21 replies to this topic

[ogm]

Here is what I think... I think Fed will be begging the world to step in and help. Especcialy China. Fed officials were in China recently already begging them to buy more real estate paper. I think thats the only optimal solution here. China stands to lose a lot more from cascading defaults and collapse of the US economy, then if they buy 200-300 bil worth of real estate paper at discount prices. I think they will step in and support the market. The real estate paper is very heavily discounted now, especcialy subprime. What do you think the default rates on subrime will ultimately be ? Also don't forget the recovery rate from foreclosures. Its not a total loss. If AAA rated top tranches of subprime stuff are trading at 95 cents on the dollar... what default rate will justify that price ? What will China risk by supporting the market and buying some of that paper ? At the same time the Fed should force the banks to tighten the lending standards. And thats what they are doing now. Overtime the quality of debt will improve at the expense of slower economic growth. but there will be no financial system implosion. No one in the world wants US to implode, aside from Osama, so they will do everything in their power to step in and support it. The world has too much to lose. Yes, there is a big problem with credit bubble, and I think ultimately when the smoke clears there will not be a massive global depression, just a slow, sluggish economy for many years to come. While the debt levels reset and improve.

Edited by ogm, 05 August 2007 - 01:05 PM.

[ogm]

Here is another thing about subprime losses that everyone is claiming. It is very important to know something that we don't... the ultimate default rate. At this point the default rate isn't even 5%... But the market is very heavily discounting the paper. So since the value of the paper goes down, creditors are asking for collateral back, and companies are marking losses. Does it mean that the payments on that paper completely stopped ? No. And untill we know the ultimate default rate its all fear and guesses. And heavy discounts. OMG ! The defaults rose from 0.5% to 1%... that 100% increase in defaults ! Mark that [bleeeep] down 50% ! Give me back my collateral ! Margin calls ! Thats whats going on here.... And if the payments on the loans continue and the default rates will not be 20-30-40% the banks will surprize us with better then expected earnings.. get the idea ? Someone will force the suckers like AHM out of business, take that paper very cheap and make a lot of money. I wonder who...

Edited by ogm, 05 August 2007 - 01:29 PM.

[Iblayz]

Aside from the direct implications of the subprime debacle (those relating to whether most of the borrowers will stay the course....and I agree that most will.....fear is nearly always worse than reality), all of this has led to rampant speculation (although not necessarily presented as such) that much of what drove the economy has dried up right before our eyes. First, we have the "build me or buy me a new home" boom that fueled massive spending and job growth in related industries. Second, we have the "remodel my house boom" fueled by historically low interest rates.....and again spurring spending and job growth. Third, we have the "use my house as an ATM" boom that, in many cases, fueled a lot of mindless spending. Most of this is now gone. It is not gone for the lack of low interest rates, but primarily due to market contraction combined with credit tightening and greater restrictions on underwriting standards. However, and mind you, I would not classify myself as a bull, but....what has happened to the inevitable dropoff in consumer spending. Well, not much, is the correct answer. I own a business that depends almost completely on the consumer discretionary dollar and have been stunned at how things held up in light of soaring gas prices. So what happened and how did it happen. Now, I am not knowledable enough to know the intracies of the economic model or the complex interactions of Fed policy and interest rates. Nevertheless there are some things that stand out in my mind. I have been rather surprised that, to this date, I have not read one serious article that seeks to quantify the massive impact of the refi boom on consumer discretionary income. Now it is true that a lot of people did stupid things when they refinanced their mortgages. But it is also true that millions of people refinanced their mortgages to the tune of saving the household several hundred dollars per month. And that money is refreshing as disposable income on a monthly basis. That, in my mind, is the primary reason that we have yet to see a big pullback in spending. It is because millions of people have more money to spend......every month. And what are they doing? Well, most of them are spending it. And what of the above mentioned "booms" that have dried up as stimuli right before our eyes. Well first we have the buyers and builders of homes. Were all of these people homeless before they bought or built a new home? If they weren't, were they PAYING for a place to live? And in light of the historically low interest rates, what are the odds that most (remember MOST.....everybody knows somebody who was the exception), in fact, ended up with a newly owned home with a monthly payment that was equal to or BELOW what they were paying prior to the new purchase. I agree with Mark that most of these people will weather the storm quite well because that is simply what people do. Then we have the "borrow it and build on to what I have" people. From the outside it looks like some of them went overboard. Most didn't. We added $80,000.00 to our principal (still at a finshed 62% LTV) three years ago but only added $108.00 to our payment. Most of these people aren't spending much more (if at all) than they were before and most who are can easily afford it. The third group is the one whose spending we miss. Most of them blew the money.....and fast. But, again because of the historically low interest rate environment, most of these people aren't spending any more on house payments than they were before (they simply owe more money for what they have without anything to show for it that has lasting value). So, while it may be true that the "use my house as an ATM" crowd did account for a lot of spending, I submit that the masses who used the opportunity to LOWER their monthly expenditures have stepped in to the gap and are spending enough of that money monthly so that we can hardly tell the difference. It all may end very badly. Almost every year we have some "catastrophe in waiting" that is destined to undermine our entire way of life and send shcokwaves through the entire financial universe. And somehow we just keep making our way through the mine field without losing our financial limbs......amazing.

[PorkLoin]

I don't know if the bubble has gone to maximum inflation and now is imploding for real. I do believe in the bubble and think that the whole system has big problems, but also think the Fed, the gov't and other gov'ts and central banks have more machinations and more furious attempts to go before we say the end is here. My wife has wanted to buy another place for a couple years, and I've been dragging my feet. Glad of it now more than ever. It'll be fun watching how this all plays out. Hope so, anyway. Doug

[ed rader]

But it is also true that millions of people refinanced their mortgages to the tune of saving the household several hundred dollars per month. And that money is refreshing as disposable income on a monthly basis.

that's true in our case. we trimmed $5k a year from our mortgage by refinancing (3x). but during the same time my income is down considerably while my wife's has increased somewhat.

gasoline has also doubled and almost everything costs more except clothes and electronics -- we're well clothed, have a 50" plasma, waaay too many computers and digital cameras etc .

bottom line is we actually have much less income. we spend about the same as ever tho. we just don't save anywhere near as much.

ed rader

Edited by ed rader, 05 August 2007 - 02:25 PM.

[spielchekr]

"... millions of people refinanced their mortgages to the tune of saving the household several hundred dollars per month. And that money is refreshing as disposable income on a monthly basis." Good observation. And from what I've gathered, a great deal of this money also never made it into the "70% are out of the market" market. Now they'll have to sit around for awhile in their houses mortgaged at 5% and figure out what to do with the savings. If they can't figure something out, then someone will help them with that little problem.

[SemiBizz]

I think you are all looking for the answers in the wrong places... get out and get around this weekend with what's left of it... I live in arguably one of the wealthiest places on the planet. This weekend I took a very long drive around it... What I saw was shocking to me, as I have lived here close to 30 years. Stores that are usually crowded with Saturday shoppers were empty... so where did they go, to the beach? It just so happened that I was headed that way... We took a long drive in what was extemely light traffic for a sunny Saturday in Marin...we went to a beachside cafe that usually has an hour or longer waiting list to get in. The waitresses are usually spinning around dizzily trying to keep up with the crowds, yesterday our waitress even remarked that she didn't understand where all the customers were... this time there were only 4 tables occupied out of 40. This is one of my wife's favorite haunts we went to yesterday... she could not believe we could get in and get served that quickly and at the first glance of the parking lot we thought it may have been closed... I also drove through Stinson Beach yesterday about 4PM... there was plenty of beach parking still available, the sun was blasting as it had been all day. There were no cars going back over the mountain to Mill Valley when there is usually a long line of stagnant traffic. No, you're not going to find the answers in the charts... or listening to the press dispatches from "Bubble-onia" (New York City). Something big is happening to our country, and it's not happening on the financial pages yet, but it's starting so show up in the charts... Everyone is still entirely too bullish, and there is too much belief that "it can't happen here"... but it is happening and I suggest you get out and take a clear objective look and make plans accordingly.... You can't wish this thing away, the psychology of buying and selling is being turned upside down...and when it happens it is always sudden. The realization is starting to sink in. Think early 1970's that is what we are looking at IMO...

[pdx5]

SemiBizz has pretty much stolen my thunder in his post above. Some people think the money saved by refinancing is a net plus. May be, but then there are the lenders (mainly banks and financing outfits) who will take a bath if rates go up. Which means all the shareholders and investors in those outfits. Looking at oil prices & worl demand for oil, if the US$ drops further, inflation will be here with vengence. That is why Fed has not dropped rates inspite of the pain in housing. If they could, they would have done so by now, the pain in housing has been known for quite some time now. I am in the camp looking for rates to go up, not go down. You can never get away from the time tested rule of finance: Borrowing only works when you put it to use in a productive effort. Borrowing just for consumption will in the end cost you more. Nope, there is no painless way to save all those who borrowed beyond their affordability limits. Some think legislation will help. How? There are big deficits now! Where is the money to come from to bail out the sinking borrowers? Increase taxes? That will surely not help the consumers and the economy.

[ed rader]

SemiBizz has pretty much stolen my thunder in his post above.

Some people think the money saved by refinancing is a net plus.
May be, but then there are the lenders (mainly banks and financing outfits)
who will take a bath if rates go up. Which means all the shareholders and
investors in those outfits. Looking at oil prices & worl demand for oil, if the
US$ drops further, inflation will be here with vengence. That is why Fed has
not dropped rates inspite of the pain in housing. If they could, they would
have done so by now, the pain in housing has been known for quite some
time now. I am in the camp looking for rates to go up, not go down.

You can never get away from the time tested rule of finance: Borrowing
only works when you put it to use in a productive effort. Borrowing just
for consumption will in the end cost you more. Nope, there is no painless
way to save all those who borrowed beyond their affordability limits.

Some think legislation will help. How? There are big deficits now! Where is
the money to come from to bail out the sinking borrowers? Increase taxes?
That will surely not help the consumers and the economy.

i can tell you where $10b a month can come from but that money doesn't really exist either does it ?

while we've maintained the status quo in spending we don't save nearly as much but we also have zero debt besides a "small" mortgage by silicon valley standards.

i agree with everything you written. i think the fed will be forced to raise rates too.

ed rader

Edited by ed rader, 05 August 2007 - 03:29 PM.

[traderpaul]

I think you are all looking for the answers in the wrong places... get out and get around this weekend with what's left of it... I live in arguably one of the wealthiest places on the planet. This weekend I took a very long drive around it... What I saw was shocking to me, as I have lived here close to 30 years. Stores that are usually crowded with Saturday shoppers were empty... so where did they go, to the beach? It just so happened that I was headed that way... We took a long drive in what was extemely light traffic for a sunny Saturday in Marin...we went to a beachside cafe that usually has an hour or longer waiting list to get in. The waitresses are usually spinning around dizzily trying to keep up with the crowds, yesterday our waitress even remarked that she didn't understand where all the customers were... this time there were only 4 tables occupied out of 40. This is one of my wife's favorite haunts we went to yesterday... she could not believe we could get in and get served that quickly and at the first glance of the parking lot we thought it may have been closed... I also drove through Stinson Beach yesterday about 4PM... there was plenty of beach parking still available, the sun was blasting as it had been all day. There were no cars going back over the mountain to Mill Valley when there is usually a long line of stagnant traffic.

No, you're not going to find the answers in the charts... or listening to the press dispatches from "Bubble-onia" (New York City). Something big is happening to our country, and it's not happening on the financial pages yet, but it's starting so show up in the charts... Everyone is still entirely too bullish, and there is too much belief that "it can't happen here"... but it is happening and I suggest you get out and take a clear objective look and make plans accordingly....

You can't wish this thing away, the psychology of buying and selling is being turned upside down...and when it happens it is always sudden. The realization is starting to sink in. Think early 1970's that is what we are looking at IMO...

Agreed, I have a friend who is a nurse making $25 an hour and paid $300 on overdraft fees so far this year.....another friend who paid over $500 in overdraft fees.....People making over $70K does not have two nickles to rub together (drives a late model German car)....He owes me $20 for more than a month.....Yesterday I was at a supermarket, the lady in front of me told the casher she only had $30 in her debt account and she was buying a pack of diapher. After the purchase, she broke down and cried that she needed the money for the gas.....The manager felt sorry for her and gave her the diaphers....Now this is Cupertino....Average house is one million plus....Like SemiBuzz said, you guys should go out and kick the tires......