Subprime Credit Crunch Could Trigger Collapse

[bart]

Re: Subprime Credit Crunch Could Trigger Collapse

That means by 2008, if not sooner.

And speaking of sooner, and also to back up Aaron's great work, here's the current weekly picture of all 5 major types of credit showing annual rates of change.

The take away is simple - all five are down trending and two or three have dropped rather sharply in the last few weeks, and reflect the same basic sub prime issue that Aaron noted. This is a very key development in my book and if the Fed & Treasury don't do some fairly large hot money injections over the next few weeks, I think we're within a few weeks (by mid March at the latest) of a significant world wide correction.

[Charles Mackay]

Re: Subprime Credit Crunch Could Trigger Collapse

I strongly recommend this lecture by Michael Hudson. (Warning for Jim Nickerson: Michael makes me sound like a Wall Street cheerleader!)

Well, that was a real breath of fresh air! It gives me additional reason to believe that I haven't gone completely off my rocker like my friends and family say I have. I liked the part where he said that interest rates can't go any lower because interest rates are set by whatever rate is necessary to stabilize the currency. amen to that! The new vigilante is the dollar rate and gold. The old vigilante (bonds) are passé in the era of Goldman rigged carry trade and derivatives.

[DanielLCharts]

Re: Subprime Credit Crunch Could Trigger Collapse

in the era of Goldman rigged carry trade

hmmm, maybe a little off your rocker.

[akrowne]

Re: Subprime Credit Crunch Could Trigger Collapse

Thanks for the great charts, Bart. Interesting stuff.. this makes sense: credit is contracting (or at least, growth is slowing down) of its own accord, so the domestic powers-that-be are pumping whatever they can (showing up in M3).

By the way, I've noticed that FCBs seem to predictably rotate out of Treasuries into Agencies, as an ongoing pattern. Do you have any theory as to why this is?

There's a similar pattern where foreign private parties follow foreign official in their buying patterns, with something like a one-year lag.

[bart]

Re: Subprime Credit Crunch Could Trigger Collapse

Thanks for the great charts, Bart. Interesting stuff.. this makes sense: credit is contracting (or at least, growth is slowing down) of its own accord, so the domestic powers-that-be are pumping whatever they can (showing up in M3).

By the way, I've noticed that FCBs seem to predictably rotate out of Treasuries into Agencies, as an ongoing pattern. Do you have any theory as to why this is?

There's a similar pattern where foreign private parties follow foreign official in their buying patterns, with something like a one-year lag.

Some excellent work on your part with that tracking via your Implode-o-meter too. Great title, some definite wry grins from here.

Pumping wise, yes the permanent repo and Eurodollar growth rates are sure way up there in M3. We've also had some major hot money pumping going on with TOMOs and TIOs since last June or so too. The daily balance totals have exceeded $100 billion on many occasions - one of those periods just ended a few days ago.
No guarantees of course, but the current credit pattern sure looks similar to 2000 and early 2001.

My primary theory on the FCB agency purchasing pattern is somewhat tinfoil hat enhanced - there are real housing assets behind them, whereas Treasuries have no fundamental longer term floor.

Very much true on foreign private parties following foreign official ones in their buying patterns with a lag. One of the better examples of that is the IMF's COFER data showing FCB's US dollar holding percentagess. FCB's moved way before almost anyone else.

[jk]

Re: Subprime Credit Crunch Could Trigger Collapse

re: fcb's moving to agencies. i think that over the time the fcb's are becoming more "daring." it's like in the 1980's and early '90's, it was said that corporate equipment buyers would never get fired for buying ibm. then they learned that other equipment was reliable and a much better bargain. the fcb's bought treasuries in the past, now they buy agencies but they TALK about maybe, someday, buying equities!

re: private foreign purchases v fcb purchases of treasuries and agencies. i think the fcb's buy while the dollar is declining. at those times private investors won't buy, and the fcb's are supporting the dollar. when the dollar started rising in 2005, likely 2o to the tax break for u.s. corps repatriating profits, fcb's no longer had to buy to support the dollar. but then private investors, with assets magnified by the carry trade, jumped in to ride the dollar and the interest rate spreads.

[Rajiv]

Re: Subprime Credit Crunch Could Trigger Collapse

Here is the corrected URL for Michael Hudson's Real Estate: Growth, Crash, or Soft Landing?

[DanielLCharts]

Re: Subprime Credit Crunch Could Trigger Collapse

That chart looks gruesome, but why not wait for some signs that we are actually in a recession before entertaining thoughts of a collapse. You're putting the carriage before the horse my friend with wild statements like, :eek: "Subprime Credit Crunch Could Trigger Collapse" :eek: . It's possible, but lets see a recession first.

[Finster]

Re: Subprime Credit Crunch Could Trigger Collapse

My primary theory on the FCB agency purchasing pattern is somewhat tinfoil hat enhanced - there are real housing assets behind them, whereas Treasuries have no fundamental longer term floor.

In addition to that, it may have not escaped their notice that over the past few years, a lot of the dollar buying power driving their export markets has come from mortgage financing ... all their bond buying depresses interest rates, but that going to the mortage market may have a more direction connection ...

[c1ue]

Re: Subprime Credit Crunch Could Trigger Collapse

And the Fed has little choice to do what it's doing, or the dollar might suffer an extreme rout. And maybe someone over there knows what's really going on with inflation. The other day I opened the AJC and there was a nice table of cable rate increases for the last half decade. Despite the fact that the cable company is heavily-regulated, the rate increases were approximately 6% a year.

Why would that be, if inflation was not at least at that level?

In fact, real estate finance people should be thankful for 5.25%.

I did an informal survey of 5 people I know well.

Question:

What is your recollection of monthly grocery bills in 1996 vs. today?

Answer: (no particular order)

1) single man now, previously family of 3
1996: $150
2007: $400 (note this is feeding fewer people)

2) single man
1996: $100
2007: $200

3) married couple with 2 children now, married couple w/o children then
1996: $150
2007: $500

4) married couple now, single then
1996: $100
2007: $300

5) married couple then, single woman now
1996: $250
2007: $200

Obviously there are some assumptions here: that the 'basket' of food purchased is essentially identical between 1996 and now (no 'Whole Paycheck' customers included here). Also, since this is a verbal survey, no independent validation.

However, individual items reviewed show many items which are significantly higher even in this 10 year period: Bread, orange juice, meat

Other items are relatively less - but are closely regulated/monopolized: sugar, milk

[Jim Nickerson]

Re: Subprime Credit Crunch Could Trigger Collapse

I did an informal survey of 5 people I know well.

Question:

What is your recollection of monthly grocery bills in 1996 vs. today?

Answer: (no particular order)

1) single man now, previously family of 3
1996: $150
2007: $400 (note this is feeding fewer people)

2) single man
1996: $100
2007: $200

3) married couple with 2 children now, married couple w/o children then
1996: $150
2007: $500

4) married couple now, single then
1996: $100
2007: $300

5) married couple then, single woman now
1996: $250
2007: $200

Obviously there are some assumptions here: that the 'basket' of food purchased is essentially identical between 1996 and now (no 'Whole Paycheck' customers included here). Also, since this is a verbal survey, no independent validation.

However, individual items reviewed show many items which are significantly higher even in this 10 year period: Bread, orange juice, meat

Other items are relatively less - but are closely regulated/monopolized: sugar, milk

I was single in 1996 and spent 231 bonars/month for food. For 2006, my wife and I spent 278 bonars/month. Neither of us are big eaters nor fat. I shopped almost exclusively at Albertson's in 1996, today we buy most food from Walmarts and Sams--not because I feel we have to, but because one just spends less money doing that.

In 1996, age 55, I spent $1,867 for health insurance, and in 2005 we spent $9056 with $5000 deductible on me and $2500 deductible on wife. I used 2005 because I came under Medicare for last four months of 2006, which reduced the outlay by $2400 for the year. What you eat might kill you, but what one must pay for health insurance will definitely "kill" what one might otherwise contribute in consumer spending to the GDP or personal savings. Heaven help those who are sick despite having health insurance, cause the health insurance leaves a whole lot that is not covered. Something else I have gleaned from health insurance: it saves one from some liability to the onerous fees charged by providers by the amounts the insurors' disallow of what is charged by providers whether paid by the insurance or the patient.

The country doesn't need to do much about the cost of food; it needs to do a whole lot about the cost of health care.

[akrowne]

Re: Subprime Credit Crunch Could Trigger Collapse

Daniel:

I think it is perfectly valid to postulate that something could trigger system-wide failure. If no one is going to say it, it's just going to be that much more of a suprise if and when it happens. I have nothing to lose, so I don't mind being "that guy".

That said, I don't buy the NBER's recession-tagging policy, nor the key data it is founded upon. I consider us already in a recession by general social health (crime levels, income distribution, etc), actual GDP (adjusted for realistic levels of median, long-term average inflation), and jobs.

The latter may be surprising to you. With the latest benchmarket adjustment, employment supposedly grew an avg of more than 180k jobs/month last year, whereas about 150k are needed to keep up with population growth. But (1) there are fewer "real" jobs, given high levels of marginal employment (compulsory part-timers), and (2) most of the ~5 million "real" jobs created in this recovery are due to government expansion, health care, or housing related. In sum, all bubble-based, directly tied to the recent accelerated bulk borrowing of this country, and thus which will largely have to be given back. This is not structural growth.

See http://br.endernet.org/~akrowne/econ...v_propping.png, http://br.endernet.org/~akrowne/econ...r_force-05.gif

[spunky]

Re: Subprime Credit Crunch Could Trigger Collapse

Daniel:

I think it is perfectly valid to postulate that something could trigger system-wide failure. If no one is going to say it, it's just going to be that much more of a suprise if and when it happens. I have nothing to lose, so I don't mind being "that guy".

That said, I don't buy the NBER's recession-tagging policy, nor the key data it is founded upon. I consider us already in a recession by general social health (crime levels, income distribution, etc), actual GDP (adjusted for realistic levels of median, long-term average inflation), and jobs.

The latter may be surprising to you. With the latest benchmarket adjustment, employment supposedly grew an avg of more than 180k jobs/month last year, whereas about 150k are needed to keep up with population growth. But (1) there are fewer "real" jobs, given high levels of marginal employment (compulsory part-timers), and (2) most of the ~5 million "real" jobs created in this recovery are due to government expansion, health care, or housing related. In sum, all bubble-based, directly tied to the recent accelerated bulk borrowing of this country, and thus which will largely have to be given back. This is not structural growth.

See http://br.endernet.org/~akrowne/econ...v_propping.png, http://br.endernet.org/~akrowne/econ...r_force-05.gif

I totally agree.

[DemonD]

Re: Subprime Credit Crunch Could Trigger Collapse

(emphasis added)

The latter may be surprising to you. With the latest benchmarket adjustment, employment supposedly grew an avg of more than 180k jobs/month last year, whereas about 150k are needed to keep up with population growth. But (1) there are fewer "real" jobs, given high levels of marginal employment (compulsory part-timers), and (2) most of the ~5 million "real" jobs created in this recovery are due to government expansion, health care, or housing related. In sum, all bubble-based, directly tied to the recent accelerated bulk borrowing of this country, and thus which will largely have to be given back. This is not structural growth.

So does that put you in the deflation camp then Aaron? Or do you think this will cause the disinflation-hyperinflation scenario?

[miju]

Re: Subprime Credit Crunch Could Trigger Collapse

You must make the difference between the ethical question of predatory lending and the economical consequences. i suppose that unfortunately the low income class will support both (no ethical approach and bankruptcies). but for the whole economy it is not obvious. Will the subprime collapse infect everybody ? may be the US economy is largely diversified to absorb this shock.
regards
Miju