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Allan from Fallbrook
ParticipantInteresting article on Yahoo News about the continuing saga of the sub-prime market. Where before Wall Street acted as though the problem were confined to a few players, such as Bear Stearns High Grade Structured Unit, it appears now that it is spreading further (and faster) than previously admitted to.
Note the insistence that the problem is “not systemic”. Well, not yet anyway.
ParticipantInteresting article on Yahoo News about the continuing saga of the sub-prime market. Where before Wall Street acted as though the problem were confined to a few players, such as Bear Stearns High Grade Structured Unit, it appears now that it is spreading further (and faster) than previously admitted to.
Note the insistence that the problem is “not systemic”. Well, not yet anyway.
ParticipantCheney and Bush and the neocons engineered the house price runup?!? Holy Halliburton, Batman!
Scruffy, a nod for a truly humorous post. However, and as Lurkor aptly pointed out: We ain’t the ones drinking the Kool-Aid, my friend. I am curious, though. What is your profession when not penning adroit little missives like the one above? Bomb throwing Anarcho-Syndicalist? Economic advisor to the French Lysee? Poli-Sci professor at SD State? Just curious. You do seem to represent an interesting mix of Tom Hayden/Jane Fonda rhetorician (circa 1972), salted with a certain level of knowing cynicism. So, I’m guessing you’re professionally involved in the RE business?
Patient Renter: I agree with your overall read, but there is a part of me (that pesky gut instinct again) that says there is a bigger element of risk than any of us (or the Fed) recognizes.
I don’t credit the Fed with any particular ability to stave off disaster, mainly given the lack of imagination that our monetary policy has displayed over the tenure of Herr Greenspan. Given the somewhat kneejerk reaction that all Western central banks (British, German and American to the fore) have shown when it comes to inflation, I think the Fed recognizes the problem and is holding off firing the cannons (in the form of rate hikes) until it is absolutely imperative they do so. I think that the Japanese example (1990 forward), the Dollar Bust/Asian Tigers Crisis (1997) and the NASDAQ/dotcom Bust (2000) are etched deeply in the Fed’s cortex.
I don’t think we are going to see a collapse (the 40 – 50% drop you mentioned), but a correction (20 – 30%). And, no, that doesn’t represent any sort of chicken entrails auguring, in that it is already happening in certain California markets.
Course, I also think Scruffy Dog should put down his copy of “Pravda” long enough to sniff the wind and recognize that where there is smoke, there is generally fire.
ParticipantCheney and Bush and the neocons engineered the house price runup?!? Holy Halliburton, Batman!
Scruffy, a nod for a truly humorous post. However, and as Lurkor aptly pointed out: We ain’t the ones drinking the Kool-Aid, my friend. I am curious, though. What is your profession when not penning adroit little missives like the one above? Bomb throwing Anarcho-Syndicalist? Economic advisor to the French Lysee? Poli-Sci professor at SD State? Just curious. You do seem to represent an interesting mix of Tom Hayden/Jane Fonda rhetorician (circa 1972), salted with a certain level of knowing cynicism. So, I’m guessing you’re professionally involved in the RE business?
Patient Renter: I agree with your overall read, but there is a part of me (that pesky gut instinct again) that says there is a bigger element of risk than any of us (or the Fed) recognizes.
I don’t credit the Fed with any particular ability to stave off disaster, mainly given the lack of imagination that our monetary policy has displayed over the tenure of Herr Greenspan. Given the somewhat kneejerk reaction that all Western central banks (British, German and American to the fore) have shown when it comes to inflation, I think the Fed recognizes the problem and is holding off firing the cannons (in the form of rate hikes) until it is absolutely imperative they do so. I think that the Japanese example (1990 forward), the Dollar Bust/Asian Tigers Crisis (1997) and the NASDAQ/dotcom Bust (2000) are etched deeply in the Fed’s cortex.
I don’t think we are going to see a collapse (the 40 – 50% drop you mentioned), but a correction (20 – 30%). And, no, that doesn’t represent any sort of chicken entrails auguring, in that it is already happening in certain California markets.
Course, I also think Scruffy Dog should put down his copy of “Pravda” long enough to sniff the wind and recognize that where there is smoke, there is generally fire.
ParticipantPatient Renter: Up front I’ll admit that I am an accountant by discipline and my knowledge of both the stock and bond market was driven by handling investment income for the insurance brokerage where I worked. I learned the hard truth about Merrill Lynch and Pru-Bache brokers (they’re salesman first and investment bankers second) and so sat down and educated myself. Being a fan of both Ben Graham and Warren Buffett, as well as an accountant, I will admit to always erring on the (very) conservative side.
That being said, I think the Fed is keenly aware of their culpability in this present housing mess, and they know full well that it stems from their desire to avoid a recession following the dot.bomb/NASDAQ bust. I think they are trying to hew to a course that is solidly in the middle and hoping that inflation simmers down of its own accord.
You mention gut instincts. Mine is telling me that the reason that the volatility indexes are so out of whack is that risk (true risk) is not being properly accounted for and the usual market mechanisms are therefore not behaving accordingly. Only recently has the bond market started to react and if you pull back and look at the complete picture, it appears as though the market(s) are finally starting to key on the dangerous combination of excess liquidity, improperly accounted for risk and the dangerous levels of risk inherent to certain sectors (i.e. CDO/CDS products).
The accountant in me says that a single serious market event, such as a blowout in the lower rated MBS sub-prime tranches will spread. Why? Because at that point scrutiny will increase, followed by a review of diligence procedures, followed by a revaluation of the portfolios (book values of CDO/CDS products are notoriously overvalued and very arbitrary). At this point, the pain will spread as a whiplash effect occurs and the various players involved scramble to protect their positions.
As I said earlier in another post, there is a Wall Street expression that goes, “Don’t panic. But if you do panic, panic first”. Merrill’s dumping of their position within the Bear Stearns MBS sub-prime unit was not a measured response from seasoned professionals; it was a fire sale. There is a recognition within the industry that there is an undue level of risk accompanying not just these (MBS sub-prime securities and instruments), but with other MBS products as well.
At some point Rational Market Theory goes out the window and the herd mentality takes over. I don’t think its any coincidence that UBS just unseated their CEO (following disclosure of the losses sustained in the sub-prime market), or that “warehouse” lending from the big investment houses has been severely curtailed, or that Bank of America is now reviewing their risk posture in the mortgage market.
Gut instinct is one thing, but you get a definite sense of the breeze starting to shift.
ParticipantPatient Renter: Up front I’ll admit that I am an accountant by discipline and my knowledge of both the stock and bond market was driven by handling investment income for the insurance brokerage where I worked. I learned the hard truth about Merrill Lynch and Pru-Bache brokers (they’re salesman first and investment bankers second) and so sat down and educated myself. Being a fan of both Ben Graham and Warren Buffett, as well as an accountant, I will admit to always erring on the (very) conservative side.
That being said, I think the Fed is keenly aware of their culpability in this present housing mess, and they know full well that it stems from their desire to avoid a recession following the dot.bomb/NASDAQ bust. I think they are trying to hew to a course that is solidly in the middle and hoping that inflation simmers down of its own accord.
You mention gut instincts. Mine is telling me that the reason that the volatility indexes are so out of whack is that risk (true risk) is not being properly accounted for and the usual market mechanisms are therefore not behaving accordingly. Only recently has the bond market started to react and if you pull back and look at the complete picture, it appears as though the market(s) are finally starting to key on the dangerous combination of excess liquidity, improperly accounted for risk and the dangerous levels of risk inherent to certain sectors (i.e. CDO/CDS products).
The accountant in me says that a single serious market event, such as a blowout in the lower rated MBS sub-prime tranches will spread. Why? Because at that point scrutiny will increase, followed by a review of diligence procedures, followed by a revaluation of the portfolios (book values of CDO/CDS products are notoriously overvalued and very arbitrary). At this point, the pain will spread as a whiplash effect occurs and the various players involved scramble to protect their positions.
As I said earlier in another post, there is a Wall Street expression that goes, “Don’t panic. But if you do panic, panic first”. Merrill’s dumping of their position within the Bear Stearns MBS sub-prime unit was not a measured response from seasoned professionals; it was a fire sale. There is a recognition within the industry that there is an undue level of risk accompanying not just these (MBS sub-prime securities and instruments), but with other MBS products as well.
At some point Rational Market Theory goes out the window and the herd mentality takes over. I don’t think its any coincidence that UBS just unseated their CEO (following disclosure of the losses sustained in the sub-prime market), or that “warehouse” lending from the big investment houses has been severely curtailed, or that Bank of America is now reviewing their risk posture in the mortgage market.
Gut instinct is one thing, but you get a definite sense of the breeze starting to shift.
ParticipantJWM: Wow. I know that parts of San Diego County, as well as Inland Empire and Riverside/San Berdoo were having problems, but Orange County? The OC has usually been pretty resistant to downward pricing pressures.
It’s also interesting to note that the major RE players are shifting gears to take advantage of the “new paradigm” emerging. Much like sharks sensing blood in the water, these guys know enough to realize that the market has changed and to make the necessary moves to capitalize on that.
Of course, I am sure that Scruffy will insist that this is nothing other than a temporary setback and all will be well shortly. Shortly, however, might be several years off.
ParticipantJWM: Wow. I know that parts of San Diego County, as well as Inland Empire and Riverside/San Berdoo were having problems, but Orange County? The OC has usually been pretty resistant to downward pricing pressures.
It’s also interesting to note that the major RE players are shifting gears to take advantage of the “new paradigm” emerging. Much like sharks sensing blood in the water, these guys know enough to realize that the market has changed and to make the necessary moves to capitalize on that.
Of course, I am sure that Scruffy will insist that this is nothing other than a temporary setback and all will be well shortly. Shortly, however, might be several years off.
ParticipantPatient Renter: If I had to guess, I would bet on a major credit contraction being the culprit that kicks the legs out from under the table.
The Fed is doing their level best to ignore core inflation and pricing pressure, because they know full well that if they increase interest rates it will have a very negative impact on the economy.
I also think the loose underwriting standards are already on the way out. There has been much reporting in the MSM about the elimination of zero doc loans in certain sectors, and how credit is tightening up. Given that the MSM has long been a mouthpiece for the NAR and RE propaganda machines, this represents a major change of pace. There is still much of the Pollyanna reportage featuring “Baghdad Bob”-type pronouncements by Lereah, Yun and Co (“the market has hit bottom; sales will come back up, etc”), but a more sanguine level of realism is now present as well.
You’re right about the speculation, of course, but it’s fun to try and parse the data and divine the ultimate outcome of this mess.
ParticipantPatient Renter: If I had to guess, I would bet on a major credit contraction being the culprit that kicks the legs out from under the table.
The Fed is doing their level best to ignore core inflation and pricing pressure, because they know full well that if they increase interest rates it will have a very negative impact on the economy.
I also think the loose underwriting standards are already on the way out. There has been much reporting in the MSM about the elimination of zero doc loans in certain sectors, and how credit is tightening up. Given that the MSM has long been a mouthpiece for the NAR and RE propaganda machines, this represents a major change of pace. There is still much of the Pollyanna reportage featuring “Baghdad Bob”-type pronouncements by Lereah, Yun and Co (“the market has hit bottom; sales will come back up, etc”), but a more sanguine level of realism is now present as well.
You’re right about the speculation, of course, but it’s fun to try and parse the data and divine the ultimate outcome of this mess.
ParticipantOne Muggle: All the same hype that accompanied the dotcom era are present here as well.
Remember, “it’s the New Economy, stupid”? All of the old business metrics were to be swept away by the new internet model. Profits didn’t matter, revenue didn’t matter; these would be replaced by a whole new set of meaningful benchmarks.
And so we had market capitalizations of internet startups exceeding a billion dollars, but the companies themselves had no revenue and no profit and no means of acquiring/achieving either. Remember pets.com? Kozmo.com? eToys? At some point during the run-up, these companies had stock prices in the hundreds of dollars per share and astronomical P/E ratios with no serious financial underpinnings.
Stop me if any of this sounds familiar. We now have skyrocketing home prices juxtaposed with stagnant or falling wages, overwhelming household debt loads and cheap, easy cash.
You’re right about the NASDAQ bubble in that it took over two and a half years for it to fully bottom out and then begin the painful journey back up. I don’t think we’ll see bottom on the RE market for at least another 18 months. And I think the fallout in the mortgage banking industry will take years to correct. You better bet that underwriting standards are going to get a lot more rigorous.
ParticipantOne Muggle: All the same hype that accompanied the dotcom era are present here as well.
Remember, “it’s the New Economy, stupid”? All of the old business metrics were to be swept away by the new internet model. Profits didn’t matter, revenue didn’t matter; these would be replaced by a whole new set of meaningful benchmarks.
And so we had market capitalizations of internet startups exceeding a billion dollars, but the companies themselves had no revenue and no profit and no means of acquiring/achieving either. Remember pets.com? Kozmo.com? eToys? At some point during the run-up, these companies had stock prices in the hundreds of dollars per share and astronomical P/E ratios with no serious financial underpinnings.
Stop me if any of this sounds familiar. We now have skyrocketing home prices juxtaposed with stagnant or falling wages, overwhelming household debt loads and cheap, easy cash.
You’re right about the NASDAQ bubble in that it took over two and a half years for it to fully bottom out and then begin the painful journey back up. I don’t think we’ll see bottom on the RE market for at least another 18 months. And I think the fallout in the mortgage banking industry will take years to correct. You better bet that underwriting standards are going to get a lot more rigorous.
ParticipantStan,
When you think about how big a chunk of the $4 trillion mortgage market that Fannie and Freddie control, I think your B school professor was indeed prescient as regards the level of risk they represent.
I talked to a former colleague of mine who has eliminated all of his positions in the stock market and has backed away from bonds as well. When I asked him if it had anything to do with how overpriced the NYSE is (from a P/E ratio vantage), he said no. Rather, it was the potential risk posed by the same lack of accounting controls you mentioned above. He felt, and I agree, that the nonsense surrounding the Arthur Andersen/Enron debacle, and Tyco, Global Crossings, etc, was not eliminated by Sarbanes-Oxley, nor even contained, but still out there and as bad as ever.
I think about the NASDAQ/dotcom bust, and how little we seemed to have learned following. The same mistakes and the same warning signs are all there, and we are ignoring them just the same.
I guess Polybius did have it right: “Those who fail to learn from the lessons of History are doomed to repeat them”.
Speaking of prescient, right?
ParticipantStan,
When you think about how big a chunk of the $4 trillion mortgage market that Fannie and Freddie control, I think your B school professor was indeed prescient as regards the level of risk they represent.
I talked to a former colleague of mine who has eliminated all of his positions in the stock market and has backed away from bonds as well. When I asked him if it had anything to do with how overpriced the NYSE is (from a P/E ratio vantage), he said no. Rather, it was the potential risk posed by the same lack of accounting controls you mentioned above. He felt, and I agree, that the nonsense surrounding the Arthur Andersen/Enron debacle, and Tyco, Global Crossings, etc, was not eliminated by Sarbanes-Oxley, nor even contained, but still out there and as bad as ever.
I think about the NASDAQ/dotcom bust, and how little we seemed to have learned following. The same mistakes and the same warning signs are all there, and we are ignoring them just the same.
I guess Polybius did have it right: “Those who fail to learn from the lessons of History are doomed to repeat them”.
Speaking of prescient, right?
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