Housing Doom

"The false economy brought on by government-induced inflation and nearly unlimited credit seemed as if it would go on forever… but forever is a long, long time."

(mistake in earlier version of the title — hate it when that happens )

Doom friend Mike has collected a Murderer’s Row from the malls.  This does not look good.

UPDATE:

"We have all agreed that our gifts to each other this year will be to take $200 and pay that towards our credit card balances." - great idea from Doomer AZSALUKI (see comment #4 below)

What, Me Worry? “They” will come to the Rescue

by Mike Folkerth

Truer words were never spoken than those of the Swiss psychiatrist Carl Jung who pronounced that, “People can’t stand too much reality.” As we watch the false economy of the U.S. meltdown, “reality” is not a word that is spoken on the main stream news or by our political wizards.

But then, if we don’t face reality head on, it will run over us from behind. Understanding what is really happening gives one the knowledge to step out of the path of the bus.

George Bush, underscoring how dire the economic crisis has become, told world leaders, “I agreed to a $700 billion rescue plan for financial institutions only after I had learned the U.S. was at risk of sinking into a “depression greater than the Great Depression.”

Too bad Mr. Bush and congress didn’t divulge this information to the American people before he shared it with the world. In the U.S., there has yet to be an official declaration that we are in a recession!

Following is a large dose of the reality that we need to ingest daily in order to plan properly. For those who say, “It’s always like this in an election year,” I think you should have your medicine checked and get a prescription for the non-delusional stuff.

STORE CLOSINGS AND LAYOFFS

Ann Taylor is closing 117 stores nationwide, Eddie Bauer has already closed 27 shops in the first quarter and plans to close up to two more outlet stores by the end of the year. Women’s retailer, Cache, announced that it is closing 20 to 23 stores this year.

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Here is Housing Doom’s third installment of our unauthorized annotated transcript of the American Enterprise Institute’s September 30, 2008 seminar "The Deflating Mortgage and Housing Bubble, Part IV: Where Is the Bottom?" [1] This is the presentation by Nouriel Roubini.

Highlights

• "… there’s a growing recognition that this was not just a subprime mortgage problem …"
• "… this is other huge time bomb of the CDS market where about $55 trillion of nominal protection has been sold against an outstanding stock of only $6 trillion of corporate bonds. "
• "… the $1 trillion number at this point is not the ceiling, it’s just barely a floor …"
• "… currently financial markets are dysfunctional. Fundamentals don’t matter, valuations don’t matter, it’s just flow."
• "… And even a small tiny island like Iceland can have systemic effects on asset prices, let alone if you have a blowup of Hungary, or Argentina, or Korea, or other economies."

Nouriel Roubini: [23:34] Well, Desmond called it very well, I think many aspects of why things are getting worse rather than better in the housing market, and I share his outlook and pessimism. I would like to elaborate on the broader picture about what’s happening in the economy and the financial markets.

I’ve been saying for a while this will be the worst financial crisis the US has experienced since the Great Depression and it looks like the worst one. I mean I don’t think there’s anything that’s happened since the Great Depression looks so severe. Of course the real economic consequences in terms of output contraction are not going to be as bad as the Great Depression because there is a massive amount of policy action, but in terms of financial shock, I mean what does happen in the last few months is really quite unbelievable, every other week another major financial institution going belly up.

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Here is Housing Doom’s second installment of our unauthorized annotated transcript of the American Enterprise Institute’s September 30, 2008 seminar "The Deflating Mortgage and Housing Bubble, Part IV: Where Is the Bottom?" [1] This is the presentation by AEI Fellow Desmond Lachman. He made use of a slide deck [2] and about three weeks after the event added newspaper articles to the site that he had written on the subjects of the future of banking regulation [3] and prospects for world-wide deflation.[4] The event site has both a video and an audio recording of the seminar.  No official transcript yet exists, but AEI has recently added a summary.[5]

Highlights

• "This is almost a once in a hundred year kind of event that is very likely to crush growth."
• "It looks to me as if it’s baked in the cake that you’re going to be getting the recession, rising unemployment, and that’s not too good for house markets. "
• "… the fact that the Fed is reducing interest rates to 1 percent in my view is neither here nor there."
• "… So you get somewhat in a vicious cycle, and that’s the reason why I think that you’ve got to get some sort of intervention to stop it."
• "What we’re going to need is we’re going to need stabilizing of the housing market through unorthodox means, coupled with a massive fiscal stimulus package, coupled with monetary policy accomodation, and then we might have a chance …"

Desmond Lachman: [12:38] Thank you very much Alex, and thanks once again for arranging this, and I really have to give you credit again, you and Chris, for having foreseen this as long ago as March of 2007. [slide 1 -- refer [2] below] You saw this coming in a big way and I recall at that time Ben Bernanke was just beginning to figure out that there might be a minor problem with subprime mortgages.

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To which Rep. Dennis Kucinich (D., Ohio) replied,[1]

"That statement that you just made you will hear about for the rest of your career."

Yep, that sounds about right.  In the interests of their physical safety, Doomers are strongly encouraged not to read the rest of the WSJ article.  I just about fell off my chair when I read this bit.

U.S. lawmakers kept up the criticism of the Treasury Department’s management of the $700 billion financial rescue plan on Friday, accusing officials of being disingenuous in the way they sold the program to Congress.

UPDATE: Check out "Bailout Anger Boiling: ‘Is Kashkari A Chump?’ ", by Diana Olick (posted about the same time as this)

… and by the way, thanks go to the Implode-O-Gang for their hilarious satire movie poster — Doom originally borrowed it here.

MORE:

Big hat tip to StockMarket-Implode for posting this embed.

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“Given the scrutiny the markets are under, Fannie and Freddie in particular, it’s irresponsible to put something like this out without having clearly done your homework.” cited in HousingWire 7/7 2008.

"Ladies and Gentlemen - The Day of Reckoning has arrived." - HousingDoom 7/7 2008

In retrospect it was last July 7th, the day Doom announced the Castle’s new chicken coop, when all hell broke loose. After reading HousingWire’s founder and Doom friend Paul Jackson’s measured response [1] to the situation I briefly regretted my earlier gut response,[2] but four months later it looks like my instincts were, regretably, the more accurate guide. I originally overreacted to a report [3] that a Lehman Brothers team headed by analyst Bruce Harting was suggesting that Fannie and Freddie would need to raise massive new capital because of an impending accounting rule change which might eventually force them to consolidate (bring back on their own balance sheets) many hundreds of billions of dollars worth of their MBS mortgage securities they had previously put into Qualifying Special Purpose Entity (QSPE) deals. Obviously a gross oversimplification On re-reading Paul’s post I have to agree with his assessment: "Shares seemingly fell by [the] second as investors read each word." Which is to say, investors were reacting so fast they were selling even before they got to the "of course OFHEO is going to exempt F&F" bit at the end of the sentence they were reading. This hair-trigger theme was played out two months later in the United Airlines false bankruptcy story fiasco,[4] and seems to be a driver in a lot of the markets’ recent volatility — maybe even yesterday’s gut-wrenching 911-point swing.[5]

Still, although the event was trivial, the result has been profound. The graphs we’re following in this series strongly suggest that Mr. Market is saying "No way on this Earth are those QSPEs bankruptcy remote." I think a lot of investors were thinking this before 7/7, but then the overreaction to the Harting analysis itself must have alerted many to the fact they were not alone in that assessment. The accountants are still working steadily to remove QSPEs from GAAP,[6] and investors are becoming quite wary of the longer issues of Agency Debt.[7] It could prove very difficult to restore the pre-July faith in agencies.

Meanwhile, at least some people are doing OK. Mr. Harting seems to have landed on his feet and has taken up new challenges — including, it would seem, the assignment of helping to write a sequel to the Hollywood blockbuster "Wall Street".[8] Sometimes life can get just a little bit weird.

Anyway, Reuters has reported [9] their regular summary of the week’s update at the NY Fed’s H.4.1 table site.[10] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[11]

Last week saw a significant selloff of agencies and a large buy of treasuries by foreign central banks, continuing the trend for both from recent weeks. However, the size of the moves moderated from the previous week. The net total of US obligations the Fed is holding for the cenbanks rose by a largish $8.87 billion. Neither the treasuries nor the agencies move threatened our Top-10 lists. However, the general trend continued. If you examine the data set, you will see that cenbank agencies holdings peaked at $985.9 billion on July 16, a week and a half after 7/7. Now 17 weeks later the holdings have dropped to $896.8 billion, and the last time agencies were under $900 billion was on March 19, 17 weeks before the peak. Thus the nice symmetrical pattern in the red line in the following.

Reuters has that "… holdings of agency securities fell by $5.08 billion in the week ended Nov. 12 to $896.79 billion, following a $7.24 billion fall in the previous week."

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Housing Doom is pleased to present the first installment of our unauthorized annotated transcript of the American Enterprise Institute’s September 30, 2008 seminar "The Deflating Mortgage and Housing Bubble, Part IV: Where Is the Bottom?" [1] This is the introduction by session moderator Alex Pollock. It uses a short slide deck.[2] The event site has numerous resources, including both an audio and a video recording of the 2 hour proceedings. There is as yet no official transcript.

Highlights

• "… this panel has previously brought you notable insights into, and accurate pessimistic forecasts of the problems of what happens when you have the collapse of a really big financial bubble …"
• "… so that would suggest about another 10 percent — that is 10 percent of the peak prices — to go."
• "So this is the institutional equivalent of putting your currency in the mattress."
• "… and they [the Federal Reserve Banks] have run their leverage up from 26 to 42 times."

Alex Pollock: [slide 1 -- refer [2] below] [00:00] … and welcome to the deflating mortgage and housing bubble Roman Numeral IV in our series.[1] [3] [4] [5] I’m Alex Pollock, a Resident Fellow at the American Enterprise Institute, and we have the same outstanding panel that we have previously had for our deflating bubble series, which by the way we fully intend to continue next Spring with deflating bubble Roman Numeral V [laughter] because this will still be going on by the Spring.

Now this panel has previously brought you notable insights into, and accurate pessimistic forecasts of the problems of what happens when you have the collapse of a really big financial bubble, which we had of course centered on mortgages but by no means limited to mortgages.

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In order to solve or stem the economic slowdown, Hennecke suggested the US would have to radically reduce spending across all sectors and recall all its troops from around the world.

Happy Remembrance / Veterans Day.  Thanks to twist [and especially Doomer L -- see below] for finding this one.[1]  Despite the strong flack he was getting from another guest, Tyche’s Martin Hennecke was quite explicit on his dire predictions about what the US will have to do to save the AAA rating on it’s sovereign debt.  And default is not out of the question.

I’m a retired civilian IT worker at Canada’s DND.  While I was there I was adamant that the West could not afford its present wars and oversees deployment.  Now, several years later, this assessment is starting to be heard on CNBC.  Doomers will recall me using language similar to the above letters-of-fire several times recently, and some of my former colleagues may recall discussions over coffee a bit like the CNBC video going back as early as 2003.  Some of those with a login might get some harmless fun out of reviewing this.

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"The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest."

A distant mirror indeed.  Remember that bit about Northern Rock having been the first British bank failure in 141 years?

Many thanks to Doomer V for this dig.  Doom rarely finds American academic historians helpful in putting the present crisis in perspective, but this guy from Virginia’s W&M recently hit one out of the park.[1]

I’ve often reflected on how the American Century (1945 - ????) has been unfolding much as did the British one (1815 - 1914).  The UK had it’s own generation of "baby boomers" born in the immediate post-Napoleonic era, notably John Ruskin and his contemporaries such as Karl Marx.  Our Summer of Love (1968) upheavals have a profound echo in the Revolutions of 1848, and now the present crisis is emerging as a sequel to the Panic of 1873.

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"The Queen asked me: ‘If these things were so large, how come everyone missed them? Why did nobody notice it’?"

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Some debt of Fannie Mae and Freddie Mac, the two largest funders of U.S. mortgages, has come under pressure in recent weeks as investors question the government’s relative commitment to the companies. Their regulator, the Federal Housing Finance Agency, has said the companies have only "effective" guarantees.

Thursday started off with this rather startling article from Reuters [1 - includes above passage] which quietly shredded the intensely studied money-quote from Bernanke’s Halloween speech: "… the U.S. government’s strong and effective guarantee of the obligations issued under the current GSE structure must be maintained." Obviously the foreign buyers of this debt are in no mood to maintain this market unless the Treasury first elevates that $200 billion support cap.

Then things started to get interesting. Mexican silver-based currency lobbyist Hugo Salinas Price posted an article [2] detailing a disturbing anomaly he’d come across in the growth of International Reserves. That is, after explosive recent growth, starting this August that growth came to a screeching halt. Readers of this series will notice a strong family resemblance between the following graph and the ratio and agencies graphs we have been following here. Doomers should follow the link for Price’s complete article and a better version of his graph. This extract reflects his puzzlement.

It seems to me that when a huge number such as $7 trillion suddenly stops growing, it must indicate that something very serious is going on. The growth of Reserves was so severe it was really an explosion; quite abruptly, it has stalled and has actually turned negative.
…

I’ll leave you with this question: what is the significance of the drastic change in the growth-trend of International Reserves, from explosive growth, to the sudden beginning of a contraction?

I hope others, more competent than myself, address this question. I believe it is quite important that we have an authoritative answer to it.

We’ve got a pretty good narrative for why foreign central banks might have started dumping Agency Debt in July, but what in the world would have slammed the door shut on the explosive growth in Reserves at about the same time? Any ideas would be greatly appreciated, because we haven’t got a clue.

Returning to our main thread, Reuters duly reported [3] their regular summary of the week’s update at the NY Fed’s H.4.1 table site.[4] As is also now customary Doom is providing an updated CSV version of the agencies and treasuries foreign central bank holdings data set.[5]

Reuters reports that foreign central banks sold a net $7.24 billion of agencies, while buying a whopping total of $19.13 billion for a healthy $11.89 billion total buy of US obligations for the week.

Reuters noted that "[t]his brought the cumulative drop in agency holdings among overseas central banks to about $67.4 billion or 7 percent since the beginning of October." Doom notes additionally that the total drop in agencies from their peak on July 16 now stands at $84.1 billion. The present level of Agency Debt holdings hasn’t been seen since late March, over 6 months ago.

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