Whoa! That was a pretty damn ugly wasn't it?
This move down kinda came out of nowhere. It all started in Asia last night. All of the major indices plunged substantially as Japan's GDP#'s came in a little light.
China's market has now dropped 12% from their recent highs. I think the longs are starting to realize that if China can't continue to grow then who in the hell can? We know the US and Europe will be dead for several years.
China and their large reserves are the only hope for world growth. The question now becomes this: Was the recent spending binge by China on commodities growth/demand oriented? Or is this stuff just sitting in a giant storage bin collecting dust?
If I had to guess I would choose option two. I mean lets face it: China only grows if the world consumes. The recent consumer data in the US basically told us that the consumer is on life support.
I doubt China can continue to have robust growth if their factories are shut down as as our consumer binges come to a complete standstill.
In The US: It's All About Housing
Calculated Risk had a great chart today on the disturbing default rates in real estate:
I am sure this chart keeps a lot of bank CEO's up late at night. I can't even begin to explain how ugly this is. As you can see, the default rates are absolutely parabolic in both commercial and residential real estate.
Here is the default data from the Fed today and how it compares historically:
"WASHINGTON (MarketWatch) -- Delinquency rates for loans and leases at U.S. banks increased to a record 6.49% in the second quarter from 5.58% in the first quarter, the Federal Reserve announced Monday. The Fed began collecting the data in 1985. The charge-off rate rose from a record 2.03% to a record 2.65%. Before this recession, the highest charge-off rate had been 1.70%. Delinquency rates for real estate loans rose from 7.10% to 8.27%, the highest since the data began in 1987. Delinquency rates for commercial and industrial loans rose from 3.12% to 3.73%, while delinquencies for consumer loans rose to from 4.69% to 4.92%, also a 22-year high."
I think I need a drink after reading this. Folks, the reality here is default rates are at record highs and show ZERO signs of slowing down. In fact, the moves look totally parabolic! Anyone thinking that housing prices won't continue to collapse afterr seeing this needs their head examined.
Peter Schiff said on Fast Money today that he believes that housing could still drop an additional 50% as credit worthy buyers continue to disappear.
I mean who in the hell is going to be able to qualify to buy a house as default rates soar, unemployment rises, and lending standards continue to tighten?
Speaking of lending standards, take a look at this from Bloomberg:
"Aug. 17 (Bloomberg) -- U.S. banks tightened standards on all types of loans in the second quarter and said they expect to maintain strict criteria on lending until at least the second half of 2010, a Federal Reserve Report showed today.“Domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households,” the Fed said in its quarterly Senior Loan Officer survey. “The net percentages of banks that tightened declined compared with the April survey.”The report suggests that lenders and borrowers are wary of taking on more risk until the U.S. economy shows clear signs of growth.
Most banks expected standards across all loan categories“would remain tighter than their average levels over the past decade until at least the second half of 2010,” the report said."
My Take Continued:
I thought the recession was over and the banks were going to start lending again?HA! They are such lying fools! Guys, this collapse is so obvious now that I believe the spin coming out of Wall St is no longer going to be effective. This could be an important pschological shift by investors in terms of how the market reacts to news.
Perhaps the market will begin selling off when the news is bad versus going up based on nothing but a hope and a prayer.
I mean lets face it: The bulltards credibility is rapidly falling apart as they scream RECOVERY everyday in the face of worsening data.
The Bottom Line
As long as housing remains in a tailspin there will be no recovery. The only way housing recovers is if prices collapse back to affordable levels.
Unfortunately, if this adjustment occurs, the banking system collapses as a result of the losses that they will be forced to take on all of those bubble loans.
Folks, what can I say? This isn't going to end pretty. Was today the beginning of a huge correction or just a pullback? Too soon to tell.
What I do know is the data is not getting any better and housing is collapsing at a much faster pace than I anticipated.
Playing the short side might not be a bad idea here. I feel a deflationary storm on the horizon in the near term.