- It might be hard to see this, but the economy is definitely on the mend. The financial sector, dysfunctional as it may be, it nowhere as much of a basket case as it was 5 months ago. It might not be much solace for the 9.5 percent Americans who are unemployed, but this is the prerequisite first-step towards recovery.
- Expect the twin wave of ARM reset foreclosures and commercial real estate (CRE) defaults coming down the pipeline. ARM reset foreclosures are people who borrowed at the margins to get a house they cannot otherwise afford- these loans are disproportionately in CA and FL. As they reset and the borrowers cannot refi because they are underwater, this will devastate the housing selling market in specific regions. CRE defaults come as weak consumer spending run malls and stores out of business (I'm sure we can all come up with concrete examples of where this is happening). Like most mortgages, the rental stream of these mall tenants are either securitized or are up as collateral against some debt obligation. The wave of shuttering stores and the consequent decline in rental income is what drove General Growth Properties, America's second largest mall operator, into chapter 11.
- More thoughts on CRE default wave: the housing bubble destroyed the likes of Wamu, Countrywide, and Bears for reasons particular to housing mortgage: Giants funds (such as TIAA-CREF, CalPERS) have huge demand for AAA securities, and home mortgages, being the safest financial obligations, was the best source of loans to bundle up and create tons of AAA "stuff". This means that the people who originated mortgages (WaMu, CFC) and those who bundled them (Bear Stearns, Merril) all got dragged down in the ensuing mess. Now the question is who holds the bag on all these CRE loans. While CRE outstanding balances is "only" a couple of trillion compared to tens of trillions of home mortgages, we suspect that a good amount of it are concentrated in local banks and credit unions. This means that the coming CRE default wave will hurt a very different segment of the financial sector.
- There is some sense that the relative smooth transition of GM and Chrysler out of BK will help the economy. To some extent this exactly the kind of deleveraging and reorganization the rest of the economy needs to undertake. Relatively speaking, this was a clean and orderly process that did not force the productive part of the economy in limbo over rent-seeking haggling.
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Mille m...
5 years ago
5 comments:
first of all, my google reader says that 3 people subscribe to this blog... so it's not just me and some other guy.
second, what i'm wondering/worrying about are the turnaround times for the other sectors that were impacted by the financial downturn (i.e. california's budget crisis and the academic job market). while the financial sector rights itself, how long does the government and academic sector have to wait before we feel the effects of an improving economy?
The stars will realign by 2012. At which point things will "look" like they are truly back to normal. The recession will be a distant memory. Buy, buy, buy...
Meanwhile we will have some inflation, a larger national debt, and Palin running for president. Hoooooo-ry for our side.
The American dream as it has been know for the last 60 years is dead (buying a 1.2 million dollar home in the hills with little or no money down) Cheap credit is dead, my FICA score just got hit by my CCs lowering my available credit by some $20,000 total and I never asked for my credit to get so large in the first place. Our 401K will be about 3/4 of the value as they were last year. And we'll pay more in health care from the traditional, for profit, insurers.
Over all it's going to be business as usual, yet we'll need a new bag of tricks to stay afloat and be swindled with.
Oh and fox news will introduce the reality game variety "news" hours. It will take the news business by storm and we'll end up with:
The $10,000 News Ponzi Scheme
$25,00 Name that News Sound Bite
Miss News
The News Celebrity Charades
Classic Miss-information
The News Gong Show
The Price is Right : Lobbyist edition
The Cheap Show: CSPAN weekly highlights
American Gladiators (I'd watch if Vanity and Bill suit up against Rachel and Keith)
PS: Yang, I don't subscribe, but I'm a long long time listener... few times poster though.
__________
Damn Oligarchical Wankers™
The financial sector is a leading indicator, so while it rights itself, it will be a while for the rest of the economy to feel the recovery.
The other problem is that state finance is pro-cyclical when ideally it should be anti-cyclical. The CA academic sector is so tied to income tax receipts that absent ruthless incoming-smoothing policies it will be susceptible to a feast-or-famine dynamics. My high school completely torn down and rebuilt during the late high flying 90's. The art deco decor looks beautiful, but you can't really run a high school if you don't have teachers.
Cheap credit is indeed dead, but I am a bit cynical about this. I can't help but have this feeling that the next financial "innovation" crisis 20 years from now will be "different" because we have "smarter quants", more "powerful IT technologies", we've "learned how to manage risk", etc etc.
I think with the pace of change in technology and math it is very easy to intimidate someone out of their common sense: It's very easy to convince someone that the emperor is not naked if you used terms such as "maximum likelihood" or "Bayesian prior" or "heuristic search optimization", as if you can somehow always spot the Hope Diamond in pile of manure.
Your quite right. The fun is just beginning with data centers full of quantum entangled computer.
And just how mathematicians and physicists were king in the financial sector this time around. So will statisticians be in the next.
QBITS are a bitch to decipher without understanding stats.
a bit late to this party, but i have been short and wrong on much of CRE for the last 9 months.
i never expected any sort of bailout for the wealthy owners now upside down in CRE (after buying/developing in 2006 and 2007 at 5% cap rates) and candidly also thought we might see many regional banks fail while the administration concentrated power in the 19. but, it appears we must stave off any hint of deflation at all costs (!!!) even if it kills our currency and leaves our debt at 1x GDP...they will find a way to work around this.
with mid-term elections in 2010, no sign of job creation in the near future, i see more amend, extend and pretend...just ignore those capital ratios...if we wait long enough we might actually be able to outrun this.
as you mention, we are about to head into resets which should top out in 2013. Defaults on prime, alt-a and option ARMs are rising and cure rates seem non existent. You think people are finally spreading the word to all their friends that they havent paid the mortgage in a year and haven't been kicked out yet? I think we get to the point that the lenders/servicers take these 7 million or whatever shadow inventory houses and just rent them back...wait it out. in the meantime, i'm sitting here in CA waiting to buy, but the prices havent hit trend line yet. and they probably won't. thanks ben. slow and orderly. extend and pretend. and FHA will be screaming for more capital here shortly.
although it will be interesting to see how dubai impacts the risk trade, and if we start to see the dollar rebound more this week as the carry unwinds. very interested to see how the printing presses and Ben's balance sheet handle this. c'mon ben, take the rate up off the 0%...
being short anything since april has been a terrible trade. the only way i make any recomendations is with pair trades these days. sell the crappy company short, buy the better managed company and hope that the beta trade doesnt kill you from the HFT programs marking up heavily shorted and low volume crud. it's been fun. better to be ignorant and listen to the cnbc team...
thanks,
BTM
disclaimer: an equity analyst, but with a specialty in consumer companies not financials (obviously)...
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