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alstry (35.38)

Alstrynomics Spreading like Wildfire!!!!!!!!!!!!!!!!!!!!!!!!!!

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May 14, 2009 – Comments (14)

The following is an article that illustrates a building block of an Alstrynomic principle well....the concept of concentric contraction.

 

As Warren Buffett succinctly observed, anything multiplied by zero is zero.

Put differently, when the value of the asset drops below the value of the debt used to buy it, poof.

Nowhere is this concept more important than in the housing market.  A couple of years back, the value of US residential real estate was about $25 trillion. Mortgage debt constituted about 45% of that ($11 trillion) and owner equity 55% ($13 trillion). (Very rough numbers)

Now, the value of the US housing market is down almost 30% and headed to, arguably, down 40%.  In other words, if the peak value was $25 trillion, the current value is about $18 trillion, and the trough value will be about $15 trillion.  So what will happen to homeowner equity?  It will drop by 70%.

PEAK
Value: $25T
Mortgage Debt: $11T
Homeowner Equity: $14T

TROUGH
Value: $15T
Mortgage Debt: $11T
Homeowner Equity: $4T

Ouch.  And by the way, that percentage holds regardless of what the actual peak value of the housing market was, as long as you start with 45% debt-to-value.  Also, most of that equity is owned by folks who own their houses outright.

And what happens if you have a more typical debt-to-value ratio--say, 80% debt?  Then, unfortunately, your equity IS going to zero.  In fact, it will only take a 20% fall in the house price for that to happen.  That's why so many households are now underwater.

PEAK
House Value:  $500,000
Mortgage (80%): $400,000
Equity: $100,000

TROUGH
House Value (down 40%):  $300,000
Mortgage (80%): $400,000
Equity: -$100,000

That's also why lot of consumer households will get wiped out. 

(By the way, this is what killed all those Wall Street banks.  Unlike consumers, they didn't have 45% debt-to-value ratios or even 80% debt-to-value ratios. They had 97%-debt-to-equity ratios.  So it didn't take much of a decline in equity to blow them to smithereens.)

http://finance.yahoo.com/tech-ticker/article/247640/The-Problem-with-Debt;_ylt=AvBmak5PxywNUnRUD4Pl.iS7YWsA?tickers=xlf,spy,dia,tol,len,l,hd?sec=topStories&pos=6&asset=&ccode=

Finally, the world is beginning to realize in a leveraged society....just a small dimunation in value can wipe somebody, some business, or some government out.......

You have been warned....PREPARE!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Deleverage....Save Cash......Buy some metals if you are so inclined....then its Miller time.

14 Comments – Post Your Own

#1) On May 14, 2009 at 11:02 AM, kdakota630 (29.50) wrote:

It would've been so much funnier if your subject line instead read as:  Alstrynomics Spreading like the FU Virus!!!!!!!!!!!!!!!!!!!!!!!!!!

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#2) On May 14, 2009 at 11:04 AM, alstry (35.38) wrote:

Because Alstrynomics is not spreading as fast as the FU virus.

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#3) On May 14, 2009 at 11:07 AM, kdakota630 (29.50) wrote:

LOL!  OK, good point.

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#4) On May 14, 2009 at 11:45 AM, alstry (35.38) wrote:

JOBS EVAPORATING IN AMERICA!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 

Almost 650,000 Americans lost their jobs last week and filed for FIRST TIME unemployment benefits......almost 250,000 more than Alstry's estimate......

At this rate.....OVER 30 MILLION AMERICANS WILL LOSE THEIR JOBS IN 2009 AND DEMAND UNEMPLOYMENT BENEFITS....

The problem is fewer and fewer companies are hiring right and the outlook is even worse as our Auto and Contruction sectors are shutting down.....AND NOW HEALTHCARE IS REDUCING WORKERS!!!!!!!!!!!!!!!!!!!!!!!!!

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#5) On May 14, 2009 at 11:46 AM, Entrepreneur58 (36.82) wrote:

Debt is a lot like pregnancy.   It feels much better getting into it than it does getting out of it.

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#6) On May 14, 2009 at 12:33 PM, bridgeboy0 (30.87) wrote:

As you said yesterday:

Quick heads up:  Tommorow we should see a better than expected weekly number of people filing for FIRST TIME unemployment claims.....I expect at least 400K people lost their jobs last week.......but the consensus is for slightly over 600K.....I think the consensus of so called experts may be high.

Apparently, some of the so called experts know a heck of a lot more the alstry.  Of course, if this prediction of yours is so far off, why should we believe the rest of your alstrynomics nonsense?  Hmm...

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#7) On May 14, 2009 at 12:35 PM, awallejr (83.80) wrote:

"That's also why lot of consumer households will get wiped out."

This conclusion is misleading.  It presumes everyone is trying to sell their houses right now, which they aren't.  People buy homes.  It is a question of affordability in meeting the monthly bills.  Whether the home is worth less if sold has zero impact on meeting that obligation.  The vast majority of homeowners are in it for the long term and are meeting their monthly obligations.

The only real concern is if we can get a lid on unemployment.  And while I don't want to get drawn into your shallow use of gross numbers again, it is hoped that it will finally peak come early 2010.

 

 

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#8) On May 14, 2009 at 12:38 PM, alstry (35.38) wrote:

Actually.....you miss the point......

If 600-650K are losing their jobs per week.....the so called experts should be forecasting a very dire outlook for our nation.....especially since fewer and fewer are hiring......an outlook consistent with the Alstrynomics perspective.

The fact that Alstry was far off only further buttresses and supports the Alstrynomic perspective.....and Alstry may have to revise his already negative outlook downward.

Prepare!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

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#9) On May 14, 2009 at 12:43 PM, alstry (35.38) wrote:

awa.....

not if we keep losing 650K jobs per week and they can't find similar replacement employment.....

600-650K PER WEEK!!!!!!!!!!!!!!!!!!!  Think about that number week after week after week after week....an now fewer and fewer compannies are hiring??????

My suggestion is that you may want to switch from Scotch to Vodka....it is clearer.

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#10) On May 14, 2009 at 12:49 PM, 4everlost (29.38) wrote:

That's easy to understand math you posted.  I thought the numbers for new unemployment benefits were for the month of April, not a single week.

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#11) On May 14, 2009 at 12:52 PM, alstry (35.38) wrote:

4ever....where did you gat that information from and please provide the source.....the government reports it is First Time weekly claims.

It would be nice to know if the government is lying to us....;)

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#12) On May 14, 2009 at 2:09 PM, awallejr (83.80) wrote:

Trying to draw me back into the same old unemployment argument again huh?  Let's watch the net monthly changes instead and discuss that number when published.  It should still net increase at least through this year.  The key will be if it continues to decrease in acceleration. 

Trust me, I don't take this unemployment increase lightly.  And in fact I am slightly more bearish than you on U3 cap predicition (you at 11%, me at 12%).  I am also of the view that it will take a longer time to eventually get it down to a more acceptable level (4ish%), and submit it might ultimately take attrition through baby boomer retirements to help do so.

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#13) On May 15, 2009 at 12:28 PM, unvrsldeflation (84.44) wrote:

I don't think attrition through retirement is going to be the option tomorrow that it has been until today. There are systemic problems coming to do with Social Security and worse problems to do with personal accounts. Alstry is right about the crisis that is coming to all levels of local government, including the states. That crisis will mean even more of what a retiree might have been counting on as supplemental benefit will not materialize. It may mean that already retired people will have to make some level of money over what it is costing them to live or risk being taxed out of the little they have left. Good thing the younger generation are such slackers. If they weren't they would really be getting it up about how much the oldsters have f**ked them. If they did that, then things could really go pear shaped.

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#14) On May 15, 2009 at 12:46 PM, RootnToot (30.07) wrote:

Indeed, things are getting no better fast.

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