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:
My Take:
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."
Continued Take:
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.
28 comments:
Ilargi of The Automatic Earth is on record predicting a nationwide 80% housing decline peak-to-trough. It seems extreme, but so far I've seen no indication that he's wrong.
As the old film title put it so eloquently, "Reality Bites."
One of the problems of having a blog is that you need a new position every day - but the winning position, the right position, the one you have been advocating, hasn't changed in a very long time.
But that's true to life, since there's no real news here, and the outlook continues to be dire. If you see the slowdown of the consumer, why would you be surprised by any of this?
As you've mentioned before, the double-dip element of the 30s Depression is the unsung characteristic. And we're about to get into it in a big, big way....
Finally, I'm actually genuinely scared. I say sell your furniture, sell your stocks, think about bankruptcy, and buy a gun. Jesus H Christ...
I'll probably end up posting something about this at some time or another but here is the gist of what I'll post.
After the Lehman bankruptcy, the government sent Hank Paulson, who was the Treasury Secretary at that time, in front of the American people to beg for $700 billion dollars for something that we now know as TARP, the Troubled Asset Relief Program. This progrram was the brainchild of Paulson and Ben Bernanke, and was supposed to be used to buy the toxic assets from the banks and securities firms. We were told that if the taxpayers did not cough up this money, it would lead to the total collapse of the financial system.
None of the TARP money was used for this purpose. Not a dime of it. The government used $125 billion to buy equity stakes in our eight largest banks. They used another $40 billion to bailout AIG, and another $47 billion to buy stakes in smaller banks around the counrty.
The banks still have these toxic assets on their balance sheets. If they had to mark these assets to anywhere resembling reality at this moment, the big banks in this country wouuld be bankrupt.
If someone goes back in history and looks for a defining moment in this crisis, that would be near the top.
bdrube
Automatic Earth is probably right.
AS these foreclosures and job losses mount housing is going to get frickin slaughtered.
Schiff is saying the same thing if he predicts another 50% from here and we are already down 30.
Minton
I'll be honest. I have been increasingly getting writers block lately.
Its hard to find anything new to write about.
Its the same old story day in and day out. Wall St continues to rape the taxpayer and the policiticians sit by and do nothing.
I am kinda just sitting here and waiting for this thing to fall apart.
It's going to be easy posting then. I will have a field day ripping apart the idiots that destroyed the economy.
I am licking my chops!
CT
The way I see it, TARP was nothing but a $700 billion buy order on the S&P.
Government gives money to banks and the banks went and bought stocks.
This increased their share prices to a level where they could do stock offerings and raise cash.
It was the largest heist in the history of the world.
The government funnelled even more money to the banks via AIG.
Don't forget about that screwing of the taxpayer.
Hank couldn't let Goldman be left out.
We've gotten hosed so many times it's pathetic.
No matter how they spin it though, your right, it always comes back to housing. To have a true recovery in our financial system, housing has to recover.
And those toxic assets sit on the balance sheets of the banks (and the Fed, lets not forget Maiden Lane). That's the ticking you hear. Eventually time will run out.
Jeff, I think when this is all over, if any of us are left standing, we should all set aside a little time to come together (at our computers or whatever), get a bottle of our favorite beer, and have a drink to each other for making it through.
That's assuming we can get onto our computers.
That's a really sappy idea. You guys can start abusing me now. LOL
CT
Great points.
Maybe someday we can have a housing time bomb happy hour where we all get ripped and make fun of Hank and Ben!
Jeff-
Thanks for the well written blog. I've been following this meltdown since discovering the old blog another F@cked borrower. Fortunately, I've sold my house and got out of the market near the top based on the numerous blogs that I have followed the past few years.
Since I'm a commercial architect, I can tell you what I'm seeing right now. It's bad.
1. Commercial Real Estate Lending has absolutely ground to a halt. Spoke to three separate commercial lenders in the past week and not one was loaning any money. They were actually spending all of their time on defaults and work-outs. One was ironically working on an 'extend and pretend' for a building that had fallen into default because Stanford Financial had a bunch of space in the building and had stopped paying.
2. Construction costs in the last four years escalated beyond what any reasonable tenant could afford in rent on a proforma basis. There is tons of recently finished space that is virtually unleasable until it gets washed through the REO process. Contractors have begun to sense the new reality, as I've seen a 25% drop in hard bid construction costs in the last 12 months. We had a job that was estimated to be exactly $4.0m by the cost estimator and bids came in at $2.8m. Until construction costs line up with the 'new normal' for rents you can forget about any commercial construction.
3. Stimulus money is going primarily towards municipal projects that were already either in design or were sitting on the shelf. I know civil engineers (bridge and road ROW) that are laying off design staff but not their field staff. Architects and engineers are losing their jobs in droves right now.
4. There is a blowup in commercial construction coming in the spring, as many contractors had 18-24 months of backlog when the collapse started last fall. There is ZERO pipeline as I can attest and these contractors (mostly medium to large regional GC's) will hit the wall in the spring.
5. In some instances, I'm on my 4th or 5th owner's rep, as all the previous ones have been laid off.
6. There are a huge number of recent college graduates (3-10yrs) who entered the real estate market in some way that are now unemployed. These were the same kids who went to dot coms in the 90's. I have three 20-something cousins who fit this build. They have all been laid off and only one has had the sense to leave the field entirely. Things are going to turn around soon they say...NOT.
I personally ran out of things to do in the last few weeks as projects finish up and while our government focus has shielded us nicely in the last year, there are storm clouds building on the horizon at my company.
Hang on to your hats folks.
MT
GLad you are enjoying the blog.
Thanks for the great anecdotes.
That all sounds very frightening. I hope you find enough work next year to keep busy.
Its ugly out there. What I want to know is hoe are thesse commercial companies going to roll their paper.
All of them refi every year or two.
I feel like I need to start searching for a bunker to hide in.
My uncle has been a builder for 31 years and never had a day without work.
He hasn't had any work in over a year now.
Its quite scary.
Like you said. Hold on tight! the next hurricane is right around the corner.
CT
My rants are a good outlet for me....lol
I am doing just fine so don't worry about me. Appreciate your thoughts.
I am really busy with work and keeping very busy which is good right now.
Its screwing up my blogging schedule. They have been getting later!
I will find peace when These idiots in DC get real around the economy!
How would we avoid chaos if there is a depression? Free Marijuana and other Entheogens? This is really about the new cycle after 2012.
http://csp.org/practices/entheogens/docs/narad-entheogenic_yoga.html
Noticed that the high in Spx recently was 666 days from the top in 2007? March low at 666. Maitreya? Second coming of Christ..
http://www.youtube.com/watch?v=BVkusRzq4Xo
MAybe if Bernanke did a bong hit he would stop spening so much money!
Anon
Wow...That is a little eery.
I always thought the 666 low was eery.
I scanned a lot of your postings and read them-- found them very interesting and enlightening! Thanks for sharing.
50% down from here? i doubt it. Prices are entering affordability zone again. Housing should start stabilizing unless unemployment explodes
Best
GLad you enjoyed them.
Anon
I think the higher end($500k+) has that far to go.
Most people can only avoid a home in the 10300k market with the tighter lending standards.
FHA doesn't like doing large loans. They do them in some markets where home prices are higher.
Its going to be u on the high end
Ooops
100-300k market above
It's getting to be quite depressing, this depression.
It's starting to hit the middle and upper middle class in Baltimore, at least as far as I see.
Still not sure what housing does here. We're going to have a lot of government workers over the next few years.
FLip
Baltimore was eerily dead on Saturday night.
I was out with some friends in the Federal Hill area and it was a ghost town.
I have never seen it so quiet and the O's were in town which means its usually a zoo down there.
I heard Legg Mason ws supposed to take 24 floors in their new skyscraper. they ended up only taking 12.
there old HQ is now empt from what I hear. Who in the hell is going to use all of that office space in B-more?
Hey Jeff,
Cash for Clunkers was alive and well in California long before the Federal Government started pissing away our cash.
The back of my vehicle registration that I received in the mail today says (and I'm not joking): "If you don't think your car is worth repairing, the state may buy your car and retire it."
SO *that's* why I got an IOU instead of real money on my tax return...
Minton
HA!
Thats classic.
I think California may be the first state that goes down.
They are so deep in the hole and I don't believe they have actually solved there budget issues out there.
It appeared like it was more can kicking down the road more than anything.
Markets up. The pumpers are at it again.
They won't go down without a fight
Saw this today:
Citigroup Credit Card Defaults Slow in July
By: Ty Wenger
NEW YORK (TheStreet (http://www.thestreet.com)) -- Citigroup -- yes, even Citigroup -- is seeing better times. On Monday, the beleaguered financial institution joined other lenders in reporting a lowering of defaults on its credit cards.
In a filing with the Securities and Exchange Commission, the New York-based bank said its credit card charge-off rate slipped to 10.03% in July from 10.51% in June.
Credit card loans are charged off after consumers are delinquent on numerous payments and the company determines those loans won't be repaid.
Other lenders also said Monday that losses in their credit card portfolios slowed in July, a sign that defaults may be stabilizing after months of climbing losses.
American Express said on Monday that the rate of charge-offs fell to 9.2% in July from 9.9% in June. The rate of delinquencies slipped to 4.2% last month from 4.4% in June.
Bank of America also saw its charge-off rate fall to 13.81% from 13.86% in June, while its delinquencies improved to 7.58% from 7.73% in the month prior.
Citigroup shares closed Monday down 1% at $4.00. By early Tuesday morning, it had regained that 1% in after-market trading.
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So delinquencies are dropping - but I'd be interested to know how settlement rates are increasing, since many of these guys are settling for 25 cents on the dollar...
Yup
These bastards at Citi are screwing me.
I pay mine CC off every month. Citit now charges interest the day you make a purchase now.
This really pissed me off. I am using my Barclay's card now instead. I refuse to pay interest with no 30 day grace period.
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