Financial Mini Rally Over
People have been rushing into financials just in time for the next series of down grades and cut earnings. Looking for bottoms in this kind of uncertainty seem highly risky. Of course, the traders will be out already...
The Fed is a Structured Investment Vehicle (SIV)?
Lets recap how the Fed managed this amazing transformation from so-called Central Bank to an off balance sheet, Distressed Loan Hedge Fund.
Upon reading this, how can these guys have objectivity for the people and a nation when their influence is so wall street?
The hoarding by banks continues. When banks stop hoarding is a sign that things are functioning normally again. I think the banks hoarding is one of the bigger statements of the degree of the crisis. No one knows where the next financial bomb will drop.
Yves makes a very good statement to counter the bulls out there:
I look at the ability to pay of the underlying borrowers, and the prospects are pretty poor independent of a recession. We have a large number of subprime ARM resets this year, followed by a not-quite-so-high but still pretty impressive level of Alt-A and option ARM resets through 2011. Many of these borrowers simply cannot afford the payments once the mortgages reset, and marginal borrowers are far more willing to walk than in the past if they have little or negative equity in the house. So the credit markets face a continuing deterioration of the underlying paper.
The housing market will look like a slow-draining bathtub for at least the next couple of years, with defaults and foreclosures likely to exceed new purchases. The unsold inventory will take a long time to recede to normal levels. And until the bottom in housing is visible, no one can be certain how bad the credit losses will be. We are so far outside any historical patterns that forecasts have become exercises in creative writing.
This summarizes my primary reasoning for how bearish on the markets I am. Certainly my personal experience is to have been harder hit by high housing costs and a dismal job market from living in Vancouver. But, the market wasn't as bad as it is now when I first got into the housing market. My estimates are that affordability would have been around 4, maybe a bit higher, and that would have been for maybe 5% of the population of Canada, with a smaller subset like myself entering the market at that time. The affordability index for the US at the peak got to 3.9, for the entire freaking country. Sure, you can break it up and some areas were fine, but it simply means a huge number of people will be struggling.
Add to that that so many increased their debt with the home equity loans. So, it isn't just the new home buyers of the period, but a huge number played the "I want and I deserve this now" game so even after the foreclosures there is going to be a lot of people who are debt slaves and do very little to stimulate the economy. I look into how managing mortgage debt played out in my life and I can't see any optimism what-so-ever. I'm a teacher, my husband is a lawyer and we were suppose have the option of being Consumers-R-Us, but the economy would halt to almost a stand still based on our spending. Well, that is not completely true, we did have a beautiful home. I just don't see how mortgage repayment stimulates the economy, which is what we mostly did. And instead of this lack of buying power playing out in a tiny micro community, it is playing out wide-spread in a big nation.
Those corporate balance sheets are going to decline and they expansion into new markets isn't going to save them because they've done an enormous amount of expansion already.
Austrian economics makes the most sense to me when I apply the theory to my own experience. For example, 3 times we've made purchases ($1-3k) that give you a year or so to pay with zero interest. So, I'm not a fool, I'm paying 6% on debt, I'll defer paying for it. Well, a year later it has always hurt the finances in terms of then looking for what to cut or what to delay. Austrian economics says debt is borrowing from your future economy, and in my household balance sheet that zero interest debt coming due has always caused looking to cut the budget somehow. Mortgages are the same except the effects on spending aren't so apparent. Well, the US has been on a spending spree with home equity loans and now the household balance sheet cuts begin, but unlike my $1-3k purchases, with mortgages they become a way of life because that debt doesn't go away short term.
I think yesterday I touched on a link about Medicare, Financial Armageddon has a link saying it reaches its legal limit by 2014. I'm going out on a limb here, but no one talks about the resentment that has to develop in younger people and the effects that will have on the safety of seniors, especially with the social conditioning of compliance with social standards declines as education is being cannibalized. Being in my mid 40s I see myself in the age group that is going to live through the biggest backlash against seniors by the time I get there if we don't stop this grossly unjust socialized transference of wealth from youth to age and start changing policy to it is fair and sustainable for all.