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25 Reasons We Will Not Have a Depression

Oops. With current low short term interest rates resets of ARMs will be a big positive for consumers. Typical prime ARM will reset to 2.25% margin plus 1-year LIBOR rate at 1.3%, or 3.50% rounded. Typical Alt-A or portfolio ARM with 6-month adjustments at 2.25% plus 0.56% 6-month LIBOR equals 2.75% rounded. Those are both lower rates than the rate at which any of the loans were originated. The few remaining sub-prime ARMs have had rates lowering 1% every six months for the past two years. What will kill the goose, however, will be the protracted high unemployment rate and unavailability of home equity credit or credit card credit or personal unsecured loans to tide over the extended unemployed. There will be additional massive numbers of bankruptcies and foreclosures with no end in sight. Welfare applications will be busting at the seams and homeless sleeping in cars and public places. Maybe that's what it'll take for Congress to finally do something more effective.


On Nov 21 12:33 AM Jasper M wrote:

> Completely ignores the mortgage reset issue.
> Which is fashionable; seeing as we are only now exiting a trough
> season for these resets, it has faded from their consciousness.<br/>
>
> Dorm, don't need a black swan, all the pieces are not only already
> in place (in mortgages alone), but irreparable. It is a falling safe.

10 Reasons to Believe That We're in a Depression

You are exhibit No. 1 why this recession could easily continue as a long depression in absence of some new novel solution. The credit contraction is unprecedented and won't be easily reversed. Lenders and investors own too much bad mortgage debt on upside down homes, some 30% of all homes at the worst point, especially second mortgages and adjustable rate loans that have no refinancing options available with current programs and represent an indeterminate risk (about 40% of the 12.8 trillion in mortgage debt is adjustable rate). Consequently lenders don't want to lend in their own portfolios, except to some blue chip corporations and the U.S. Government.

Consumers, collectively with the highest debt service ever, are backed into a corner. Guidelines for all types of consumer and business loans keep tightening, historically a very accurate predictor of economic downturn (apologies to the yield curve and leading indicators). Credit card limits and home equity lines of credit (HELOCs) have been slashed and frozen. Entire categories of mortgage loans no longer exist and won't reappear in your lifetime. You cannot borrow against your home at any LTV without proof of employment and income, even with an 850 credit score and 1% LTV. The bank won't part with its cash unless the loan can be easily sold to Wall Street, and it can't. There are no subprime loans at all, no stated income, no-ratio or no-doc processes (all eliminated by bank regulator guidance issued September 26, 2006), and all the loan programs left have had continually tightening guidelines for three years. Most will applaud the new restrictive guidelines as healthy for the future, but they came at the worst possible time in economic history, and they are definitely going to ensure a doozy of a long recession/depression.

Many millions of consumers who might have used some home equity or credit card debt to weather unemployment or underemployment in a recession in the very recent past have no access to those resources today. There will be many millions more of bankruptcies and foreclosures as the recession drags on and too many borrowers exhaust all resources to service excess debt. I fully expect there will be tent cities on the capital mall before Congress wakes up from its obsession with health care reform.

Just last week "investors" announced a new higher credit score requirement of 640, up from 620, for all government-insured loans (FHA, VA, USDA Rural), which don't even have any credit score requirement under the government issued guidelines. Last Friday HUD announced new guidelines that effectively ends the FHA streamline refinance program (refinances an existing FHA mortgage) not requiring an appraisal and/or credit score qualification, thereby eliminating one of the few remaining ways popular way for FHA borrowers to quickly lower their mortgage interest, even if they're upside down. Bureaucrats and investors are doing the opposite of what politicians and lawmakers supposedly have been trying to do to relieve the economic crisis.


On Nov 21 11:20 AM yellowhoard wrote:

> Just tried to increase my line of credit with BOA and was refused.
>
>
> In spite of a near perfect credit rating and a debt to equity ratio
> that could allow the bank to sell my properties for 1/3rd of what
> they were appraised for just last year, were I to go into default,
> they said no go.
>
> I don't really need the money. I only thought it would be useful
> to have it as an option if I saw any compelling business opportunities
> down the road.
>
> That said, if this tight as a piano wire policy at BOA and others
> continues, we're in for a doozy of a depression.

Is the Market Reversal Already Happening?

You make a very reasonable and reasoned comment. However, as you point out, FIRE companies will continue to downsize and markdown. And the small banks aren't the real zombies, it's the big banks sitting on huge portfolios of worthless second mortgages and delinquent or severely underwater first liens that haven't been written off (not to mention T-securities bought leveraged with TARP and TALF funds, that could go down too when interest rates increase).

The big wild card so many bears are looking at is whether the FIRE's, and their disabled consumer clients, are like lepers who have, or might, infect the whole villlage to the point where recovery isn't possible for a good long while. The nascent recovery is likely, but nobody can gauge the extent. It won't help much if the recovery gets us back to, say 8% unemployment over two years; that would still be a horrifically recessionary equilibrium accompanied by millions more bankruptcies and foreclosures. There is little left in standard monetary or fiscal policy, or anything new on the legislative table to date, to effectively counter the big problems in housing and debt service in the economy. I supect there could be several significant pullbacks in stocks over the next few years as the fragile economy evolves. In any case, happy hunting for stocks of some of the many good companies having the parameters you cite, that will ultimately prosper, whatever happens. Just bear in mind that all stocks do follow one another generally in time, just with different relative sized price moves.

On Nov 22 12:14 PM Steve Mc wrote:

> Please keep one thing in mind. When you are examining a Trailing
> Twelve Month p/e ratio, that ratio also factors in massive negative
> earnings posted by the likes of AIG, FNM, Lehman, Bear Stearns, all
> the small zombie banks with awful balance sheets, etc.
>
> Also remember that during that 20 years ago we entered into the golden
> age of finance as a manufacturing base continued to contract and
> was shipped off shore. FIRE (Finance, Insurance, and Real Estate)
> hit a manic Euphoria starting about 6 to 7 years ago with low interest
> rates and the repeal of many banking rules designed to keep the system
> safe.
>
> As a result, the financial services industry grew at an extreme pace
> on a percentage basis relative to other S&amp;P 500 components. Massive
> negative earnings from this sector, and FIRE companies continuing
> to downsize and markdown toxic assets makes the rest of the S&amp;P
> have a p/e of 88. I am not saying that the market is still not overvalued,
> but I am saying that if you discount the financial services industry
> that p/e number would come down significantly.
>
> If you want to avoid getting burned on the downside of the rally
> you really don't have to. My rules for stock picking right now are
> p/e X p/b = No greater than 30, must pay dividends, must have ROE
> &amp; ROA greater than 10% each for the last 5 years, not alot of
> debt on the balance sheet, growing business with competant management.
>
>
> If you follow tactics like this, even if the market corrects 30%
> in the short term you will still make money in the long run by buying
> solid businesses.

Leading Indicators Rise for 7th Straight Month to a Two Year High

I believe it's the case that there has "never" been a recession with the yield curve sharply positive as it is now. Caveats: (1) never say "never;" (2) if the recovery takes unemployment from 17% (including give-ups and unsatisfied part time workers) to 12%, it won't feel like much of a recovery, more like the dead cat bounce in the stock market. Suppose the indicators then turn negative again after that "recovery;" the recession will seem endless for too many. While a recovery is likely, it won't be strong enough or soon enough. Time is not on the side of upside down real estate investors and lenders, those with extended unemployment and underemployment, near-retirees, those on fixed incomes suffering reduced interest income with continued inflation, etc. Lots of bankruptcies and foreclosures ahead in this recovery.

Why the Stock Market Should Crash

Hear, hear. The consuner is a dead duck. But the corporations in the stock market are, what, 38% in global revenue, riding on the backs of the developing countries. They are not the U.S. economy. Furthermore, there's no fixed link between the stock market and the economy. Stock and commodity markets are casinos driven by the options markets, which in turn are driven by computer buy/sell programs to benefit the investment banks that run them. Also, the stocks are bought and sold by the market makers. When the entire world dumped stock on them last year at low prices, they owned the market. Now they are raising prices until most are dumped back onto the retirment funds at much higher prices. Then, and only then will prices crash, and that will not be until the vast majority is convinced there's no direction but up. It may take a few quarters of "recovery" to get to that point.

When Will Deflation Turn Into Inflation? (And How Quickly?)

That's a very well-written, faxcinating article with braod vision of the economic landscape. But have the stock and commodity markets already discounted, possibly over-discounted, the inflation expected in the intermediate term? Actually, much consumer goods inflation has already happened, even as leveraged assets have deflated, notwithstanding the official CPI numbers. During the mild CPI "deflation" of the last year the bread I buy went from $1.39 to $1.99 per loaf, up 43%, cheddar cheese from $2.99/lb to $4.99/lb, up 33%, milk from $1.89 to $2.89/gal, up 53%, round steak from $1.99/lb to $3.99, up 50%, gasoline $1.89/gal at the low to $2.39 up 26%. Consumer price index down 2%???...what a bad joke. It's probably due to the ginned up numbers for housing costs. Meanwhile housing values down 30%, consumer income up nothing or cancelled and stock market about flat.

The middle class has been crushed by the asset deflation, and will be further crushed by continuing monetary inflation already showing up in consumer goods. Furthermore, residential mortgage lenders and real estate investors won't be helped for a long time by monetary inflation because the rules and environment for getting mortgages have changed drastically for the worse. Systemic monetary inflation won't save the day for the consumer asset, or at least not quickly enough. The next immediate phase of the crisis is that a large portion of the 16% who are under/unemployed will file for bankruptcy and be foreclosed as income and savings can't pay the bills and unemployment benefits and savings run out but credit card or home equity loans are unavailable. That could lead to even worse housing prices and economy. There's lots more debt liquidation by one means or another in store. That might mean a severe correction in stock and commodity prices at some point before resuming a long term uptrend.

Consumer goods inflation might continue gradully, but asset inflation and more accelerated goods inflation won't resume in earnest until surviving banks see that the worst of the debt liquidation is over, the writeoffs have been taken mostly and enough economic growth has resumed to make it less risky to make higher yielding private loans instead of sitting on Treasury securities, and thus the money supply will begin to expand relentlessly...maybe starting in a couple years at the earliest...free reserves are off the charts.

The only way I can think of that a significant portion of distressed consumers could survive the process now unfolding would be for the U.S. government to soon make low-interest long-term loans directly to consumers to pay off a significant portion of more burdensome debts such as excess mortgage debt, regardless of their employment status. But that won't happen, no popular support. ALL the government assistance is going to keep AIG and insolvent banks in business while they live on taxpayer funds via interest on T-securities and stock market profits. It's too bad because that would save both the lenders and the borrowers together. Unfortunately the government has chosen to save the lender/investor/campai... class only, with nothing for individual consumers (oh, sorry, I forgot the $600 or so special tax rebate). As millions of consumers go down the tubes the political process is going to be interesting to watch.

The Dow: Ominous Parallels to the 1929-1930 Era

Good points, however this is a deflationary depression due to debt implosion and the Fed's money printing might not work since it's going into the wrong hands: failed lenders and investors, not failed borrowers; it won't work to stop the collapse of the consumer economy. The biggest problem with stocks in the GD was the raising of the margin requirement forcing liquidation. In this new D bank regulators and mortgage lenders have basically raised the margin on real estate, forcing liquidation, having obvious devastating consequences to housing values, mortgage securities, and the economy. Bank regulators first caused the housing crisis, perhaps inadvertently, with the biggest mistake in economic history, The Interagency Guidance on Non-Traditional Mortgages issued September 26, 2006. The Guidance is taken as requirements by lenders, and it guaranteed that no subprime borrower would be able to refinance after their interest rates adjusted to 10-15%, and it soon led to the end of any housing asset based lending (no doc, stated income, no ratio). Wall Street rationally pulled the plug on creating any new mortgage securities. Virtually all subprime lending ceased by early 2007. By early 2008 there was no stated income or other "low doc" lending. Then the mavens at Fannie and Freddie, now government controlled, plus mortgage insurers, have continued to tighten lending guidelines all through the crisis, forcing more and more liquidation. Most would agree that many of the new regulations and guidelines were necessary, but we've gone from one universe to another in an instant, and that won't reverse, so the consequences can't be reversed. Many of the changes were necessary for the long term, but came at the worst possible moment in real estate history. There will be massive consumer bankruptcies and foreclosures ahead as unemployment benefits run out and the economy doesn't recover fast enough. The Geithner programs for Housing Affordable Refinance Program and loan modification program haven't work, won't work sufficiently to fix much. Not sure what this means for the stock market. Banks are using Fed money to trade the securities markets, since they aren't lending to any but the most qualified, but can any of this rescue the overall economy? In this case trickle down economics can't stop the implosion of the consumer sector. Will the next leg of bankruptcies and foreclosures kill the stock market?


On Oct 09 03:18 PM thiazole wrote:

> I agree with you, but no need to type in all caps.
>
> I actually tend to believe that "real" market performance is worse
> during inflationary periods when compared to deflationary periods
> (per relative change in GDP), perhaps because of investor psychology.
> During inflationary periods, investors sell down the market not fully
> realizing how much inflation has eroded the market all by itself.
> Just look at the market since 2000. It turns out that after inflation,
> even the 2007 DJIA high of 14,000 was lower than where the Dow was
> in 2000, yet there were a lot of good economic years in between.
> Imagine how much the market would have fallen had the economy been
> bad during that period. On the other hand, deflation probably has
> the opposite psychological effect - if the market falls 90%, that
> seems too much even if there was 50% deflation during that period,
> so bargain hunters swoop in and create a floor for the market that
> is actually much higher than it should have been. That being said,
> of course I still believe that deflation is much worse for the economy,
> although both are bad.

U.S Dollar: Chart Points to Major Reversal/Rally

Tend to agree that dollar is technically oversold and a significant intermediate "rally" or mild corrective period can be expected in the near future. View is supported by the fact that Treasury securities have been overbought and now appearing to having a reversal, and the yield curve strongly positive. However, any such developments are likely short lived. You imagine what would happen to the economies of the world with interest rates rising significantly any time soon. That phase is down the road a piece after economies clearly start recovering robustly.

Before it happens most likely the U.S. will have a period of calamitous bankruptcies and foreclosures as high unemployment continues and benefits run out. This time is very different. In all recessions in the past 40 years, unemployed folks could get through a recession by borrowing against the grown equty in their homes with asset based equity loans or refinances (no ratio or no doc). Now there are no such loans and no grown equity; only the employed are allowed to borrow, and cash out limited to 80% LTV/CLTV. The lenders are guaranteeing the further demise of the middle class, and lots more lenders will fail. Meanwhile I don't see how state governments are going to balance budgets without a round of major spending cuts, and that means more unemployment. Can the U.S. government solve these problems? Maybe, but there's no political will or creative programs. Saving lenders without bailing out borrowers doesn't work for the economy.

Has the Market Decoupled from Economic Reality?

Speaking of moving averages, the SPX is trading below its 50 week and 200 week moving averages, both of which are now declining. A 62% Fibonacci retrace of the 900 point decline from 2007 peak to March, 2009 trough is about 558 points, so the retrace point is 1233, at which point the ndex will be into resistance formed in 2005-2008, also the breakdown point of December, 2008. If the index went to 1233 in the very near term it would be right between the declining 200 week and 50-week moving averages.

I should also note the trading range between 675 and 975 of 300 points between September, 2008 and July, 2009. The breakout from that range projects the price to 1275 and the market should trade above the range for 10 months. If the index went to 1233 quickly, most likely there would be many bearish technical divergences and too many bulls. If the market spends considerable time trading near current levels before moving up, that would set the stage for a more extended bull market as some kind of economic recovery becomes reality.

I should also note that the market has spent about 5 years trading above 1250 (1999-2001, plus 2005 to 2007), and, so far, in that time span somewhat over 4 years below 1250. A principle that often works is that prices will spend at least as much time below a price range as the most recent time span above that range before it can break out above the boundary of the two ranges. That means about another 6 months to a year below 1250 before it can go higher. I supect we'll see a move to 1230 within the six months, probably after a short correction or trading range, and then a more significant corrective trading range of 1000 to 1250 in 2010 awaiting more confirming positive economic performance (10% bull market correction from 1230 = 1107, or a mini bear of 19% from 1230 back to 1000). The possibility exists that the market will correct from near here to the 950 breakout level by the end of the year, to test the yearly low of 2009 in early 2010, but that would be counter to normal seasonal patters of a rally from October lows through the end of the year. Disappointing earnings reports could support such an abnormal seasonal pattern. If that happened first, it would actually be a much healthier pattern for 2010 and beyond since the base would be strengthened before the move up.

Has the Market Decoupled from Economic Reality?

The whole rally has been a short squeeze. After investors sold out in 2007-2008 the market makers were loaded with stock and lots of investors were short. Now as the averages have hovered near rally highs for three months and have made marginal new highs with the % of stocks above their 50-day moving average hovering in the 80-90% range, the typical maximum rally highs. But note well that as the indexes keep making marginal new highs there is now a bearish divergence as the % of stocks over their 50-day averages has dropped into the 70%'s! The bearish divergence that has developed in Augst-October appears to be a mirror image of the bullish divergence in March '09.

The flagging momentum is most likely a harbinger of a correction or bear market of some type. Wherever and whenever it stops most likely a bullish divergence in the bullish % will likely tell us again. At that point the majority will again be bearish, will have many reasons why the economic recovery isn't going to happen (yield curve notwithstanding), and will agree that everybody should have seen it coming since earnings can't increase in such a bad economy, and the banks hadn't yet recognized their losses yet. I expect that phase of the market will be accompanied by widespread recognition of soaring bankruptcies and bank failures as the many unemployed run out of benefits and file for BK and lose homes in foreclosure.

How the Feds Are Making the Mortgage Mess Even Worse

How in heaven can the government just shut down a $30+ billion mortgage originator/servicer on the strength of mere "suspicions." What are they accused of and how could it possibly be so serious as to warrant complete and sudden shut down with no due process? I realize that their primary source of funding, Colonial Bank was accused of fraud in connection with trying to obtain TARP funding, but why punish TBW, and the Colonial situation wasn't even proven yet.

Oh, and I hate to be the bearer of bad news, Jake, but your credit rating might get ruined on top of your difficulties if some mindless clerk or computer system reports your payment as a 30-day mortgage late...your credit will drop by 100 points right now. Take it from one who was similarly victimized. Homecomings' processing equipment shredded my timely submitted May mortgage payment check. They sent it back to me with an apology letter dated May 28. I immediately sent a replacement check. Suddenly in June I began getting notices from credit card companies slashing my limits and raising my rates. When I checked my credit report there was a mortgage late report for a $49 late fee reported for May, and no doubt my credit scores bombed out big time.

What Can Stop This Market Rally?

What can stop rally? Short term, only when the preponderance of stock futures and options players are long, and the momentum has stalled for a few weeks. Barring a strong rally over the very recent trading range, I'm guessing that will be about the end of next week to a few days after Labor Day, after the September calls have topped for three weeks and active puts nearly worthless, but inactive October puts have based for three weeks. (Note, 89% bulls on stock futures a week ago, usually peaking ahead of price top.)

Another brief bout of selling in the interest rate instruments to raise competitive yields would be another harbinger. Interest securities are overbought on daily, quarterly and yearly stochastics but oversold on weekly and monthly.

Any correction will be relatively short lived (Oct-mid Nov). Stocks are very overbought on weekly and monthly stochastics, but oversold on quarterly and yearly. Also, the yield curve is very positive and "don't fight the Fed." Small investors are drowning in money market cash earning nothing, and banks have nothing to do with the incredible mountain of free reseves except earn arbitrage interest and dividends and play the stock market (for quite a long time they won't be lending it to real estate developers, commercial refinancers, small businesses or the many millions of un/under-employed small fish who will fry eventually in bankruptcy and foreclosure waiting for the strong recovery that will come, but not soon enough).

Less Government or Lower Wages? You Choose

We need lower sales, less spending, more saving!!? How about more income! Over-leveraged consumer? What about AIG, Goldman, Lehman, BearS, JPM, Citi, WF, BofA, etc., etc.? Allow market forces to wring out the exesses!! Tell that to the Fed and Treasury. The SLF and TARP-ridden survivors are now basking in traditional bonuses playing the markets using taxpayer money for leveraged speculation. They're really wringing out their excesses...from the taxpayers hides. Meanwhile the taxpayers eat cake. Current "saving" is because all the credit card limits were slashed, payment rates increased, and balance transfer offers discontinued. I wonder what's happening to savings balances, not savings rates. The only ones who are going to be wrung out by natural market forces are unemployed consumers and the dwindling ranks of remaining taxpayers. Can anybody suggest the best way to go long bankruptcies and foreclosures?

Fibonacci Stops Rally in China?

The computers that count are the ones at the program trading firms. They're optimizing profit based on selling options. Long term doesn't matter much. The August and September index call options broke down below a multiweek trading range. Short term most likely the market will mark time now while the September calls base and most of the Augusts go out worth less than their recent high trading range. Will that be a base for an Elliot Wave No. 2 in a new long term bull market, or a trading range in a continued corrective downtrend? The computers won't decide until it sees who's buying the puts, calls and futures.

Coming Soon: Banking Crisis of Historic Proportions

Not a debt bubble at all. Just transform some of the really toxic debt into a more benign form of debt. No new debt at all. Think of it as debt restructuring designed to avert a national (interantional) crisis. The loans are collateralized in a fashion by the income tax system. The lenders will repay their loans or lose their charters.

The true prospective new debt bubble being created is what the Fed and Treasury are doing with all the special lending facilities and TARP. Speaking of ability to repay, I wonder if Citi, Chase, Wells, BofA and all the other TARP recipients could have proven they could repay TARP loans except for collecting the spread between Treasury securities proably bought with huge leverage using the TARP funds and other various borrowings from the Fed...free money for sure. If the nation continues to rely on these trickle down economic programs, there won't be anybody left to pay the taxes or to repay anything.

My plan is simply an idea to save Joe sixpack and his creditors from the onrushing orgy of bankruptcies, foreclosures and lender failures. I'm open to better ideas, but I haven't seen any others around that aren't just more complex taxpayer giveaways to the lenders.


On Aug 16 03:16 PM ebworthen wrote:

> So let me get this straight:
>
> Another debt bubble to solve the current debt bubble?
>
> Uncollateralized loans to people who cannot demonstrate and ability
> to pay to solve a debt crisis caused by the same?
>
> This would work as well as federal housing projects in inner cities.
>
>
> Your plan would be like watching a rerun on T.V. with commercials
> of a bad sequel with no popcorn.