Russ Wetherill

More Losses on the Way: Don't Drink the Kool-Aid

The real problem is the government is taking on private debts. Governments are not instituted among free men so that innocent men can pay for the bad debts of others. Governments are created to enforce laws which protect one man's property from others, not to confiscate taxpayer money to make good on bad deals between bankers and speculators.

Why is QE ever a good idea? Why should money be taken from one taxpayer household and given to another to stimulate the economy? How about the household that needs the money could, say, work for the household that has the money, instead of using the government to rob the solvent household and give an unearned windfall to the insolvent? Why don't we just all rob each other until we all are equally poor. Great idea!


On Nov 24 12:37 PM derryl wrote:

> Ben and Tim will ride to the rescue with a big vat full of grape
> flavored QE Koolaid. They have not yet begun to print.
>
> The real estate losses, realized and unrealized, have created a deflationary
> secular trend. All of the inflation generating money creation has
> already been exhausted buying those properties and creating the bubble.
> The bubble profits are now sloshing around the world as an ocean
> of liquidity inflating investable asset classes. The bubble debts
> are now becoming defaults which threaten banking solvency, and constraining
> consumer spending and shrinking the real economy.
>
> A program of QE targeted at households would put spending money in
> people's hands to support GDP. It would put debt paydown money in
> people's hands to bail out household balance sheets and restore bank
> mortgages and other loans to performing status.
>
> This would not be inflationary. It would be anti-deflationary.
> It would target the source of the deflation pressures, which is the
> household balance sheet whose ills are infecting bank balance sheets.
> QE money that is not spent on consumption or used to pay down debt
> would contribute to the savings glut and asset inflation, which keeps
> interest rates and returns on investments low--a fairly benign side
> effect of the monetary injection.
>
> Everybody was supposed to get their swine flu shot to prevent a nonexistent
> flu pandemic. The real pandemic is household debt. The cure is
> grape flavored QE Koolaid injected into households.

September's S&P / Case-Shiller Shows Continued but Considerably Weaker Bounce

The home prices peaked in August. If the 3-month moving average is factored out, the September 10-city comp data dropped by 1.1%. This is roughly equal to the gain in August. The approximately 2-3% month-over-month July rise is keeping the September number slightly positive.

Are Fed MBS Purchases Really Holding Mortgage Rates Down?

Inflation risk? Where do you get inflation risk from? We are in the middle of massive debt deleveraging in the private sector, massive debt leveraging in the public sector, unemployment is at 26yr highs and headed higher.

The massive government spending will keep inflation in check for years to come, not create inflation as many claim. As deficits grow, deficit maintenance costs grow proportionately. This means cuts in government spending and increases in taxes will eventually have to happen. The greater the deficits, the sooner the spending cuts and tax increases will occur. Look to the east, Japan has been running deficits for years - where's the inflation?

And, we aren't Zimbabwe. There is no practical way to inflate our way out of public debt by printing dollars. The American people just won't put up with it. And, foreign investors will take their investment dollars elsewhere.

Mortgage Rates: Falling in the Fall

Higher rates mean lower sale prices. When rates increase by 1% your average buyer's purchasing power decreases by 8% for a 30yr FRM.

Once the rates go back up and the tax credits expire, house prices will start the next leg down. It's inevitable. The Obama administration is just trying to forestall the correction until after the 2010 midterms.

Look for an extension of the housing credit for another 6 months in March and another round of MBS purchases by the FED to get us through November 2010.

Home Sales at Highest Level Since February 2007

Buy Now before you're priced out of the market, eh, Mark?

Have Equity Markets Gone Too Far Too Quickly?

Did equities also fall too far, too quickly? Was DOW 14,000 a real value, or was it inflated by HELOC spending?

Maybe DOW between 9,000 and 10,000 is where it should be, and perhaps, should have been all along. With all that's transpired over the last few years, I think the only way to estimate value is to forget the past and look at prospective earnings going forward. Earnings won't improve much until consumer spending comes back. That will take time since the average consumer is mired in debt, and generally more inclined to save than spend.

But, as long as the wheels don't come off the cart completely, I expect that the market will remain basically where it is for the next few years until all of the debt is paid down, and lives are rebuilt.

A decade from now, the economy should be well into recovery mode and stocks purchased today should be doing well.

Is Unemployment Only 9.5%?

You're right, the seasonal numbers are probably different this year than normal. But, instead of lower than normal, they might also be higher than normal too. So what?

You can either believe in the methodology of the model, or question specific equations or assumptions in the model. But, to dismiss what you obviously don't understand just because you disagree with the result, frankly, raises questions about your objectivity.

The whole point of the seasonal adjustments is to correct for seasonal trends that might cause one to misinterpret what the data is telling you. If you want to know whether unemployment improved in October as a result of steps taken in September, then you might want to factor out seasonal Halloween jobs, since this might skew the data. Ignoring the Halloween jobs effect in October might show an improving job market when the job market is actually deteriorating. This is also true for Christmas, summer jobs, etc. Without seasonal adjustments, the data would be truly worthless to direct efforts to improve the job market.

Analyzing U.S. Economy in Terms of Housing

This "recovery," as you put it, is a complete illusion courtesy of the great prestidigitator Ben Benanke. The stock market is up thanks to a combination of extremely low interest rates, revision of FASB mark-to-market rules mending financial companies' balance sheets, and company cost cutting by reducing payroll and selling inventory. What happens when the smoke clears?

In football, it's easy to make first downs when you move the line of scrimmage ten yards backward on every play. But, that doesn't mean that the team is doing anything especially positive or meaningful.

The housing market, like the stock market, is also up not from correcting inherent market imbalances, but rather, by being manipulated from both the demand and supply sides. On the demand side: the IRS is goosing up demand by offering tax credits, the FED is keeping interest rates low thereby creating the appearance of affordability, and the GSEs are offering low-down-payment mortgages making more buyers presently able to purchase.

On the supply side: the banks are restricting supply by failing to foreclose on delinquent loans, modifying mortgage terms, and sitting on REO instead of listing it. If you have the market power to control the supply and demand in any market, you can pretty much set the price. That's why we have antitrust laws.

Unfortunately, now, by proclaiming a policy of 'stabilizing home prices,' the government is the primary violator instead of the enforcer of the antitrust laws. What other laws don't apply to our elected leaders?

The Fed and Fannie Mae: Throwing Money Down a Black Hole

In firefighter parlance, this is what is known as a controlled burn. The government knows that it is now impossible to contain the fire, and instead of allowing the whole forest to burn out over a fortnight, they are flooding the housing market with previously unimagined levels of liquidity.

Fannie Mae, Freddie Mac, Ginnie Mae, and FHA are still writing high-risk loans that they know, or should know, will result in high default rates.

No-down-payment or low-down-payment loans have always resulted in high default rates. Low interest rates help affordability now, but will result in higher default rates later due to falling equity as a result of higher interest rates - coupled with the inability to refinance.

Future defaults, however, are part of the overall plan. You see, just as the bubble grew over time, it also needs to deflate over time. House flipping was the norm on the way up, so it also needs to be occurring on the way down. This is the plan: to spread out the losses over a larger group of buyers, and ultimately taxpayers.

That is why the tax credit was created - to lure buyers into the market. These new buyers will cause some of the losses to be written off. Many new buyers will also default in the next couple years thus causing more losses to be written off, but not by the banks. The taxpayers will be fronting the money.

This is why the tax credit had to be expanded. The low-end home market was pretty well saturated with new buyers. The mid-to-high-tier market ($750k-$1M) remains frozen in California, and other parts of the country, in part because the incentives did not reach higher income families. Therefore new buyers weren't stepping in to take their share of the pain and help to transfer some of non-performing assets off of bank balance sheets and onto the GSEs.

The plan is now to have these mid-to-high-tier buyers step in and increase the volume of sales thus "curing" this part of the market. And, at the same time, increased sales will benefit the National Association of Realtors' lobby by increasing sales volume.

I don't entirely disagree with this plan. Under the circumstances, this will unburden financial institutions and transfer the non-performing assets to low-performing assets at low interest rates. The government is making sure the interest rates are very low so that these loans can be carried for a long period of time with lower debt service payments. The financial institutions will then be able to recapitalize and make performing loans at higher rates.

The only problem with this plan is the whole morality issue. The innocent taxpayers are being punished for the sins of profligate financiers. Where is the justice?

The other thing to recognize is that once the government turns off the spigot, the fire will rage anew. Rates will climb. Purchase power will fall and home prices will fall with it. Tax credits will expire, and there will be fewer buyers. Equity will fall and defaults will rise from underwater buyers who bought will little or no money down.

As Sir Winston Churchill said in a speech in November 1942: "Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."

Long-Awaited Housing Recovery Is Finally Underway

Recovery Problem #1: Historically low interest rates will eventually rise making homes less affordable.

Recovery Problem #2: Tax credits will expire making homes less affordable.

Recovery Problem #3: Unemployment is rising making homes less affordable to those without jobs.

Recovery Problem #4: Foreclosures are rising which will make homes more affordable (at lower prices) - yes they are still out there.

Property Values Set to Fall 43% from Current Depressed Levels

43% Nationwide? Wow! That would be something...

There may be areas that correct half that number - the coastal areas of California, for example, which are just starting to correct from peak pricing, due to Option ARMs. But, 43% nationally doesn't pass the smell test, even before reviewing your methodology.

As for the methodology, first of all, you use a limited sample size to extrapolate future prices. The trend line is only over four years, and this is useful to project losses twelve years in the future? A trend line based on data from 1960 to 2000 would better predict something.

Second, the chosen period from 1993 to 1997 was the tail end of the recession. Home buying activity was slower than normal and therefore price growth would also be slower.

Lastly, predictions like these only serve to call into question the credibility of rational, reasonable, fact-based predictions. Had your analysis been based on rising unemployment, rising interest rates, tighter credit, expiration of government stimulus, deflationary pressures on wages and materials, etc., then the analysis would have been worth a careful read. But, as it is... try again.

Consumer Confidence Is a Lagging Indicator: Expect Post-Recession Gloom Through 2010

Take off the training wheels. If the economy can stand without government support, then that would constitute recovery - real recovery. Until then, how will anyone know? Time will tell. A few quarters of 3.5% growth AFTER the governmental fiscal and monetary stimulus end will be very compelling, even to me. But we aren't there just yet...

I think it's fair to say that we have recovered from last fall's financial collapse, but that does not mean that all of our problems are behind us.

We still have trillions of dollars of bad loans that have yet to be dealt with, growing public debt, record private debt, more jobs lost than created, and lower paying jobs replacing higher paying jobs.

Facts are stubborn things. Unemployment is such a fact, like it or not. More unemployed deals a double blow to governmental coffers since less revenue in the form of tax receipts flows in and more expenses are incurred by sending out unemployment checks. No economic recovery, real or imagined, can be sustained with rising unemployment.

And it's not just the quantity but also the quality of jobs. Jobs must be created that maximize the highest skill level of each worker. We can't all work in fast food and afford $300k houses in LA. Can we?


On Oct 29 05:53 PM thiazole wrote:

> And what would you require to admit that we are in the recovery phase?
> I find that most skeptics have no idea how to answer that question
> (or they answer it with metrics like unemployment which have always
> been poor predictors of recovery).

Shiller: More than Stimulus Driving Home Prices Higher

The distinction I would make is between contributing factors and enabling factors. There are many contributing factors which influence buying decisions, but not all of those factors make buying possible.

The $8k first-time buyer credit and the low-interest-rate loans make purchasing homes at current prices not only desirable, but also possible. These government programs, along with FHA loans, qualify many more buyers at current prices.

This is an example of sine qua non (without which not). Absent these government programs there would be fewer buyers bidding for the same properties. More buyers means more sales at higher prices.

Of course, the other side of the supply-demand equation is being manipulated as well. Banks are restricting supply by failing to foreclose on delinquent owners. This practice is enabled by a change to the FSBA mark-to-market rules which allows banks to value assets by other methods than market price. This wasn't the case when the assets were increasing in value and the investment banks could mark up the value to the new market, with a 30:1 leverage and loan out even more risky loans. But I digress.

Yes, the market price is being overtly manipulated. What's more, the government's reason for this is to stabilize the economy, which may very well be true. But, this certainly does not mean that prices are increasing in any real sense, or that it is a good time to buy.

Then again, for a realtor, any time is a good time! I remember back in 2006 being told that now is good time to buy before you are priced out of the market. Really? Does that even make sense? I guess realtors don't have to make sense, they just have to say something that makes buyers fearful.

Right now, realtors are saying that we should buy before rates go up. Really? But when rates go up, buyers can afford less home, so the prices will drop. Won't they? At which point, my equity will drop. Why is this good, again?

The secret that the realtors don't want you to know is that buyers will pay what they can afford to pay. If rates go up, payments remain largely the same because that is all the buyers can afford. That is why I would prefer to buy a house at 10 percent interest rate, and not 5 percent. When the prevailing rates drop to 7.5% then my house goes up in value and I can refinance into a lower rate. If I buy at 5 percent, when the rates go up to 7.5% then I won't be able to refinance, and my home just dropped in value. Buy now before rates go up! Great Idea!

Option ARMs Still a Gaping Hole

These loans are the main reason I still haven't bought a home in California. The Option ARM is operates as a five-year leasehold agreement with the remainder to revert to the lender upon nonpayment. It will take many more years for these loans to work their way through the system. Fortunately, there are a lot of really nice low-priced rental houses out there.

Many of these Option ARMs were a very good deal for the 'owner' since no money was required up front and 'rental payments' were far below market value. There was also the potential for great profits if the wager paid off. No real down side except for impact to their credit score. But, when you have bad credit to start with there really isn't a downside, is there?

And in California, thanks to California Code of Civil Procedure Section 580b, defaulting purchasers are not liable for a deficiency judgment, provided they don't refinance:

"No deficiency judgment shall lie in any event after a sale of
real property or an estate for years therein for failure of the
purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the
balance of the purchase price of that real property or estate for
years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.
Where both a chattel mortgage and a deed of trust or mortgage have been given to secure payment of the balance of the combined purchase price of both real and personal property, no deficiency judgment shall lie at any time under any one thereof if no deficiency judgment would lie under the deed of trust or mortgage on the real property or estate for years therein."

How Long Will the Great Recession Last?

How long will the recession last? Short answer is that it depends. It depends on how long it takes us to get our personal and public financial houses in order.

It takes time to pay off debts, it takes time to divest non-performing assets, and it takes time for politicians to realize that more spending and more taxes do not lead to economic prosperity - they lead to financial ruin.

When will the recession end? The only answer to this question, given the spendthrift ways of the current administration is not soon, may not ever. The CBO projects a decade of deficits, perhaps $10T in total.

How will these deficits be reduced? More taxes. How will the health care, and carbon tax programs be funded? Even more taxes. How will Social Security payments be sustained in an era of aging population? Not even by taxes.

More taxes equals less discretionary spending for investment and consumption. This means fewer jobs, economic stagnation, and lower standards of living for all. Historically, the only effective way to expand the economy has been reducing government spending, decreasing taxes, and maintaining positive cash flow.

All levels of government, most financial organizations, and many individuals have, and remain, headed down the wrong road. Taking on more debt does not make you richer, it makes you poorer. Being broke is far better than being in debt because every dollar you earn is your own, no one else has a claim to it.