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Roubini/Ritholtz Conference Call

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October 03, 2008 – Comments (9)

This would have been an interesting call to listen in on.  Big Picture has posted some live blogging of it.

At 5:30 they talk depression...  Ritholtz doesn't think it will be as bad but says it will be a fair depression.

What my biggest fear about the whole thing is that I think lending standards today are by far much looser then what lead to the great depression.  Low interest rates are the problem.  They cause the asset price inflation and when you borrow to an income level with low interest rates you simply aren't empowered to pay back that debt fast. 

I did a series of posts showing the difference in the person who puts extra money on a mortgage when rates are higher and then like they are now.  With low rates you pay extra and you pay extra and you pay extra and it hardly puts a dent into reducing what has to be paid back.  With higher rates just a small sacrifice of increasing your payment by 10% can take years off of paying your mortgage back.  The inablity to pull oneself out of debt and get ahead when indepted to income level with low rates is simply under appreciated.  Low rate are only beneficial for those already have debt at a higher level and they can refinance at a lower rate.  Assuming they don't then borrow to that percent of income, they are much better off.

So, what I understood of the depression was that mortgages were about 15 years.  Low interest rates were part of the problem then just as today, however, what they were able to pull out of their battle chest that can't be done today was to extend the length of the load.  Going from 15 to 30 years take 20-25% off the load payment.  That can save some households.  Going from 30 to 40% saves about 5% and that just isn't going to help households in trouble.  Add to that problem, they increased the percent of income that could be used for mortgage payments.  I've heard as high as a whopping 50%.

So, you have people indebted to a higher percent of income for debt servicing at low rates for longer term mortgages then what they faced in the Great Depression.  This is much, much worse.  Who really knows how bad this is going to be?  I don't, but I consider this difference and I think this difference is worse.

5:37, that's a 975 P/E for the S&P based on earnings and using a P/E of 15.

5:39, $50 oil?

9 Comments – Post Your Own

#1) On October 03, 2008 at 2:24 AM, awallejr (81.56) wrote:

Interest rate has ZERO impact on amortization, which is what you are describing.  30 year mortgages have been the norm since after WWII. Interest as a PERCENTAGE  of your monthly payment decreases over the years, becoming about equal with principle around year 15 and then declining as a percentage.  Another rule of thumb is if you make one additional monthly payment per year (excluding escrows) you can shave about 7 years off the loan.  I would only advise doing that if you plan on living in the house a long time.  Again, the rate of interest is irrelevant.

Interest rates did not cause the Depression.  20-30 pct unemployment did after companies went belly up from the stock market manipulation implosion.  (was actually legal back then to manipulate prices and you only needed 10pct margin).  Check Aresfinancial's video links a few blogs below.

Wage inflation in the long run really is the debtor's friend, presuming a FIXED low interest rate.  Adjustables only have use if you really don't plan on living in the property for more than say 5 years, or if interest rates were extremely high and constantly dropping like they did in the 1980's.  However, less creditworthy borrowers many only be able to get ajustables.

As for PE analysis just take a look at a ton of stocks with PEs under ten and still declining (NUE? a ton of commodity stocks, even the AG stocks).  In this market panic is king, PE means little.

As for $50 oil.  I've been down this road before.  Last year we cried about $3 gas.  This year $4.  And I suspect next year $5.  We will be hearing the same old crap next march about how we are running out of oil and that is why it is selling for $500 a barrel (sarcasm) yadda yadda yadda.

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#2) On October 03, 2008 at 4:35 AM, DemonDoug (78.32) wrote:

I like this quote: "“Cash is safe today as long as it’s not in a bank or a money-market fund,” says Roubini, getting another laugh. Financial apocalypse humor is somehow less funny than other kinds of humor."

lol. great find deb.  congrats on #1 too.

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#3) On October 03, 2008 at 4:38 AM, Fool (32.10) wrote:

You Mam have hit the nail on the head. I agree with you 200000000000000000%. The way mortages are done these days people are not very commited to a certain house and location, they just wanna make some money and move on. The reason like you said is that they know they will never, ever pay off for a house if they stay in it...they hope to sell it at a higher price, make profit and maybe one day they could afford a house to be paid off. Now that hous prices are going down everything is imploding AS IT SHOULD!

please read my posts I think you will feel better that you are not alone. Reagrding the bail out I am against it and so are 99% of middle class. The media and some congress men are now saying that the sentiment has changed and many who call are for the bailout. I know for a fact that is wrong because my friend works for a congress man, they just lie about this.

The only reason congress hasn't voted for it yet is this: we are close to election and they want to hear a little to people...just a little....they will still vote and do what rich people want...why? because the very rich are the ones who contribute 100 of thousands of dollars to their campaign...the same people are teh ones who pay $100,000/month ! for gulf course/country club memberships....this is the worst time in U.S. history...the very rich have such a grip on our life that makes it even hard to breath for middle class....

As an example: 15 million people donated to Ron Paul campaing with an average of 20 to 100 bucks ...that only came to about 700 million dollars...compare that to what McCain and Obama made in 2 weeks....i was shocked when I found out that McCain got 700 million dollars in donations in one night at a dinner...by the way..it was a $5000 per plate dinner.

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#4) On October 03, 2008 at 4:39 AM, Fool (32.10) wrote:

You Mam have hit the nail on the head. I agree with you 200000000000000000%. The way mortages are done these days people are not very commited to a certain house and location, they just wanna make some money and move on. The reason like you said is that they know they will never, ever pay off for a house if they stay in it...they hope to sell it at a higher price, make profit and maybe one day they could afford a house to be paid off. Now that hous prices are going down everything is imploding AS IT SHOULD!

please read my posts I think you will feel better that you are not alone. Reagrding the bail out I am against it and so are 99% of middle class. The media and some congress men are now saying that the sentiment has changed and many who call are for the bailout. I know for a fact that is wrong because my friend works for a congress man, they just lie about this.

The only reason congress hasn't voted for it yet is this: we are close to election and they want to hear a little to people...just a little....they will still vote and do what rich people want...why? because the very rich are the ones who contribute 100 of thousands of dollars to their campaign...the same people are teh ones who pay $100,000/month ! for gulf course/country club memberships....this is the worst time in U.S. history...the very rich have such a grip on our life that makes it even hard to breath for middle class....

As an example: 15 million people donated to Ron Paul campaing with an average of 20 to 100 bucks ...that only came to about 700 million dollars...compare that to what McCain and Obama made in 2 weeks....i was shocked when I found out that McCain got 700 million dollars in donations in one night at a dinner...by the way..it was a $5000 per plate dinner.

Report this comment
#5) On October 03, 2008 at 4:39 AM, Fool (32.10) wrote:

You Mam have hit the nail on the head. I agree with you 200000000000000000%. The way mortages are done these days people are not very commited to a certain house and location, they just wanna make some money and move on. The reason like you said is that they know they will never, ever pay off for a house if they stay in it...they hope to sell it at a higher price, make profit and maybe one day they could afford a house to be paid off. Now that hous prices are going down everything is imploding AS IT SHOULD!

please read my posts I think you will feel better that you are not alone. Reagrding the bail out I am against it and so are 99% of middle class. The media and some congress men are now saying that the sentiment has changed and many who call are for the bailout. I know for a fact that is wrong because my friend works for a congress man, they just lie about this.

The only reason congress hasn't voted for it yet is this: we are close to election and they want to hear a little to people...just a little....they will still vote and do what rich people want...why? because the very rich are the ones who contribute 100 of thousands of dollars to their campaign...the same people are teh ones who pay $100,000/month ! for gulf course/country club memberships....this is the worst time in U.S. history...the very rich have such a grip on our life that makes it even hard to breath for middle class....

As an example: 15 million people donated to Ron Paul campaing with an average of 20 to 100 bucks ...that only came to about 700 million dollars...compare that to what McCain and Obama made in 2 weeks....i was shocked when I found out that McCain got 700 million dollars in donations in one night at a dinner...by the way..it was a $5000 per plate dinner.

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#6) On October 03, 2008 at 10:07 AM, dwot (61.05) wrote:

awallejr that rule of thumb for decreasing length of payment is completely untrue as rates decline.  That works at mortgage rates of about 8%.  About 60% down in this blog I have a table that shows months of savings with a 10% increase, which is more than one extra payment per year.  The rate of interest is completely relevant.

Crumb, late for work...

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#7) On October 03, 2008 at 2:28 PM, awallejr (81.56) wrote:

That chart is discussing rates of returns off bonds, which value will fluctuate depending on movement of interest rates.  Would be the same analysis for calculating values off the selling of mortgages in the secondary market too. But we were talking amortization off mortgages which is a different issue. 

I am sure there are sites that give you amortization schedules.  Plug in different numbers and actually the higher the interest rate the longer it takes to get to parity between principal and interest.

And yeah if you pay more than one extra payment per year you will shave more time off the loan. 

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#8) On October 03, 2008 at 5:51 PM, dwot (61.05) wrote:

awallejr, the chart I asked to you refer to is about 60% down in the article, the bond stuff is at the top.

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#9) On October 03, 2008 at 8:22 PM, awallejr (81.56) wrote:

Well the chart I think you were discussing then, is basically saying a person with a lower interest rate would have to pay more per year over the regular payment in order to equal the same AMOUNT saved by a higher interest rate loan.  Well that is kind of obvious since a lower interest rate would be paying less interest over the life of the loan anyway. I still don't see how this impacts anything except one's desire to pay off their loan quicker or how it relates to the Great Depression.  

As I said before the only real impact of interest rates to a 30 year fixed (which has been the norm for decades, not 10 or 15 year loans), is the monthly payment. Either a person can afford it or not.  Whether they wish to pay them off sooner is really a question of personal choice.  From an historical point of view one is better off not paying loans off sooner.  The income tax advantage is very helpful in the early years, and over time inflation will play on the side of the debtor making future payments easier and easier.  Look at any house bought 30 years ago to today, even with the current crisis.   

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