Finally, a voice of economic reason

[cr]

From: http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/FinallyAVoiceOfEconomicReason.aspx

When a respected financial guru such as Bill Gross says the subprime-mortgage crisis is going to spell trouble for other markets, maybe folks will start paying attention.

By Bill Fleckenstein
For several months now, many folks have claimed that mortgage problems were “only” subprime — and/or contained.
Now, as the credit noose tightens at every level and facet of the mortgage business, it’s pretty clear that anyone who made those claims had no understanding of what’s gone on for the past several years or was not telling the truth. A reading of Bill Gross’ monthly outlook for July, “Looking for Contagion in All the Wrong Places,” should correct their views.
Home alone with the undeniable truth
Gross writes: “The problem lies not in a Bear Stearns hedge fund that can be papered over with 100 cents on the dollar marks.” Rather, “the real problem lies in the homes that were financed with cheap and in some cases gratuitous money in 2004, 2005 and 2006. Because while the Bear hedge funds are now primarily history, those millions and millions of homes are not. They’re not going anywhere.”
Gross goes on to note that people did not expect to end up in this predicament. They assumed that their teaser rates would be turned into new teaser rates.
What they really believed, though Gross doesn’t mention this, is that house prices would go up forever. Folks were encouraged — by Fed Chairman Ben Bernanke, former Chairman Alan Greenspan and virtually everyone else, save for a few of us skeptics who’d seen this movie before — to think that everything was hunky-dory. Of course, all of the insanity that I have been describing on a regular basis is a function of irresponsible policies on the part of the Greenspan Federal Reserve and many other central banks.
As an important aside, I would just point to the acknowledgement — in high places — of that recklessness. In a recent report, the Bank for International Settlements (BIS) noted: “Behind each set of concerns lurks the common factor of highly accommodating financial conditions. Tail events affecting the global economy might at some point have much higher costs than is commonly supposed.”
The aftertaste of the Greenspan era
That’s from a June 25 story by Ambrose Evans-Pritchard of the London Telegraph, who writes: “In a thinly veiled rebuke to the U.S. Federal Reserve, the BIS said central banks were starting to doubt the wisdom of letting asset bubbles build up on the assumption that they could safely be ‘cleaned up’ afterwards — which was more or less the strategy pursued by former Fed chief Alan Greenspan after the dotcom bust.”
The consequences of that “strategy,” as noted by Gross: “Escalating delinquencies of course ultimately lead to escalating defaults. Currently 7% of subprime loans are in default. The percentage will grow and grow like a weed in your backyard tomato patch” — an indication that this problem is going to get worse and going to be with us for some time.
Gross goes on to note that if default rates climb to 10%, “even some single-A tranches face the grim reaper.” (Editor’s note: Those tranches were represented to buyers as high-quality debt instruments, supposedly among the safest pieces of collateralized debt obligations, or CDOs, that owned the risky mortgages in question.)
As for even higher-rated triple-A’s, Gross says, “Folks, the point is that there are hundreds of billions of dollars of this toxic waste and whether or not they’re in CDOs or Bear Stearns hedge funds matters only to the extent of the timing of the unwind.”
He is not wondering whether this is going to be a problem, only at what rate it becomes a problem.
Easy money, difficult times
Gross warns: “The subprime crisis is not an isolated event and it won’t be contained by a few days of headlines in The New York Times. And it will not remain confined to a neat little Petri dish in some mad financial derivative scientist’s laboratory.”
He goes on to say the U.S. economy will be affected, and “consumption will be reduced, to say nothing of new-home construction over the next 12-18 months.”
Now, that is not news to regular readers of my column. But I share it because Gross is a person whom many people look up to. Avoiding the problems that have built up for years has been a function of denial, but the more you read about problems that you can see quite plainly, the harder it is to deny the very same. As someone who’s widely read, Gross will help people believe that what their eyes are telling them.
As I’ve said many times, I don’t know when the party in the stock market is going to end. But given all the leverage, and given all the trend-following, risk-seeking, quick-triggered, hot-money operators out there, I don’t see any way that we can avoid a crash or crashlike experience. I cannot emphasize strongly enough that the leveraging up of America is over. But the de-leveraging and the problems associated with that have only just begun.

[hipmatt]

Ya, but Sec. Paulson says we are AT or NEAR the housing bottom..

LOL!!! How can you say the bottom is here with the growing inventory, increasing rates, tighter lending standards, and massive foreclosures and even more are predicted.

http://money.cnn.com/2007/07/02/news/economy/paulson_housing.reut/

Paulson: Housing ‘at or near bottom’
But Treasury secretary gives no timetable for recovery; says financial markets remain healthy despite subprime mortgage mess.
July 2 2007: 4:40 PM EDT

WASHINGTON (Reuters) — Treasury Secretary Henry Paulson said Monday the U.S. housing market correction was “at or near the bottom,” although it could be some time before an upturn.

“In terms of looking at housing, most of us believe that it’s at or near the bottom,” he told Reuters. “It’s had a significant impact on the economy. No one is forecasting when, with any degree of clarity, that the upturn is going to come other than it’s at or near the bottom.”
ECONOMY

Paulson added that global economic growth remains solid, and a resilient U.S. consumer and strong labor markets are underpinning the domestic economy.
Paulson: China must push for reform

“We are making this transition successfully (from) a growth rate that wasn’t sustainable to one that is sustainable,” Paulson said.

Asked about any spillover from the well-publicized problems in the subprime mortgage sector, Paulson acknowledged that excesses can build in benign economic periods with ample liquidity, which can lead to an erosion of standards.

“We’ve certainly seen it in a number of areas. Borrowers need to be wary of the risks they’re taking on in times of low interest rates, particularly if they haven’t fixed their rates. Lenders need to be wary,” he said.

Recent jitters in financial markets stemming from troubles in the subprime sector of the mortgage market underscored the risks and can serve as a “call for vigilance,” he added. Markets have been unsettled as two hedge funds at Bear Stearns (Charts, Fortune 500) ran into trouble with subprime bets that went bad.

Paulson, who was chairman of Goldman Sachs Group Inc. (Charts, Fortune 500) before taking the top Treasury post last year, said he monitors financial markets closely, and aside from the subprime situation, they remain healthy.

“Markets are volatile,” he said. “I haven’t seen a single thing that surprises me – it’s hard to surprise me.”

[hipmatt]

Ya, but Sec. Paulson says we are AT or NEAR the housing bottom..

LOL!!! How can you say the bottom is here with the growing inventory, increasing rates, tighter lending standards, and massive foreclosures and even more are predicted.

http://money.cnn.com/2007/07/02/news/economy/paulson_housing.reut/

Paulson: Housing ‘at or near bottom’
But Treasury secretary gives no timetable for recovery; says financial markets remain healthy despite subprime mortgage mess.
July 2 2007: 4:40 PM EDT

WASHINGTON (Reuters) — Treasury Secretary Henry Paulson said Monday the U.S. housing market correction was “at or near the bottom,” although it could be some time before an upturn.

“In terms of looking at housing, most of us believe that it’s at or near the bottom,” he told Reuters. “It’s had a significant impact on the economy. No one is forecasting when, with any degree of clarity, that the upturn is going to come other than it’s at or near the bottom.”
ECONOMY

Paulson added that global economic growth remains solid, and a resilient U.S. consumer and strong labor markets are underpinning the domestic economy.
Paulson: China must push for reform

“We are making this transition successfully (from) a growth rate that wasn’t sustainable to one that is sustainable,” Paulson said.

Asked about any spillover from the well-publicized problems in the subprime mortgage sector, Paulson acknowledged that excesses can build in benign economic periods with ample liquidity, which can lead to an erosion of standards.

“We’ve certainly seen it in a number of areas. Borrowers need to be wary of the risks they’re taking on in times of low interest rates, particularly if they haven’t fixed their rates. Lenders need to be wary,” he said.

Recent jitters in financial markets stemming from troubles in the subprime sector of the mortgage market underscored the risks and can serve as a “call for vigilance,” he added. Markets have been unsettled as two hedge funds at Bear Stearns (Charts, Fortune 500) ran into trouble with subprime bets that went bad.

Paulson, who was chairman of Goldman Sachs Group Inc. (Charts, Fortune 500) before taking the top Treasury post last year, said he monitors financial markets closely, and aside from the subprime situation, they remain healthy.

“Markets are volatile,” he said. “I haven’t seen a single thing that surprises me – it’s hard to surprise me.”

[LookoutBelow]

Think back during the begining of the Iraq war….Remember that clown iraqi information minister who was saying all of that B.S. about the Americans are NOWHERE near baghdad ?….Remember him and his stupid smirk ?….Remember how we all laughed thinking he's got a real nasty surprise coming… ?….now replace that image of that Iraqi idiots face in your minds memory with Paulson's face…. telling the world that "housing is already at the bottom"…….Get the picture ?..Nuff said ……

 

They will tell you that everybody is doing wonderful while people are actually starving in the streets in cold, stark reality….its their job in govt…its called "Spin" and "Propaganda"…its not news…its theater.

Believe 1/3 of what you read and NONE of what you see on the tube.

[LookoutBelow]

Think back during the begining of the Iraq war….Remember that clown iraqi information minister who was saying all of that B.S. about the Americans are NOWHERE near baghdad ?….Remember him and his stupid smirk ?….Remember how we all laughed thinking he's got a real nasty surprise coming… ?….now replace that image of that Iraqi idiots face in your minds memory with Paulson's face…. telling the world that "housing is already at the bottom"…….Get the picture ?..Nuff said ……

 

They will tell you that everybody is doing wonderful while people are actually starving in the streets in cold, stark reality….its their job in govt…its called "Spin" and "Propaganda"…its not news…its theater.

Believe 1/3 of what you read and NONE of what you see on the tube.

[bubble_contagion]

Is the time to buy gold, whiskey and ammo?

[bubble_contagion]

Is the time to buy gold, whiskey and ammo?

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