[Allan from Fallbrook]

JWM, you realize you represent the exception and not the rule, correct?

Most Americans are in “dis-saving” mode (to use the old Econ101 phrase). The majority most likely to feel the impact are those homeowners who not only purchased an over-valued home, but then proceeded to pile debt on top of that, in the form of 2nd/3rd mortgages, home equity lines and credit cards. It is not even a matter of being in over one’s head, people have added so much debt (and at increasingly egregious rates), it exceeds any rational ability to pay it off.

I used a hypothetical example of a Temecula homeowner previously, but actually do know several people in that neck of the woods who fall into this category.

In one case, the family purchased a $635k house (they make a combined $92k in salary), and then added two more HELOCs totaling $194k. The HELOCs were for home upgrades (pool, landscaping, new kitchen and bath), as well as “toys” (new GMC Denali for the wife and a boat). Their 1st was a 2/28 with a teaser rate (1.5% for the first two years) and then prime + following. It resets this month, and they are already stretched due to debt service costs, gas (they both commute to SD each day) and necessities. The house is on the market for $725k (down from $760k), with no offers to date. Ugly? You bet.

But my sense is that in communities like Temecula, Murrieta, Corona, Moreno Valley, etc, this is the norm and not the exception. And the vast majority of families out there are closer to the US median per capita rate ($43k per household earner) than the six figures + per year needed to just service this kind of debt.

[Allan from Fallbrook]

I’ll dump the monocle, but I’m keeping my spiked helmet and my fencing scar!

[Allan from Fallbrook]

I’ll dump the monocle, but I’m keeping my spiked helmet and my fencing scar!

[Allan from Fallbrook]

Danke.

I’ll now curb the Teutonic humor; it tends to bother the PC crowd.

[Allan from Fallbrook]

Danke.

I’ll now curb the Teutonic humor; it tends to bother the PC crowd.

[Allan from Fallbrook]

JG, this is completely off topic, but being of German descent (and hearing your reference to the French propensity to surrender), I have a joke that generally really tweaks the French that I can’t resist telling.

Q: Why are there trees on the Champs Elysee?

A: Because the Wehrmacht likes to march in the shade!

Now back to our regularly scheduled programming.

[Allan from Fallbrook]

JG, this is completely off topic, but being of German descent (and hearing your reference to the French propensity to surrender), I have a joke that generally really tweaks the French that I can’t resist telling.

Q: Why are there trees on the Champs Elysee?

A: Because the Wehrmacht likes to march in the shade!

Now back to our regularly scheduled programming.

[Allan from Fallbrook]

JG, I think you are correct when you mention your gut instincts. Layman or no, the bottom line is that the financial market is driven by emotion, instinct (generally misguided) and greed.

I have seen quite a few people quoting Rational Market Theory in some of the posts here and elsewhere, but there is little rationality, especially when the market trends quickly downward. What was Galbraith’s maxim? “The market will remain irrational longer than you can remain solvent”. And as his book on the Great Crash of 1929 attests, it had far less to do with prevailing market conditions, then the emotions surrounding the market and the decision to rein in the money supply.

This last factor is the one that concerns me most right now. I agree that the CDO market will undoubtedly weather this particular storm. What if, however, it spreads? That was the danger that LTCM posed back in 1998. I don’t think anyone believed that a single company could trigger a meltdown, but no one fully knew how deeply LTCM’s positions went, the same way no one fully understands (or cares to understand) how grave the danger is regarding derivatives positions.

And, JG, I wouldn’t question your gut right now. I think your instincts are right. I think a lot of people looking at this right now have the same instinct in point of fact. I think we all feel something is not right, and in a big way; we just have yet to see the enormity of the mess.

French salute, huh? Boy, those poor French can’t seem to catch a break anywhere. There is a school of thought that claims the origination of that salute came from English bowmen showing their contempt for French knights (after the shafts from their longbows easily pierced French armor) during the Battle of Agincourt. The middle finger was the “drawing” finger, used by the bowmen to pull the bowstring fully back. Course, like “tranch”, I might be talking completely out my butt.

[Allan from Fallbrook]

JG, I think you are correct when you mention your gut instincts. Layman or no, the bottom line is that the financial market is driven by emotion, instinct (generally misguided) and greed.

I have seen quite a few people quoting Rational Market Theory in some of the posts here and elsewhere, but there is little rationality, especially when the market trends quickly downward. What was Galbraith’s maxim? “The market will remain irrational longer than you can remain solvent”. And as his book on the Great Crash of 1929 attests, it had far less to do with prevailing market conditions, then the emotions surrounding the market and the decision to rein in the money supply.

This last factor is the one that concerns me most right now. I agree that the CDO market will undoubtedly weather this particular storm. What if, however, it spreads? That was the danger that LTCM posed back in 1998. I don’t think anyone believed that a single company could trigger a meltdown, but no one fully knew how deeply LTCM’s positions went, the same way no one fully understands (or cares to understand) how grave the danger is regarding derivatives positions.

And, JG, I wouldn’t question your gut right now. I think your instincts are right. I think a lot of people looking at this right now have the same instinct in point of fact. I think we all feel something is not right, and in a big way; we just have yet to see the enormity of the mess.

French salute, huh? Boy, those poor French can’t seem to catch a break anywhere. There is a school of thought that claims the origination of that salute came from English bowmen showing their contempt for French knights (after the shafts from their longbows easily pierced French armor) during the Battle of Agincourt. The middle finger was the “drawing” finger, used by the bowmen to pull the bowstring fully back. Course, like “tranch”, I might be talking completely out my butt.

[Allan from Fallbrook]

JG, thanks for the compliment. I came up in a British owned insurance brokerage (Willis Group PLC) and they seemed to prefer low-key and even keeled to brash zealotry. We used to have an expression in insurance, “passing a burning match”, which referred to passing liability down the food chain. I think what is happening here in the derivatives market is exactly that, compounded by Stan’s observation that no one involved really has a complete picture of what is going on.

There is almost a willful ignorance on the part of analysts, commenters and observers as regards the true picture of how risky these instruments are and how much overall danger they pose.

I would think the gravest concern would be risk aversion overcoming greed (yes, it is possible when losses run high enough), combined with a credit crunch. The liquidity we are awash in can and probably will go away. If this contraction occurs, the severity of the downturn will be greatly amplified and the reverberations will be felt much more strongly and throughout the world.

Granted, this is somewhat Chicken Little, but not outside the realm of possibility. The more I watch the gyrations of Bear Stearns, and how quickly Merrill Lynch liquidated their sub-prime MBS position, the more I think Denmark is a lot rottener (sp?) than any of us realize.

JG: Are those your initials or do they correspond to a Navy rank? Please tell me the former, rather than the latter. The only thing worse than being upbraided by a Navy officer is being upbraided by a Marine officer.

[Allan from Fallbrook]

JG, thanks for the compliment. I came up in a British owned insurance brokerage (Willis Group PLC) and they seemed to prefer low-key and even keeled to brash zealotry. We used to have an expression in insurance, “passing a burning match”, which referred to passing liability down the food chain. I think what is happening here in the derivatives market is exactly that, compounded by Stan’s observation that no one involved really has a complete picture of what is going on.

There is almost a willful ignorance on the part of analysts, commenters and observers as regards the true picture of how risky these instruments are and how much overall danger they pose.

I would think the gravest concern would be risk aversion overcoming greed (yes, it is possible when losses run high enough), combined with a credit crunch. The liquidity we are awash in can and probably will go away. If this contraction occurs, the severity of the downturn will be greatly amplified and the reverberations will be felt much more strongly and throughout the world.

Granted, this is somewhat Chicken Little, but not outside the realm of possibility. The more I watch the gyrations of Bear Stearns, and how quickly Merrill Lynch liquidated their sub-prime MBS position, the more I think Denmark is a lot rottener (sp?) than any of us realize.

JG: Are those your initials or do they correspond to a Navy rank? Please tell me the former, rather than the latter. The only thing worse than being upbraided by a Navy officer is being upbraided by a Marine officer.

[Allan from Fallbrook]

Stan,

I agree on all counts. However, what is missing from your equation is the possibility of a severe credit contraction occurring within the short-term. If you have been following the volatility indexes, they have been curiously out of whack for quite some time (even puzzling the august Alan Greenspan).

We are essentially awash in cheap, easy money, fueled in no small part by Chinese central banks. If you look at the rash of over-priced LBOs and buyouts taking place across all industry sectors and juxtapose this with the same easy money that pushed air into the housing bubble, and then factor in the definite funkiness of the bond markets, a more serious picture starts to emerge.

Add to this the overall level of concern on the parts of the big investment houses, and this concern is not solely limited to the nonsense taking place in the sub-prime CDO market.

As I said earlier, I don’t think we are looking at a collapse, but rather a severe correction. However, if you are sitting up in Temecula in a $500k house that you put a HELOC and a 2nd on, and your 1st is about to reset to a significantly higher rate, well, your idea of collapse and mine might be considerably different.

Mr. JG, I will endeavor to find a spelling of “tranch” that I can pass along or will consider myself the gutted sturgeon in this instance. Sir.

Regards

[Allan from Fallbrook]

Stan,

I agree on all counts. However, what is missing from your equation is the possibility of a severe credit contraction occurring within the short-term. If you have been following the volatility indexes, they have been curiously out of whack for quite some time (even puzzling the august Alan Greenspan).

We are essentially awash in cheap, easy money, fueled in no small part by Chinese central banks. If you look at the rash of over-priced LBOs and buyouts taking place across all industry sectors and juxtapose this with the same easy money that pushed air into the housing bubble, and then factor in the definite funkiness of the bond markets, a more serious picture starts to emerge.

Add to this the overall level of concern on the parts of the big investment houses, and this concern is not solely limited to the nonsense taking place in the sub-prime CDO market.

As I said earlier, I don’t think we are looking at a collapse, but rather a severe correction. However, if you are sitting up in Temecula in a $500k house that you put a HELOC and a 2nd on, and your 1st is about to reset to a significantly higher rate, well, your idea of collapse and mine might be considerably different.

Mr. JG, I will endeavor to find a spelling of “tranch” that I can pass along or will consider myself the gutted sturgeon in this instance. Sir.

Regards

[Allan from Fallbrook]

Speaking of Bear Stearns, I came across this article on Bloomberg about them trying to sell “Toxic Waste” CDOs to CalPERS and other pension funds. They are hawking these products as being safe, and they are offering a 20% return.

Da Counselor’s comment above used the term “shady” to describe certain Wall Street deals, and I cannot think of a better term. Well, unless you skip “unethical”, “loathsome”, and “contemptible”, that is.

http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=aW5vEJn3LpVw

[Allan from Fallbrook]

Speaking of Bear Stearns, I came across this article on Bloomberg about them trying to sell “Toxic Waste” CDOs to CalPERS and other pension funds. They are hawking these products as being safe, and they are offering a 20% return.

Da Counselor’s comment above used the term “shady” to describe certain Wall Street deals, and I cannot think of a better term. Well, unless you skip “unethical”, “loathsome”, and “contemptible”, that is.

http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=aW5vEJn3LpVw

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