T2W Bot

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The emerging market meltdown that occurred between May 12 and June 13, 2006, had an impact on currencies, the carry trade and incredible growth in derivatives over the last decade, as described in Part 1.
In summary, here are the issues we will be examining in part 2.

An index that has been uncannily accurate in providing advance warning of emerging market trouble and what it is saying now. 
What the yield curve inversion for the third time in the last six months means. How accurate has it been in the past in warning of a pending slow down? 
Based on the importance that real estate and related construction activities play in economies around the globe, what impact will a real estate correction have?
Real wage growth, a principal driver in consumer spending, has been trending down since 1965. What does it mean for the economy going forward?
What are the most important cycles saying about what to expect in the coming months and years? 
Finally, we will tie these factors together to...
Continue reading...
 
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mattblackman

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5 0
The news this week (Aug 25) showed that the housing market in the US has continued to deteriorate much more rapidly than those in the soft landing camp believed possible. I see this single factor as one of the greatest risks facing the US and global economies going forward....
 

dbphoenix

Legendary member
6,952 1,244
mattblackman said:
The news this week (Aug 25) showed that the housing market in the US has continued to deteriorate much more rapidly than those in the soft landing camp believed possible. I see this single factor as one of the greatest risks facing the US and global economies going forward....
That's because those in that camp have a stake in a stable if not rising market. Plus many of them haven't been doing this long enough to have experienced a cycle.

And, apparently, they don't pay any attention to charts. I had been watching home construction since last summer:
 

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mattblackman

Newbie
5 0
S&P Housing Market Index (SPHOME)

dbphoenix said:
That's because those in that camp have a stake in a stable if not rising market. Plus many of them haven't been doing this long enough to have experienced a cycle.

And, apparently, they don't pay any attention to charts. I had been watching home construction since last summer:
------------------------
Yes and take a look at either the S&P Home Builders Index shown here or the Philadelphia Housing Index (HGX). Bearish as hell with the head & shoulders top confirmed in April 06. SPHOME weekly is currently showing a bearish pennant formation with support around 3000 with min projected target of 1500. This would take the index back to where it was in Oct 2001....

http://www.goldhaven.com/Chart/SPHOME-Wkly.jpg
 

dbphoenix

Legendary member
6,952 1,244
This may also be of interest. This is essentially what I tried to tell people last fall and winter before giving up.

Db

Face it: The housing bust is here


Missed in last week's 'Fed is done' euphoria was more stark evidence the housing bubble has burst. Growing numbers of homeowners can't make their payments.

By Bill Fleckenstein

Back on June 12, 2005, Time Magazine chose this headline for its cover: "Home $weet Home: Why We're Going Gaga Over Real Estate." I did not share the euphoria, as I believed that the housing bubble was about to peak.

In fact, in my column two months later -- the headline of which, "It's RIP for the housing boom," stood in stark contrast -- I said that Time's cover would be shown in retrospect as basically having marked the peak. That real-time view little more than a year ago has been validated, regrettably.

The fabled engine of our economy is clearly unwinding. The sobering implications, however, were lost on the stock market last Tuesday. That's when a weaker-than-expected PPI number incited the umpteenth Fed-is-done rally. What folks ignored that day: News from the National Association of Homebuilders that its Housing Confidence Index fell to the lowest level since early 1991.

When 'adjustable' becomes unsustainable


But the bigger picture is becoming increasingly harder to ignore. What we'll soon be seeing on a regular basis was portrayed by The Wall Street Journal last week, in a story titled "Homeowners Start to Feel the Pain of Rising Rates" (subscription required). The subtitle nicely summarizes the thrust of it: "Payments on Adjustable Loans Hit Overstretched Borrowers; 'Budgets Are Out of Whack.'"

It begins with the story of a Detroit accountant who was looking to lower her monthly payments. In 2004, she refinanced a $312,000 mortgage via an option-adjustable-rate mortgage that offered various payment choices, as do so many of these plans. Her (introductory) rate of 2.3% is now up to 8.75%, and her loan balance has grown to $324,000. She claims that the terms weren't clearly spelled out. But if she actually read the documentation, as accountants often do, and didn't get it, you can imagine how many people truly understand their mortgages. (Hint: The number rhymes with "hero.")

Since she's unable to refinance (in part, due to a nasty prepayment penalty), she must sell her house. The problem: Because everyone else is pretty much in the same boat and Detroit's economy isn't so swell, she can't -- even with having reduced her original asking price of $470,000 to $270,000. (Note: That would leave her $54,000 in the hole.)

To share some numerical dimensions of the problem: People who have ARMs are "all of a sudden finding their budgets out of whack because their house payments went up 25% or 30%," according to a Pasadena bankruptcy attorney whose comment serves as the Journal story's subtitle. According to Credit Suisse: "The portion of adjustable-rate mortgages that were at least 90 days past due has climbed 140% this year. And, according to a UBS study: About $137.5 billion face resets this year and about $524 billion face resets over the next four years."

Aftertaste of an open spigot

The story states the problem precisely: "Yet, the downside of the lending boom (my emphasis) is starting to show." And that is what it has been: a lending boom.

As I have been saying: Although the abdication of responsibility in lending showed up in housing prices, this mania, at its heart, has been a lending mania. (If we'd had a bull market in houses that produced stupid prices -- but we didn't have folks buying homes they patently couldn't afford -- it wouldn't have to end in the absolute debacle we are headed toward.)

Ghosts of Volckers past


It's a topic at the heart of another Wall Street Journal piece last week: "How the Fed Lost Its Groove" (subscription required) by economist Henry Kaufman. He notes the explosion of liquidity and debt that has occurred in the last handful of years (though it's been going on longer than that.) Though the federal funds rate has risen from 1% to 5.25%, he points out, this hasn't slowed down a debt expansion or credit availability: "Non-financial debt in the U.S. expanded at a rate of 6% in 2001, grew by 10% in 2005, and has been swelling at an even faster rate this year. At this pace, debt is growing at an astounding 50% faster than GDP."

Kaufman also notes that credit-derivative contracts increased from roughly $4 trillion at the end of 2003 to $17 trillion at the end of 2005. This growth -- in what Greenspan and the Fed think are so wonderful -- "is not just about reducing risk; it is fueling speculation."

No safety in transparency

Kaufman cited the downside of the Fed's insistence on transparency, that being the explosion of footings on the balance sheets of financial institutions:

"How can this be? The Fed policies of measured response and transparency have improved the capacity of financial intermediaries to gauge the market impact of central-bank actions. In this kind of environment, financial intermediaries employ a variety of 'value at risk' analytical techniques, along with a wide range of credit instruments, to quantify risk within narrow bounds. Ironically, the predictability borne of the Fed's measured response and transparency encourages (my emphasis) risk-taking and speculative trading. As the Fed lowers uncertainty about the near term, investors grow bolder."

At some point (sooner, rather than later), there will be a housing-finance-related "accident," due to an incendiary combination of housing debt and derivatives. That is what lies ahead. What remains to be seen is exactly when the financial bomb gets detonated.

Meanwhile, though this mess has just started, the end game is (and has been) very predictable, as the story states: "Some borrowers are opting to sell homes they can no longer afford." Unfortunately, folks like the accountant from Detroit are going to find that as this occurs, there won't be enough buyers, as many people will need to sell. The inevitable scenario: "Some California brokers say they are beginning to see a return of 'short sales' -- transactions in which the sales price isn't large enough to cover outstanding loans." Soon, this term will be replaced by "jingle mail," which I described in my Aug. 7 column [NB: this refers to the practice of mailing one's keys to the lender, then walking away from the property].

Ringmaster of this disaster

That, ladies and gentlemen, is how Alan Greenspan managed to make folks' lives ultimately even worse, in attempting to bail out his equity bubble with a real-estate bubble. Let's never forget who the un-indicted architect of this mess was: Alan Greenspan and the other merry pranksters at the Fed.

Of course, those folks who didn't learn anything from the equity mania, and who will turn out to have gotten themselves trapped in the housing mania, really have only themselves to blame. As I have been warning for at least a couple of years now, all of this was going to be wonderful until it wasn't. That moment in time is upon us.
 

erierambler

Well-known member
265 8
dbphoenix said:
This may also be of interest. This is essentially what I tried to tell people last fall and winter before giving up.

Db

Face it: The housing bust is here


Missed in last week's 'Fed is done' euphoria was more stark evidence the housing bubble has burst. Growing numbers of homeowners can't make their payments.

By Bill Fleckenstein




"Some California brokers say they are beginning to see a return of 'short sales' -- transactions in which the sales price isn't large enough to cover outstanding loans." Soon, this term will be replaced by "jingle mail," which I described in my Aug. 7 column [NB: this refers to the practice of mailing one's keys to the lender, then walking away from the property].


Of course, those folks who didn't learn anything from the equity mania, and who will turn out to have gotten themselves trapped in the housing mania, really have only themselves to blame. As I have been warning for at least a couple of years now, all of this was going to be wonderful until it wasn't. That moment in time is upon us.

Well I would disagree to an extent. Interest rates are not that high yet. In the early eighties interest rates jumped to better than 18%. Homebuilders had built many dwellings on speculation. That is not happening now. There is still strong demand for townhouses and single homes ( filling up by empty nesters , downsizing). Definitely much slower ( we are down 30% for homes in our area). Heck in the early 70's interest rates were better than 9%. We could just enter into a lull.
erie
 

dbphoenix

Legendary member
6,952 1,244
That depends almost entirely on demand. As supply increases, demand has to increase as well in order to keep prices elevated. Otherwise, they have to fall.

In any case, everything I thought would happen over the past year has happened, and we won't be lingering. And we won't be shopping in this market, either. Guess I'll have to change my name to DbNewMexico.
 

erierambler

Well-known member
265 8
dbphoenix said:
That depends almost entirely on demand. As supply increases, demand has to increase as well in order to keep prices elevated. Otherwise, they have to fall.

In any case, everything I thought would happen over the past year has happened, and we won't be lingering. And we won't be shopping in this market, either. Guess I'll have to change my name to DbNewMexico.
Yes , prices will fall........... and I won't be buying real estate for a while. Looking forward to some buys though, I missed an opportunty in 2001.

erie
 

dbphoenix

Legendary member
6,952 1,244
erierambler said:
Yes , prices will fall........... and I won't be buying real estate for a while. Looking forward to some buys though, I missed an opportunty in 2001.

erie
I can't complain. By the time I left Santa Fe, my house had tripled. Our house here has quadrupled. Real estate appreciation seems to follow me.
 

erierambler

Well-known member
265 8
dbphoenix said:
I can't complain. By the time I left Santa Fe, my house had tripled. Our house here has quadrupled. Real estate appreciation seems to follow me.
Excellent....... We haven't seen that kind of appreciation here.

erie
 

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