Thursday, May 27, 2010

Party On! Denial is a Powerful Emotion

I thought this was an interesting video. You have the classic arrogant Keynesian ivy league economist in Dr. Sachs trading blows with noted hedge fund manager Hugh Hendry.

I don't think I need to tell you whose side I am on. Sitting and doing nothing like Dr. Sachs suggests is nothing more than additional can kicking. Hugh says let the banks die that took on too much risk and purge all of the bad debts out of the system.

Note: Hit the play button below:





My Take:

We have been taking the "head in the sand" Dr. Sachs route for about 4 years now which is when the credit markets first seized up.

How's that route been working out?

Need I answer? Foreclosures and unemployment are hitting new highs on a quarterly basis. The government continues to hide the losses hoping that the economy will recover. Things are getting worse on a daily basis despite what the stock market does.

WHEN ARE THESE KEYNESIANS THAT ARE RUNNING THIS COUNTRY GOING TO REALIZE THAT THIS IS NOT WORKING?

Hugh Hendry's answer is the only route out of this mess. We have been trying the "hide the trillions" game for four years now and things continue to get worse.

Wakeup America! The only people that are thriving right now are the oligarchs of this country.

I think this chart says it all:




This graph is a little dated but the trend is the same. The wealthy are thriving at the cost of the taxpayer. The bailouts are benefitting only those with wealth while we sit here and losr our jobs and default on our homes.

Remember back in 2008 when the banks were bailed out with TARP money and then had a very profitable 2009? You would have thought that this was a good thing because the banks could now work on fixing their balance sheets with the extra profits.

This would be the prudent thing to do when you are insolvent right?

So what did the bankers decide to do? Instead of fixing their balance sheets they pocketed half of the money in the form of bonuses. I mean I am sure they said why take the losses if the goverment isn't going to force us to?

Wall St literally makes me want to vomit. They are consumed with greed and they don't care who they have to destroy in order make a buck including you.

Bubble machines do not fix bad economies. Look at the char tabove: Housing prices are up 300% or more in the bubble areas and yet average incomes have only risen 13%.

This is insane! I see people come on here claiming that the housing correction is over after a 30% reduction in areas like DC. How can that be when prices rose 300% or more in a decade where wages were basically flat?

The only way we got here was through fraudulent lending. Sadly we have decided to continue and lend improperly via FHA because the goverment sees no solution other than to keep the party going. this will only lead to more bad loans and more losses.

Housing is still a bubble that still has not corrected. The problem is EXACTLY what Hugh says above: The bad debts need to be purged. What we have attempted to do so far is to ignore the losses which is not a solution.

Whats happening right now in markets like DC is people CANNOT afford to sell because they don't have enough equity in the house. They are basically "stuck".

The sellers don't have the cash to short sell so they either stop paying their mortgage and start squatting or they continue to be debt slaves and pray that prices come back. The banks aren't forcing them to do anything because they don't want to take the loss on a foreclosure.

I have had bankers tell me they would rather have someone sit in the house and take care of it versus foreclosing and leaving it empty. They are in no rush to fix the housing problem. Why would they be in a rush when the fraudulent accounting rules allow them to keep these garbage loans on the books without a penalty?

As a result, housing has turned ino a total cluster****. The prices you see you see on the MLS are nothing but a pipedream. There has been no real price discovery in most housing markets other than Vegas and a few others. Prices are flat or only slightly declining because the banks and home owners remain in a stalemate waiting to see who will blink first.

Meanwhile the bad debt just sits there rotting like roadkill on the side of the highway.

The same thing is happening on the commercial side of lending.

I have a banking source who just recently came back from a large finance convention. They have a commercial loan modification program that they are marketing to all of the large banks.

The banks basically told them they want nothing to do with the program because they don't believe their customers can afford even a modified loan! This is how bad this situation is!

For now we have chosen to continue and keep our heads in the sand and pretend that everythings ok. We more of that today in the markets when China said they will continue to support the European debt markets. Stocks took off and caught a lot of people short(including me...got pipped..oh well) which then created a large short covering rally which exacerbated the move higher.

The reality here is all we did today was successfully rearranged the deck chairs on the Titanic once again. The central banks are running around in a panic trying to keep everyone on the same page. China was taken care of...For now!

Here's the bottom line:

When REAL price discovery is seen in both housing/financial markets it's going to make the fall of 2008 look like a birthday party. The bad debts are still there rotting and they aren't going anywhere until they are cleared via getting paid off or default.

The longer we ignore the debt problem the longer we will suffer with a bad economy. There will be no recovery without exposing the debt skeletons that were created by the housing mania.

Sadly, the elites like the one above really don't care because they aren't the ones suffering.

19 comments:

getyourselfconnected said...

Here is hoping that video goes viral. Great find. What is worse a long slow bleed or just some real bad pain up front? Oh I forgot, Ponzi economies cannot do the short burst of pain thing. My bad.

You have to see my post tonight, it's a classic in the making. Up in a bit.

jeff said...

Thanks Get

I will hop over and check it out.

Anonymous said...

"This is insane! I see people come on here claiming that the housing correction is over after a 30% reduction in areas like DC. How can that be when prices rose 300% or more in a decade where wages were basically flat?"

I love watching you take a dump on the markets you know nothing about. I was actually going to take the time to educate you on why the idea that prices rose "300%" and wages were "basically flat" were gross exaggerations. However, I realized once I do that you (being presumably a reasonable guy) may realize that I am right, and that would be no fun.

No, instead, I will let you wallow in your ignorance of certain markets and make absurd projections like 30-40% drop (Case shiller value of 125 for DC). And for the record, I did not say "the correction is over". I allowed for the possibility of a nominal bottom (CS DC of 155).

Either way, have fun continuing to drop turd after turd on markets you know nothing about. Slowly, but surely you are building an enormous shit sandwich of all the erroneous projections on the DC market. Its going to be great fun watching you take a bite!

jeff said...

LOL

You won't explain it because there is no rational answer to the question as to why a 30% correction is adequate when the bubble blew prices up by 300+%.

There two huge headwinds that have not hit yet and will be the catalyst for the correction.

1) Mugh higher interest rates as the world realizes we are another Greece.

2) Dramatically tougher lending standards of 20% down with a DTI of 36% after FHA blows up just like Fannie and Freddie did two years ago.

Both of these headwinds are inevitable and its going to turn the housing market into swiss cheese.

You are either a digruntled home flipper, mortgage rep, or realtor.

Please keep posting thoughbecause I figure out a little more each time you come on here preaching like you are the god of housing.

Anonymous said...

Jeff said...

"1) Mugh higher interest rates as the world realizes we are another Greece.

2) Dramatically tougher lending standards of 20% down with a DTI of 36% after FHA blows up just like Fannie and Freddie did two years ago.

Both of these headwinds are inevitable and its going to turn the housing market into swiss cheese."

And these will both happen...when?

Sadly, I can already see where this is going. A year from now when basically nothing has changed, I will be here gloating and you will be on to the next crisis du jour saying "it just hasnt happened yet".

We need an end all be all date of when Case Shiller DC will drop all the way down 125 due to all the things you contend.

Is one year too soon for you? OK how bout 18 months? Want to make it 2 years just to be safe? Give me a timetable when you will be willing to say "I was wrong" and eat your ginormous shit sandwich.

Anonymous said...

Oh and the same rules apply to me too. This is a huge advange for you since I am way up the foodchain at DC Case Shiller 155! Imagine how much fun you are going to have sticking it to me every month as we plummet past 155 down to the level of 125 which you are so sure of.

Give me a date buddy!!!

jeff said...

Housing cycles go in years not months.

The last cycle took 9 years to come full circle. Japan is 20 years from the lows in home prices and they still haven't recovered back to where they were.

It may be 2 years. I can't time all of this by saying it will be this month or that month.

The ability of the Fed to kick the can down the road has been very impressive.

What I do know is if I was a homebuyer I would not be touching a house in DC with Case Shiller being where it is right now because the macro economic risks are simply too high.

My best guess is this happens within 2 years if you want a number.

getyourselfconnected said...

Anon,
no worries I am sure the DC area will be supported by some added paragraph to a reform bill or something. I love that you are gloating but it makes you look pretty dumb to ignore all the massive support the housing markets have. What would prices be if a bank and not FNM/FRE/FHA were doing the loans and charging 7-9% for a mortgage?

Anonymous said...

OK Jeff, 2 years it is. 155 or higher, I win and you eat crow, 125 or lower, you win and I eat it.

Getyourselfconnected said...

"I love that you are gloating but it makes you look pretty dumb to ignore all the massive support the housing markets have."

Ignore? How do you know that I am not pricing that in to my projections?

Jeffrey said...

Anon

Deal.

One caveat. If we go below 125 and then rebound slightly above 2 years from now I still get to eat some crow:)

Anonymous said...

Why bother to argue with the confused flotsum and Jetsons that come to the site to get a rise out of you, Jeff.

Just preach on, brother.

And Anon, I have a suggestion as to a nickname for you. You might try "bagholder" on for size because that's exactly what you're going to be if you're stupid enough to be holding on to all of the crap that you say that you have when everything explodes.

Exactly how much is the government paying you to show up and troll?

flipdippy said...

Anon,

Enjoy gloating from your tent city somewhere out in Ashburn after the shit hits the fan and you can't even afford a scratch and dent can of Alpo with which to feed yourself.

I don't know how you can predict anything when the middle class there is already being squeezed and the taxes are only beginning to be raised. Let's see how the foreclosure and short sale problems are in Montgomery County in the middle of 2011 once their current taxes are enacted, at which point the federal govt will have raised taxes once (expiration of Bush tax cuts) with another round being debated in congress. I don't see prices rising.

And you're half right. Jeff, wages aren't flat. They are actually down. Once you account for the fact it takes 2 incomes to produce what it used to take only 1, and you extract the debt taken on by the middle class to maintain the same standard of living which existed after WW2 - early 1970s, the price of everything has gone up much faster than wages except for technology for which we can thank China for building and financing said debt for our middle class to consume.

It takes an income of roughly 175k to support a 500k mortgage by traditional standards. How many households earn that much? And those that do in DC, do you have any idea how much quality daycare costs? With 2 wage earners, you need an income of roughly 300-400k to comfortably have that house and afford daycare/preschool. That figure should go up as taxes increase. How many people earn that much? Not many, even in DC.

Watch what happens when people need to hoard their dollars and the velocity of money slows because there is no credit available and they fear being unable to afford essentials like heat and food.

Markets can remain irrational longer than people can stay solvent. This is no different.

Bagholder said...

And Anon, I have a suggestion as to a nickname for you. You might try "bagholder" on for size because that's exactly what you're going to be if you're stupid enough to be holding on to all of the crap that you say that you have when everything explodes."


Will do. Say, why dont you get a nickname so I can call you out in due time for your abject doomism? Jeff, from now on, I shall be called Bagholder!


"flipdippy said...
Anon,

Enjoy gloating from your tent city somewhere out in Ashburn after the shit hits the fan and you can't even afford a scratch and dent can of Alpo with which to feed yourself."

Hi toughguy! Tell you what, you are so sure of yourself, why dont you give me YOUR projections. For the record:

DC case shiller is currently at 175.28. In the next 24 months:

I say it stays above 155.

Jeff says it goes below 125.

Whats your projection oh great prophet flippeedipppee???

flipdippy said...

there is no point trying to argue about where the case shiller index will be in 1 or 2 years. it is fundamentally a flawed measurement to use to predict future price movement, up or down, especially in places like DC where the cost of a single family home is so high.

If nobody sells the index won't drop. That won't mean the market is healthy.

So have fun speculating about where it lands. I don't care. It can go up or down, the DC market will still weaken over time. Especially once the cost of capital and the requirements for underwriting a mortgage tighten, which is coming.

GLTY.

getyourselfconnected said...

Arguing about housing index numbers is going to seem real silly before long.

Jeffrey said...

Anon 1

Well said.

Part of me loves to argue.

Don't worry I will carry on!

I respect all viewpoints.

I took a break for the holiday. Back at it next week.


Flip

Your arguement is perfect. Nothing to add.

Anonymous said...

"flipdippy said...
there is no point trying to argue about where the case shiller index will be in 1 or 2 years. it is fundamentally a flawed measurement to use to predict future price movement, up or down, especially in places like DC where the cost of a single family home is so high."

So how can you tell when/if things are recovering? Or when/if things are tanking for that measure?

Its interesting in that some people seem to only point out that some data set is flawed when it goes against their perception of whats "really" going on. I know this permabull who refuses to believe there was even a recession because he "didnt see it with his own eyes".

flipdippy said...

Anon,

Are you actually that naieve?

I'm not going to sit here and tell you I know when things are going to get worse, precisely how bad they are going to get, and how the recovery will happen. If I could, I assure you I wouldn't be on Jeff's blog arguing with you.

The real estate market is structurally supported by the government, through artificially low interest rates (thank you QE), through unlimited guarantees vis a vis FNM/FRE/FHA, and various other lending facilities made available to banks, and until recently the homebuyer tax credit.

There is no way in hell in DC or anyplace else you or anyone else can say the market has bottomed until we know what happens when those supports are removed. And the longer they are left in place, the longer and slower the bleed.

I don't know when the government will remove the supports. So we sit and wait.

Anonymous said...

"The real estate market is structurally supported by the government, through artificially low interest rates (thank you QE), through unlimited guarantees vis a vis FNM/FRE/FHA, and various other lending facilities made available to banks, and until recently the homebuyer tax credit."


So again, what if anything does this have to do with CS numbers being "fundamentally flawed" as you said before?

If anything, I would contend that the govt support is showing up in CS prices. Specifically, the only reason they are up on a YOY basis is because the govt is there providing price support.

That doesnt make it fundamentally flawed. What would make it fundamentally flawed is that if the govt were supporting prices, and yet, despite that support, the index showed values plunging when the werent.

If your contention is that once govt supports are gone, prices will plunge, thats fine. Thats an entirely different argument altogether though.