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June 19, 2007 (iTulip)
This from an iTulip letter writer today. Can you blame her?
iTulip readers started to read about the housing bubble here August 2002 so they can be forgiven for losing patience reading coverage of the whole predictable ugly debacle five years later. While chronicling the decline makes good doomer press, it's too late now for readers to do much about it. iTulip's Sean O'Toole will tell you his response to iTulip's coverage was to sell his CA properties in mid 2005 at a huge profit and start his foreclosureradar.com business.
The Twin Debacles
June 15, 2007 (Daniel Gross - Slate.com)
How the housing collapse is like the Iraq war
What do Iraq and the U.S. housing market have in common? At first blush, not much. Iraq, which has taken the lives of thousands and ruined America's reputation abroad, is far more disastrous than the housing collapse, which has been merely financially devastating.
Nonetheless, the twin debacles, which are defining the foreign policy and domestic economy of the second Bush term, have significant similarities, especially in the way that their public- and private-sector architects and promoters have behaved. Iraq and the housing market offer a case study in how two phenomena can go from being extremely popular to deeply unpopular in a matter of months. And with Iraq having turned into a disaster about two years before housing did, the way Iraq is playing out in the culture may predict what will happen in housing.
Moving to within six months of iTulip's usual one to two year range of future focus, here we start to see evidence of cluefullness on the late 2007 recession that we determined October 2006 is due in Q4 2007.June 15, 2007 (Daniel Gross - Slate.com)
How the housing collapse is like the Iraq war
What do Iraq and the U.S. housing market have in common? At first blush, not much. Iraq, which has taken the lives of thousands and ruined America's reputation abroad, is far more disastrous than the housing collapse, which has been merely financially devastating.
Nonetheless, the twin debacles, which are defining the foreign policy and domestic economy of the second Bush term, have significant similarities, especially in the way that their public- and private-sector architects and promoters have behaved. Iraq and the housing market offer a case study in how two phenomena can go from being extremely popular to deeply unpopular in a matter of months. And with Iraq having turned into a disaster about two years before housing did, the way Iraq is playing out in the culture may predict what will happen in housing.
Report from UCLA team skirts the R-word
June 19, 2007 (Annette Haddad - LA Times)
The sluggish housing market is starting to drag down the rest of the economy, leading UCLA forecasters to conclude that although the U.S. is not actually in a recession, "it is certainly close."
Even Professor Ben Bernanke appears to be starting to get a clue, if for no other reason to lay the foundation for future rate cuts without the Fed accidentally crashing the bond market... again (pdf).June 19, 2007 (Annette Haddad - LA Times)
The sluggish housing market is starting to drag down the rest of the economy, leading UCLA forecasters to conclude that although the U.S. is not actually in a recession, "it is certainly close."
Bernanke hints at thinking on housing
June 15, 2007 (Krishna Guha- FT)
Changes in house prices could have a bigger effect on consumption than the traditional “wealth effect” suggests, Ben Bernanke said on Friday in comments that offer some insight into how the Federal Reserve may think about the continuing problems in the US housing market.
One constant source of irritation for us at iTulip is boneheaded coverage of government stats. C'mon, guys. Is it really that friggin' hard? Why report the weather warmer in June than in March? How about using a little common sense and report the weather in June versus June last year, or for all the Junes going back 20 years? June 15, 2007 (Krishna Guha- FT)
Changes in house prices could have a bigger effect on consumption than the traditional “wealth effect” suggests, Ben Bernanke said on Friday in comments that offer some insight into how the Federal Reserve may think about the continuing problems in the US housing market.
Not like this...
Permits, considered a good barometer of future activity, rose by 3 percent in May but that followed a huge 7.1 percent plunge in April.
Like this...Permits are down 28% in the past 12 months, while starts are down 16%.
Economists generally consider permits to be a better indicator of building activity than starts, which can be influenced heavily by weather. The sampling error on permits is lower as well, at plus or minus 1.4%.
Some financial writers get it. Steven Rattner's June 18, 2007 warning on the credit bubble is as historic as the article published by Business Week, September 7, 1929, below. Compare the two and you will see two relevant similarities: excessive optimism and over-leveraged banks. The statement "brokers' loans swell till they absorb a third of the banking resources of the country" has a familiar ring along side "Between Jan. 1 and April 19, $115 billion of debt was repriced, representing 29% of all bank loans in the U.S." In both cases, borrowed money, enabled by a temporary suspension of any reasonable fear of loss, is used to finance the visions of entrepreneurs and financiers. There is a fine line between a vision and a mirage, and it is only a scarcity of money relative to the desire for it that allows the marketplace to make the distinction. When money is free, men become slaves of any desire, good or ill. Else speculation reaches only the political bounds set by central banks, usually delimited by tax policy, thus the sudden recent interest in private equity capital gains taxes. Economists generally consider permits to be a better indicator of building activity than starts, which can be influenced heavily by weather. The sampling error on permits is lower as well, at plus or minus 1.4%.
To answer your question, Steve: many innocent bystanders will share their pain.
| The Coming Credit Meltdown By STEVEN RATTNER, Wall Street Journal June 18, 2007; Page A17 The subprime mortgage world has been reduced to rubble with no lasting impact on another, larger, credit market dancing on an equally fragile precipice: high-yield corporate debt. In this fast-growing arena of loans to business -- these days, mostly, private equity deals -- lending proceeds as if the subprime debacle were some minor skirmish in a little known, far away land. How curious that so many in the financial community should remain blissfully oblivious to live grenades scattered around the high-yield playing field. Amid all the asset bubbles that we've seen in recent years -- emerging markets in 1997, Internet and telecoms stocks in 2000, perhaps emerging markets or commercial real estate again today -- the current inflated pricing of high-yield loans will eventually earn quite an imposing tombstone in the graveyard of other great past manias. In recent months, lower credit bonds -- conventionally defined as BB+ and below -- have traded at a smaller risk premium (as compared to U.S. Treasuries) than ever before in history. Over the past 20 years, this margin averaged 5.42 percentage points. Shortly before the Asian crisis in 1998, the spread was hovering just above 3 percentage points. Earlier this month, it touched down at a record 2.63 percentage points. That's less than 8% money for high-risk borrowers. So robust has the mood become that providers of loans now rush to offer "repricing" at ever lower rates, terrified that borrowers will turn to others to refinance their loans, leaving the original lenders with cash on which they will earn even less interest. Between Jan. 1 and April 19, $115 billion of debt was repriced, representing 29% of all bank loans in the U.S. The low spreads have been accompanied by less tangible indicia of imprudent lending practices: the easing of loan conditions ("covenants," as they are known in industry parlance), options for borrowers to pay interest in more paper instead of cash, financings to deliver large dividends to shareholders (generally private equity firms) and perhaps most importantly, a general deterioration in the credit quality of borrowers. In 2006, a record 20.9% of new high-yield lending was to particularly credit-challenged borrowers, those with at least one rating starting with a "C." So far this year, that figure is at 33%. No exaggeration is required to pronounce unequivocally that money is available today in quantities, at prices and on terms never before seen in the 100-plus years since U.S. financial markets reached full flower. Led by private equity, borrowers have rushed to avail themselves of seemingly unlimited cheap credit. From a then-record $300 billion in 2005, new leveraged loans reached $500 billion last year and are pacing toward another quantum leap in 2007. Even leading buyers of loans, such as Larry Fink, chief executive of BlackRock, say "we're seeing the same thing in the credit markets" that set the stage for the fall of the subprime loan market. Why should so many theoretically sophisticated lenders be willing to bet so heavily in a casino with particularly poor odds? Strong economies around the world have pushed default rates to an all-time low, which has in turn lulled lenders into believing these loans are safer than they really are. Just 0.8% of high-yield bonds defaulted last year, the lowest in modern times. And with only three defaults so far this year, we've luxuriated in the first default-free months since 1997. By comparison, high-yield default rates have averaged 3.4% since 1970; higher still for paper further down the totem pole. Like past bubbles, the current ahistorical performance of high-yield markets has led seers and prognosticators to proclaim yet another new paradigm, one in which (to their thinking) the likelihood of bankruptcy has diminished so much that lenders need not demand the same added yield over the Treasury or "risk-free" rate that they did in the past. To be sure, the emergence in the past 20 years of more thoughtful policy making may well have sanded the edges off of economic performance -- what some economists call "the Great Moderation" -- thereby reducing the volatility of financial markets and consequently the amount of extra interest that investors need to justify moving away from Treasuries. But to think that corporate recessions -- and the attendant collateral damage of bankruptcies among overextended companies -- have been outlawed would be as foolhardy as believing that mortgages should be issued to home buyers with no down payments and no verification of financial status. And just as the unwinding of the subprime market occurred at a time of economic prosperity, the high-yield market could readily unravel before the next recession. With the balance sheets of many leveraged buyouts strung taut, a mild breeze could topple a few, causing the value of many leveraged loans to tumble as shaken lenders reconsider their folly. The surge in junk loans has also been fueled by a worldwide glut of liquidity that has descended more forcefully on lending than on equity investing. Curiously, investors seem quite content these days to receive de minimis compensation for financing edgy companies, while simultaneously fearing equity markets. The price-to-earnings ratio for the S&P 500 index is currently hovering right around its 20-year average of 16.4, leagues below the 29.3 times it reached at the height of the last great equity bubble in 2000. Some portion of this phenomenon seems to reflect tastes in Asia and elsewhere, where much of the excess liquidity resides: Foreign investors own only about 13% of U.S. equities but 43% of Treasury debt. In search of higher yields, these investors are moving into corporate and sovereign debt. Today, the debt of countries like Colombia trades at less than two percentage points above U.S. Treasuries, compared to 10 percentage points five years ago. Perhaps the mispricing of high-yield debt has been exacerbated by the surge in derivatives, a generally useful lubricant of the financial markets. Banks hold far fewer loans these days; mostly, they resell them, often to hedge funds, which frequently layer on still more leverage, thereby exacerbating the risks. Another popular destination is in new classes of securities where the loans have been resliced to (theoretically) tailor the risk to specific investor tastes. But in the case of subprime mortgages, this securitization process went awry, as buyers and rating agencies alike misunderstood the nature of the gamble inherent in certain instruments. Assessing the likely consequences of a correction is more daunting than merely predicting its inevitability. The array of lenders with wounds to lick is likely to be far broader than we might imagine, a result of how widely our increasingly efficient capital markets have spread these loans. No one should be surprised to find his wallet lightened, whether out of retirement savings, an investment pool or even the earnings on their insurance policy. The bigger -- and harder -- question is whether the correction will trigger the economic equivalent of a multi-car crash, in which the initial losses incur large enough damages to sufficiently slow spending enough to bring on recession, much like what happened during the telecom meltdown a half-dozen years ago. But we have little choice but to sit back and watch this car accident happen. It would have been a mistake to dispatch the Federal Reserve to deflate the dot-com mania or the housing bubble. And it would be a mistake now for the Fed to rescue imprudent high-yield lenders. They have to learn the hard way. Hopefully, not too many innocent bystanders will share their pain. Mr. Rattner is managing principal of the private investment firm Quadrangle Group LLC | Business Week - September 7, 1929 For five years, at least, American business has been in the grip of an apocalyptic, holy-rolling exaltation over the unparalleled prosperity of the "new era," upon which we, or it, or somebody has entered. Discussions of economic conditions in the press, on the platform, and by public officials have carried us into a cloudland of fantasy where all appraisal of present and future accomplishment is suffused with the vague implication that a North American millenium is imminent. Clear, critical, realistic and rational recognition of current problems and perplexities is rare. Changes in the structure and processes of American industry and trade have been swift and sweeping, as the President's Committee on Recent Economic Changes has so well shown. Have these changes fundamentally altered the conditions of economic security and progress for either the individual business man or the nation? The simple truth is that we do not know. The Committee was honest and scientific enough to say so. American business should be sane and sensible enough to recognize it. There is not a single new and important development in our economic life in recent years of which we can confidently calculate the consequences or judge the soundness and permanence. We have seen an amazing increase in man-hour production in industry since the war, but we do not know why it took place then, or whether it was merely a resumption of a rise, quite as rapid, that had been going on for fifty years before the war. We certainly do not know how long or rapidly it can continue, or, if it does, whether and how the problems of adjusting employment and consumer purchasing power to it will be met. We have seen new industries rise like rockets, and old ones grow tired and die. We do not know how soon the new ones will fizzle out, or what others will take their place. We have seen the machinery of distribution formed and reformed into new patterns changing every day before our eyes, but no one can say precisely where they leave the consumer and the independent enterpriser, or whether they will fundamentally alter the costs of distribution or mitigate the rigors of commercial competition. We have seen security prices soar out of sight of earnings, brokers' loans swell till they absorb a third of the banking resources of the country, and the blind pools of ancient days return and multiply by endless crossing and pyramiding as the investment trusts of today. Banks merge and emerge in chains, trailing trusts and holding companies, while industrial corporations pay dividends not by producing goods but by buying each others' stocks and by borrowing and lending everybody's money in the market. But of all these things can anyone say with surety what they signify, whether they are safe and sound, or what they are leading to? We do not even know, or cannot agree, whether inflation exists, what it means, or how it shall be measured. In face of the ignorance, uncertainty, and irrationality that surround every aspect of the "new era," it were wisdom for business to keep its feet firmly on the ground and assume for the present that the principles that prevailed through the long business past still govern the stability and success of business today. |
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