Bear Hat Back On
It has been a very long time since I have actively made much in the way of picks. My expectation of the market is that it would go through a series of ups and downs and the downs would be bigger then the ups so even though there would be short periods when one can gain, like right now, ultimately I think it is still heading lower.
One of the ways that I think of the housing bubble, and the huge overhang of homes it created, is that it borrowed from tomorrow in more ways then people think about. It is obvious that the debt is borrowing from tomorrow, buy now and pay for it later.
What is less obvious is that it borrow tomorrow's jobs. So people were working and making good money, and in some cases because of the false demand for labor some wages were probably much higher then if tomorrow's jobs were not being done yesterday.
Big Picture has a post that estimates the amount the rise in profits can be attributed to the bubble, 388%. To me that means that sustainable profits are probably in the range of 25-30% of the peak, which suggests the market is still quite over valued.
The other thing in that post is a more accurate look at the home owner equity for people with mortgages. The data that has been used includes all home owners, but, as the post points out, people who have paid off their homes are not going to be a problem for the banking system and the equity of people with mortgages is what you need to be looking at to properly assess the health of banks.
Take out the clear title home owners and equity declines from 43% to 15%. So, housing goes down another 10% and homeowners with mortgages have 5% equity? What a disaster. From the post:
More likely, she sniffs, it has something to do with the fact that “an overwhelming portion of some $8 trillion in mortgage debt (or 80% of the total) is teetering on the edge of, or in some state of, negative equity.”
There is no question that when I compare today's bubble with the bubble that cause the depression, well, today's bubble is simple much bigger. For the depression somewhere I read that 12% of debt was never repaid once the banking system sorted itself out. That would have just been stuff in the banking system. Today there is so much off balance sheet stuff, and the bubble is bigger and lending standard weaker, well, I suspect that a lot more will never be repaid.
And business is straddled with massive debt as well.