Detroit Dan writes:
Thanks CR! I really think you are providing us with the information we need to see what is happening to the economy. I intend to continue liquidating stocks in anticipation of a major correction in the near future. I'm not enough of a trader to think I can sell at the exact time that true panic (as opposed to a false alarm) sets in...
Detroit Dan | 01.03.07 - 10:04 pm | #

DaveL writes:
CR - if we're allowed to 'vote' please hang onto the bar chart version of GDP with and w/o MEW. I've always found it extremely informative and a powerful depiction of the impact of housing on the overall economy. The 2nd, proposed replacement ?, chart is very insightful but doesn't seem to provide that same linkage into the bigger picture.

In fact up until this post I'm afraid I didn't seem to be sufferring many confusions at all. Have to think a bit more about some of your explanations, especially the impact/no impact argument. Perhaps we could all keep collectively working on this until a sufficient # get it ?
DaveL | 01.03.07 - 10:16 pm | #

PartyBoy writes:
Is the average American is partially retarded?
PartyBoy | 01.03.07 - 10:23 pm | #

FredW writes:
I also think the chart of MEW impact on GDP is very useful even given the lack of info on where the MEW goes.
FredW | 01.03.07 - 10:24 pm | #

ac writes:
Hmmmm... I've done quite a bit of research on this subject in the past few weeks.

IMO this is the definitive statment on MEW.

ac | 01.03.07 - 10:33 pm | #

crispy&cole writes:
Another One Gets Smoked:

http://bakersfieldbubble.blogspot.com
crispy&cole | Homepage | 01.03.07 - 11:06 pm | #

szara writes:
Interesting news tip from crispy&cole. Brokers Secured Funding aparently joins the list of subprime lender casualties. There seems to be a lender shutdown every other day now.

Not normal, folks. I also noticed looking at the abx page at www.markit.com that the bbb- index had another credit event on December 28, and has started to drop again.

I don't pretend to understand the abx product, or have a grasp on what the price movements in those indices really mean, but it doesn't look very good.

Everyone seems to be thinking that the incredible amounts of global liquidity are going to keep us afloat, but I suspect that history would tell us that great surges of liquidity are often wasted on tulip bulbs and their modern equivalents, leading to much subsequent discomfort.
It's a good time to read Kindleberger.
szara | 01.04.07 - 1:00 am | #

ac writes:
I don't pretend to understand the abx product, or have a grasp on what the price movements in those indices really mean, but it doesn't look very good.

Neither do I. For all the noise out there, I keep reminding myself that we live in a completely unprecedented situation which anybody from any other time in modern history would look upon with complete astonishment:

Anybody can buy any house they want regardless of price, income, or credit history.

I keep telling myself this is some sort of delusion or gross misunderstanding on my part, but the ads blogs and news reports I see day after day suggest otherwise.

I’d happily accept any convincing argument that this situation won’t result in financial disaster.

Really - I’m ready to stop worrying and move on. Lay it on me.

ac | 01.04.07 - 1:35 am | #

dryfly writes:
Everyone seems to be thinking that the incredible amounts of global liquidity are going to keep us afloat, but I suspect that history would tell us that great surges of liquidity are often wasted on tulip bulbs and their modern equivalents, leading to much subsequent discomfort.

Absolutely. But remember what Lord Keynes said about timing markets, solvency & irrationality.

The question is as always - when?

And are there warning signs or just a series of coincidental 'false warnings' prior to some future rapid and unanticipated plunge?

I've been expecting this liquidity (credit) bubble to burst since dot.com... it almost did collapse then but didn't. Instead it just side stepped the crisis & kept right on expanding into real estate.

This was partially due to AG, the Fed & 1% FFR... but even more importantly due to currency manipulation at BoJ, PBoC and all the other FCBs & the resulting 'conundrum'.

I believe it will end & end badly as you suggest just like all the others did before it... going back to the tulips & south seas & all.

But having missed guessing the timing for a better part of decade now... and seeing similar warning signs but no collapse... should cause one to pause and ask is this really it this time or just more false positives?

Considering the reserve build ups still going on at FCBs as of Dec'06 and how they are still predominantly USD denominated... meaning liquidity is still injecting into the US, somewhere... I don't think we are at an end yet.

There is a big difference between saying 'not yet' and 'never'.

dryfly | 01.04.07 - 1:49 am | #

Tanta writes:
It is only with great trepidation that I dare to disagree with ac, but I don't think there can be a "definitive statement" on MEW that does not take into account the question of which Big Dog has to eat those questionable loans supplying all the MEW.

Thus.
Tanta | 01.04.07 - 6:42 am | #

Anonymous writes:
Tanta - take the arguement but you may be taking us to a 3rd level of our confusion. By that I mean L1 = MEW and its' direct impacts (much discussed here but widely ignored), L2=MEW calculation and outlook. NOW you ask us to think about whether the widthdrawls, which are really loans, will keep getting paid off. Oh my aching head.

But - presuming that's on the right track - could you expend a bit ? I'd see CR's MEW decline but then a further tipping point on your argument. The question then becomes how much MEW was funded by exotics. I'd think that would be low since almost by definition exotics are for those with no equity.
Anonymous | 01.04.07 - 8:28 am | #

Neal writes:
More liquidity injected into the economy through foreign bank purchases will never make it to the middle or lower classes, they are too undependable now. Instead, the available money will concentrate more and more in the upper 5% of the population. That is the only way that, "on the average", the economy will do OK.
Neal | 01.04.07 - 8:30 am | #

DaveL writes:
Apologies - only pseudo-anon. in the preceeding. Too early in my day.
DaveL | 01.04.07 - 8:30 am | #

MaxedOutMama writes:
Yeah, Secured Funding went.

There seems to be some squawk on the broker boards about trouble with 100% financing now.

Still, the loans being written (depending on your perspective) will make you laugh or cry.
MaxedOutMama | Homepage | 01.04.07 - 8:47 am | #

jhm writes:
I also like the bar chart. I notice that non MEW adjusted GDP seems to be on an upward trend. Will this continue, even as the headline number falls?
jhm | 01.04.07 - 8:54 am | #

wally writes:
The chart seemed pretty clear to me... and very informative.
wally | 01.04.07 - 9:19 am | #

Richard writes:
>>I intend to continue liquidating stocks in anticipation of a major correction in the near future.

dan, don't be a dope. if you liquidated before 2006 you lost out on US index gains of almost 14% and if you had a couple of $$$ in some emerging markets you'd be up big time. CR's analysis is interesting but it by no means predicts when and how much of something will happen. do yourself a favor if you're a doom and gloomer do something like 80% stocks and bonds well diversified across the spectrum of investments and stay 20% in cash.
Richard | 01.04.07 - 9:24 am | #

RM writes:
According to your chart, before '97, MEW activity seemes to be steady at 100 billion (only went to'91).

Don't you think that when the lenders realize (and since they are going under, they must be realizing now) they are giving out loans based on values of homes (that in reality could be worth 30-40% less than they are appraised at) that are not correct, that the loans will almost completely dry up or go back to the average?

New owners were taking out loans on the "perceived" increase in their homes that didn't really exist? Won't these people just hand in their keys?
As an aside, if an owner walks away from a mortgage, do they have to claim bankruptcy first? How does it effect their credit rating?
RM | 01.04.07 - 9:34 am | #

Tanta writes:
New owners were taking out loans on the "perceived" increase in their homes that didn't really exist? Won't these people just hand in their keys?
As an aside, if an owner walks away from a mortgage, do they have to claim bankruptcy first? How does it effect their credit rating?

There's really a misperception about "just handing in the keys" (a/k/a "jingle mail") that may well surpise a number of people, so we might as well be clear on it. The technical term is "deed in lieu of foreclosure" or just "deed-in-lieu," and it means a voluntary deeding of the property to the lender to avoid the foreclosure process. But, there is nothing in any standard (or nonstandard, that I've seen) mortgage or DOT document that givens the borrower the option and the lender the obligation to accept a d-i-l. In states where a deficiency judgement can be pursued (i.e., a court judgement obligating the borrower for the difference between the sales price of the foreclosed property and the loan amount, if the loan amount is greater), a lender does not have to accept a d-i-l, which would prevent obtaining the deficiency. Furthermore, a d-i-l will be reported by the mortgage servicer, and it wreaks nearly as much havoc on your credit rating as an FC, at least in terms of getting future mortgage credit (it may not hurt you as much for getting future non-mortgage credit, because of the vississitudes of the way credit scoring works and depending on how early in the process the lender accepts the d-i-l). In all events, a d-i-l is considered a "workout" or "loss mitigation," meaning it is at the sole discretion of the lender. Those blithe spirits who think they can just mail in the keys are probably going to be just as shocked as those blithe fools who thought they could deduct capitalized interest on their Option ARMs on their annual tax returns. Bad news is in store.

Claiming bankruptcy before or after isn't going to have any effect on the ability to offer a d-i-l instead of foreclosure. Although a BK is still bad news for a mortgage lender, it is still true that most borrowers in BK continue to make mortgage payments (or work out a repayment plan). Mortgage lenders can and do get the BK stay lifted to proceed with foreclosure, so it's not like filing BK will necessarily prevent that.
Tanta | 01.04.07 - 10:49 am | #

Clive writes:
Sorry for an unsophisticated question, but I'm not sure whether MEW refers only to homeowners increasing their debt on property they already own, or includes a situation where the buyer simply has a larger mortgage than the seller. For example, a year ago my elderly mother sold her house, on which the mortgage was paid off years ago, for $400K and moved into a nursing home; the buyer, let's say, put down $100K and had a $300K mortgage. As a result of this transfer, the debt against this house went up by $300K.

Does that $300K count as part of MEW? Or would it only be counted if the new owner took out a home equity loan or a second mortgage? To the extent that the MEW figure includes the former, then MEW merely represents the volume of transactions and the normal situation in which buyers tend to be younger and less wealthy than sellers, rather than the more obvious threat that would come from existing owners leveraging their properties as the price rose. Thanks.
Clive | 01.04.07 - 10:57 am | #

Tanta writes:
Anonymous Dave L (Halo does that to me periodically; I refuse to accept responsibility):

A couple of things: the last couple of quarters have shown record numbers of cash-out refinances of conventional first mortgages, according to the Freddie Mac report, at the same time that the median age of the refinanced property is increasing and hence the amount of appreciation is increasing. In 2003, the median cashed-out loan was for a property 1.7 years old with 5% appreciation from the original loan. In Q306 the median age was 34 months and appreciation was 33%. And these are not, of course, "exotics."

But MEW is more than cash-out refinancing or HELOCs. We forget that what also goes into MEW is the difference between a new mortgage purchaser's loan amount and the property seller's mortgage payoff. At the height of the boom you had new first-time homebuyers coming in borrowing 95-100% to buy a $500M house on which the seller owed $150M. Unless that seller plowed the entire $350M proceeds into a new home purchase, you get net MEW. Of course it is wise for any number of reasons for the sales proceeds to be invested completely in the new property, but I'm tired of people telling me how wise everyone's been the last couple of years, so I don't necessarily assume that sale proceeds haven't also been consumed in some way or another.

Especially since, frankly, I believe that a substantial portion of MEW has been being used for years precisely to retire about-to-be-distressed debt. That's the "rolling loan gathers no loss" phenonmenon, and I have no doubt that property sellers have been using at least some of the equity extracted from sales to pay off troubled consumer debt. So there's the issue of how much MEW is used to pay for past consumption, which affects the GDP question, but there's also the issue of how much MEW has been used to keep the MEW available--to keep the debt pyramiding working long enough for borrowers in distress to still have equity extraction options--cash-out, HELOC--even when LTVs start to get too high. We should also remember that although a rate/term refinance (no increase in mortgage balance beyond rolling in closing costs of up to 5%) don't strictly speaking count as MEW, insofar as they reduce the monthly mortgage payment, they free up cash flow for consumption (or other debt service). Folks without enough equity to cash-out can probably still refinance into a 40-year IO ARM to lower the payments. So, yes, "exotics" do still have a big role in keeping the party going for over-leveraged borrowers. It's when you can no longer lower the payments by any means--term can't get longer, teaser rates don't get lower--that the pyramid falls apart.
Tanta | 01.04.07 - 11:14 am | #

Tanta writes:
Clive, I didn't see your comment before I posted--that's not a dumb question.
Tanta | 01.04.07 - 11:17 am | #

DaveL writes:
Tanta - gracias. Helpful, clear, constructive. My head still hurts but that's my problem.
DaveL | 01.04.07 - 11:27 am | #

Tanta writes:
One more thing on the seller-equity-extraction issue: lenders routinely "condition" new mortgage approval on the borrower paying off or paying down some or all non-mortgage debt in order to make the ratios work. This isn't always especially smart or effective--if you don't require the borrower to cut up the credit cards at closing--and even that can last 10 minutes--you're generally just temporarily reducing the debt load. The only time I see this strategy as making any sense is for a borrower without a history of carrying high consumer debt who just needs to clear up something that could cause a cash-flow problem in the first year of the loan.

Anyway, even though those property sellers at the height of the boom were receiving huge equity checks at closing, you can't necessarily assume that they had low DTIs. Low house payments, sure, but you know anybody with a low house payment who made it up on the Lexus and the plasma TV, not to mention the kids in college and the medical bills and so on? One would assume that if property sellers were reducing their debt loads at the time that first-time homebuyers were increasing theirs, you would not only see total equity holding fairly constant, but total debt service holding constant, too, and that isn't happening. It looks to me that if existing home sellers--by choice or by force--are temporarily reducing their DTIs by paying off consumer debt with extracted equity, they're reloading after closing.

Having spent an entire day in the hospital yesterday, I got caught up on 6-month-old Ladies Home Journal and there was some laughable piece about a couple who sold their townhouse at the height of the boom, plowed all the proceeds into the McMansion, and then discovered how little fun it was to own a giant house with a bunch of large, echoing, empty rooms in it. So they cashed out six months later to buy furniture. I suspect that's what you were seeing back in '03 when cash-outs were happening for loans less than 2 years old with little appreciation.
Tanta | 01.04.07 - 11:34 am | #

dryfly writes:
More liquidity injected into the economy through foreign bank purchases will never make it to the middle or lower classes, they are too undependable now. - Neal

****

Yeah, Secured Funding went.

There seems to be some squawk on the broker boards about trouble with 100% financing now. - Maxed Out Momma

****

I think we all fail to see the 'problem' from the other side - meaning we, for whatever reason, can't fathom the perspective of the Asian FCBs.

I'm not all that certain they care if 20% of the loans go belly up here in the states & whether our financial system chokes on it or not. They have their own problems. Their problem is to drive their currency down vis-a-vis their neighbors as measured against the USD to be certain their exports continue to grow & not their neighbors.

Think about it for a minute - it really isn't about us. We are just the vehicle because our currency is the benchmark & we are the customer of last resort.

And if they fail at that job, then there are serious repercussions - for their country & probably for them individually.

For example I have read a number of places that there remains something like 300-400 million Chinese still living at near subsistence levels. We are talking people out in western & central China making LESS than $500/yr per family.

These folks are 'voting with their feet' and moving to coastal cities like Shanghai & Guangzhou - something like 20-30 million every year in search of 'better jobs'.

Imagine an area smaller than coastal California getting ~30M impoverished peasants every year. And there are already ~200-300M living along that coastal corridor. And in comparison we complain about 1M Mexicans entering the whole USA.

The Chinese gov't is keenly aware of this 'opportunity' but can't stop it without a Mao-like hammer drop.

So instead they try to make sure they have jobs for them... either that or its another revolution. Hence the PRCs fixation with >10% annual growth rates at any cost. And the only way any developing country has been able to bootstrap that kind of growth is through manipulated currency based export manufacturing.

[continued]

dryfly | 01.04.07 - 12:00 pm | #

dryfly writes:
[continued from above]

So somewhere there is a clerk at the PBoC who comes in every morning and has to find a home in USD denominated assets somewhere for approximately a billion dollars. Every day. Their reserve growth is something like $25-30B/month.

It is a task not unlike cleaning the Augean Stables.

Then multiply that by every other Asian Tiger, India, BoJ and now OPEC, Russia... and if the USD continues to fall vs the euro & pound, expect the ECB & BoE to jump in. None of them can afford to see their currency fall vs USD UNLESS their neighbors' currencies fall LESS vs the USD than theirs.

So if they can't jam more dollars into shaky MBS - they will bid up what MBS there still is being offered and then treasuries & equities & commodities and every other debt vehicle they can think of.

While we might think it a good idea to see some of this liquidity 'trickle down' to the masses - that's not the concern of the FCBs & their proxies. Their job is to move product.

Until that system changes - we are going to continue to see these bubbles whether in RE or equities or bonds or tulips.

dryfly | 01.04.07 - 12:08 pm | #

dryfly writes:
Errata...

None of them can afford to see their currency fall vs USD UNLESS their neighbors' currencies fall LESS vs the USD than theirs.

Should read...

None of them can afford to see their currency rise vs USD UNLESS their neighbors' currencies rise MORE vs the USD than theirs.

You all get the point, I'm sure. But sometimes even my head hurts when I try to think all this stuff through.

dryfly | 01.04.07 - 12:23 pm | #

frank writes:
Tanta

I agree that lenders can go after borrowers by judicial foreclosure. As we both know they rarely do, except in those instances of fraud and or the borrowers as significant other assets.

However, given the deception and small print of Option Arms the borrower could have ample defense that they didn't know nor understand the terms and conditions of the loan.

Judicial foreclosures take much longer and are much more expensive that Deeds in Lieu of Foreclosure.

What is most interesting and not discussed about the rapid failure of the Subprime Lenders is that this will increase the number of defaults. Lending to subprime borrowers is a MAJOR servicing issue. The lenders have to stay upon these delinquent borrowers. As the subprime lenders fail and the servicing departments get cut back or transfered their will be fewer employees to chase the debt and or work out the debt with some forebearance.

And given that the loan has been repackaged, sold and belongs to some investor in a tranche who is going to protect the ultimate bagholder.
frank | 01.04.07 - 1:01 pm | #

Tanta writes:
However, given the deception and small print of Option Arms the borrower could have ample defense that they didn't know nor understand the terms and conditions of the loan.

You know, Frank, I'm still not sure about that. I certainly think the Option ARM borrowers are not thinking things through or making smart decisions, of course, but I can't convince myself they have a foreclosure defense here unless the lender didn't recast the loan to stop neg am as soon as it went delinquent. As long as the lender provides a statement balance to the borrower, I'm still a little puzzled over how anyone can fail to notice that their loan balance is increasing. If they do notice that, the time to do something about it is before they get into foreclosure. I'm not trying to excuse boiler-room lenders or sleazy mortgage practices, mind you, I just also have no patience for people who already have credit cards but still haven't mastered the concept of "minimum payments" by the time they get to buying a house. In any case, I'll be interested to see if any suits regarding deceptive Option ARM originations make it, either in defense against deficiency/foreclosure or some kind of class action. I agree that no servicer/investor is usually going to fight for a deficiency judgement for $10 or $20M, but they will for $50M. It depends on how far underwater we go here on appraised values, and the neg am portion is only going to be part of that loss.

And it doesn't matter much what subprime servicers want or don't want to do, since most of them sell servicing-released and the master servicer is constrained by the securitization agreement. A servicer who doesn't keep enough loss mit staff to recover as much as possible is going to eat the loss, not pass it through to the bondholder, if the failure to recover is the servicer's fault. (Not that that will help the bondholder much, since a servicer downgrade will beat the bond price up just as bad as losses will. If anyone is paying attention. Is anyone paying attention?)
Tanta | 01.04.07 - 1:27 pm | #

dryfly writes:
Is anyone paying attention?

I'm paying attention.

Tanta - I'm real interested in the bond pricing issues in the secondary market.

I see some very conflicting issues if we continue on this same course of tightening standards in the face of constant or increasing liquidity flows.

Fewer 'packages' to bid on in the secondary market due to tightening standards (with as much or more money to bid with).

I mean see MOM's post on the last thread...

If stated-income loans are curbed, you've just chopped out 30% of the demand in many of these states! LINK

Imagine how high the prices for the 'approved' products could go... and as a result how low the yeilds?

And just imagine the 'incentives' & 'pressures' to re-expand the brackets of what is or isn't approved?

There are forces far bigger than common sense in play here... the regulators are 'kinking the hose' to pinch back the flow, meanwhile back at the fire truck the capital markets are turning up the pressure on the booster pumps.

dryfly | 01.04.07 - 1:45 pm | #

dryfly writes:
BTW - I'm not suggesting we re-loosen the guidance to accommodate the flow.

I'm just trying to point out how completely broken the whole current system is & it isn't JUST due to our lax regulatory system. Our lax regulatory system is in fact a RESULT of the flood of liquidity inundating just about every asset class.

dryfly | 01.04.07 - 1:50 pm | #

vader writes:
I remember a Sci Fi story once where a bank issued banknotes for loans and when they got them back via deposits or loan repays, they just burned them.

It may seem illogical, but within the context of the story, it kept inflation down as well as say a gold based economy.

Soooo blue skying, there is little difference between the PBoC destroying excess $s by making bad loans or burning them other than accounting practices and habit.

In practice, IMHO, the bubbles are just vast incinerators for destroying excess liquidity-intentional or not-without destroying faith in the currancy or affecting the masses who might rise up and do vile things to the elites.

IMHO, when you realize that it is politics pushing this, US elites wanting lots of money as markers and China elites wanting to survive, then you understand what is going on. The value of currency has little to do with it. The old ways of making profit has nothing to do with it. The hazard of bad investing has been done away with.

When and even if it ends is not known or even knowable. Instead of banks and investors involved as in the past, you have vast soverign nations. This is a new game.
vader | 01.04.07 - 2:10 pm | #

Tanta writes:
yeah, dryfly, I see your point, it's just that at a certain point we're going to have to stop calling these things "securities" if they stop being "secure"--no originator around to make good on breach of reps, no servicer around to make collection efforts/process foreclosures, no warehouse lenders around to keep the refi money in play--I'm back to 4shzl's PoB Credit Card, I guess. I mean, liquidity can't make mortgages, sell mortgages, service mortgages, or do drive-by inspections of REO, and while analysts like that Citi guy I made some serious fun of a while back seem to think that four or five consolidated 800-lb gorillas left over after the food chain collapses can keep all 50 states plus the district in mortgages, I have my doubts. If these "securities" start to trade like dealer paper, it'll be because we all gave up on the illusion that there's enough recovery against the collateral to make jack difference.
Tanta | 01.04.07 - 2:14 pm | #

frank writes:
Tanta,
Ths comment regarding servicing is that subprime borrowers need a lot of phone calls and follow-ups. Most importantly it has to be done as soon as the borrower falls into arrears.

These borrowers are use to heavy handed tactics and as we all well know they are not pleasant, polite calls.


If you think the boiler sales room are tough, listen to the collection department calls.

If these borrowers aren't called immediately and followed up they fall further and futher behind which pushes them from default to foreclosure.

The servicing of these loans is extremely critical to repayment. These departments will need more manpower, staffing and assistance; instead of attrition.

And with the parent subprime lender out of business the incentives are not there, other than to go through the motions.


If the mortgage side of the company is not around the service side does not have the access to roll them into a new loan.

With fewer subprimes around there are fewer outs for the borrower to go refinace with. And if they do, for sure they will have higher balances based on prepayments, late fees and the new points on the new loan, which only extends the inevitable.

Happy New Year & Get well soon.
frank | 01.04.07 - 2:29 pm | #

dryfly writes:
To follow up on tanta's & vader's post - both of which I agree with - I'd like to ask a 'dumb question'...

So our collective sovereigns via respective FCBs are driving this... primarily motivated by 'political considerations'...

But if I am not mistaken - the size of the FCB contributions are still quite a bit smaller than all of the private contributions combined - yes/no?

Anyone have any information on that?

Secondly, if the private funds ARE letting the capital market 'dog' be wagged by a very focused & determined FCB 'tail'... another analogy is one determined bell whether is all it takes to lead a herd to slaughter... my second question would be...

What would be looking for as 'signals' that the herd has in fact bolted from behind the bell whether & starting to stampede?

I get the part of why the FCBs are doing what they do - I don't get why the private funs have been so well behaved in line behind them.

Any illuminations on this would be appreciated - this is where I think we see the end of the conundrum. JMHO.

dryfly | 01.04.07 - 2:37 pm | #

ams16 writes:
Dryfly, your observations are very convincing. And scary.

Because to me, this seems like a house of cards that is collapsing, but countries keeps blowing on it just the right way to prevent it from falling. (Bad analogy, but that's what I'm picturing in my head.)

Eventually, this has to fall. Doesn't it? Or are the permabulls right? This state of affairs could continue forever, or at least for the near future.

Recently, I heard on NPR that private equity firms were buying companies left, right and center fully leveraged. And in the opinion of some analysts, overpaying for them. The new bubble? We can just keep switching from Real Estate to the stock market and back, with the liquidity sloshing to and fro.

Though, if you are correct in that private contributions are bigger than the central banks, maybe they will wake up eventually.

(My personal opinion is that everything will come to a halt as the baby boomers start trying to cash in on their retirement funds en masse. Selling stocks to fund their lifestyle, and have the stock market slowly peter out in response.)
ams16 | 01.04.07 - 2:42 pm | #

dryfly writes:
Any illuminations on this would be appreciated - this is where I think we see the end of the conundrum.

I should have added... 'that and of course the possibility of the FCBs throwing in the towel first'... But that would lead the herd to stampede I'd guess. We wouldn't need 'reserve data' to tell us something has changed.

dryfly | 01.04.07 - 2:44 pm | #

dryfly writes:
Eventually, this has to fall.

I think it does - just don't know how or when.

I keep asking permabulls to tell me a convincing narrative of how we muddle through & all I get is 'we always have'.

I'm still waiting for that narrative.

dryfly | 01.04.07 - 2:46 pm | #

dr strangemoney writes:
Read Kindelberger and Bernanke's Essays on The Great Depression at the same time. I'm not sure if I should be laughing or crying. I've just started the Bernanke book. I'm still waiting for a mention that maybe lending money to a homeless guy in Florida to buy 4 house is the real problem -- instead I just seem to keep reading about how the problem was that the banks wouldn't lend him money to buy 4 more houses.
dr strangemoney | Homepage | 01.04.07 - 2:51 pm | #

dryfly writes:
Recently, I heard on NPR that private equity firms were buying companies left, right and center fully leveraged. And in the opinion of some analysts, overpaying for them.

I can testify for a fact that is going on - I work with some of these folks. They have money flowing like 'manna from heaven' if it is to be spent on 'capital'... wages & benies, not so much. But this is certainly one place where cheap hot money is flowing... no more flipping condos, now they are flipping companies.

I am sure there are more we haven't even dreamed of - financial engineers are smarter than I am.

dryfly | 01.04.07 - 2:52 pm | #

Jim writes:
dryfly
as always your comments shed perceptive light on the question. However, as a former firefighter, I think you meant to say the midship (main, high volume) pump is still running full blast. The booster pump on my old firetruck would barely run a garden hose.

Tanta and others.
I wonder if when folks are mailing in the keys, their primary concern is food versus shelter, not credit ratings. And if you have the phone shut off for failure to pay the phone bill, calls from collection agencies are easy to avoid. The paper letters they send (assuming the mud hut down by the river that you now live in has an address) make for useful heating material when the gas is also shut off for non-payment.

Partially (well completely except as it relates to ability to pay the rent) off-topic, one of our local cheese companies raised all pay grades by $3 per hour yesterday in an attempt to recruit labor after the Immigration raids last month. Beginning wage with no skill except a pulse is now $11 per hour. Other companies in the valley will doubtless (hopefully) raise wages in the fight for a diminishing legal work force.
Jim | 01.04.07 - 3:20 pm | #

dryfly writes:
Other companies in the valley will doubtless (hopefully) raise wages in the fight for a diminishing legal work force.

Or figure out a way to make the undocumented appear more convincingly 'documented'.

My guess is this was a 'show of toughness' for the new congress - I'd guess it will be back to business as usual pretty soon. Let us know what's happening on this front, okay?

And thanks for the correction on my flawed 'hose' analogy... LOL, wouldn't you know it, somebody here on CR's site would actually *KNOW* something. ;)

dryfly | 01.04.07 - 3:33 pm | #

vader writes:
Best way to avoid the past due calls is with caller id.
vader | 01.04.07 - 3:45 pm | #

Jim writes:
dryfly

you *know* more than me, just in other areas.

one of the other unintended outcomes of the ICE raid is the legal but brown portion of the workforce is quietly going into hiding. Legal workers (either citizens of this country or with valid green cards) who know someone who is not legal (either family or friend) are laying low out of fear they will be picked up by what they perceive as an arbitrary government agency running wild. What ICE did was legal and followed the letter of the law, but they burned a lot of trust that day.
Jim | 01.04.07 - 3:52 pm | #

AllenM writes:
Well, as a nervous as a nelly real estate investor who got his financing finished yesterday- I can definitely tell you that if the subprimes go down, this market will follow like a sinking submarine. I went through a financial examination to get the deal done that was the worst since my first real estate purchase back in the 90's. Totally ridiculous. I couldn't believe that the morons behind the scenes were so desperate for yield that they were willing to do a 7 percent first, with a floating Heloc second for an investment property. Told the mortgage broker I would be replacing the bogus second with some private money from my family at a reasonable rate just above the first and he laughed- they were willing to lose the criminal prepayment penalty for a paltry one percent rate increase. Secondary buyers are chumps for return. I will pay that one off within three months and they can go swing- just before their returns shoot up to that unacceptable double digit level. I can't belive the level of crap about the source of the funds available and "Patriot Act Acceptable". Keerist, I swear for honest folks the price of dealing with the chimps in underwriting is enough to make you cry.

Think about who has been living high on the hog as a result of riding those yield curves downward- big finance. Now if you get back to the old certificates of confiscation- Wall Street's 15-20% capital tied up six ways from sunday on a defaulting disabled guy from Peoria. Now international high finance thinks it has a good deal, but how many folks like me stick to the them by only getting the cheapest paper available for long term use and burning the high cost paper asap? BTW I bought a friends house preforeclosure and leased it back for less than their payments were to Saxon and MTC for less money owed- criminal profits in subprime, and huge risks to boot. Now I have a stable situation (I hope), although I dislike renting to friends. They have an incentive to keep their crap together, as they can repurchase their property from me within four years, and I make a reasonable return.

Now pay the piper.
AllenM | 01.04.07 - 4:21 pm | #

B. Sneath writes:
Please run the Greenspan-Kennedy bar chart with 12 month moving averages for MEW & % of disposable income. These would probably be reasonable projections of when MEW impacts consumption, given the lags between mortgage equity withdrawl and consumer purchases. Eyeballing the data, it looks like MEW driven consumption should begin falling rapidly just about.......now!

Thanks.
B. Sneath | 01.04.07 - 4:33 pm | #

94121 writes:
http://www.sfgate.com/cgi-bin/article.cgi?file=/ chronicle/archive/2007/01/04/BUGDBNCBRC1.DTL& type=business from today's SF Chronicle on recent returns in the market for Northern California. Slightly off topic but hopefully interesting.

"For all the talk of a housing slowdown, almost 97 percent of people who sold Bay Area homes in November got more than they paid for their properties and almost half at least doubled their money, according to a new report. "
94121 | Homepage | 01.04.07 - 8:52 pm | #

FredW writes:
Dryfly: "Hence the PRCs fixation with >10% annual growth rates at any cost."

Inevitably won't this growth slow down or even reverse as the MEW drys up and high oil prices exert a world-wide "tax." PRC must know this is coming and must be planning for alternative growth options - like boosting internal consumption?
FredW | 01.04.07 - 9:17 pm | #

dryfly writes:
94121 - I saw a discussion on that report. But they didn't calculate how much MEW they pulled out prior to the sale... only:

Selling Price
- Buying Price
- Improvements
= Gain

So the report didn't mention how much cash people actually walked away with from the transaction if any.

My guess is given the past increases they probably walked away with something if they weren't complete morons... but we don't know that.

And of course throw in standard 'past performance does not guarantee future results' disclaimer...

dryfly | 01.04.07 - 9:20 pm | #

dryfly writes:
Hey Fred - it appears that as we tighten our guidance & regs on our side, the Asians are loosening up their controls on how they buy securities on their side... in an effort to make it 'easier'. From Setser...

It looks like the Koreans are going to let their local banks swap their won for the central banks’ dollars. That means the banks get to play with the dollars – and presumably make a bit more adventurous investments than the central bank.

[...]

One result of all this: the line between central bank purchases of US debt and private purchases of US debt is blurring. Korean banks will soon be buying US debt with dollars borrowed (via the swap contract) from Korea’s central bank. I suspect Chinese banks have been doing the same thing for some time now.

I'm not sure our tightening of guidance will have as much of an effect on 'liquidity' as many suspect... MEW might be abandoned as the primary vehicle but there will be others - maybe the stock market.

Also had a good reference to a recent article in the Economist... The Global Gusher... a very good primer on the issue.

dryfly | 01.04.07 - 9:43 pm | #

Neal writes:
Even if there were zero risk premium put on sub-prime loans, and FCB's bought notes like mad, how does this make the working class afford $300K and up houses? The affordability factor is too high, therefore liquidity must go elsewhere. Why not into purchases of corporations and stock, inflating those beyond reasoable value. No trickle-down there.
Neal | 01.04.07 - 11:14 pm | #

tframe writes:
dryfly, thanks for the economist link... it appears to me that the CBs social engineering is partly responsible for this mess and explains why the Fed's attempts to take the yield curve back to "neutral" as AG put it failed... the FCBs won't sell their Treasuries at any cost (it appears anyway)...

tanta, i'll guess which big dog is mostly on the hook for the mew question: jpmc... here's their 3Q06 financial supplement... take a look at p.13:

http://files.shareholder.com/dow...ent% 20Final.pdf
tframe | 01.04.07 - 11:38 pm | #

dryfly writes:
sure tframe - I'm just a 'pilgrim' like the rest of us.

dryfly | 01.05.07 - 12:11 am | #

FredW writes:
Dryfly: "I'm not sure our tightening of guidance will have as much of an effect on 'liquidity' as many suspect..."

I agree that the guidance seems toothless. I was thinking that the MEW spigot may be dry - no increases in equity means that those that have been using this option are out of luck. Folks that haven't tapped their equity probably aren't going to. Average equity being at record lows would seem to confirm that this source is gone. If the liquidity alternatively flows into stocks and bonds I'm not sure how this supports the average consumer who used to have a home ATM. We can expect more buy-backs perhaps but maybe not much in the way of productive investment.
FredW | 01.05.07 - 1:35 am | #

vader writes:
I am a stranger in a strange land.


A pilgrim has purpose and direction.

I have none.
vader | 01.05.07 - 9:53 am | #

michaelcampion writes:
CR- Thanks for the number crunching... I'm wondering if there is any to quantify the multiplier effect from the MEW. That is; is the predicted 0.8% drop to the GDP based on the MEW going from 521M to 300M acutally understated. Or is this not an applicable question because of the way things are calcuated or another nuance. (I'm in my infancy of macroecon understanding)
michaelcampion | 01.05.07 - 6:30 pm | #