whatever money they had remaining.
But the snow won't fair well for commercial real estate, i.e. malls and shopping centers. Retail commercial real estate, if hit harder than it has been so far this year, will like get hit more on their loans, which will further devalue bank assets and further devalue banks. And, let's not forget about derivatives, credit default swaps, blah, blah, blah.
On the bright side, the Internet continues to reign supreme, so that's good news for Amazon.com and other online retailers.
But, if bricks and mortar retail is hit again this year, we might see some failures and that means higher unemployment levels from the likes of at least high-end retail.
Keep in mind that the D.C. area still has purchasing power because people have jobs, but this big snowstorm does not help the economy for the area or country. As retail woes continue, it means further problems in unemployment, less consumer spending and the cycle continues.
Now, some of you might be saying, "Hey, unemployment went down last month to 10 percent from 10.2 percent in October." My sources tell me the unemployment rate last month did not add unemployed persons ready for extended unemployment benefits. Here's why:
In November, Congress agreed to unemployment extensions--possibly longer in states with unemployment higher than 8 percent (which represents most states). In order to make the numbers look better in November (probably to push consumer confidence higher for the holiday season) Congress decided not to officially approve the extension until December. See Senate OKs Filing Extension for Jobless.
The Labor Department's Bureau of Labor Statistics did not include unemployed persons eligible for extensions starting in November because the Senate did not OK it until this weekend. Therefore, a number of these unemployed civilians claiming unemployment (now extended unemployment) fell into a "black hole" and did not exist in BLS (or BS) unemployment statistics.
Look for unemployment to reach at least 10.5 percent for December, based on BLS numbers. Which (here's the BS part) actually was 17.5 percent if you include people who are part-time, discouraged workers not looking for a job, etc. That number should increase in January's unemployment because it might have included some people who had part-time jobs for the holidays. Keep in mind unemployment hit 25 percent during the Great Depression.
So, after one of the largest snowstorms in the D.C. history hit at one of the worst times for retailers, the losers in this scenario include retail commercial real estate and retail mortgages (topping of a horrendous year already), bricks and mortar retail establishments (topping off an already horrendous year), banks and/or commercial mortgage-backed securities special servicers holding retail defaults, bondholders on those CMBS retail loans (topping off an already horrendous year) and unemployed people looking for work in retail establishments (topping off an already horrendous year for them as well). Also, Democrats in Congress since this is another hit to banks, it will worsen the economy and continue to hurt their re-election chances for next year--and don't get me started on their inability to agree on healthcare--dumbasses.
The winners include UPS, Fedex and postal workers (although budget cuts can still affect their positions during the year). Online retailers, including Amazon.com, Best Buy and retailers who sell items that do not need to be tried on. and can be ordered online That would also factor in Target, Wal-Mart and other discount retailers who still did well this holiday season. Also, the grocery stores did well (topping off an already good year for them since all of us need to eat). They were packed prior to the snowstorm.
Who else did well? Hmmm....airline flights cancelled, possibly less people travelling...that can go either way. See East Coast Flights, Shopping Snowed In.
I think rock-salt companies are going to have a good year, snow shovelling, infrastructure workers who will repair potholes and cable television operators (topping off an already good year for them).
Oh, and banks, for no other reason than the Federal Government gave them a Christmas gift year round of free money so that they can save their sorry asses.
With that I can only say--Oh...the weather outside is frightful, and the timing's not delightful, but since none of us have any dough...Let it Snow, Let it Snow, Let it Snow!
Merry Christmas and Happy New Year! Let's hope for a more prosperous year in 2010!
In all likelihood, potential consumers will be doing what my wife and I are doing (other than shovelling snow and watching movies). They'll be on the computer and purchasing items online, paying slightly more for faster shipping. (Incidentally, it just goes to show how many people are purchasing gifts online. I ordered a DVD that took about two weeks to arrive through normal shipping. Usually, it would be about five business days).
With D.C. shut down, much like it was back in 1979 during Washington's Birthday weekend, bricks and mortar retailers will likely get hit in an already poor holiday retail season. Inventory has been ordered with whatever money they had remaining.
But the snow won't fair well for commercial real estate, i.e. malls and shopping centers. Retail commercial real estate, if hit harder than it has been so far this year, will like get hit more on their loans, which will further devalue bank assets and further devalue banks. And, let's not forget about derivatives, credit default swaps, blah, blah, blah.
On the bright side, the Internet continues to reign supreme, so that's good news for Amazon.com and other online retailers.
But, if bricks and mortar retail is hit again this year, we might see some failures and that means higher unemployment levels from the likes of at least high-end retail.
Keep in mind that the D.C. area still has purchasing power because people have jobs, but this big snowstorm does not help the economy for the area or country. As retail woes continue, it means further problems in unemployment, less consumer spending and the cycle continues.
Now, some of you might be saying, "Hey, unemployment went down last month to 10 percent from 10.2 percent in October." My sources tell me the unemployment rate last month did not add unemployed persons ready for extended unemployment benefits. Here's why:
In November, Congress agreed to unemployment extensions--possibly longer in states with unemployment higher than 8 percent (which represents most states). In order to make the numbers look better in November (probably to push consumer confidence higher for the holiday season) Congress decided not to officially approve the extension until December. See Senate OKs Filing Extension for Jobless.
The Labor Department's Bureau of Labor Statistics did not include unemployed persons eligible for extensions starting in November because the Senate did not OK it until this weekend. Therefore, a number of these unemployed civilians claiming unemployment (now extended unemployment) fell into a "black hole" and did not exist in BLS (or BS) unemployment statistics.
Look for unemployment to reach at least 10.5 percent for December, based on BLS numbers. Which (here's the BS part) actually was 17.5 percent if you include people who are part-time, discouraged workers not looking for a job, etc. That number should increase in January's unemployment because it might have included some people who had part-time jobs for the holidays. Keep in mind unemployment hit 25 percent during the Great Depression.
So, after one of the largest snowstorms in the D.C. history hit at one of the worst times for retailers, the losers in this scenario include retail commercial real estate and retail mortgages (topping of a horrendous year already), bricks and mortar retail establishments (topping off an already horrendous year), banks and/or commercial mortgage-backed securities special servicers holding retail defaults, bondholders on those CMBS retail loans (topping off an already horrendous year) and unemployed people looking for work in retail establishments (topping off an already horrendous year for them as well). Also, Democrats in Congress since this is another hit to banks, it will worsen the economy and continue to hurt their re-election chances for next year--and don't get me started on their inability to agree on healthcare--dumbasses.
The winners include UPS, Fedex and postal workers (although budget cuts can still affect their positions during the year). Online retailers, including Amazon.com, Best Buy and retailers who sell items that do not need to be tried on. and can be ordered online That would also factor in Target, Wal-Mart and other discount retailers who still did well this holiday season. Also, the grocery stores did well (topping off an already good year for them since all of us need to eat). They were packed prior to the snowstorm.
Who else did well? Hmmm....airline flights cancelled, possibly less people travelling...that can go either way. See East Coast Flights, Shopping Snowed In.
I think rock-salt companies are going to have a good year, snow shovelling, infrastructure workers who will repair potholes and cable television operators (topping off an already good year for them).
Oh, and banks, for no other reason than the Federal Government gave them a Christmas gift year round of free money so that they can save their sorry asses.
With that I can only say--Oh...the weather outside is frightful, and the timing's not delightful, but since none of us have any dough...Let it Snow, Let it Snow, Let it Snow!
Merry Christmas and Happy New Year! Let's hope for a more prosperous year in 2010!
Monday, November 30, 2009
Legal 'Extend and Pretend'
Now that the FDIC has complied with “extend and pretend,” residential and/or commercial mortgage-backed securitization property values will not come close to returning to 2007 levels—or even 2004 levels for that matter.
By deteriorating future investor confidence in securities, the federal government’s “short-term gain-for-future-sacrifice” practice will likely stall an active return to RMBS and/or CMBS.
Just look at the situation right now. Although AAA bondholders can still be made whole on a 50 percent value drop in commercial real estate (Moody’s said property values are now down to 2002 levels), higher unemployment is causing prime residential loans to fail, causing losses for AAA RMBS bondholders. With the outlook of Option-A/Interest-Only extensions, residential loan modifications, etc., how long will it take for RMBS to return and, therefore, property values to reach anything resembling 2007 levels?
Likewise, CMBS faces a slow return to securitization with highest maturities from 2015-2017. Granted, one or two loans originated into the pipeline, but they require assistance through the Troubled Asset Loan Facility program. Without the TALF program, when does CMBS return? Will it return if unemployment remains above 10 percent and near 11 percent moving into 2011? Wells Fargo Securities forecasts 10.8 percent into 2011. As you mention, mark-to-market manipulation alters true valuation, transparency and buyer confidence. Have bondholders regained any confidence in the ratings agencies at this point? There are still many unanswered questions.
It is no secret that the Public-Private Investment Program has yet to gain legs because investors are leery of partnering with the government on deals, particularly based on some contractual wording. Plus, it doesn’t help that government changes the rules in the middle of the game. My nine-year old nephew tried doing that in our Monopoly game this weekend. As the banker, he said all the money in the bank belonged to him. I told him that acting like the Federal Government was not going to help him win the game. He said it was only play money. I said, “What do you think today’s currency is?”
It is ironic that most legislators see “bankruptcy cram down” on mortgages as a negative affect to the RMBS market because bondholders will not have confidence in current and future mortgage values, but the same logic does not seem to apply when government manipulates regulations and accounting principles. That’s okay, however, because stock prices go up, consumers look at their 401k’s and there is peace on earth.
Only the Fed is buying MBS right now, and the first hurdle for the Federal Government—holiday retail sales—is coming down the pike in 1Q 2010.
The second hurdle will likely be the unemployment rate, unlikely to drop through 2010.
The third hurdle involves higher delinquencies in FHA and rising defaults in Fannie Mae and Freddie Mac loans, forcing higher capital standards there and in banks. Let’s face it, higher capital standards mean less debt for businesses—small and large—keeping unemployment high for awhile. High unemployment means hotels, retail, office and industrial not returning anytime fast.
Sources tell me industrial is really getting slammed and, of course, we know CMBS delinquencies/defaults continue to rise for hotels and multifamily, not to mention retail, and they are rising in office. In 2010, we will likely see more of the same. Who will return to a CMBS market with increasingly rising default rates? Nobody is coming back to RMBS anytime soon.
The fourth hurdle becomes a Congress looking for reelection in November and passing regulatory reform that favors consumer approval either in Spring or Summer of 2010. By that time, hotels are history, retail will likely face severe damage and office properties will face higher defaults. How that legislation will affect financial markets and investor confidence is another major question. In some ways, it could increase investor confidence knowing that rules are in place that will not change.
However, the fifth hurdle is a weakening dollar that faces a threat of rising long-term rates and if rates start to rise, the printing press shuts down and a slow economy becomes no economy. If the situation gets dire by the third quarter, prior to elections, the good, the bad and the ugly bank scenario could come down the pike. Of course, that might mean placing some large banks into receivership or consolidating a couple of major financial institutions. Meanwhile, we are sure to see more banks shutting down and FDIC taking further hits. Assuming bank customers don’t panic and believe their assets are still safe and insured, the stock market should only drop by 30 percent until it shows true P/E ratios.
In any case, toxic assets remain in these banks and they do need to be removed before securitization returns—a AAA bond becomes a true AAA bond--and debt can flow again. Those assets need to be removed before unemployment declines and true valuations return. How they remove these assets remains a key question for the Fed and Treasury. With trillions of dollars in money spent, some strategies once on the table for the Fed and Treasury, are no longer possible.
By deteriorating future investor confidence in securities, the federal government’s “short-term gain-for-future-sacrifice” practice will likely stall an active return to RMBS and/or CMBS.
Just look at the situation right now. Although AAA bondholders can still be made whole on a 50 percent value drop in commercial real estate (Moody’s said property values are now down to 2002 levels), higher unemployment is causing prime residential loans to fail, causing losses for AAA RMBS bondholders. With the outlook of Option-A/Interest-Only extensions, residential loan modifications, etc., how long will it take for RMBS to return and, therefore, property values to reach anything resembling 2007 levels?
Likewise, CMBS faces a slow return to securitization with highest maturities from 2015-2017. Granted, one or two loans originated into the pipeline, but they require assistance through the Troubled Asset Loan Facility program. Without the TALF program, when does CMBS return? Will it return if unemployment remains above 10 percent and near 11 percent moving into 2011? Wells Fargo Securities forecasts 10.8 percent into 2011. As you mention, mark-to-market manipulation alters true valuation, transparency and buyer confidence. Have bondholders regained any confidence in the ratings agencies at this point? There are still many unanswered questions.
It is no secret that the Public-Private Investment Program has yet to gain legs because investors are leery of partnering with the government on deals, particularly based on some contractual wording. Plus, it doesn’t help that government changes the rules in the middle of the game. My nine-year old nephew tried doing that in our Monopoly game this weekend. As the banker, he said all the money in the bank belonged to him. I told him that acting like the Federal Government was not going to help him win the game. He said it was only play money. I said, “What do you think today’s currency is?”
It is ironic that most legislators see “bankruptcy cram down” on mortgages as a negative affect to the RMBS market because bondholders will not have confidence in current and future mortgage values, but the same logic does not seem to apply when government manipulates regulations and accounting principles. That’s okay, however, because stock prices go up, consumers look at their 401k’s and there is peace on earth.
Only the Fed is buying MBS right now, and the first hurdle for the Federal Government—holiday retail sales—is coming down the pike in 1Q 2010.
The second hurdle will likely be the unemployment rate, unlikely to drop through 2010.
The third hurdle involves higher delinquencies in FHA and rising defaults in Fannie Mae and Freddie Mac loans, forcing higher capital standards there and in banks. Let’s face it, higher capital standards mean less debt for businesses—small and large—keeping unemployment high for awhile. High unemployment means hotels, retail, office and industrial not returning anytime fast.
Sources tell me industrial is really getting slammed and, of course, we know CMBS delinquencies/defaults continue to rise for hotels and multifamily, not to mention retail, and they are rising in office. In 2010, we will likely see more of the same. Who will return to a CMBS market with increasingly rising default rates? Nobody is coming back to RMBS anytime soon.
The fourth hurdle becomes a Congress looking for reelection in November and passing regulatory reform that favors consumer approval either in Spring or Summer of 2010. By that time, hotels are history, retail will likely face severe damage and office properties will face higher defaults. How that legislation will affect financial markets and investor confidence is another major question. In some ways, it could increase investor confidence knowing that rules are in place that will not change.
However, the fifth hurdle is a weakening dollar that faces a threat of rising long-term rates and if rates start to rise, the printing press shuts down and a slow economy becomes no economy. If the situation gets dire by the third quarter, prior to elections, the good, the bad and the ugly bank scenario could come down the pike. Of course, that might mean placing some large banks into receivership or consolidating a couple of major financial institutions. Meanwhile, we are sure to see more banks shutting down and FDIC taking further hits. Assuming bank customers don’t panic and believe their assets are still safe and insured, the stock market should only drop by 30 percent until it shows true P/E ratios.
In any case, toxic assets remain in these banks and they do need to be removed before securitization returns—a AAA bond becomes a true AAA bond--and debt can flow again. Those assets need to be removed before unemployment declines and true valuations return. How they remove these assets remains a key question for the Fed and Treasury. With trillions of dollars in money spent, some strategies once on the table for the Fed and Treasury, are no longer possible.
Wednesday, November 25, 2009
Bleeding Burgundy and Gold
On September 13, I wrote about the N.F.L. product. It was game one and an exciting time because I found the RedZone channel, which continues to be the bargain of the season for anyone who owns Verizon Fios.
As I mentioned, I did not want to bring in this sport to FinTruth, but it deserves to be in here, and so does a story from the Wall Street Journal about my favorite football team--the Washington Redskins. Yes--they are 3-7 in the middle of their worst season ever with an owner who is one of the worst owners ever (with the exception of the bigoted George Preston Marshall who founded the team).
Reed Albergotti's article, Are the Redskins Losing Washington?, describes how a once-proud franchise now stands demoralized under owner Daniel Snyder's rule. After reading it, I sent the following email to Reed.
Reed,
Nice article and mostly true. A little history you might know:
Edwin Bennett Williams brought in former L.A. Rams coach George Allen to coach the Washington Redskins in 1971. Allen brought the team to respectability with the “Over the Hill Gang,” some key Los Angeles Rams that Allen took with him to Washington. Vince Lombardi died the previous year, but the team was headed in the right direction before Allen. Williams was responsible for the beginning of Redskins lore.
Self-made millionaire Jack Kent Cooke, more than hiring Gibbs, hired General Manager Bobby Beathard when he took the team over in 1981. Beathard was the architect of the undefeated 1972 Miami Dolphins, and he told Cooke about an innovative offensive coordinator named Joe Gibbs, who would make a good head coach. That was the key move that Cooke made. He hired a great general manager.
That is the main criticism fans have with Daniel Snyder. This pseudo self-made millionaire—a college dropout funded by family friend Mort Zuckerman on a couple of ventures (one that failed)—has too much ego to understand that he knows nothing about the nuances of pro football. Fans are screaming for him to fire his buddy Vinny Cerrato—GM for post-Joe Montana, Steve Young S.F. 49ers—and hire a real GM. Then, he can stand back for that GM to hire a good head coach and set up a strategy for a winning team.
The only question is whether Snyder is astute enough to determine the difference between a good and bad GM, and if he can stand back and let management run the operation.
Frankly, Zuckerman funded Snyder $1 million for a college newspaper—it failed; Zuckerman funded Snyder $1million for Snyder Communications—not sure how, but it succeeded. Now, he owns Six Flags, which is in bankruptcy and Johnny Rockets—not sure how it’s doing. The Redskins have been successful because Snyder uses his marketing expertise to siphon money from an extremely strong fan base.
As you mentioned in the article, that is starting to dwindle.
It makes one Redskin fan think that Snyder is the wealthiest loser on the face of the earth.
Thanks again for the article.
A Die-Hard Redskin Fan
Indeed, I have been a die-hard Redskin fan since the early 1970s, and I watch every game because I bleed burgundy and gold. But now, fans like myself have been stabbed in the back by a facist owner more concerned about his own pocketbook and ego than perpetuating--now establishing--a winning tradition in Washington, D.C.
Like the Nation's Capital itself, the owner finds himself absorbed with money and power. Tradition, pride and success are secondary.
Let's hope it changes for all of its residents.
As I mentioned, I did not want to bring in this sport to FinTruth, but it deserves to be in here, and so does a story from the Wall Street Journal about my favorite football team--the Washington Redskins. Yes--they are 3-7 in the middle of their worst season ever with an owner who is one of the worst owners ever (with the exception of the bigoted George Preston Marshall who founded the team).
Reed Albergotti's article, Are the Redskins Losing Washington?, describes how a once-proud franchise now stands demoralized under owner Daniel Snyder's rule. After reading it, I sent the following email to Reed.
Reed,
Nice article and mostly true. A little history you might know:
Edwin Bennett Williams brought in former L.A. Rams coach George Allen to coach the Washington Redskins in 1971. Allen brought the team to respectability with the “Over the Hill Gang,” some key Los Angeles Rams that Allen took with him to Washington. Vince Lombardi died the previous year, but the team was headed in the right direction before Allen. Williams was responsible for the beginning of Redskins lore.
Self-made millionaire Jack Kent Cooke, more than hiring Gibbs, hired General Manager Bobby Beathard when he took the team over in 1981. Beathard was the architect of the undefeated 1972 Miami Dolphins, and he told Cooke about an innovative offensive coordinator named Joe Gibbs, who would make a good head coach. That was the key move that Cooke made. He hired a great general manager.
That is the main criticism fans have with Daniel Snyder. This pseudo self-made millionaire—a college dropout funded by family friend Mort Zuckerman on a couple of ventures (one that failed)—has too much ego to understand that he knows nothing about the nuances of pro football. Fans are screaming for him to fire his buddy Vinny Cerrato—GM for post-Joe Montana, Steve Young S.F. 49ers—and hire a real GM. Then, he can stand back for that GM to hire a good head coach and set up a strategy for a winning team.
The only question is whether Snyder is astute enough to determine the difference between a good and bad GM, and if he can stand back and let management run the operation.
Frankly, Zuckerman funded Snyder $1 million for a college newspaper—it failed; Zuckerman funded Snyder $1million for Snyder Communications—not sure how, but it succeeded. Now, he owns Six Flags, which is in bankruptcy and Johnny Rockets—not sure how it’s doing. The Redskins have been successful because Snyder uses his marketing expertise to siphon money from an extremely strong fan base.
As you mentioned in the article, that is starting to dwindle.
It makes one Redskin fan think that Snyder is the wealthiest loser on the face of the earth.
Thanks again for the article.
A Die-Hard Redskin Fan
Indeed, I have been a die-hard Redskin fan since the early 1970s, and I watch every game because I bleed burgundy and gold. But now, fans like myself have been stabbed in the back by a facist owner more concerned about his own pocketbook and ego than perpetuating--now establishing--a winning tradition in Washington, D.C.
Like the Nation's Capital itself, the owner finds himself absorbed with money and power. Tradition, pride and success are secondary.
Let's hope it changes for all of its residents.
Thursday, November 19, 2009
DeLong Way Home
In response to the following articles sent by a friend and/or mentor:
Odds Increasing That We're Headed For A Great Depression The Business Insider November 17, 2009 Brad DeLong has long argued against the fears that we could head into something like the Great Depression. But now the UC Berkeley economist has turned a bit bearish on the economy.
From DeLong (see proceeding article): For 2 1/4 years now I have been saying that there is no chance of a repeat of the Great Depression or anything like it -- that we know what to do and how to do it and will do it if things turn south. I don't think I can say that anymore. In my estimation the chances of another big downward shock to the U.S. economy -- a shock that would carry us from the 1/3-of-a-Great-Depression we have now to 2/3 or more--are about 5%. And it now looks very much as if if such a shock hits the U.S. government will be unable to do a d----- thing about it. DeLong thinks that Democratic deficit hawks and Republican anti-stimulus politicians will effectively prevent the government from doing anything to ameliorate a deteriorating economic situation. What’s more, outrage against the bailouts coming from the left and the right will prevent the Obama administration from orchestrating anything like we saw last fall. “So if another big bad shock hits the U.S. economy, what could the Obama administration possibly do?” DeLong asks. ________________________________________ Chance of Great Depression Now 5%… J. Bradford DeLong's Grasping Reality with All Eight Tentacles [Ref. http://delong.typepad.com/sdj/2009/11/chance-of-great-depression-now-5.html] November 16, 2009
For 2 1/4 years now I have been saying that there is no chance of a repeat of the Great Depression or anything like it - that we know what to do and how to do it and will do it if things turn south. I don't think I can say that anymore. In my estimation the chances of another big downward shock to the U.S. economy -- a shock that would carry us from the 1/3-of-a-Great-Depression we have now to 2/3 or more -- are about 5%. And it now looks very much as if if such a shock hits the U.S. government will be unable to do a d----- thing about it. We could cushion the impact of another big downward shock by a lot more deficit spending--unemployment, after all, goes down whenever anybody spends more (even though sometimes falling unemployment comes at too-high a price in rising inflation), and the government's money is as good as anybody else's. But the centrist Democratic legislative caucus has now dug in its heels behind the position that we cannot undertake more deficit spending right now because we have a dire structural health-care financing proble afrer 2030.
The Republican legislative causes has now dug in its heels behind the position that the fact that unemployment is 10% shows not that policy earlier this year was too cautious but rather that it was ineffective. And the Obama administration has not been able or has not tried to move either of those groups out of their current entrenchments. We could cushion the impact of another big downward shock by recapitalizing the banks again. But the failure of the Fed and the Treasury in the aftermath of Lehman to grab a share of the upside from its capital injection and purchase operations for the public in the form of warrants means that there is no coalition anywhere for a repeat or anything like a repeat of propping-up the banking system: the right thinks it is an unwarranted intervention in the free market, the left thinks that it is a giveaway to the undeserving and feckless superrich, and the center is bewildered because it is an enormous and poorly-structured intervention in the market, it is a giveaway to the undeserving and feckless superrich, and the optics are terrible. So if another big bad shock hits the U.S. economy, what could the Obama administration possibly do? [DeLong references the following Bloomberg article.] ________________________________________ Fed ‘Severely Limited’ Savings on AIG, Watchdog Says: Bloomberg [Ref. http://www.bloomberg.com/apps/news?pid=20601103&sid=a_O0IqdEksIw] November 16, 2009 The Federal Reserve Bank of New York “severely limited” its ability to save taxpayer money on American International Group Inc.’s rescue by refusing to compel banks to take concessions, said a Treasury Department watchdog. The Fed didn’t use its “considerable leverage” as regulator of several of AIG’s counterparties to force them to accept so-called haircuts on credit-default swaps, Neil Barofsky, special inspector for the Troubled Asset Relief Program, said today in a report. The regulator gave up efforts to negotiate discounts from the banks after two days and opted to pay them in full for $62.1 billion in swaps, Barofsky said. “These policy decisions came with a cost -- they led directly to a negotiating strategy with the counterparties that even then-New York Fed President Geithner acknowledged had little likelihood of success,” Barofsky said.
Timothy Geithner, now Treasury secretary, was among officials who took over negotiations with the banks from AIG in November 2008. Lawmakers including Representative Darrell Issa have said the September 2008 AIG rescue was a “backdoor bailout” for banks that received billions in payments. The Fed contacted eight of AIG’s biggest counterparties by telephone last year to negotiate discounts, Barofsky said. While UBS AG, the Zurich-based bank, was willing to make a 2 percent concession, the Fed decided that all counterparties would receive full payment, he said. ‘Misuse’ of Power In a letter to Barofsky included in his report, the Fed said it “would not have been appropriate to use our supervisory authority on behalf of AIG to obtain concessions from domestic counterparties.” Doing so would have been a “misuse” of power that would have given an advantage to non-U.S. banks that the Fed doesn’t regulate, the Fed said.
Andrew Williams, a Treasury spokesman, said in an e-mail statement that Barofsky’s report “overlooks the central lesson learned from the unprecedented steps taken to support AIG.” “The federal government needs better tools to deal with the impending failure of a large institution in extraordinary circumstances like those facing us last fall,” Williams said. “It is for these reasons that the Obama administration has proposed a regulatory reform agenda that includes giving the government the emergency authority to resolve a significant, interconnected financial institution.”
My response is I’m surprised DeLong doesn’t already think we are in Great Depression II. On McNeil-Lehrer last night, there was a story about how Food Banks in Texas and D.C. are getting overwhelmed by people not just unemployed but underemployed without enough money to afford food. I’m sure you saw the recent study that one in seven in this country are going hungry. Mind you, that IS with unemployment insurance which was not available in Great Depression I.
Also, I don’t think we printed this massive amount of money to build up massive capital reserves for banks in Great Depression 1. If I’m not mistaken, the banks failed and there were runs on the banks so people had no money at all. Now imagine if these banks failed like they should have failed, the loans fail and/or failed like they should have and there was no unemployment insurance….and this guy thinks there was no chance of a Depression!
Unemployment for part-time workers, frustrated unemployed persons, etc. is 17.5 percent and 10.2 percent under U-3. That’s soon to increase based on the numbers I’m seeing. During the Great Depression 1, it was 25 percent unemployment. First, it may get there just yet. Second, if banks did fail and businesses had to take a good hard look at themselves, that unemployment number would have likely gone to 25 percent or more.
However you look at it, the Federal government is running the economy. They are the ones making it happen and hoping that the economy will eventually run on its own. The problem is that it cannot run on its own.
I spoke with an author at a book festival last weekend who wrote “Spread the Wealth” and the basic premise of his book is an historical perspective of “printing” money and the disastrous results it had during past recessions or down cycles. He said Bernanke’s philosophy to print money and take us out of this malaise is not political, it’s just bad economics. He forecasts the Dow dropping to 7,000-8,000 and advises on short-term bonds as well as gold.
Meredith Whitney was on Bloomberg yesterday saying we’re in for a “W” shaped recession (not as downward on the second part of the W) and she sees no way that is not going to happen.
It amazes me how some economists will not admit to a deflationary environment.
Some numbers change—consumer confidence, retail sales, housing starts, sales, etc. Some numbers have not changed—increasing unemployment, higher capital reserves and the amount of toxic debt that remains in these financial institutions. A large bank or two or three will need to be acquired or put into receivership; with the help of the Federal Government, they need to dump those crappy assets and sell them off before a normal debt-flowing economy can take over without government intervention.
And, when I say government intervention, that includes Goldman (Government) Sachs and Berkshire (Just call me King George) Hathaway lending out $500 million to preferred small businesses to use the capital and pull away from other small businesses that GS and BH—and, of course, zombie banks--won’t lend to. That seems real fair. Then GS and BH can invest in the “winners.”
In reference to the movie, we’re in “Zombieland.” The government will run the flow of money in this economy until it stops. When it stops, who knows? But one thing is certain—unemployed people, bearish consumers (people who can actually obtain credit) and that 70 percent of GDP necessary for a strong economy is not happening anytime soon.
Odds Increasing That We're Headed For A Great Depression The Business Insider November 17, 2009 Brad DeLong has long argued against the fears that we could head into something like the Great Depression. But now the UC Berkeley economist has turned a bit bearish on the economy.
From DeLong (see proceeding article): For 2 1/4 years now I have been saying that there is no chance of a repeat of the Great Depression or anything like it -- that we know what to do and how to do it and will do it if things turn south. I don't think I can say that anymore. In my estimation the chances of another big downward shock to the U.S. economy -- a shock that would carry us from the 1/3-of-a-Great-Depression we have now to 2/3 or more--are about 5%. And it now looks very much as if if such a shock hits the U.S. government will be unable to do a d----- thing about it. DeLong thinks that Democratic deficit hawks and Republican anti-stimulus politicians will effectively prevent the government from doing anything to ameliorate a deteriorating economic situation. What’s more, outrage against the bailouts coming from the left and the right will prevent the Obama administration from orchestrating anything like we saw last fall. “So if another big bad shock hits the U.S. economy, what could the Obama administration possibly do?” DeLong asks. ________________________________________ Chance of Great Depression Now 5%… J. Bradford DeLong's Grasping Reality with All Eight Tentacles [Ref. http://delong.typepad.com/sdj/2009/11/chance-of-great-depression-now-5.html] November 16, 2009
For 2 1/4 years now I have been saying that there is no chance of a repeat of the Great Depression or anything like it - that we know what to do and how to do it and will do it if things turn south. I don't think I can say that anymore. In my estimation the chances of another big downward shock to the U.S. economy -- a shock that would carry us from the 1/3-of-a-Great-Depression we have now to 2/3 or more -- are about 5%. And it now looks very much as if if such a shock hits the U.S. government will be unable to do a d----- thing about it. We could cushion the impact of another big downward shock by a lot more deficit spending--unemployment, after all, goes down whenever anybody spends more (even though sometimes falling unemployment comes at too-high a price in rising inflation), and the government's money is as good as anybody else's. But the centrist Democratic legislative caucus has now dug in its heels behind the position that we cannot undertake more deficit spending right now because we have a dire structural health-care financing proble afrer 2030.
The Republican legislative causes has now dug in its heels behind the position that the fact that unemployment is 10% shows not that policy earlier this year was too cautious but rather that it was ineffective. And the Obama administration has not been able or has not tried to move either of those groups out of their current entrenchments. We could cushion the impact of another big downward shock by recapitalizing the banks again. But the failure of the Fed and the Treasury in the aftermath of Lehman to grab a share of the upside from its capital injection and purchase operations for the public in the form of warrants means that there is no coalition anywhere for a repeat or anything like a repeat of propping-up the banking system: the right thinks it is an unwarranted intervention in the free market, the left thinks that it is a giveaway to the undeserving and feckless superrich, and the center is bewildered because it is an enormous and poorly-structured intervention in the market, it is a giveaway to the undeserving and feckless superrich, and the optics are terrible. So if another big bad shock hits the U.S. economy, what could the Obama administration possibly do? [DeLong references the following Bloomberg article.] ________________________________________ Fed ‘Severely Limited’ Savings on AIG, Watchdog Says: Bloomberg [Ref. http://www.bloomberg.com/apps/news?pid=20601103&sid=a_O0IqdEksIw] November 16, 2009 The Federal Reserve Bank of New York “severely limited” its ability to save taxpayer money on American International Group Inc.’s rescue by refusing to compel banks to take concessions, said a Treasury Department watchdog. The Fed didn’t use its “considerable leverage” as regulator of several of AIG’s counterparties to force them to accept so-called haircuts on credit-default swaps, Neil Barofsky, special inspector for the Troubled Asset Relief Program, said today in a report. The regulator gave up efforts to negotiate discounts from the banks after two days and opted to pay them in full for $62.1 billion in swaps, Barofsky said. “These policy decisions came with a cost -- they led directly to a negotiating strategy with the counterparties that even then-New York Fed President Geithner acknowledged had little likelihood of success,” Barofsky said.
Timothy Geithner, now Treasury secretary, was among officials who took over negotiations with the banks from AIG in November 2008. Lawmakers including Representative Darrell Issa have said the September 2008 AIG rescue was a “backdoor bailout” for banks that received billions in payments. The Fed contacted eight of AIG’s biggest counterparties by telephone last year to negotiate discounts, Barofsky said. While UBS AG, the Zurich-based bank, was willing to make a 2 percent concession, the Fed decided that all counterparties would receive full payment, he said. ‘Misuse’ of Power In a letter to Barofsky included in his report, the Fed said it “would not have been appropriate to use our supervisory authority on behalf of AIG to obtain concessions from domestic counterparties.” Doing so would have been a “misuse” of power that would have given an advantage to non-U.S. banks that the Fed doesn’t regulate, the Fed said.
Andrew Williams, a Treasury spokesman, said in an e-mail statement that Barofsky’s report “overlooks the central lesson learned from the unprecedented steps taken to support AIG.” “The federal government needs better tools to deal with the impending failure of a large institution in extraordinary circumstances like those facing us last fall,” Williams said. “It is for these reasons that the Obama administration has proposed a regulatory reform agenda that includes giving the government the emergency authority to resolve a significant, interconnected financial institution.”
My response is I’m surprised DeLong doesn’t already think we are in Great Depression II. On McNeil-Lehrer last night, there was a story about how Food Banks in Texas and D.C. are getting overwhelmed by people not just unemployed but underemployed without enough money to afford food. I’m sure you saw the recent study that one in seven in this country are going hungry. Mind you, that IS with unemployment insurance which was not available in Great Depression I.
Also, I don’t think we printed this massive amount of money to build up massive capital reserves for banks in Great Depression 1. If I’m not mistaken, the banks failed and there were runs on the banks so people had no money at all. Now imagine if these banks failed like they should have failed, the loans fail and/or failed like they should have and there was no unemployment insurance….and this guy thinks there was no chance of a Depression!
Unemployment for part-time workers, frustrated unemployed persons, etc. is 17.5 percent and 10.2 percent under U-3. That’s soon to increase based on the numbers I’m seeing. During the Great Depression 1, it was 25 percent unemployment. First, it may get there just yet. Second, if banks did fail and businesses had to take a good hard look at themselves, that unemployment number would have likely gone to 25 percent or more.
However you look at it, the Federal government is running the economy. They are the ones making it happen and hoping that the economy will eventually run on its own. The problem is that it cannot run on its own.
I spoke with an author at a book festival last weekend who wrote “Spread the Wealth” and the basic premise of his book is an historical perspective of “printing” money and the disastrous results it had during past recessions or down cycles. He said Bernanke’s philosophy to print money and take us out of this malaise is not political, it’s just bad economics. He forecasts the Dow dropping to 7,000-8,000 and advises on short-term bonds as well as gold.
Meredith Whitney was on Bloomberg yesterday saying we’re in for a “W” shaped recession (not as downward on the second part of the W) and she sees no way that is not going to happen.
It amazes me how some economists will not admit to a deflationary environment.
Some numbers change—consumer confidence, retail sales, housing starts, sales, etc. Some numbers have not changed—increasing unemployment, higher capital reserves and the amount of toxic debt that remains in these financial institutions. A large bank or two or three will need to be acquired or put into receivership; with the help of the Federal Government, they need to dump those crappy assets and sell them off before a normal debt-flowing economy can take over without government intervention.
And, when I say government intervention, that includes Goldman (Government) Sachs and Berkshire (Just call me King George) Hathaway lending out $500 million to preferred small businesses to use the capital and pull away from other small businesses that GS and BH—and, of course, zombie banks--won’t lend to. That seems real fair. Then GS and BH can invest in the “winners.”
In reference to the movie, we’re in “Zombieland.” The government will run the flow of money in this economy until it stops. When it stops, who knows? But one thing is certain—unemployed people, bearish consumers (people who can actually obtain credit) and that 70 percent of GDP necessary for a strong economy is not happening anytime soon.
Tuesday, November 17, 2009
A Shameless Self-Promotion
I hate to do this, but an influential business person said I "nailed it" on a response to a blog question about Business and the Economy, and just to prove my comments are not totally whacked-out, stupid or just plain boring, here is my comment along with Bill Nazur's response. I know this is shameless self-promotion, but I'm not above that.
I can just relate what I'm hearing from my sources, some of it is from articles I wrote in NewsLink and Commercial/Multifamily NewsLink:
1. One bank economist I spoke with forecast unemployment to peak at 10.8 percent (the U-3 figure). The U-6 figure is now at 17.5 percent, which includes total unemployment (marginally attached workers, part-time workers, workers who have given up looking for a job).
2. Many sources--mostly investors--are not happy that the FDIC, Fed, Treasury, etc. "extend and pretend" on commercial mortgage maturities. Granted, some of these are performing loans receiving cash flow, but the property values have dropped considerably and may not return for some time. One economist said the banks cannot keep extending these loans forever.
3. In the commercial mortgage-backed securities market, special servicers holding delinquent loans have a fiduciary responsibility to bondholders, who are beginning to engage in "tranche warfare" (investment grade vs. non-investment grade bondholders). AAA bondholders want to speed up foreclosures while lower grade bondholders want to wait.
4. According to sources, at least 500 small-to-mid size and regional banks would fail today if they had to write down all these bad commercial loans. However, there are also 8,000 chartered banks out there.
The problem is the FDIC would go broke if they had to seize all of the insolvent banks at one time. The FDIC, unlike during the Savings & Loans crisis, assist in bank acquisitions and hold some equity in the commercial loan portfolios from the failed banks, my source said. Other loans are auctioned off via DebtX, First Financial Network or other FDIC vendors.
5. Homebuyer tax credits, while improving homebuying, are driving homebuyers to purchase now, and some say this program will decrease future homebuying to spur the economy.
6. Residential mortgage-backed securities also face an "interest waterfall" scenario. If unemployment causes foreclosures on prime loans, then more AAA bond buyers will start losing money, and that can bring a lack of confidence to residential and commercial mortgage securitization, sources say.
7. Unemployed borrowers with prime loans will need "modifications" to improve AAA investor/bondholder confidence, but it can also keep housing prices from falling--another 'extend/pretend' scenario. That's the real estate perspective, but it ties into overall business.
8. Unemployment will likely continue if "toxic assets" force banks to hold more capital reserves. More reserves keep credit from businesses and without, debt, businesses will not be able to expand and hire more people.
9. Stronger businesses do not want to take on debt and, for that matter, neither do consumers. Weaker businesses and consumers may want debt but banks are not willing to risk it. (In fact, some banks are hiking credit card rates for consumers to 29 percent, forcing Congress to move up credit card legislation).
10. Now, because of deleveraging and a vast reduction in credit, many authors and/or sources say we are in a deflationary environment, but most economists I speak to say the risk down the road remains inflationary because the Fed can't print all that money and not have inflation.
11. Others argue that if unemployment continues and consumers save money, having the key rate down to near zero does not matter because consumers with good credit will not want to take on new debt and businesses with good credit histories will not need necessarily want the risk. One source said it will take two quarters without mortgage delinquencies to create more confidence in the business sector to begin taking on debt. But will banks risk it?
A credit-based recession faces these issues. I personally don't think there is one easy answer to it. A wise man, however, once quoted, "Present sacrifices for future gains." The philosophy today seems to be "present gains for future sacrifices."
Here's the response from Bill Nazur, VP of Specialty Lending, Author, Speaker, Media Advisor. (By the way, my real name is Mike. Robert Michaels is a pseudonym...really!)
Mike absolutely nailed it. Most importantly, bullet point 10 summarizes our issues quite handily. There isn't any imaginable scenario that would prevent inflation from occurring. Sadly, too many of my fellow talking heads, analysts (loosely interpreted), and news reporters aren't willing to speak the truth, as long as they generate headline news. The economists are completely right on this one. Brian is also correct that the government is filling a void in the wrong manner. We can't even say this is a Keynesian approach as the stimulus and dollars that are committed aren't being immediately fed into the economy any time soon. This whole thing is tragic....I will just continue to lead my family and friends on the right path. Now, I will run off to your blog, and read the entire post.
By Bill Nazur VP Specialty Lending, Author, Speaker, Media Advisor
I can just relate what I'm hearing from my sources, some of it is from articles I wrote in NewsLink and Commercial/Multifamily NewsLink:
1. One bank economist I spoke with forecast unemployment to peak at 10.8 percent (the U-3 figure). The U-6 figure is now at 17.5 percent, which includes total unemployment (marginally attached workers, part-time workers, workers who have given up looking for a job).
2. Many sources--mostly investors--are not happy that the FDIC, Fed, Treasury, etc. "extend and pretend" on commercial mortgage maturities. Granted, some of these are performing loans receiving cash flow, but the property values have dropped considerably and may not return for some time. One economist said the banks cannot keep extending these loans forever.
3. In the commercial mortgage-backed securities market, special servicers holding delinquent loans have a fiduciary responsibility to bondholders, who are beginning to engage in "tranche warfare" (investment grade vs. non-investment grade bondholders). AAA bondholders want to speed up foreclosures while lower grade bondholders want to wait.
4. According to sources, at least 500 small-to-mid size and regional banks would fail today if they had to write down all these bad commercial loans. However, there are also 8,000 chartered banks out there.
The problem is the FDIC would go broke if they had to seize all of the insolvent banks at one time. The FDIC, unlike during the Savings & Loans crisis, assist in bank acquisitions and hold some equity in the commercial loan portfolios from the failed banks, my source said. Other loans are auctioned off via DebtX, First Financial Network or other FDIC vendors.
5. Homebuyer tax credits, while improving homebuying, are driving homebuyers to purchase now, and some say this program will decrease future homebuying to spur the economy.
6. Residential mortgage-backed securities also face an "interest waterfall" scenario. If unemployment causes foreclosures on prime loans, then more AAA bond buyers will start losing money, and that can bring a lack of confidence to residential and commercial mortgage securitization, sources say.
7. Unemployed borrowers with prime loans will need "modifications" to improve AAA investor/bondholder confidence, but it can also keep housing prices from falling--another 'extend/pretend' scenario. That's the real estate perspective, but it ties into overall business.
8. Unemployment will likely continue if "toxic assets" force banks to hold more capital reserves. More reserves keep credit from businesses and without, debt, businesses will not be able to expand and hire more people.
9. Stronger businesses do not want to take on debt and, for that matter, neither do consumers. Weaker businesses and consumers may want debt but banks are not willing to risk it. (In fact, some banks are hiking credit card rates for consumers to 29 percent, forcing Congress to move up credit card legislation).
10. Now, because of deleveraging and a vast reduction in credit, many authors and/or sources say we are in a deflationary environment, but most economists I speak to say the risk down the road remains inflationary because the Fed can't print all that money and not have inflation.
11. Others argue that if unemployment continues and consumers save money, having the key rate down to near zero does not matter because consumers with good credit will not want to take on new debt and businesses with good credit histories will not need necessarily want the risk. One source said it will take two quarters without mortgage delinquencies to create more confidence in the business sector to begin taking on debt. But will banks risk it?
A credit-based recession faces these issues. I personally don't think there is one easy answer to it. A wise man, however, once quoted, "Present sacrifices for future gains." The philosophy today seems to be "present gains for future sacrifices."
Here's the response from Bill Nazur, VP of Specialty Lending, Author, Speaker, Media Advisor. (By the way, my real name is Mike. Robert Michaels is a pseudonym...really!)
Mike absolutely nailed it. Most importantly, bullet point 10 summarizes our issues quite handily. There isn't any imaginable scenario that would prevent inflation from occurring. Sadly, too many of my fellow talking heads, analysts (loosely interpreted), and news reporters aren't willing to speak the truth, as long as they generate headline news. The economists are completely right on this one. Brian is also correct that the government is filling a void in the wrong manner. We can't even say this is a Keynesian approach as the stimulus and dollars that are committed aren't being immediately fed into the economy any time soon. This whole thing is tragic....I will just continue to lead my family and friends on the right path. Now, I will run off to your blog, and read the entire post.
By Bill Nazur VP Specialty Lending, Author, Speaker, Media Advisor
The Rubber Meets the Road
Here's where the rubber meets the road. The rubber is business lending and the road translates to "toxic assets" sitting in large, medium and small financial institutions, otherwise known in the Japanese vernacular as "zombie banks."
In CNN.com's Small Business Loans: $10 Billion Evaporates, we see what happens when we follow a logical chain of common sense. If you have read my previous blogs, or just skimmed them, I have alluded to investment analysts, economists and a bunch of people smarter than myself who pay attention to the economic landscape and see through the BS being reported.
Here's the logic chain:
Link One: A bank with trillions of dollars in loans that will never be fully repaid;
Link Two: A federal government that would rather retain a philosophy of higher debt and more consumer spending (70 percent of economic growth) over more fiscal restraint by putting banks into a receivership, unloading the toxic assets, merging together some of these "too-big-to-fail" banks and putting the Glass-Steagal Act back into place;
Link Three: Banks saying thanks for the free money--we'll hold it in our capital risk-ratio reserves so we do not fail or go into receivership;
Link Four: Banks saying that since they have so many "toxic assets" they need to hoard this money and not lend it to businesses;
Link Five: Businesses laying off employees to the current 10.2 percent unemployment rate with Wells Fargo Securities now reforecasting to 10.8 percent unemployment into the first quarter of 2011--well above the most-adverse scenario in the Treasury's bank stress tests that took place before the summer.
Hence, my title, the "Rubber Meets the Road," because small business leaders will speak with Treasury Secretary Timothy Geithner as to where any money is for credit. And, here's the answer--the strong businesses that do not need credit will have it available to them once they start expansion and the businesses that are weak--well--bank do not want to take the credit risk. Thanks for playing "tainted capitalism."
Meanwhile, the weak business that will undergo further layoffs--that also includes state and local governments as well--will increase the unemployment rate.
If we follow that logic chain to its full conclusion, it means that unemployed persons will not spend nearly as much money as they have in the past, more businesses will slowdown or fail, more homebuyers will face foreclosure since unemployment is the primary reason for foreclosure under normal economic circumstances and more RESIDENTIAL MORTGAGE toxic assets will keep banks from lending.
"The very issues that brought us to the brink of disaster and caused us to pass TARP are still there," said Elizabeth Warren, chair of the Congressional Oversight Panel created to oversee the U.S. banking bailout or the Troubled Assets Relief Program (TARP) last week.
And, on a side note, retail stores become more vacant, hotel loans deteriorate, office vacancies increase and all banks are now stuck with EVEN MORE TOXIC ASSETS in terms of COMMERCIAL REAL ESTATE. Not to mention CREDIT CARD CHARGE OFFS, STUDENT LOANS, BUSINESS LOANS and other consumer and corporate debt.
Does this make sense? Do you see why it is a mistake to not get rid of those crappy loans lying in these banks--all so the rich people who own our Congress...well...Federal Government in general...can remain rich. And our taxpayer money continues to capitalize banks that do not lend, our taxpayer money funds Fannie Mae, Freddie Mac and FHA-insured mortgages and our taxpayer money is going to dwindle down as more people lose their jobs and pay fewer taxes.
Meanwhile, the corporate leaders with overwhelming wealth use high-paid tax attorneys to find loopholes in tax laws so that they pay much less than necessary in taxes.
I'll tell you right now, I'm feeling a little frugal these days with the little amount of money I have left after the monthly mortgage payment, the monthly bills and the usual spending my wife and I do for food and any other necessities. There's really not alot left over for any discretionary spending unless I want to pay 30 percent interest rates on credit card debt for the next 10-20 years at least. And we don't even have kids! I don't really see how a family of four cannot go into serious debt--or at least go paycheck-to-paycheck in this society. To me, it's just common sense.
And, trust me, the people who can afford any and all luxuries in this society, can hire very smart accountants who will find every way to reduce any substantial tax burdens.
Now that I think about it, why did our founding fathers leave England for this new land? Oh...right...Taxation Without Representation...the wealthy, politically influential people owned everything and made all the rules...and the poor people had to go along with it. Now I get it.
There was once a man named George Washington, and his friend Thomas Jefferson who discussed finding a new country where with laws not manipulated by the wealthy for the wealthy. Where people had opportunities to start a business, a bank--perhaps, and succeed or fail based on their own merits.
The laws--the Declaration of Indepence and a Constitution--elected people to represent them in the government from local municipalities, districts and states, with their welfare in mind. Yes, they paid taxes so that everyone in the country took part in their pursuit of happiness.
I mean, sure, not everything was perfect--by far. But the men who founded this country philosophically believed in freedom from tyranny and equal treatment under the law--as much as they could back then. The Constitution provided a document for success and, rich or poor, America served as the land of opportunities.
It was all done because George and Tom felt a bunch of wealth aristocrats were ripping them off of their hard-earned money so they could go and get wealthier--taxation without representation.
Wait a minute, that was 18th century England...right? Not the 21st Century.
Nah...I was never that good with history.
Face it, George and Tom's role in history was to start a new government in a new land.
It's our role in history--as U.S. citizens--to start new home theater systems in new houses.
In CNN.com's Small Business Loans: $10 Billion Evaporates, we see what happens when we follow a logical chain of common sense. If you have read my previous blogs, or just skimmed them, I have alluded to investment analysts, economists and a bunch of people smarter than myself who pay attention to the economic landscape and see through the BS being reported.
Here's the logic chain:
Link One: A bank with trillions of dollars in loans that will never be fully repaid;
Link Two: A federal government that would rather retain a philosophy of higher debt and more consumer spending (70 percent of economic growth) over more fiscal restraint by putting banks into a receivership, unloading the toxic assets, merging together some of these "too-big-to-fail" banks and putting the Glass-Steagal Act back into place;
Link Three: Banks saying thanks for the free money--we'll hold it in our capital risk-ratio reserves so we do not fail or go into receivership;
Link Four: Banks saying that since they have so many "toxic assets" they need to hoard this money and not lend it to businesses;
Link Five: Businesses laying off employees to the current 10.2 percent unemployment rate with Wells Fargo Securities now reforecasting to 10.8 percent unemployment into the first quarter of 2011--well above the most-adverse scenario in the Treasury's bank stress tests that took place before the summer.
Hence, my title, the "Rubber Meets the Road," because small business leaders will speak with Treasury Secretary Timothy Geithner as to where any money is for credit. And, here's the answer--the strong businesses that do not need credit will have it available to them once they start expansion and the businesses that are weak--well--bank do not want to take the credit risk. Thanks for playing "tainted capitalism."
Meanwhile, the weak business that will undergo further layoffs--that also includes state and local governments as well--will increase the unemployment rate.
If we follow that logic chain to its full conclusion, it means that unemployed persons will not spend nearly as much money as they have in the past, more businesses will slowdown or fail, more homebuyers will face foreclosure since unemployment is the primary reason for foreclosure under normal economic circumstances and more RESIDENTIAL MORTGAGE toxic assets will keep banks from lending.
"The very issues that brought us to the brink of disaster and caused us to pass TARP are still there," said Elizabeth Warren, chair of the Congressional Oversight Panel created to oversee the U.S. banking bailout or the Troubled Assets Relief Program (TARP) last week.
And, on a side note, retail stores become more vacant, hotel loans deteriorate, office vacancies increase and all banks are now stuck with EVEN MORE TOXIC ASSETS in terms of COMMERCIAL REAL ESTATE. Not to mention CREDIT CARD CHARGE OFFS, STUDENT LOANS, BUSINESS LOANS and other consumer and corporate debt.
Does this make sense? Do you see why it is a mistake to not get rid of those crappy loans lying in these banks--all so the rich people who own our Congress...well...Federal Government in general...can remain rich. And our taxpayer money continues to capitalize banks that do not lend, our taxpayer money funds Fannie Mae, Freddie Mac and FHA-insured mortgages and our taxpayer money is going to dwindle down as more people lose their jobs and pay fewer taxes.
Meanwhile, the corporate leaders with overwhelming wealth use high-paid tax attorneys to find loopholes in tax laws so that they pay much less than necessary in taxes.
I'll tell you right now, I'm feeling a little frugal these days with the little amount of money I have left after the monthly mortgage payment, the monthly bills and the usual spending my wife and I do for food and any other necessities. There's really not alot left over for any discretionary spending unless I want to pay 30 percent interest rates on credit card debt for the next 10-20 years at least. And we don't even have kids! I don't really see how a family of four cannot go into serious debt--or at least go paycheck-to-paycheck in this society. To me, it's just common sense.
And, trust me, the people who can afford any and all luxuries in this society, can hire very smart accountants who will find every way to reduce any substantial tax burdens.
Now that I think about it, why did our founding fathers leave England for this new land? Oh...right...Taxation Without Representation...the wealthy, politically influential people owned everything and made all the rules...and the poor people had to go along with it. Now I get it.
There was once a man named George Washington, and his friend Thomas Jefferson who discussed finding a new country where with laws not manipulated by the wealthy for the wealthy. Where people had opportunities to start a business, a bank--perhaps, and succeed or fail based on their own merits.
The laws--the Declaration of Indepence and a Constitution--elected people to represent them in the government from local municipalities, districts and states, with their welfare in mind. Yes, they paid taxes so that everyone in the country took part in their pursuit of happiness.
I mean, sure, not everything was perfect--by far. But the men who founded this country philosophically believed in freedom from tyranny and equal treatment under the law--as much as they could back then. The Constitution provided a document for success and, rich or poor, America served as the land of opportunities.
It was all done because George and Tom felt a bunch of wealth aristocrats were ripping them off of their hard-earned money so they could go and get wealthier--taxation without representation.
Wait a minute, that was 18th century England...right? Not the 21st Century.
Nah...I was never that good with history.
Face it, George and Tom's role in history was to start a new government in a new land.
It's our role in history--as U.S. citizens--to start new home theater systems in new houses.
Friday, November 6, 2009
It's the Housing Market, Stupid
When this whole colossal credit crisis started and Congress tried to figure out what was going on--I still don't think many of them understand at this point--Fed Chair Ben Bernanke said the key is in the housing market. If the housing market returns, the economy returns. (I'm paraphrasing, of course).
Despite stupid subprime loans (i.e. interest only, no income, no asset, no job)--which are really not subprime but just stupid loans--the derivatives and structured investment vehicles tied to these loans turned a severe recession into a Great Depression--Part Deux.
However, don't think for a second the answer to this crisis is to revive a dormant housing market. The housing market will likely never be as heated as it was from 2002-2007, give or take a year, and consumers will never be spending like they did during that time for quite awhile. Yet, even though we know this, it seems the strategy is to keep mortgage rates low and incentivize potential homebuyers to do the same things that caused this mess in the first place.
Here's a few reasons it won't work:
1. Unemployment--most people can't keep houses without jobs or buy houses for that matter. The unemployment rate released today hit 10.2 percent.
2. Consumer deleveraging--The Federal Reserve reported today that outstanding consumer credit fell at a 7.2 percent annual rate in September, the eighth consecutive decline. Credit balances had never fallen eight months in a row before in the 66-year history of the data. Consumer credit fell by $14.8 billion to $2.46 trillion in September, down 4.7% compared with a year ago. Outstanding credit can fall if consumers pay off balances, or if lenders write off bad loans.
3. A Long Credit Time-Out--Yasmine Kamaruddin, economic analyst at Wells Fargo Securities, said consumer credit as a percent of disposable income was elevated during the previous business cycle, and "we may see a permanent downward shift as lenders continue to raise lending standards."
"Consumers remain reluctant to take on debt in the face of slow wage and salary growth and a weak labor market," Kamaruddin said.
But it's not just the consumer. Don't think for a second that banks want to lend to anybody remotely suspect of being a bad credit risk. They already need to hold capital reserves to the hilt for piles of valueless loans on their books.
No jobs, no consumer spending, no credit. It's a recipe for deflation even though no economist or expert with any political stature wants to admit it. Instead, the Fed/Treasury insists on going into its "toolbox" and using the "tools" it now has access to in order to fix this crisis.
Here are the "tools" in their arsenal:
1. Accounting manipulations--changing mark-to-market accounting to mark-to-model so banks do not need to write off all the bad assets on their books so their stock prices do not fall. Notice today how we discovered unemployment worse than expected and an historical drop in credit but the stock market ended in the positive range? Go figure.
2. Stimulus programs--Cash for Clunkers made it look like a resurgence in the auto industry when, in reality, it was "quick fix." Auto sales dropped immediately after the program dropped out of circulation. Also, the Homebuyer Tax Credit and its extension signed today. Again, another band-aid on a brain hemorrhage. With a supplemental 6,500 tax credit for current homeowners in their home five out of eight years, it should help incentivize some potential homebuyers out there.
The only problem with this "tool" is that it will add further debt onto the FHA, Fannie Mae and Freddie Mac balance sheets. For FHA, it is on its way to bankruptcy. There was supposed to be an announcement earlier this week showing why FHA is still solvent. They had to postpone that announcement to recalculate their numbers. No word on when they will have that press briefing.
Fannie Mae is now doing a "deed-for-lease" program meaning that borrowers facing foreclosure will be able to rent their house from a property manager hired by Fannie Mae. It also means Fannie Mae will not have to write down another bad loan.
However, as unemployment increases and consumers continue to not spend, it will cause a higher number of foreclosures. In normal circumstances, without stupid mortgages, the main reason for foreclosure is unemployment.
What is more dangerous, however, is that under normal circumstances, the housing market might slowly pick itself off the floor and start lending again through government programs. With Fannie and Freddie taking major writedowns--or renting out homes--more liquidity dries up and a bankrupt FHA dries up that government-based liquidity.
If you didn't hear, Fannie Mae said submitted a request to the Treasury Department for an additional $15 billion to eliminate its "net worth deficit." It is seeking to receive the funds on or by Dec. 31.
Therefore, the only money that banks can lend to homeowners will be from....from...hmmm....there is no money to lend to purchase a home.
Oh well, there goes the mortgage market.
Forget about a slowdown in homebuying...what about a shut down in homebuying???
So, if Ben Bernanke said that housing is the key, then this approach may just blow up in his face.
Without any mortgages--or a piddly amount--an economic revival appears highly unlikely for quite some time. Then, tack on commercial real estate's debacle of undervalued mortgages, and the community and regional banks become insolvent with those "toxic" loans.
Now, if you were a prudent bank or credit union that did not get into trouble prior to this economic crisis, with subprime mortgages and commercial real estate construction loans and private label securities, et. al. good for you. You're the winner.
Tell them what they've won! They've won the task of paying higher premiums to the FDIC because of all the other loser, irresponsible banks going under. Congratulations!!
And, for that consumer that purchases a home, takes out a prime loan, keeps up an impeccable credit history and goes to work each day trying to earn money to support his and/or her family to make their mortgage payments on time and not go hungry, what do they win??
Well, a free supply of food stamps and hopefully they can keep their job with potential salary cuts and furloughs, probably without a matching 401K and the fear of hyperinflation in the future!! They'll also know that the tax money they send to the federal government goes into all these programs that have been trying bail out the irresponsible, loser banks that destroyed the mortgage industry in the first place and the investment banks that melted down the entire global economy to go along with it.
A big thanks to Tim Geithner and Ben Bernanke for hosting this show, and thanks to the consumers for playing "The Rich Get Richer Everyone Else is Screwed." We'll see you next time on most of these politically correct stations!
Despite stupid subprime loans (i.e. interest only, no income, no asset, no job)--which are really not subprime but just stupid loans--the derivatives and structured investment vehicles tied to these loans turned a severe recession into a Great Depression--Part Deux.
However, don't think for a second the answer to this crisis is to revive a dormant housing market. The housing market will likely never be as heated as it was from 2002-2007, give or take a year, and consumers will never be spending like they did during that time for quite awhile. Yet, even though we know this, it seems the strategy is to keep mortgage rates low and incentivize potential homebuyers to do the same things that caused this mess in the first place.
Here's a few reasons it won't work:
1. Unemployment--most people can't keep houses without jobs or buy houses for that matter. The unemployment rate released today hit 10.2 percent.
2. Consumer deleveraging--The Federal Reserve reported today that outstanding consumer credit fell at a 7.2 percent annual rate in September, the eighth consecutive decline. Credit balances had never fallen eight months in a row before in the 66-year history of the data. Consumer credit fell by $14.8 billion to $2.46 trillion in September, down 4.7% compared with a year ago. Outstanding credit can fall if consumers pay off balances, or if lenders write off bad loans.
3. A Long Credit Time-Out--Yasmine Kamaruddin, economic analyst at Wells Fargo Securities, said consumer credit as a percent of disposable income was elevated during the previous business cycle, and "we may see a permanent downward shift as lenders continue to raise lending standards."
"Consumers remain reluctant to take on debt in the face of slow wage and salary growth and a weak labor market," Kamaruddin said.
But it's not just the consumer. Don't think for a second that banks want to lend to anybody remotely suspect of being a bad credit risk. They already need to hold capital reserves to the hilt for piles of valueless loans on their books.
No jobs, no consumer spending, no credit. It's a recipe for deflation even though no economist or expert with any political stature wants to admit it. Instead, the Fed/Treasury insists on going into its "toolbox" and using the "tools" it now has access to in order to fix this crisis.
Here are the "tools" in their arsenal:
1. Accounting manipulations--changing mark-to-market accounting to mark-to-model so banks do not need to write off all the bad assets on their books so their stock prices do not fall. Notice today how we discovered unemployment worse than expected and an historical drop in credit but the stock market ended in the positive range? Go figure.
2. Stimulus programs--Cash for Clunkers made it look like a resurgence in the auto industry when, in reality, it was "quick fix." Auto sales dropped immediately after the program dropped out of circulation. Also, the Homebuyer Tax Credit and its extension signed today. Again, another band-aid on a brain hemorrhage. With a supplemental 6,500 tax credit for current homeowners in their home five out of eight years, it should help incentivize some potential homebuyers out there.
The only problem with this "tool" is that it will add further debt onto the FHA, Fannie Mae and Freddie Mac balance sheets. For FHA, it is on its way to bankruptcy. There was supposed to be an announcement earlier this week showing why FHA is still solvent. They had to postpone that announcement to recalculate their numbers. No word on when they will have that press briefing.
Fannie Mae is now doing a "deed-for-lease" program meaning that borrowers facing foreclosure will be able to rent their house from a property manager hired by Fannie Mae. It also means Fannie Mae will not have to write down another bad loan.
However, as unemployment increases and consumers continue to not spend, it will cause a higher number of foreclosures. In normal circumstances, without stupid mortgages, the main reason for foreclosure is unemployment.
What is more dangerous, however, is that under normal circumstances, the housing market might slowly pick itself off the floor and start lending again through government programs. With Fannie and Freddie taking major writedowns--or renting out homes--more liquidity dries up and a bankrupt FHA dries up that government-based liquidity.
If you didn't hear, Fannie Mae said submitted a request to the Treasury Department for an additional $15 billion to eliminate its "net worth deficit." It is seeking to receive the funds on or by Dec. 31.
Therefore, the only money that banks can lend to homeowners will be from....from...hmmm....there is no money to lend to purchase a home.
Oh well, there goes the mortgage market.
Forget about a slowdown in homebuying...what about a shut down in homebuying???
So, if Ben Bernanke said that housing is the key, then this approach may just blow up in his face.
Without any mortgages--or a piddly amount--an economic revival appears highly unlikely for quite some time. Then, tack on commercial real estate's debacle of undervalued mortgages, and the community and regional banks become insolvent with those "toxic" loans.
Now, if you were a prudent bank or credit union that did not get into trouble prior to this economic crisis, with subprime mortgages and commercial real estate construction loans and private label securities, et. al. good for you. You're the winner.
Tell them what they've won! They've won the task of paying higher premiums to the FDIC because of all the other loser, irresponsible banks going under. Congratulations!!
And, for that consumer that purchases a home, takes out a prime loan, keeps up an impeccable credit history and goes to work each day trying to earn money to support his and/or her family to make their mortgage payments on time and not go hungry, what do they win??
Well, a free supply of food stamps and hopefully they can keep their job with potential salary cuts and furloughs, probably without a matching 401K and the fear of hyperinflation in the future!! They'll also know that the tax money they send to the federal government goes into all these programs that have been trying bail out the irresponsible, loser banks that destroyed the mortgage industry in the first place and the investment banks that melted down the entire global economy to go along with it.
A big thanks to Tim Geithner and Ben Bernanke for hosting this show, and thanks to the consumers for playing "The Rich Get Richer Everyone Else is Screwed." We'll see you next time on most of these politically correct stations!
Monday, October 19, 2009
Money Can't Buy Quality Resolutions
We are learning more and more--as a country and private citizens--that you can't throw money at a problem and expect to resolve it.
Washington Redskins owner Daniel Snyder behaves in the same manner that the U.S. Treasury acts toward banks. Snyder expects to throw money at staff and players and that will get the D.C. region a winning football team. Not so. It gets a bunch of greedy players who think they've won something before playing the game.
Earning--or not earning--millions of dollars means much more to many of these players than winning the Super Bowl. That's great for the players and staff, but what about the fans? They end up paying to watch a crappy product on the football field.
As for the Fed printing money and throwing it at banks, with the hope that they become magically solvent despite billions of dollars, maybe trillions, in toxic assets. That's led to executive compensation, bonuses and no lending to borrowers and businesses.
Without debt, all this country sees is a bunch of greedy investment bankers make more money while states and municipalities layoff police and teachers. Communities turn to crap and taxpayers watch neighborhoods in foreclosure and decline.
So, yes, we can throw money at a problem and hope it goes away--but it doesn't. It only helps the needs of the few outweigh the needs many.
Problem solving sometimes requires time, patience and hard work--three things nobody in power wants to deal with these days.
Washington Redskins owner Daniel Snyder behaves in the same manner that the U.S. Treasury acts toward banks. Snyder expects to throw money at staff and players and that will get the D.C. region a winning football team. Not so. It gets a bunch of greedy players who think they've won something before playing the game.
Earning--or not earning--millions of dollars means much more to many of these players than winning the Super Bowl. That's great for the players and staff, but what about the fans? They end up paying to watch a crappy product on the football field.
As for the Fed printing money and throwing it at banks, with the hope that they become magically solvent despite billions of dollars, maybe trillions, in toxic assets. That's led to executive compensation, bonuses and no lending to borrowers and businesses.
Without debt, all this country sees is a bunch of greedy investment bankers make more money while states and municipalities layoff police and teachers. Communities turn to crap and taxpayers watch neighborhoods in foreclosure and decline.
So, yes, we can throw money at a problem and hope it goes away--but it doesn't. It only helps the needs of the few outweigh the needs many.
Problem solving sometimes requires time, patience and hard work--three things nobody in power wants to deal with these days.
Friday, October 9, 2009
Mortgage Rates Likely to Rise
If the Federal Reserve stops purchasing debt from Fannie Mae and Freddie Mac--as they said they would do in the first quarter next year--mortgage rates will likely rise.
Why? Because the Council of Foreign Relations has a chart that shows only the Fed is purchasing GSE debt. With that being the case, and FHA delinquencies rising, mortgage rates will rise if foreign investors are not purchasing the debt.
Foreign investor had been purchasing agency debt during the good times, keeping mortgage rates low on Fannie and Freddie loans, but central banks are printing money to keep their own banks solvent.
Just a thought. With mortgage rates nearing all-time lows this week, it might be time to refinance if you can save $100 on your mortgage, if your home is not underwater and if you still have a job. Otherwise, unless the Fed decides to extend agency purchases (which is certainly possible) or it have Government Sachs purchases debt with its own money, the mortgage market will not be driving economic growth anytime soon.
Why? Because the Council of Foreign Relations has a chart that shows only the Fed is purchasing GSE debt. With that being the case, and FHA delinquencies rising, mortgage rates will rise if foreign investors are not purchasing the debt.
Foreign investor had been purchasing agency debt during the good times, keeping mortgage rates low on Fannie and Freddie loans, but central banks are printing money to keep their own banks solvent.
Just a thought. With mortgage rates nearing all-time lows this week, it might be time to refinance if you can save $100 on your mortgage, if your home is not underwater and if you still have a job. Otherwise, unless the Fed decides to extend agency purchases (which is certainly possible) or it have Government Sachs purchases debt with its own money, the mortgage market will not be driving economic growth anytime soon.
Wednesday, October 7, 2009
The Other Mortgage Market
It's funny to just be hearing about how bad commercial real estate will get because I've been writing for the past year about how bad it's been getting--and it gets worse.
California hotel foreclosures and delinquencies, for example, increased 220 percent and 389 percent, respectively, according to Atlas Hospitality Group, a consulting firm based in Irvine, Calif.
Alan Peay, the president of Atlas, said alot of those loans are 2005-2007 vintage CMBS loans--a vintage with rather lax underwriting.
Trepp LLC, a New York City research firm that monitors commercial mortgage-backed securities, said appraisal reductions increased 75 percent on $4.29 billion of CMBS loans. That means property values are falling like they've been doing in the residential market.
Many analysts I've spoken with say commercial real estate is a reflection of the residential market because capital chased product in both markets and inflated prices so that cap rates were driven to ridiculously low levels on commercial properties.
That said, Victor Calanog, director of research at Reis Inc., New York, does not expect property values to return to their peak levels for more than 10 years. That means banks are sitting with undervalued assets on their books that they are currently trying to extend--and CMBS special servicers also play the extension game for as long as they can.
Trepp said that in September, 1039 CMBS loans with a total balance of $11.81 billion had deteriorating delinquency status. Of the $11.81 billion, $739 million represented extended performing matured balloons. $3.19 billion of loans moved from current to 30 days delinquent; $3.80 billion went from 30 to 60 days delinquent; $1.87 billion went from 60 to 90 days delinquent; $892 billion were non-performing extended balloons.
$3.25 billion in loans improved their delinquency status but the net deterioration was $8.56 billion.
Retail loans had the highest balance of loans with deteriorating delinquency at $3.4 billion, followed by office loans at $2.2 billion and hotel loans at $2.3 billion.
I was just thinking, in fact, how Kevin Donhaue, a special servicer at Midland, spoke at a Mortgage Bankers Association conference nearly two years ago and said this danger awaited the CMBS industry.
I was at another conference where an investor said--off the record--that the CRE CDO market was going to implode.
Yes, there is a major spike in commercial defaults and more are coming. How bad do I think it will get? I think it's already bad. Bank CEOs are telling me that at least 500 banks are going to shut down and commercial real estate is a big reason for it (alot of construction loans out there).
In an article for tomorrow, I emailed Calanog and he replied that vacancies and effective rents for office properties will not return to their peak levels until 2017; for retail, 2015/2016; for industrial properties, 2013/2014.
Bad fundamentals, no CMBS market (although the Fed has the Troubled Asset Backed Securities Loan Facility to purchase AAA legacy securities and assist in new issuance), no banks lending on risky assets and alot of private equity waiting to scoop up assets at bargain-basement prices.
The Fed and Treasury are caught between a rock and a hard place. The accounting rules are more favorable for banks to make extensions because they do not have to declare "mark-to-market" values.
That said, if it takes 10 years or more for properties to return to 2007 values, I'm not sure how banks can keep these loans on their books without becoming "zombie" banks, a la Japan during its lost decade or two.
And, how do investors determine true value if the rules change in mid-stream? And, when will banks be able to lend again holding these risky assets?
Sticking with the Fed's present course, the only step is to create an GSE-type agency, like Fannie Mae or Freddie Mac, to refinance all these commercial properties with more printed money.
The U.S. is already ridiculously in debt. What's a couple more trillion going to hurt as long as banks don't have to admit that their loans are undervalue. That way, the Federal Deposit Insurance Corp. can save their money so that they don't have to borrow from Treasury.
Or, the Fed can print more money and give it to Treasury to loan to the FDIC to seize the banks.
There are probably only two people in the United States who have the answer to this commercial real estate dilemma we are in--rising defaults without liquidity to refinance maturities--and if Ben Bernanke and Timothy Geithner don't have it, then we are really in trouble.
California hotel foreclosures and delinquencies, for example, increased 220 percent and 389 percent, respectively, according to Atlas Hospitality Group, a consulting firm based in Irvine, Calif.
Alan Peay, the president of Atlas, said alot of those loans are 2005-2007 vintage CMBS loans--a vintage with rather lax underwriting.
Trepp LLC, a New York City research firm that monitors commercial mortgage-backed securities, said appraisal reductions increased 75 percent on $4.29 billion of CMBS loans. That means property values are falling like they've been doing in the residential market.
Many analysts I've spoken with say commercial real estate is a reflection of the residential market because capital chased product in both markets and inflated prices so that cap rates were driven to ridiculously low levels on commercial properties.
That said, Victor Calanog, director of research at Reis Inc., New York, does not expect property values to return to their peak levels for more than 10 years. That means banks are sitting with undervalued assets on their books that they are currently trying to extend--and CMBS special servicers also play the extension game for as long as they can.
Trepp said that in September, 1039 CMBS loans with a total balance of $11.81 billion had deteriorating delinquency status. Of the $11.81 billion, $739 million represented extended performing matured balloons. $3.19 billion of loans moved from current to 30 days delinquent; $3.80 billion went from 30 to 60 days delinquent; $1.87 billion went from 60 to 90 days delinquent; $892 billion were non-performing extended balloons.
$3.25 billion in loans improved their delinquency status but the net deterioration was $8.56 billion.
Retail loans had the highest balance of loans with deteriorating delinquency at $3.4 billion, followed by office loans at $2.2 billion and hotel loans at $2.3 billion.
I was just thinking, in fact, how Kevin Donhaue, a special servicer at Midland, spoke at a Mortgage Bankers Association conference nearly two years ago and said this danger awaited the CMBS industry.
I was at another conference where an investor said--off the record--that the CRE CDO market was going to implode.
Yes, there is a major spike in commercial defaults and more are coming. How bad do I think it will get? I think it's already bad. Bank CEOs are telling me that at least 500 banks are going to shut down and commercial real estate is a big reason for it (alot of construction loans out there).
In an article for tomorrow, I emailed Calanog and he replied that vacancies and effective rents for office properties will not return to their peak levels until 2017; for retail, 2015/2016; for industrial properties, 2013/2014.
Bad fundamentals, no CMBS market (although the Fed has the Troubled Asset Backed Securities Loan Facility to purchase AAA legacy securities and assist in new issuance), no banks lending on risky assets and alot of private equity waiting to scoop up assets at bargain-basement prices.
The Fed and Treasury are caught between a rock and a hard place. The accounting rules are more favorable for banks to make extensions because they do not have to declare "mark-to-market" values.
That said, if it takes 10 years or more for properties to return to 2007 values, I'm not sure how banks can keep these loans on their books without becoming "zombie" banks, a la Japan during its lost decade or two.
And, how do investors determine true value if the rules change in mid-stream? And, when will banks be able to lend again holding these risky assets?
Sticking with the Fed's present course, the only step is to create an GSE-type agency, like Fannie Mae or Freddie Mac, to refinance all these commercial properties with more printed money.
The U.S. is already ridiculously in debt. What's a couple more trillion going to hurt as long as banks don't have to admit that their loans are undervalue. That way, the Federal Deposit Insurance Corp. can save their money so that they don't have to borrow from Treasury.
Or, the Fed can print more money and give it to Treasury to loan to the FDIC to seize the banks.
There are probably only two people in the United States who have the answer to this commercial real estate dilemma we are in--rising defaults without liquidity to refinance maturities--and if Ben Bernanke and Timothy Geithner don't have it, then we are really in trouble.
Tuesday, October 6, 2009
Mortgage Time Warp
If you're in the camp that I'm in--that we're in a deflationary period as United States consumers deleverage off credit highs because there's nowhere else to go but down--then consider the current residential mortgage industry.
First, a word from the Federal Reserve's Flow of Funds Accounts of the United States for the second quarter, released September 17.
"Household debt contracted at an annual rate of 1¾ percent in the second quarter, marking the fourth consecutive quarter of contraction. In the second quarter, home mortgage debt decreased at an annualrate of 1½ percent, while consumer credit decreased at an annual rate of 6½ percent."
I was just thinking today that we are more than two years from the securitization breakdown from August 2007. At that time, not only had the residential mortgage-backed securities market shut down but "innocent bystander" commercial mortgage-backed securities was caught in the negative turmoil that dried up liquidity from the capital markets.
The spigot was off even though some water was left running.
Those who don't know about securitization for residential mortgages, it's basically analogous to a mortgage pie. That mortgage for a house--that loan--is (or was) a pie that a bank/lender sold to an investment banker (in many cases, Fannie Mae and Freddie Mac--government-sponsored enterprises--or FHA, an agency under the Department of Housing and Urban Development that uses Ginnie Mae securities for a government-owned loan).
Investment banks pooled together loans, packaging them into securities and selling those securities to global investors. It's one reason that the subprime market (bad quality loans) caused the global economic meltdown--because some of those bad loans were pooled with the "prime" market (good loans). It was a "creative financial instrument" backed with the best ratings from rating agencies that were sold to investors who trusted those ratings and the investment bankers.
However, those bad loans were not just bad, they were horrible quality loans. Low-income people matched with interest-only loans that they could only sustain for a year or two. No-income, no-asset loans with rates low enough for someone with no money at all to get a home. These "horrible loans" were matched with good loans, good ratings and investors started losing alot of money. So, needless to say, investors could no longer trust the residential mortgage-backed securities market and it shut down.
Now, it seems many commercial mortgages fell into the same camp because underwriting an office, a hotel or a retail property "pro-forma"--meaning tenants would always be in place because the economy would always be strong and prices would never fall--was a hip thing to do from 2005 to 2007. Those loans, some also interest only, have five-year and 10-year maturities and the borrowers are not average Joe Six-Pack. Many are real estate investment trusts and some just real estate moguls.
But we can talk about commercial real estate another day. Let's stick with residential and get back to the present.
We sit in a residential mortgage market more than two years without securitization, which leads me to this article from HousingWire, "FHA is Replacing Securitization in Mortgage Financing."
No doubt, this is true. You see, normally, one might say the current mortgage market is not your grandfather's mortgage market. But, in this case, it is your grandfather's mortgage market.
With bank credit tight and no securitization market or warehouse lending, for that matter, the only place lenders can sell their loans are: Fannie Mae, Freddie Mac and FHA.
Now let me think...during the Great Depression, the mortgage market started picking up the economy because some housing programs helped make homeownership more affordable for everyone...what were those programs? Oh yeah...FHA, then Fannie Mae and then Freddie Mac.
You see, securitization was a product invented about 30 years ago and the commercial securitization market was not developed until the Savings and Loan Crisis in the early 1990s--less than 20 years ago.
The FHA, Fannie Mae and Freddie Mac is today's mortgage industry--same as in the 1940s and 1950s, which spawned suburban sprawl, more highways, higher employment and the "American Dream" of homeownership.
Today, the cloud of unemployment remains dark and ominous. Unless there is a job to go to, I don't think many people are going to be moving anytime soon. Today, interest rates remain low--just as they were back in the 1960s. However, housing prices remain high and for some who have weak credit, unattainable.
The U.S. federal government is trillions of dollars in debt, unlike the 1930s-1950s. We are in a different world of unchartered waters where history cannot be the guide to current solutions. It will take critical thinking applied to actions, consequences and geopolitical stability.
That said, I wonder how many people can afford homes with 10 percent down--which is the new Fannie Mae and Freddie Mac guidelines. There are no 0 percent down and 5 percent down with lender-funded mortgage insurance programs anymore--at least none that I know of or none without an extremely high interest rate (the definition of a real subprime loan). The are no first and second trusts.
There are alot of foreclosed properties and properties in default. There are alot of bad credit scores because of credit card defaults, foreclosures, judgements on liens, bankruptcies. In today's Fannie Mae and Freddie Mac, I can't imagine where people will go for loans???
Oh, right, one place. FHA. The place that middle-class people went following World War II to get a new home priced somewhat affordably for the time--before a massive credit bubble brought home prices to some exorbitant, completely unrealistic level.
Now, the Home Valuation Code of Conduct should keep appraisers from valuing homes too high. In fact, in reality, HVCC keeps deals from going through. Just ask a Realtor you know. I know some that said appraisers are tougher than they have ever been on home prices.
That said, people can still purchase foreclosed properties, there are short sales and...yes...some people are getting their loans modified (as long as these residential mortgage-backed securities investors don't sue lenders for contractually ripping them off).
But back to FHA--the government-run program backed by Ginnie Mae securities. As explained on the Ginnie Mae website, "Ginnie Mae MBS [mortgage-backed securities] are fully modified pass-through securities guaranteed by the full faith and credit of the United States government."
It also says: "At Ginnie Mae, we help make affordable housing a reality for millions of low- and moderate-income households across America by channeling global capital into the nation's housing markets."
So, FHA is backed by the Ginnie Mae, our U.S. Federal Government will insure that investors around the world will receive their money if these loans go bad. That's the good news.
Here's some bad news. FHA has nearly 23 percent of its loans in delinquency or foreclosure.
Ken Denninger, in his Market Ticker article, Corruption: Government Housing Programs, displays the statistics he likely received from FHA Neighborhood Watch. Looking at those statistics, major servicers show a number of loans in forbearance along with a lot of 90-day delinquencies. Investor’s Business Daily has delinquencies at 14.4 percent in 2Q, up from 12.6 percent two years earlier.
I'm not completely sure why anyone would really want to invest in mortgages with such high delinquency rates, particularly in today's market. The loans have good rates but low downpayments and questionable credit scores. In fact, subprime delinquencies were lower than FHA delinquencies at one point in the past decade. It's like investing in subprime loans with government backing but without the high interest rates to go along with them.
So, who would pay money for these loans? How about the same people who are investing in EVERYTHING these days? Looks like we need to rev up the printing machine again!
However, that said, Denninger also sends us today a disturbing article from a 21-year old Wall Street veteran who exposes ties from FHA to where else? Wall Street. Her name is Pam Martens and in her Counterpunch article, Wall Street Titans Use Aliases to Foreclose on Families While Partnering With a Federal Agency, she said the Department of Housing and Urban Development has been "moving a chunk of that [FHA] role to Wall Street since 2002."
"Rounding out its dubious housing credentials, Wall Street is now on life support courtesy of the public purse known as TARP as a result of issuing trillions of dollars in miss-rated housing bonds and housing-related derivatives, many of which were nothing more than algorithmic concepts wrapped in a high priced legal opinion. It’s difficult to imagine a more problematic resume for the new housing czars."
Well, there you go. We've come full circle.
First, a word from the Federal Reserve's Flow of Funds Accounts of the United States for the second quarter, released September 17.
"Household debt contracted at an annual rate of 1¾ percent in the second quarter, marking the fourth consecutive quarter of contraction. In the second quarter, home mortgage debt decreased at an annualrate of 1½ percent, while consumer credit decreased at an annual rate of 6½ percent."
I was just thinking today that we are more than two years from the securitization breakdown from August 2007. At that time, not only had the residential mortgage-backed securities market shut down but "innocent bystander" commercial mortgage-backed securities was caught in the negative turmoil that dried up liquidity from the capital markets.
The spigot was off even though some water was left running.
Those who don't know about securitization for residential mortgages, it's basically analogous to a mortgage pie. That mortgage for a house--that loan--is (or was) a pie that a bank/lender sold to an investment banker (in many cases, Fannie Mae and Freddie Mac--government-sponsored enterprises--or FHA, an agency under the Department of Housing and Urban Development that uses Ginnie Mae securities for a government-owned loan).
Investment banks pooled together loans, packaging them into securities and selling those securities to global investors. It's one reason that the subprime market (bad quality loans) caused the global economic meltdown--because some of those bad loans were pooled with the "prime" market (good loans). It was a "creative financial instrument" backed with the best ratings from rating agencies that were sold to investors who trusted those ratings and the investment bankers.
However, those bad loans were not just bad, they were horrible quality loans. Low-income people matched with interest-only loans that they could only sustain for a year or two. No-income, no-asset loans with rates low enough for someone with no money at all to get a home. These "horrible loans" were matched with good loans, good ratings and investors started losing alot of money. So, needless to say, investors could no longer trust the residential mortgage-backed securities market and it shut down.
Now, it seems many commercial mortgages fell into the same camp because underwriting an office, a hotel or a retail property "pro-forma"--meaning tenants would always be in place because the economy would always be strong and prices would never fall--was a hip thing to do from 2005 to 2007. Those loans, some also interest only, have five-year and 10-year maturities and the borrowers are not average Joe Six-Pack. Many are real estate investment trusts and some just real estate moguls.
But we can talk about commercial real estate another day. Let's stick with residential and get back to the present.
We sit in a residential mortgage market more than two years without securitization, which leads me to this article from HousingWire, "FHA is Replacing Securitization in Mortgage Financing."
No doubt, this is true. You see, normally, one might say the current mortgage market is not your grandfather's mortgage market. But, in this case, it is your grandfather's mortgage market.
With bank credit tight and no securitization market or warehouse lending, for that matter, the only place lenders can sell their loans are: Fannie Mae, Freddie Mac and FHA.
Now let me think...during the Great Depression, the mortgage market started picking up the economy because some housing programs helped make homeownership more affordable for everyone...what were those programs? Oh yeah...FHA, then Fannie Mae and then Freddie Mac.
You see, securitization was a product invented about 30 years ago and the commercial securitization market was not developed until the Savings and Loan Crisis in the early 1990s--less than 20 years ago.
The FHA, Fannie Mae and Freddie Mac is today's mortgage industry--same as in the 1940s and 1950s, which spawned suburban sprawl, more highways, higher employment and the "American Dream" of homeownership.
Today, the cloud of unemployment remains dark and ominous. Unless there is a job to go to, I don't think many people are going to be moving anytime soon. Today, interest rates remain low--just as they were back in the 1960s. However, housing prices remain high and for some who have weak credit, unattainable.
The U.S. federal government is trillions of dollars in debt, unlike the 1930s-1950s. We are in a different world of unchartered waters where history cannot be the guide to current solutions. It will take critical thinking applied to actions, consequences and geopolitical stability.
That said, I wonder how many people can afford homes with 10 percent down--which is the new Fannie Mae and Freddie Mac guidelines. There are no 0 percent down and 5 percent down with lender-funded mortgage insurance programs anymore--at least none that I know of or none without an extremely high interest rate (the definition of a real subprime loan). The are no first and second trusts.
There are alot of foreclosed properties and properties in default. There are alot of bad credit scores because of credit card defaults, foreclosures, judgements on liens, bankruptcies. In today's Fannie Mae and Freddie Mac, I can't imagine where people will go for loans???
Oh, right, one place. FHA. The place that middle-class people went following World War II to get a new home priced somewhat affordably for the time--before a massive credit bubble brought home prices to some exorbitant, completely unrealistic level.
Now, the Home Valuation Code of Conduct should keep appraisers from valuing homes too high. In fact, in reality, HVCC keeps deals from going through. Just ask a Realtor you know. I know some that said appraisers are tougher than they have ever been on home prices.
That said, people can still purchase foreclosed properties, there are short sales and...yes...some people are getting their loans modified (as long as these residential mortgage-backed securities investors don't sue lenders for contractually ripping them off).
But back to FHA--the government-run program backed by Ginnie Mae securities. As explained on the Ginnie Mae website, "Ginnie Mae MBS [mortgage-backed securities] are fully modified pass-through securities guaranteed by the full faith and credit of the United States government."
It also says: "At Ginnie Mae, we help make affordable housing a reality for millions of low- and moderate-income households across America by channeling global capital into the nation's housing markets."
So, FHA is backed by the Ginnie Mae, our U.S. Federal Government will insure that investors around the world will receive their money if these loans go bad. That's the good news.
Here's some bad news. FHA has nearly 23 percent of its loans in delinquency or foreclosure.
Ken Denninger, in his Market Ticker article, Corruption: Government Housing Programs, displays the statistics he likely received from FHA Neighborhood Watch. Looking at those statistics, major servicers show a number of loans in forbearance along with a lot of 90-day delinquencies. Investor’s Business Daily has delinquencies at 14.4 percent in 2Q, up from 12.6 percent two years earlier.
I'm not completely sure why anyone would really want to invest in mortgages with such high delinquency rates, particularly in today's market. The loans have good rates but low downpayments and questionable credit scores. In fact, subprime delinquencies were lower than FHA delinquencies at one point in the past decade. It's like investing in subprime loans with government backing but without the high interest rates to go along with them.
So, who would pay money for these loans? How about the same people who are investing in EVERYTHING these days? Looks like we need to rev up the printing machine again!
However, that said, Denninger also sends us today a disturbing article from a 21-year old Wall Street veteran who exposes ties from FHA to where else? Wall Street. Her name is Pam Martens and in her Counterpunch article, Wall Street Titans Use Aliases to Foreclose on Families While Partnering With a Federal Agency, she said the Department of Housing and Urban Development has been "moving a chunk of that [FHA] role to Wall Street since 2002."
"Rounding out its dubious housing credentials, Wall Street is now on life support courtesy of the public purse known as TARP as a result of issuing trillions of dollars in miss-rated housing bonds and housing-related derivatives, many of which were nothing more than algorithmic concepts wrapped in a high priced legal opinion. It’s difficult to imagine a more problematic resume for the new housing czars."
Well, there you go. We've come full circle.
Tuesday, September 22, 2009
'Because It's All Our Turf'
Remember the film The Warriors when Cyrus, a visionary gang leader, spoke in front of all the New York City gangs saying that they can rule the city "because it's all our turf."
That was then, this is now.
In today's financial climate, that may as well be Ben Bernanke standing in front of international banking CEOs, their companies and central banks saying that they can control the entire global economy "because it's all our turf."
That's true. The world does belong to the people who have money. But, don't expect investors to necessarily follow a rigged game. Ken Denninger's article, Find the Difference: Why Ponzi Finance Fails, in Market Ticker, paints a disturbing picture of today's economy and the future outcome unless the Fed and U.S., as a whole, reigns in decades of debt.
Denninger backs up his comments with charts, mostly Fed data from the FRB Z1 release. According to Denninger, the U.S. has pushed debt to the limits without the money available to pay for it. He also makes the assumption that the Fed and Goldman Sachs manipulates the stock and bond markets with Fed-printed money and asks the question: "How long will this last?"
I recently spoke with a Wall Street insider who said the true test of the market--whether it crashes or not--will be when the economy returns to full throttle and Bernanke needs to ween the U.S. off of this "printed-cash" to prevent inflation. However, doing it too soon will prevent the proper recovery.
For Denninger, it's not a matter of "if" but "when" the economy collapses. The insider I spoke with said that very few people are able to perform the balancing act Ben Bernanke and Timothy Geithner proposed--a very small percentage.
Again, the deflation-inflation debate comes to light. Some say the problem will never even get to inflation because the country has entered a long stretch of deflation. In either case, the prospects are not necessarily good in the near term.
For anyone with a 401k not ready to retire in the next 30 years, it might not be that bad. However, without a job, how long will money be going into that 401k?
When I asked my inside Wall Street source about when I might want to go conservative on investment and when might I be more aggressive, he told me not to worry about it because there is no way to predict when the market will fall and when it will rise. That's true.
Assuming Denninger is right, there is stll no way to predict a falling market from a rising one. The best guess would be if you start to see unemployment remaining at high levels--above 10 percent--into the second half of 2010 and into 2011, or if the 10-year Treasury bond begins to rise at an extraordinary pace. In any case, it will be on some kind of "shock" or "surprise," because only an unexpected event can truly trigger a market crash.
As in The Warriors, Cyrus' vision never did come to fruition, and most members of the gang called The Warriors returned home to their own turf--Coney Island.
After a night of running--because the gang was unfairly accused of assassinating Cyrus by a complete nut-job when that nut-job actually did it--they were tired and rundown.
The leader of The Warriors looks up at their home, a rundown boardwalk on an empty beach and a broken down amusement park. He says, "We fought all that way to get back to this?"
Will bankers say that when they find consumers want to deleverage rather than spend because they can't spend anymore? Will CEOs look at their own financial institutions still filled with toxic assets that don't add up in value and say that? Will we say that to ourselves in the future, looking at vacant homes, condos, industrial buildings and retail establishments? Or, will it be a little of both? Let's hope not.
That was then, this is now.
In today's financial climate, that may as well be Ben Bernanke standing in front of international banking CEOs, their companies and central banks saying that they can control the entire global economy "because it's all our turf."
That's true. The world does belong to the people who have money. But, don't expect investors to necessarily follow a rigged game. Ken Denninger's article, Find the Difference: Why Ponzi Finance Fails, in Market Ticker, paints a disturbing picture of today's economy and the future outcome unless the Fed and U.S., as a whole, reigns in decades of debt.
Denninger backs up his comments with charts, mostly Fed data from the FRB Z1 release. According to Denninger, the U.S. has pushed debt to the limits without the money available to pay for it. He also makes the assumption that the Fed and Goldman Sachs manipulates the stock and bond markets with Fed-printed money and asks the question: "How long will this last?"
I recently spoke with a Wall Street insider who said the true test of the market--whether it crashes or not--will be when the economy returns to full throttle and Bernanke needs to ween the U.S. off of this "printed-cash" to prevent inflation. However, doing it too soon will prevent the proper recovery.
For Denninger, it's not a matter of "if" but "when" the economy collapses. The insider I spoke with said that very few people are able to perform the balancing act Ben Bernanke and Timothy Geithner proposed--a very small percentage.
Again, the deflation-inflation debate comes to light. Some say the problem will never even get to inflation because the country has entered a long stretch of deflation. In either case, the prospects are not necessarily good in the near term.
For anyone with a 401k not ready to retire in the next 30 years, it might not be that bad. However, without a job, how long will money be going into that 401k?
When I asked my inside Wall Street source about when I might want to go conservative on investment and when might I be more aggressive, he told me not to worry about it because there is no way to predict when the market will fall and when it will rise. That's true.
Assuming Denninger is right, there is stll no way to predict a falling market from a rising one. The best guess would be if you start to see unemployment remaining at high levels--above 10 percent--into the second half of 2010 and into 2011, or if the 10-year Treasury bond begins to rise at an extraordinary pace. In any case, it will be on some kind of "shock" or "surprise," because only an unexpected event can truly trigger a market crash.
As in The Warriors, Cyrus' vision never did come to fruition, and most members of the gang called The Warriors returned home to their own turf--Coney Island.
After a night of running--because the gang was unfairly accused of assassinating Cyrus by a complete nut-job when that nut-job actually did it--they were tired and rundown.
The leader of The Warriors looks up at their home, a rundown boardwalk on an empty beach and a broken down amusement park. He says, "We fought all that way to get back to this?"
Will bankers say that when they find consumers want to deleverage rather than spend because they can't spend anymore? Will CEOs look at their own financial institutions still filled with toxic assets that don't add up in value and say that? Will we say that to ourselves in the future, looking at vacant homes, condos, industrial buildings and retail establishments? Or, will it be a little of both? Let's hope not.
Tuesday, September 15, 2009
Proof in the Pudding
As usual, another blogger says it better than myself.
In the previous entry, I pointed out that math doesn't lie. Karl Denninger of The Market Ticker shows the proof in the pudding--the facts--in Bernanke "Recession is Over" (Depression Has Just Begun).
It's one thing to write about something. It's another to provide analysis. It's quite another when the facts are out there. However, when it's all three, it's just plain frightening.
In the previous entry, I pointed out that math doesn't lie. Karl Denninger of The Market Ticker shows the proof in the pudding--the facts--in Bernanke "Recession is Over" (Depression Has Just Begun).
It's one thing to write about something. It's another to provide analysis. It's quite another when the facts are out there. However, when it's all three, it's just plain frightening.
The Return of 'W'
Calm down! The former U.S. President is not returning to the White House!
When I say 'W' I'm speaking of a double-dip recession, not George W. Bush back in D.C. A double-dip recession is like two scoops of chocolate ice cream compared to hearing another Bush speech.
Still, the economy faces a 'W' rather than 'V', 'U' or 'L'-shaped recessions. Some people are calling for a square-root recession and you might just be hearing that term more often.
In the The Outlook for Recovery in the U.S. Economy, Janet Yellen, president and CEO of the San Francisco Federal Reserve Bank said she envisions a 'U-shaped' recession.
There is a key difference between politics and economics. Politics are philosophical and somewhat subjective. We grow up with certain values that factor into our politics.
But economics can be like a mathematic equation. For example, complex, interest-only loans plus unsophisticated borrowers equals destruction of the residential mortgage industry. Add structured investment vehicles, derivatives and credit default swaps to mortgages and that equals global economic collapse. See how it works?
How about this one--100 percent income minus 36 percent debt equals 64 percent income. I use 36 percent because if you have a house, that's the maximum debt-to-income ratio allowed under a Fannie Mae/Freddie Mac prime loan. It would be 41 percent under an FHA loan.
And now--33 percent income minus 36 percent debt equals absolutely no way that anyone is spending because there is more debt than income. Why do I use this equation?
Because, if I'm not mistaken, unemployment insurance--at least in Maryland--reflects a weekly maximum benefit amount of $380 per week. That would be about $20,000 per year or about 33 percent, of someone who makes $60,000 per year. If you made more money, too bad--it's $380 per week max.
Now, my guess is that unemployed persons plus debt (i.e. mortgage and/or rent, bills, insurance, etc.) equals very little discretionary income. Also, factor in a 10.2 percent unemployment rate by the middle of 2010, which most economists believe will be the peak before it falls.
Under this scenario, I expect very little spending between now and the middle of 2010. Why some economists use this "pent-up demand" scenario, I have no idea. Because, again, this is not politics--it's not philosophical or subjective. It's the facts--no money, no debt, no credit, no spend. That simple.
Now, that's just the unemployed. That said, how much debt builds when unemployed--if you even have credit? How much interest increases on those credit card bills? Remember, this all happens from now--September--to next June 2010 under conservative estimates.
Then, even if unemployment falls to 9 percent by 2011, that's still alot of unemployment--not to mention a large percentage of part-time workers, people who are frustrated and want full-time jobs, etc., which is up to 16.8 percent right now.
"Consumer spending? Who said anything about consumer spending?" Former Saints coach Jim Mora might scream. And yet, retail sales looked better in the month of August. Oh, goody...back-to-school sales picked up, we has the "cash-for-clunkers" program take off, people went on vacation, kids spent money with their lifeguard jobs and so we all had a little fun.
So, when spending suddenly drops precipitously in September through November with a sudden surge of 2 percent in December, we'll all say the economy is back on track because we wanted to buy our children some gifts for Christmas, Hannukah or Kwanzaa day.
Get real. Math doesn't lie, and economists wearing rose-colored glasses--the same economists that wanted to say there was no housing bubble--cannot really see the facts and expect consumer spending to pick up into a 'V-shaped' recovery.
Have we seen a recovery at all? Yes. For that reason, we do not have an 'L-shaped' recovery.
Now, is this a sustainable recovery? Will it be a 'U-shaped' recovery. Martin Bailey, who is on the White House Economic Council of Advisors, said a sustainable recovery is "questionable." He said it today on Bloomberg. If there is any sign of a sustainable recovery, he says "Yes." But he couldn't say it. He said it's questionable. That's like a public relations person saying he or she can't answer the question. That's a "yes" to the question--otherwise, they'd answer no. For Bailey, it's a "no," or he would have said yes. Therefore, no 'U-shaped' recovery.
That leaves us with the 'W' or 'square-root' recovery. I vote for a 'w' because banks have assets that have values that--for the reasons given above--are not coming back anytime soon.
The mathematical equation--100 percent values of housing and commercial real estate minus 30 percent of those values equals 70 percent of value. That's a conservative estimate. Okay, so banks have assets at 70 percent of value and they're holding these crappy assets. Residential foreclosures continue and commercial real estate delinquencies and defaults are just beginning.
So banks cannot lend until they build up enough capital to cover Tier One risk. Banks not lending equals businesses not hiring which approximates lower job growth. That means less consumer spending, less money for retailers and more defunct retail properties.
For example, Blockbuster Video said today it could close 960 stores in the next year to 18 months. How many jobs does that slash and how many strip malls will that affect? It's all tied together.
With fewer purchases--Best Buy reported profit losses today--less industrial output results and that leads to more defunct industrial properties. As companies struggle, more office vacancies come to fruition, including more bank branches closing down with crappy commercial real estate assets on their books.
Less discretionary spending includes more hotel deterioration. Less younger people getting jobs and multifamily vacancies increase. More crappy, lower-valued assets.
Now, the government provides capital to the banks so maybe one day they can lend even though "toxic" asset growth builds. Neil Barofsky said that capital can be $24.7 trillion at maximum. Let's be conservative and say it's one-quarter of that amount--$6 trillion provided by the Federal Government for banks to lend. We get back $1 trillion from the banks so we really spend $5 trillion.
Smaller banks hold nearly $1 trillion of commercial real estate and, including commercial mortgage-backed securities, it all totals $3.5 trillion. Residential real estate represents $11 trillion. That's not including credit card debt in default and corporate debt in default.
What's this mean? Small-to-large banks with bad assets plus CMBS defaults plus trillions lost in credit default swaps and derivatives plus ? given by the Fed in "printed" money plus trillions of dollars in Federal debt equals little debt for businesses.
How much does that leave for the average $60,000 per year worker with a couple kids who is still employed? This is someone getting paid, still pays his or her mortgage and has the usual water and electric bills. They'll push the limit for some holiday spending in addition to usual expenditures--clothes to replace the ones with holes in them, shoes, tennis shoes and, of course, food which we need to live in.
"We're very bullish on the global economy," a dumbass on Bloomberg just said. Sure. Talk is cheap, but he's hoping to get even more stupid investors to put their money with his fund.
Consumer spending? Try consumers saving...if they're even able to do that.
That's the math...don't expect consumers to bring us out of this recession (it's really a depression, but nobody's allowed to say that). Don't expect prices to drop as speculative investors invest in commodities--like corn. Don't expect business to pick up for China or other countries that want to import in the U.S. The consumer is not buying.
Don't expect those businesses, if business does not pick up, to be getting any bailouts from the banks because they're holding onto their precious capital with the amount of risk they have. Do the math. No money equals no spending equals no business equals more layoffs. More layoffs, less spending...less spending, weaker economy. Weaker economy--deflation.
And, yes, it will come back to unclogging the banks of "toxic" assets, which should have been top priority when this economic crisis started in the first place. That's not a political opinion.
From Hank Paulson--in a Republican regime--to Timothy Geithner in a Democrat regime--the math does not add up. $? capital plus -$assets +/- new tax rules = 0 liquidity.
How much capital and how much are the bad assets--we don't know for sure. We do know that financial institutions no longer need to account for those bad assets based on current market value. Why? Because if they wanted us to know, it would be good news. It's obviously not good news. Financial institutions would report major losses if they had to do mark-to-market accounting. That's a fact. And, yes, someday in a U.S. society with very little spending and debt for years to come, those property values will increase. It might take 10-15 years for 2007 values, but that's a 10-15-year recession--sometimes up, sometimes down--like a 'W'.
Even then, not all of those values will return to 100 percent.
Also, if Bernanke wanted us to know how much these "clearinghouse" financial institutions received, and continue to receive, from the infamous Treasury discount window, he would tells us because we would not be concerned about it. It would be good news. Therefore, it's not good news.
We should be concerned that he wants to keep it a secret from Bloomberg. We should be concerned that at least 500 banks are insolvent and the FDIC will have to close them in the next year. How much will that cost?
The country has huge debt and consumers have huge debt. If we as consumers save money, it still doesn't explain how to keep electricity, water and other utility prices from rising. It doesn't explain how to make insolvent banks more solvent. It doesn't explain how spending will increase.
Match the actions and a calculated gamble for consumers to spend more in this country--bringing us all out of a deep recession, and we have a bad mathematical calculation. You would expect better from the Fed Chairman and Treasury Secretary--but they're really politicians, not economists.
When I say 'W' I'm speaking of a double-dip recession, not George W. Bush back in D.C. A double-dip recession is like two scoops of chocolate ice cream compared to hearing another Bush speech.
Still, the economy faces a 'W' rather than 'V', 'U' or 'L'-shaped recessions. Some people are calling for a square-root recession and you might just be hearing that term more often.
In the The Outlook for Recovery in the U.S. Economy, Janet Yellen, president and CEO of the San Francisco Federal Reserve Bank said she envisions a 'U-shaped' recession.
There is a key difference between politics and economics. Politics are philosophical and somewhat subjective. We grow up with certain values that factor into our politics.
But economics can be like a mathematic equation. For example, complex, interest-only loans plus unsophisticated borrowers equals destruction of the residential mortgage industry. Add structured investment vehicles, derivatives and credit default swaps to mortgages and that equals global economic collapse. See how it works?
How about this one--100 percent income minus 36 percent debt equals 64 percent income. I use 36 percent because if you have a house, that's the maximum debt-to-income ratio allowed under a Fannie Mae/Freddie Mac prime loan. It would be 41 percent under an FHA loan.
And now--33 percent income minus 36 percent debt equals absolutely no way that anyone is spending because there is more debt than income. Why do I use this equation?
Because, if I'm not mistaken, unemployment insurance--at least in Maryland--reflects a weekly maximum benefit amount of $380 per week. That would be about $20,000 per year or about 33 percent, of someone who makes $60,000 per year. If you made more money, too bad--it's $380 per week max.
Now, my guess is that unemployed persons plus debt (i.e. mortgage and/or rent, bills, insurance, etc.) equals very little discretionary income. Also, factor in a 10.2 percent unemployment rate by the middle of 2010, which most economists believe will be the peak before it falls.
Under this scenario, I expect very little spending between now and the middle of 2010. Why some economists use this "pent-up demand" scenario, I have no idea. Because, again, this is not politics--it's not philosophical or subjective. It's the facts--no money, no debt, no credit, no spend. That simple.
Now, that's just the unemployed. That said, how much debt builds when unemployed--if you even have credit? How much interest increases on those credit card bills? Remember, this all happens from now--September--to next June 2010 under conservative estimates.
Then, even if unemployment falls to 9 percent by 2011, that's still alot of unemployment--not to mention a large percentage of part-time workers, people who are frustrated and want full-time jobs, etc., which is up to 16.8 percent right now.
"Consumer spending? Who said anything about consumer spending?" Former Saints coach Jim Mora might scream. And yet, retail sales looked better in the month of August. Oh, goody...back-to-school sales picked up, we has the "cash-for-clunkers" program take off, people went on vacation, kids spent money with their lifeguard jobs and so we all had a little fun.
So, when spending suddenly drops precipitously in September through November with a sudden surge of 2 percent in December, we'll all say the economy is back on track because we wanted to buy our children some gifts for Christmas, Hannukah or Kwanzaa day.
Get real. Math doesn't lie, and economists wearing rose-colored glasses--the same economists that wanted to say there was no housing bubble--cannot really see the facts and expect consumer spending to pick up into a 'V-shaped' recovery.
Have we seen a recovery at all? Yes. For that reason, we do not have an 'L-shaped' recovery.
Now, is this a sustainable recovery? Will it be a 'U-shaped' recovery. Martin Bailey, who is on the White House Economic Council of Advisors, said a sustainable recovery is "questionable." He said it today on Bloomberg. If there is any sign of a sustainable recovery, he says "Yes." But he couldn't say it. He said it's questionable. That's like a public relations person saying he or she can't answer the question. That's a "yes" to the question--otherwise, they'd answer no. For Bailey, it's a "no," or he would have said yes. Therefore, no 'U-shaped' recovery.
That leaves us with the 'W' or 'square-root' recovery. I vote for a 'w' because banks have assets that have values that--for the reasons given above--are not coming back anytime soon.
The mathematical equation--100 percent values of housing and commercial real estate minus 30 percent of those values equals 70 percent of value. That's a conservative estimate. Okay, so banks have assets at 70 percent of value and they're holding these crappy assets. Residential foreclosures continue and commercial real estate delinquencies and defaults are just beginning.
So banks cannot lend until they build up enough capital to cover Tier One risk. Banks not lending equals businesses not hiring which approximates lower job growth. That means less consumer spending, less money for retailers and more defunct retail properties.
For example, Blockbuster Video said today it could close 960 stores in the next year to 18 months. How many jobs does that slash and how many strip malls will that affect? It's all tied together.
With fewer purchases--Best Buy reported profit losses today--less industrial output results and that leads to more defunct industrial properties. As companies struggle, more office vacancies come to fruition, including more bank branches closing down with crappy commercial real estate assets on their books.
Less discretionary spending includes more hotel deterioration. Less younger people getting jobs and multifamily vacancies increase. More crappy, lower-valued assets.
Now, the government provides capital to the banks so maybe one day they can lend even though "toxic" asset growth builds. Neil Barofsky said that capital can be $24.7 trillion at maximum. Let's be conservative and say it's one-quarter of that amount--$6 trillion provided by the Federal Government for banks to lend. We get back $1 trillion from the banks so we really spend $5 trillion.
Smaller banks hold nearly $1 trillion of commercial real estate and, including commercial mortgage-backed securities, it all totals $3.5 trillion. Residential real estate represents $11 trillion. That's not including credit card debt in default and corporate debt in default.
What's this mean? Small-to-large banks with bad assets plus CMBS defaults plus trillions lost in credit default swaps and derivatives plus ? given by the Fed in "printed" money plus trillions of dollars in Federal debt equals little debt for businesses.
How much does that leave for the average $60,000 per year worker with a couple kids who is still employed? This is someone getting paid, still pays his or her mortgage and has the usual water and electric bills. They'll push the limit for some holiday spending in addition to usual expenditures--clothes to replace the ones with holes in them, shoes, tennis shoes and, of course, food which we need to live in.
"We're very bullish on the global economy," a dumbass on Bloomberg just said. Sure. Talk is cheap, but he's hoping to get even more stupid investors to put their money with his fund.
Consumer spending? Try consumers saving...if they're even able to do that.
That's the math...don't expect consumers to bring us out of this recession (it's really a depression, but nobody's allowed to say that). Don't expect prices to drop as speculative investors invest in commodities--like corn. Don't expect business to pick up for China or other countries that want to import in the U.S. The consumer is not buying.
Don't expect those businesses, if business does not pick up, to be getting any bailouts from the banks because they're holding onto their precious capital with the amount of risk they have. Do the math. No money equals no spending equals no business equals more layoffs. More layoffs, less spending...less spending, weaker economy. Weaker economy--deflation.
And, yes, it will come back to unclogging the banks of "toxic" assets, which should have been top priority when this economic crisis started in the first place. That's not a political opinion.
From Hank Paulson--in a Republican regime--to Timothy Geithner in a Democrat regime--the math does not add up. $? capital plus -$assets +/- new tax rules = 0 liquidity.
How much capital and how much are the bad assets--we don't know for sure. We do know that financial institutions no longer need to account for those bad assets based on current market value. Why? Because if they wanted us to know, it would be good news. It's obviously not good news. Financial institutions would report major losses if they had to do mark-to-market accounting. That's a fact. And, yes, someday in a U.S. society with very little spending and debt for years to come, those property values will increase. It might take 10-15 years for 2007 values, but that's a 10-15-year recession--sometimes up, sometimes down--like a 'W'.
Even then, not all of those values will return to 100 percent.
Also, if Bernanke wanted us to know how much these "clearinghouse" financial institutions received, and continue to receive, from the infamous Treasury discount window, he would tells us because we would not be concerned about it. It would be good news. Therefore, it's not good news.
We should be concerned that he wants to keep it a secret from Bloomberg. We should be concerned that at least 500 banks are insolvent and the FDIC will have to close them in the next year. How much will that cost?
The country has huge debt and consumers have huge debt. If we as consumers save money, it still doesn't explain how to keep electricity, water and other utility prices from rising. It doesn't explain how to make insolvent banks more solvent. It doesn't explain how spending will increase.
Match the actions and a calculated gamble for consumers to spend more in this country--bringing us all out of a deep recession, and we have a bad mathematical calculation. You would expect better from the Fed Chairman and Treasury Secretary--but they're really politicians, not economists.
Sunday, September 13, 2009
The NFL Product
I didn't want to bring the NFL into FinTruth--a.k.a. the Financial Truth--because the NFL is entertainment, a sport, and it is almost taboo to bring the NFL into our finance-related truths. But, it's also still a business.
Let me take you to a new Red Zone product provdied by the NFL Network via Verizon FIOS and Comcast. Don't get me wrong. I'm a beneficiary of the RedZone--it's the best part of NFL Sunday Ticket and I get it cheap.
You see, NFL Sunday Ticket--solely provided by Direct TV--now has its RedZone portion provided by Verizon FIOS and Comcast Cable. It provides viewers with all the scoring possessions of every NFL team in the country. I love it. For $5o, I get the RedZone channel for the entire season.
Now, if you're a Miami fan living in Washington, D.C., you still might want NFL Sunday Ticket to watch the entire Dolphin game--and all Dolphin games--throughout the year. However, Redskin fans in Washington, D.C. can watch the RedZone channel during commercials and during the games the 'Skins aren't playing in.
The problem is for those local fans, who get Direct TV just to get NFL Sunday Ticket. This year, they're sitting with a satellite dish on their roof and ripped off for the fact that they invested in Sunday Ticket, only later finding out that cable subscribers paid $50 for this benefit.
They must have paid more than $300 for NFL Sunday Ticket...we paid $50.
That said, unemployment continues to rise, the Redskins' owner--Daniel Snyder--pays way too much money for players so that he can market the team rather than put together a winner and the Redskins showed nothing in their three receivers drafted last year during the first week of the season. Frankly, Orakpo didn't show too much either against the Giants.
It's still too early to tell for the Redskins this season, but here are the facts:
The NFL wins, the NFL owners win, the NFL owners will win when they lock out players before the 2011 season and, as usual, the fans lose.
Unless, of course, your team either gets to the playoffs, wins the Super Bowl or you won in this week's pool. Also, with fantasy football, the NFL will always be the true winners for keeping fans involved in all the games. Plus, for fanatasy football players like myself, I'm a winner for paying $50 for RedZone. For my friends who already paid for their Sunday Ticket, they're the $250-$300 losers. Rip off. Yes.
But we're finding out more and more in business--and politics--that life is not necessarily fair.
That said, welcome back NFL...I love it. And, it makes me forget, for one day, about the incredible economic abyss we--as a nation--live in. Especially when the great actor Gene Hackman promotes Lowes above Home Depot as the top hardware store in the country.
Let me take you to a new Red Zone product provdied by the NFL Network via Verizon FIOS and Comcast. Don't get me wrong. I'm a beneficiary of the RedZone--it's the best part of NFL Sunday Ticket and I get it cheap.
You see, NFL Sunday Ticket--solely provided by Direct TV--now has its RedZone portion provided by Verizon FIOS and Comcast Cable. It provides viewers with all the scoring possessions of every NFL team in the country. I love it. For $5o, I get the RedZone channel for the entire season.
Now, if you're a Miami fan living in Washington, D.C., you still might want NFL Sunday Ticket to watch the entire Dolphin game--and all Dolphin games--throughout the year. However, Redskin fans in Washington, D.C. can watch the RedZone channel during commercials and during the games the 'Skins aren't playing in.
The problem is for those local fans, who get Direct TV just to get NFL Sunday Ticket. This year, they're sitting with a satellite dish on their roof and ripped off for the fact that they invested in Sunday Ticket, only later finding out that cable subscribers paid $50 for this benefit.
They must have paid more than $300 for NFL Sunday Ticket...we paid $50.
That said, unemployment continues to rise, the Redskins' owner--Daniel Snyder--pays way too much money for players so that he can market the team rather than put together a winner and the Redskins showed nothing in their three receivers drafted last year during the first week of the season. Frankly, Orakpo didn't show too much either against the Giants.
It's still too early to tell for the Redskins this season, but here are the facts:
The NFL wins, the NFL owners win, the NFL owners will win when they lock out players before the 2011 season and, as usual, the fans lose.
Unless, of course, your team either gets to the playoffs, wins the Super Bowl or you won in this week's pool. Also, with fantasy football, the NFL will always be the true winners for keeping fans involved in all the games. Plus, for fanatasy football players like myself, I'm a winner for paying $50 for RedZone. For my friends who already paid for their Sunday Ticket, they're the $250-$300 losers. Rip off. Yes.
But we're finding out more and more in business--and politics--that life is not necessarily fair.
That said, welcome back NFL...I love it. And, it makes me forget, for one day, about the incredible economic abyss we--as a nation--live in. Especially when the great actor Gene Hackman promotes Lowes above Home Depot as the top hardware store in the country.
Friday, September 11, 2009
Mucking the Stock Market
My problem with the Elliott Wave Principle, as it was last Spring, is its tenacity for muckraking. When things don't turn out as forecasted, they're not necessarily wrong in their projections...just delayed.
The "evil speculator" at www.evilspeculator.com has little doubt that this is still a bear market, but now the forecast for the market to crash is delayed until October. Based on the earlier charts, all three scenarios said September. However, a new analysis now pushes that crash out further despite three separate analyses that said otherwise. Not only is this frustrating and drudging, but it really seems to be meant for day traders. Just my opinion.
In the long term, the evil speculator could be absolutely right--we're in a bear market rally still and it's going to crash sometime soon. However, when is soon?
It's like making a long-term bet that a good football team is not going to the Super Bowl. Only, there are side bets as to whether the team will score more points than the other team in the first quarter of a game. Then, the second quarter. Then, the third quarter. That team may or may not keep scoring more points. They may even win the game. Or a few games. So--you made some money. But you're not going to know you're long-term projection until that team has lost enough games that it can't make it into the playoffs. Or, that team could make it into the playoffs but lose the championship game and not make it into the Super Bowl. Great. You were right long term, but look how long it took to find that out.
In this case, a crash might happen in the fourth quarter as companies report poor third quarter earnings based on overzealous analyst opinions. Fact is, many companies reported second quarter profits only because they cut overhead through layoffs. Really, the P/E (profit/earnings) scenarios are not matching up.
However, that doesn't necessarily mean a market crash if investors are focused on the banks, and the Federal Government continues to prop up banks through accounting rule changes and cash input. Investors may also be watching unemployment closely to determine whether this is a deflationary economic cycle and whether consumers will start spending soon.
Personally, I think it's deflation because there's no telling how long banks will be able to provide debt to businesses with all the "toxic" debt they're holding. When unemployment doesn't fall as expected in the 3rd quarter of 2010, the market could crash then and there because most economists expect unemployment to begin to decline at that time.
If that's the case, then the supposed crash was not in September or October 2009 but maybe sometime late in the month of September 2010--next year at this time--when the U.S. starts to unexpectedly see the unemployment rate remain steady or increase. It's the unexpected that swings the market to extreme ups or downs.
That said, judging the stock market today is difficult because many of the same rules do not apply. I'll once again refer you to Mike "Mish" Shedlock who provides some historical perspective on corporate bonds and treasuries. First, it's easier to follow if you read it a couple of times and, second, it's a pattern likely to not suddenly change.
Here's the link to Junk Bond Defaults Worst Since the Great Depression. So Why Is the Market Rallying?
Personally, I just watch for a market peak--probably 10,000 but 11,000 at most, and go conservative on mutual funds. Unless you're an expert, many who are experts say now is not a good time to start playing the stock market.
The "evil speculator" at www.evilspeculator.com has little doubt that this is still a bear market, but now the forecast for the market to crash is delayed until October. Based on the earlier charts, all three scenarios said September. However, a new analysis now pushes that crash out further despite three separate analyses that said otherwise. Not only is this frustrating and drudging, but it really seems to be meant for day traders. Just my opinion.
In the long term, the evil speculator could be absolutely right--we're in a bear market rally still and it's going to crash sometime soon. However, when is soon?
It's like making a long-term bet that a good football team is not going to the Super Bowl. Only, there are side bets as to whether the team will score more points than the other team in the first quarter of a game. Then, the second quarter. Then, the third quarter. That team may or may not keep scoring more points. They may even win the game. Or a few games. So--you made some money. But you're not going to know you're long-term projection until that team has lost enough games that it can't make it into the playoffs. Or, that team could make it into the playoffs but lose the championship game and not make it into the Super Bowl. Great. You were right long term, but look how long it took to find that out.
In this case, a crash might happen in the fourth quarter as companies report poor third quarter earnings based on overzealous analyst opinions. Fact is, many companies reported second quarter profits only because they cut overhead through layoffs. Really, the P/E (profit/earnings) scenarios are not matching up.
However, that doesn't necessarily mean a market crash if investors are focused on the banks, and the Federal Government continues to prop up banks through accounting rule changes and cash input. Investors may also be watching unemployment closely to determine whether this is a deflationary economic cycle and whether consumers will start spending soon.
Personally, I think it's deflation because there's no telling how long banks will be able to provide debt to businesses with all the "toxic" debt they're holding. When unemployment doesn't fall as expected in the 3rd quarter of 2010, the market could crash then and there because most economists expect unemployment to begin to decline at that time.
If that's the case, then the supposed crash was not in September or October 2009 but maybe sometime late in the month of September 2010--next year at this time--when the U.S. starts to unexpectedly see the unemployment rate remain steady or increase. It's the unexpected that swings the market to extreme ups or downs.
That said, judging the stock market today is difficult because many of the same rules do not apply. I'll once again refer you to Mike "Mish" Shedlock who provides some historical perspective on corporate bonds and treasuries. First, it's easier to follow if you read it a couple of times and, second, it's a pattern likely to not suddenly change.
Here's the link to Junk Bond Defaults Worst Since the Great Depression. So Why Is the Market Rallying?
Personally, I just watch for a market peak--probably 10,000 but 11,000 at most, and go conservative on mutual funds. Unless you're an expert, many who are experts say now is not a good time to start playing the stock market.
Sunday, September 6, 2009
I was at a "Balance the Bucks" rally today and read the following poem. Lots of great acts by extrememly talented musicians saying it's time for the people to take back their country.
The Best Money Can Buy
by Robert Michaels
Hear my story, all this is true,
It's not meant to make you feel sad or blue,
When you know the truth, you might find it quite funny,
That the entire world is actually based on money.
China owns more than half of U.S. debt,
But how much money will that country really get
When the Fed prints money by the hour
The dollar loses all its power,
It's a theory Fed Chair Ben Bernanke does not seem to get.
The members of the Federal Reserve, this is great, they disagree,
That doesn't bode well for you and me,
Will the economy inflate or deflate, do we buy gold bullion?
the Kansas City Fed President said the biggest banks are still overleveraged by about $5 trillion--(that's dollars).
California paid China in its IOUs
‘Cause JP Morgan Chase, Bank of America and Wells Fargo took care of their dues,
So these overleveraged banks now own the golden state,
Wonderful--too little, too late.
But, for some,
this might be good news,
California is thinking of making marijuana legal
That would cure the state's blues,
For that matter, make it legal across the country,
so the federal government can tax it as they choose.
After all, don’t you feel we are all just the best money can buy?
America’s bought and sold on one big lie,
The U.S. can’t seem to make a car and—
We won’t go very far,
‘Cause--we’ll have loads of debt
No matter how hard we try.
Now, did you hear about those toxic loans?
I know you did--we still have them--I hear all the groans.
Foreclosures are in the millions
Government programs costing trillions
And our Treasury Secretary, Tim Geithner’s on the phone to Ben,
To print more money for the banks (and his buddies) to lend
Yeah, right. I'm sure a lot of businesses will see those loans.
Let’s face it, we have a role in this.
You and I bought lots of merchandise,
And for all that debt, we need to compromise,
So now let’s stop the debt,
And let’s all make a bet,
That without material things, we can still feel alive and well,
And tell all those frickin' banks they can to go to hell.
Because, as long as bankers have all the dough,
They won't let the rest of us know,
The truth about the government,
And how our tax money is spent
By politicians who are on the take.
Just how much money do all these power-mongers make?
That really is, my country ‘tis of thee
Our sweet land of liberty,
But they raise the cost for you and me,
And pocket the proceeds don't you see.
Don't let the government tell you to start spending,
So they can act like the banks will start lending.
Then we remain slaves to debt,
Adding to credit card payments we never met.
I'm talking about interest rates we never knew were there,
Let me ask you, is that really fair?
And, when that credit card legislation went through
That one that would lower interest rates, too.
Oh, that's right, it's happening next year,
A little too late, indeed, I fear.
So that's my tale, hope it wasn't too long,
But how much longer can this charade go on?
Our expenses are bad--that much is true,
But behave and save, and who knows what you can do?
And, here's the bright spot, this part is really quite funny,
You and I just don't need a lot of money.
For example, love is free for you and me,
Love yourself, keep the faith in this land of liberty,
Appreciate the world, the people, the land and sea,
And you'll understand inside what each of us can and will always be.
Otherwise, you'll just feel we are the best money can buy,
America bought and sold on one big lie,
In a global economy, the U.S. can’t seem to make a car and—
Without universal healthcare our future entrepreneurs won’t go very far,
Because we'll be on the path we're taking right now,
with loads of debt to pay off,
and who in the world knows how?
The biggest concern of the weekend is that when two Federal Reserve presidents disagree on the outlook for inflation and deflation, this is not a good signal that anyone there knows what's going to happen. In fact, they don't.
The Best Money Can Buy
by Robert Michaels
Hear my story, all this is true,
It's not meant to make you feel sad or blue,
When you know the truth, you might find it quite funny,
That the entire world is actually based on money.
China owns more than half of U.S. debt,
But how much money will that country really get
When the Fed prints money by the hour
The dollar loses all its power,
It's a theory Fed Chair Ben Bernanke does not seem to get.
The members of the Federal Reserve, this is great, they disagree,
That doesn't bode well for you and me,
Will the economy inflate or deflate, do we buy gold bullion?
the Kansas City Fed President said the biggest banks are still overleveraged by about $5 trillion--(that's dollars).
California paid China in its IOUs
‘Cause JP Morgan Chase, Bank of America and Wells Fargo took care of their dues,
So these overleveraged banks now own the golden state,
Wonderful--too little, too late.
But, for some,
this might be good news,
California is thinking of making marijuana legal
That would cure the state's blues,
For that matter, make it legal across the country,
so the federal government can tax it as they choose.
After all, don’t you feel we are all just the best money can buy?
America’s bought and sold on one big lie,
The U.S. can’t seem to make a car and—
We won’t go very far,
‘Cause--we’ll have loads of debt
No matter how hard we try.
Now, did you hear about those toxic loans?
I know you did--we still have them--I hear all the groans.
Foreclosures are in the millions
Government programs costing trillions
And our Treasury Secretary, Tim Geithner’s on the phone to Ben,
To print more money for the banks (and his buddies) to lend
Yeah, right. I'm sure a lot of businesses will see those loans.
Let’s face it, we have a role in this.
You and I bought lots of merchandise,
And for all that debt, we need to compromise,
So now let’s stop the debt,
And let’s all make a bet,
That without material things, we can still feel alive and well,
And tell all those frickin' banks they can to go to hell.
Because, as long as bankers have all the dough,
They won't let the rest of us know,
The truth about the government,
And how our tax money is spent
By politicians who are on the take.
Just how much money do all these power-mongers make?
That really is, my country ‘tis of thee
Our sweet land of liberty,
But they raise the cost for you and me,
And pocket the proceeds don't you see.
Don't let the government tell you to start spending,
So they can act like the banks will start lending.
Then we remain slaves to debt,
Adding to credit card payments we never met.
I'm talking about interest rates we never knew were there,
Let me ask you, is that really fair?
And, when that credit card legislation went through
That one that would lower interest rates, too.
Oh, that's right, it's happening next year,
A little too late, indeed, I fear.
So that's my tale, hope it wasn't too long,
But how much longer can this charade go on?
Our expenses are bad--that much is true,
But behave and save, and who knows what you can do?
And, here's the bright spot, this part is really quite funny,
You and I just don't need a lot of money.
For example, love is free for you and me,
Love yourself, keep the faith in this land of liberty,
Appreciate the world, the people, the land and sea,
And you'll understand inside what each of us can and will always be.
Otherwise, you'll just feel we are the best money can buy,
America bought and sold on one big lie,
In a global economy, the U.S. can’t seem to make a car and—
Without universal healthcare our future entrepreneurs won’t go very far,
Because we'll be on the path we're taking right now,
with loads of debt to pay off,
and who in the world knows how?
The biggest concern of the weekend is that when two Federal Reserve presidents disagree on the outlook for inflation and deflation, this is not a good signal that anyone there knows what's going to happen. In fact, they don't.
Wednesday, September 2, 2009
30 Years of Debt Down the Drain
Let me refer you, once again, to Karl Denninger's The Market Ticker and his article on the current debt crisis created with the help of greedy consumers and financial institutions. We all want to at least appear wealthy, but money outside of your normal income comes at a price...unless, of course, you're talking about the U.S. dollar's future, which will soon have no value at all. Fact is, those times we once called "prosperity" in the 1980s and 1990s...and the outrageous behavior of the past decade show up in The Foolishness of CNBC's Economic Analysis. Being the fiscal conservative I am, I appreciate the article.
However, in another one of Denninger's rants, McStupid: Mortgage Bankers Association, I disagree with his argument that a 20 percent downpayment on a house is the only way to assure housing does not get into a bubble. That's ultra fiscal conservative and can do harm to the overall economy.
Granted, some people should not be in homes and, yes, many borrowers should not have been homeowners in this crisis, but some people just don't have 20 percent downpayments lying around.
In some instances, fiscally responsible people can invest in a home, make payments and increase their equity by putting 5 percent down. The key is that they show character, capacity and capability to repay their loan. Usually, that's found in credit reports with high scores.
The other fault Denninger has, as does Suze Orman, is that the 15-year loan might have a lower interest rate, pay off the mortgage faster and increase equity 50 percent quicker, but it also does not leave much room for emergencies (i.e. car breakdowns, broken water heaters, broken air conditioners, etc).
Here's a fact--ONE EXTRA MORTGAGE PAYMENT per YEAR, APPLIED TO PRINCIPAL = an 18-YEAR PAYOFF on a 30-YEAR MORTGAGE. That way, you can pay it off when you have the resources or use those funds in case of an emergency. Why are you going to strap yourself into payments that, indeed, you may not be able to afford.
It may not seem this way right now, but homeownership does and will have future advantages. Owning as an investment, for the right reasons, will always be more advantageous than throwing away money each month. And, the right reasons include living in house and making it a home. Not treating a house like it's a stock certificate to be flipped or traded.
Everyone is to blame in this credit crisis, including the borrowers and consumers who, like the wizards of Wall Street, have a human propensity for greed. It's in our nature to want what we can't have and when we can have it, it comes at a cost. And, as Denninger's article and chart point out, we are now deleveraging and paying the price.
However, in another one of Denninger's rants, McStupid: Mortgage Bankers Association, I disagree with his argument that a 20 percent downpayment on a house is the only way to assure housing does not get into a bubble. That's ultra fiscal conservative and can do harm to the overall economy.
Granted, some people should not be in homes and, yes, many borrowers should not have been homeowners in this crisis, but some people just don't have 20 percent downpayments lying around.
In some instances, fiscally responsible people can invest in a home, make payments and increase their equity by putting 5 percent down. The key is that they show character, capacity and capability to repay their loan. Usually, that's found in credit reports with high scores.
The other fault Denninger has, as does Suze Orman, is that the 15-year loan might have a lower interest rate, pay off the mortgage faster and increase equity 50 percent quicker, but it also does not leave much room for emergencies (i.e. car breakdowns, broken water heaters, broken air conditioners, etc).
Here's a fact--ONE EXTRA MORTGAGE PAYMENT per YEAR, APPLIED TO PRINCIPAL = an 18-YEAR PAYOFF on a 30-YEAR MORTGAGE. That way, you can pay it off when you have the resources or use those funds in case of an emergency. Why are you going to strap yourself into payments that, indeed, you may not be able to afford.
It may not seem this way right now, but homeownership does and will have future advantages. Owning as an investment, for the right reasons, will always be more advantageous than throwing away money each month. And, the right reasons include living in house and making it a home. Not treating a house like it's a stock certificate to be flipped or traded.
Everyone is to blame in this credit crisis, including the borrowers and consumers who, like the wizards of Wall Street, have a human propensity for greed. It's in our nature to want what we can't have and when we can have it, it comes at a cost. And, as Denninger's article and chart point out, we are now deleveraging and paying the price.
Tuesday, September 1, 2009
U.S. Bought and Sold
Here's a real good article today from Paul Farrell of Marketwatch.com titled "Democracy is dead ... lobbyists rule America."
http://www.marketwatch.com/story/16-credos-for-our-new-lobbyist-nation-2009-09-01
It's so true, too. After all, everyone at this point knows the change in Financial Accounting Standards Board rules now make insolvent banks look solvent. Plus, if there were mark-to-market rules still, I was told by one of my sources close to the situation that 3,000 banks would fail right now. That's right--3,000 BANKS out of 8,000 would fail right now based on assets that are worth far less because property values dropped.
So, when you hear that Shittybank turned a profit or made any sort of revenue, look up FAS 157 in the accounting books to see how they were able to make loan losses into gains. This is a joke. 3,000 banks are insolvent, we'll find out that unemployment increased considerably last month, the stock market is on the verge of another downfall by about 1,000 points--at least--and there are no new jobs out there.
On top of that, consumer spending was not as good as thought. August month-over-month spending declined and year-over-year fell as well. From Ken Denninger's Market Ticker today:
ICSC-Goldman Store Sales
Released on 9/1/2009 7:45:00 AM For wk8/29, 2009
Prior
Actual
Store Sales - W/W change
0.6 %
-0.5 %
Store Sales - Y/Y
-0.2 %
-0.7 %
HighlightsAugust chain-store sales ended up being a disappointment, according to ICSC-Goldman's same-store tally which fell 0.5 percent in the Aug. 29 week for a minus 0.7 percent year-on-year rate.
The report down plays the impact of back-to-school calendar shifts and stresses the overall trend which it said is not improving. The report isn't making a call for month-to-month sales. Redbook is up next.
Definition: This weekly measure of comparable store sales at major retail chains, published by the International Council of Shopping Centers, is related to the general merchandise portion of retail sales. It accounts for roughly 10 percent of total retail sales. Why Investors Care
As Denninger said: What back-to-school sales?
That's right. Can you say "deflation"? Knew you could. How about this one: "Japan's Lost Decade." See what happened there earlier this week? A major political overhaul. Let's face it, the Japanese are getting tired of living through a 20-year recession. Well, guess what our future is going to be?
You see, the person very close to what is going on not only told me that 3,000 banks would fail under normal FASB mark-to-market rules but he also said that changing the accounting rules and trying to hide all the bad loans is exactly what Japan did when the same thing happened to them in the late 1980s. It is the same thing we are doing now.
Get ready for a lost decade--possibly more--unless something can be done about these useless assets that, in some cases, may never get back to their original value. Another source very close to the action said he sees property values not returning to 2007 levels until 10-15 years down the road. Just how long can we go without businesses getting loans so that they can employ people with borrowed money?
On the bright side, my source said Neil Barofsky's report on the $24.7 trillion the Fed could spend on this crisis would mean that everyone of these crappy assets were worth zero and that just is not the case. Still, one-fourth of that amount, 25 percent, is more than $6.1 trillion. If assets will not return to 2007 value until 2019-2024, what are these banks going to do? What is the federal government going to do?
However, my source did say the Congressional Oversight Panel's August report on the Risk of Continued Troubled Assets is worth the reading. Elizabeth Warren, who I very much admire as does my source, and her group hit the nail on the head--something needs to be done about these assets or else. How did that song go? I think I'm turning Japanese, I think I'm turning Japanese--I really think so. Very prophetic.
So, how does this relate to Paul Farrell's article. The guys who created these toxic assets, the ones now holding these assets, are not only bailed out to do the same thing, but they're getting rewarded for screwing up the entire economy. They not only still have jobs while millions of others don't, they're getting bonuses.
As for the future of this country, so far, it business as usual in D.C.
If you're an executive still trading derivatives or the ones who packaged crappy loans on Wall Street, or a government executive running the country, way to go--you'll still have an abundance of wealth even though you helped completely screw up the economy. But, of course, you understand it, so we need you to fix it. Right.
In this greedy bizarro world called the U.S., failure is success for the entitled class.
Meanwhile, you can yell at your kids' teachers, who won't make near the amount of money you're making, use your money and influence to get your kid an A when they really deserved an F. After all, you're entitled. You got the same deal from the Treasury and Federal Reserve.
http://www.marketwatch.com/story/16-credos-for-our-new-lobbyist-nation-2009-09-01
It's so true, too. After all, everyone at this point knows the change in Financial Accounting Standards Board rules now make insolvent banks look solvent. Plus, if there were mark-to-market rules still, I was told by one of my sources close to the situation that 3,000 banks would fail right now. That's right--3,000 BANKS out of 8,000 would fail right now based on assets that are worth far less because property values dropped.
So, when you hear that Shittybank turned a profit or made any sort of revenue, look up FAS 157 in the accounting books to see how they were able to make loan losses into gains. This is a joke. 3,000 banks are insolvent, we'll find out that unemployment increased considerably last month, the stock market is on the verge of another downfall by about 1,000 points--at least--and there are no new jobs out there.
On top of that, consumer spending was not as good as thought. August month-over-month spending declined and year-over-year fell as well. From Ken Denninger's Market Ticker today:
ICSC-Goldman Store Sales
Released on 9/1/2009 7:45:00 AM For wk8/29, 2009
Prior
Actual
Store Sales - W/W change
0.6 %
-0.5 %
Store Sales - Y/Y
-0.2 %
-0.7 %
HighlightsAugust chain-store sales ended up being a disappointment, according to ICSC-Goldman's same-store tally which fell 0.5 percent in the Aug. 29 week for a minus 0.7 percent year-on-year rate.
The report down plays the impact of back-to-school calendar shifts and stresses the overall trend which it said is not improving. The report isn't making a call for month-to-month sales. Redbook is up next.
Definition: This weekly measure of comparable store sales at major retail chains, published by the International Council of Shopping Centers, is related to the general merchandise portion of retail sales. It accounts for roughly 10 percent of total retail sales. Why Investors Care
As Denninger said: What back-to-school sales?
That's right. Can you say "deflation"? Knew you could. How about this one: "Japan's Lost Decade." See what happened there earlier this week? A major political overhaul. Let's face it, the Japanese are getting tired of living through a 20-year recession. Well, guess what our future is going to be?
You see, the person very close to what is going on not only told me that 3,000 banks would fail under normal FASB mark-to-market rules but he also said that changing the accounting rules and trying to hide all the bad loans is exactly what Japan did when the same thing happened to them in the late 1980s. It is the same thing we are doing now.
Get ready for a lost decade--possibly more--unless something can be done about these useless assets that, in some cases, may never get back to their original value. Another source very close to the action said he sees property values not returning to 2007 levels until 10-15 years down the road. Just how long can we go without businesses getting loans so that they can employ people with borrowed money?
On the bright side, my source said Neil Barofsky's report on the $24.7 trillion the Fed could spend on this crisis would mean that everyone of these crappy assets were worth zero and that just is not the case. Still, one-fourth of that amount, 25 percent, is more than $6.1 trillion. If assets will not return to 2007 value until 2019-2024, what are these banks going to do? What is the federal government going to do?
However, my source did say the Congressional Oversight Panel's August report on the Risk of Continued Troubled Assets is worth the reading. Elizabeth Warren, who I very much admire as does my source, and her group hit the nail on the head--something needs to be done about these assets or else. How did that song go? I think I'm turning Japanese, I think I'm turning Japanese--I really think so. Very prophetic.
So, how does this relate to Paul Farrell's article. The guys who created these toxic assets, the ones now holding these assets, are not only bailed out to do the same thing, but they're getting rewarded for screwing up the entire economy. They not only still have jobs while millions of others don't, they're getting bonuses.
As for the future of this country, so far, it business as usual in D.C.
If you're an executive still trading derivatives or the ones who packaged crappy loans on Wall Street, or a government executive running the country, way to go--you'll still have an abundance of wealth even though you helped completely screw up the economy. But, of course, you understand it, so we need you to fix it. Right.
In this greedy bizarro world called the U.S., failure is success for the entitled class.
Meanwhile, you can yell at your kids' teachers, who won't make near the amount of money you're making, use your money and influence to get your kid an A when they really deserved an F. After all, you're entitled. You got the same deal from the Treasury and Federal Reserve.
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