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Tough to be a central banker these days. When you're not busy pretending you have meaningful influence over the out-of-control global credit machine, you are busy pondering what to do if it breaks down (pdf). For the Bank of International Settlements (BIS), the central banker's central bank, that means an institutional expression of Moore’s Paradox: that the belief expressed in one part of a statement is sufficient (though not necessary) to falsify it in the second part. Thus we get two completely contradictory beliefs expressed in the 77th Annual Report of the Bank for International Settlements for the financial year which began on 1 April 2006 and ended on 31 March 2007, submitted to the Bank's Annual General Meeting held in Basel on 24 June 2007.
The report contains something for the optimists.
Interest Rates Will Rise in `Golden Age' of Growth, BIS Says
June 25, 2007 (Gabi Thesing - Bloomberg)
Central banks will need to continue raising interest rates to quell inflation as the "golden age" of global economic expansion continues, the Bank for International Settlements said.
"Inflationary pressures might turn out to be more significant than anticipated," BIS General Manager Malcolm Knight told a press conference in Basel, Switzerland, yesterday. "Authorities should continue gradually to normalize the level of policy interest rates'' as the global economy extends what ``may well go down in history as a `golden age.'"
And something for the pessimists:June 25, 2007 (Gabi Thesing - Bloomberg)
Central banks will need to continue raising interest rates to quell inflation as the "golden age" of global economic expansion continues, the Bank for International Settlements said.
"Inflationary pressures might turn out to be more significant than anticipated," BIS General Manager Malcolm Knight told a press conference in Basel, Switzerland, yesterday. "Authorities should continue gradually to normalize the level of policy interest rates'' as the global economy extends what ``may well go down in history as a `golden age.'"
BIS warns credit spree could produce 1930s-style depression
June 25, 2007 (Leslie Wines - MarketWatch)
The Bank for International Settlements is warning that years of loose monetary policy have fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump is than generally understood, the U.K.'s Telegraph newspaper reported on its website. Virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and Southeast Asia in the early and late 1990s. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a 'new era' had arrived", the bank was quoted as saying. The BIS, the ultimate bank of central bankers, pointed to multiple worrying signs, including mass issuance of new types of credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system, the report said.
Can both bearish and bullish futures be equally possible? The data for now appear to be on the bear side.June 25, 2007 (Leslie Wines - MarketWatch)
The Bank for International Settlements is warning that years of loose monetary policy have fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump is than generally understood, the U.K.'s Telegraph newspaper reported on its website. Virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and Southeast Asia in the early and late 1990s. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a 'new era' had arrived", the bank was quoted as saying. The BIS, the ultimate bank of central bankers, pointed to multiple worrying signs, including mass issuance of new types of credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system, the report said.
For example, in his July PIMCO missive released today Bill Gross waxes doomish on the fate of Main Street as the fallout of the housing market continues to inexorably drain credit and confidence from U.S. households, setting aside for the time being last month's "glass half full" perspective.
Investment Outlook
Bill Gross | July 2007
Looking for Contagion in All the Wrong Places
Whew, that was a close one! Ugly for a few days I guess, but it could have been much worse! No, I refer not to Paris Hilton upon her initial release from the LA County pokey after serving three days of hard time, but to the Bear Stearns/subprime crisis. Shame on you Mr. Stearns, or whoever you were, for scaring us investors like that and moving the Blackstone IPO to the second page of the WSJ. We should have had a week of revelry and celebration of levered risk taking. Instead you forced us to remember Long Term Capital Management and acknowledge once again (although infrequently) that genius, when combined with borrowed money, can fail. But (as the Street would have you believe), this was just a close one. Sure Bear itself had to come up with a $3 billion bailout, but folks, most of these assets are worth 100 cents on the dollar. At least that’s how they have ‘em marked! Didn’t wanna sell any so that someone would think otherwise…no need to yell “fire” in a crowded theater ‘ya know. After all, hasn’t Ben Bernanke repeated in endless drones that financial derivatives are a healthy influence on the financial markets and the economy? And aren’t these assets well…financial derivatives? Besides, I direct you to the investment grade, nay, in many cases AAA ratings of these RMBS (Residential Mortgage-Backed Securities) and CDOs (Collateralized Debt Obligations) and defy you to tell me that these architects were not prudent men. (Sorry ladies, they are still mostly men!)
Speaking of CDOs, we are scheduled to do a follow-up interview with our mortgage CDO expert Jim Finkel tomorrow. Jim is CEO of Dynamic Credit, LLC. His predictions from our interview with him in early March are holding up well:Bill Gross | July 2007
Looking for Contagion in All the Wrong Places
Whew, that was a close one! Ugly for a few days I guess, but it could have been much worse! No, I refer not to Paris Hilton upon her initial release from the LA County pokey after serving three days of hard time, but to the Bear Stearns/subprime crisis. Shame on you Mr. Stearns, or whoever you were, for scaring us investors like that and moving the Blackstone IPO to the second page of the WSJ. We should have had a week of revelry and celebration of levered risk taking. Instead you forced us to remember Long Term Capital Management and acknowledge once again (although infrequently) that genius, when combined with borrowed money, can fail. But (as the Street would have you believe), this was just a close one. Sure Bear itself had to come up with a $3 billion bailout, but folks, most of these assets are worth 100 cents on the dollar. At least that’s how they have ‘em marked! Didn’t wanna sell any so that someone would think otherwise…no need to yell “fire” in a crowded theater ‘ya know. After all, hasn’t Ben Bernanke repeated in endless drones that financial derivatives are a healthy influence on the financial markets and the economy? And aren’t these assets well…financial derivatives? Besides, I direct you to the investment grade, nay, in many cases AAA ratings of these RMBS (Residential Mortgage-Backed Securities) and CDOs (Collateralized Debt Obligations) and defy you to tell me that these architects were not prudent men. (Sorry ladies, they are still mostly men!)
- The Fed is more likely to raise than lower rates. At the time (early March), ALL of the investment banks were forecasting three (3) rate cuts. It’s almost July, and no rate cuts in sight.
- When push comes to shove in the mortgage CDO market, the ratings agencies will become the focus of attention. Can’t think of anyone else who had that insight then.
- Efficient market theory will win: many careless lenders will go out of business. Sure enough, 80 of the 86 lenders who have gone out of business [http://ml-implode.com/] have done so since then.
In the mainstream press, it's still Groundhog Day in the housing market. No surprises for iTulip readers.
Homebuilders' Index Drops to 16-Year Low
June 18, 2007 (Alan Zibel - AP)
Sentiment Index for Housing Market Hits Lowest Level in More Than 16 Years, Trade Group Says
A measurement of industry sentiment about the housing market fell in June for the fourth straight month to the lowest point in more than 16 years.
Housing developers are being squeezed by tighter lending standards for borrowers trying to get mortgage loans. In response to weak demand, developers are cutting prices and offering buyer incentives to cope with a mounting supply of unsold homes, the National Association of Home Builders said Monday.
And...June 18, 2007 (Alan Zibel - AP)
Sentiment Index for Housing Market Hits Lowest Level in More Than 16 Years, Trade Group Says
A measurement of industry sentiment about the housing market fell in June for the fourth straight month to the lowest point in more than 16 years.
Housing developers are being squeezed by tighter lending standards for borrowers trying to get mortgage loans. In response to weak demand, developers are cutting prices and offering buyer incentives to cope with a mounting supply of unsold homes, the National Association of Home Builders said Monday.
New home sales ease, while confidence falls
June 26, 2007 (Chris Reese - Reuters)
U.S. new home sales in May fell more than expected while consumer confidence in June fell to a 10-month low amid anxiousness about jobs and the business climate, adding to signs of sluggish economic growth this year.
Some economists are starting to adjust to the realities. Housing economist Mark Vitner says, "Must wait for 2009" for home prices to start to recover. June 26, 2007 (Chris Reese - Reuters)
U.S. new home sales in May fell more than expected while consumer confidence in June fell to a 10-month low amid anxiousness about jobs and the business climate, adding to signs of sluggish economic growth this year.
We are very near a bottom in the housing market. But we are not out of the hole yet and we won't see any "real strength" until 2009. So says Mark Vitner, senior economist at Wachovia Securities. He tells John Wordock we should continue to see "soft conditions" for "quite some time."
That's still one to six years ahead of our Jan. 2005 prediction of a bottom between 2010 and 2015, but more accurate than frequent statements earlier this year that the bottom had already occurred. If you go back and look at our January 2004 housing bust scenario
Housing Bubbles Are Not Like Stock Market Bubbles, you'll see that far from indicating a bottom, today's housing news indicates the next steps in the process.
Unlike stock market bubbles, real estate bubbles don't pop. Collapsing stock market bubbles are characterized by a sudden collapse in prices because stock markets are highly liquid. You see huge volumes of transactions at ever lower prices during a stock market collapse. Collapsing housing bubbles, on the other hand, are characterized by illiquidity, a sudden collapse in transactions. Buyers and sellers seem to disappear.
The reason is a reversal in the psychology of buyers that developed at the top of a speculative housing market. Buyers had been buying at prices they knew were too high but on the assumption that they'd be able to sell if they needed to. The thought was: "Ok, maybe it's overpriced, but at least I'll be able to sell it later for at least what I paid for it, but likely more." What happens on the way down is that houses go on the market and just about no one shows up to look. That's because buyers weren't buying earlier primarily because they needed a place to live, but because they thought the price would likely rise and that, in any case, they'd be able to get out when they wanted with all of their money or more. On the way down, neither condition is true. So buyers stay home, so to speak.
We made that prediction three and a half years ago (the piece was originally published on AlwaysOn, January 20, 2004). Where will we be three and a half years from now? The reason is a reversal in the psychology of buyers that developed at the top of a speculative housing market. Buyers had been buying at prices they knew were too high but on the assumption that they'd be able to sell if they needed to. The thought was: "Ok, maybe it's overpriced, but at least I'll be able to sell it later for at least what I paid for it, but likely more." What happens on the way down is that houses go on the market and just about no one shows up to look. That's because buyers weren't buying earlier primarily because they needed a place to live, but because they thought the price would likely rise and that, in any case, they'd be able to get out when they wanted with all of their money or more. On the way down, neither condition is true. So buyers stay home, so to speak.
The housing bubble is another instance of a forgotten lesson of history. You'd think we'd have learned our lesson from the 1990s stock market bubble, but then you might have expected we'd have learned the lessons of speculative bubbles from the U.S. bubble in the 1920s, and Japan in the 1990s, rather than repeating the mistake in the U.S. in the 1990s. But there are even more important forgotten lessons of history than the lesson of speculative bubbles. In the iTulip Select area today I spell out the Three Great Lost Lessons and the implications: Too Much Credit, Limits of Economic and Military Monopoly, and the Rise of Authoritarian Capitalism.
iTulip Select: The Investment Thesis for the Next Cycle™
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