Monday, September 27, 2010

Today's Best Reads

1--Housing Prediction: Bottom in 2014, Then a Decade of Stagnation, Charles Hugh Smith, of two minds

Excerpt: We all know the story of the Great Housing Bubble: low interest rates, disavowal of risk management, subprime loans to unqualified buyers and investor wariness after the dot-com stock market crash all led to a massive sustained surge in home buying.In the early 1990s, home sales averaged about 4 million a year. By the mid-2000s, that number had nearly doubled to 7 million sales a year...

At this point, the guessing game moves from "when will housing bottom?" to "how much further will housing decline?" Some analysts are staking out future drops in the neighborhood of 5 to 8 percent, but bubbles tend to fully retrace to their starting point, and then dip another 10% just for good measure.

2--Gold is the final refuge against universal currency debasement, Ambrose Evans Pritchard, Telegraph

Excerpt: States accounting for two-thirds of the global economy are either holding down their exchange rates by direct intervention or steering currencies lower in an attempt to shift problems on to somebody else, each with their own plausible justification. Nothing like this has been seen since the 1930s.

The US and Britain are debasing coinage to alleviate the pain of debt-busts, and to revive their export industries: China is debasing to off-load its manufacturing overcapacity on to the rest of the world, though it has a trade surplus with the US of $20bn (£12.6bn) a month.

It is no mystery why so many states around the world are trying to steal a march on others by debasement, or to stop debasers stealing a march on them. The three pillars of global demand at the height of the credit bubble in 2007 were – by deficits – the US ($793bn), Spain ($126bn), UK ($87bn). These have shrunk to $431bn, $75bn, and $33bn respectively as we sinners tighten our belts in the aftermath of debt bubbles.

3--Risk of trade war rises as key US committee backs tariffs on China, Telegraph

Looming trade war with China (excerpt): The adoption of the measure by the Ways and Means Committee on Friday means it will now be voted on by the House of Representatives on Wednesday.

"China's exchange-rate policy has a major impact on American businesses, and Americans jobs, which is what this is all about," said Sander Levin, a Democrat from Michigan and chairman of the committee....

According to the bill's supporters, a properly valued yuan would move jobs back to the US as exports from China become more expensive. The Peterson Institute for International Economics in Washington argues up to 500,000 American jobs could be created.

4--Wall Street knew its mortgage securities were subpar, Shahien Nasiripour, Huffington Post

Excerpt: During a little-noticed hearing this week in Sacramento, Calif., a firm hired by Wall Street to analyze mortgages given to borrowers with poor credit, which were then packaged and sold to investors during the boom years, revealed that as much as 28 percent of those loans failed to meet basic underwriting standards -- and Wall Street knew all along.

Worse, when the firm flagged those loans for potential issues, Wall Street banks ignored its recommendation nearly half the time and likely purchased those loans anyway -- selling them to unwitting investors who were never told that the biggest home loan due diligence firm in the country had found potential defects in these mortgages.

Wall Street firms knew they were buying lead yet passed it off as gold to investors who had no knowledge of the alchemy behind the scenes.

5--The second leg down in housing, The Alliance group

Excerpt: In 1992, some 4 million homes per year were being purchased. A decade later, that number had risen 25% to 5 million. A mere 3 years later, annual sales were 7 million units — a 40% increase....

From 1977 to 2010, the median U.S. home price was 4.1 times median household income. But as the charts indicate, home prices are still above that mean. Same with home prices relative to rentals, or housing value as percentage of GDP...

Without....the heavy hand of the government intervening, the residential real estate market is will soon experience what price discovery is all about.

6--Bernanke and QE2, Calculated Risk

Excerpt: ...historically quantitative easing has led to increases in asset prices in the short term. This is why I've been noting in the comments that "bad economic news" is perhaps "good stock market news" - since investors are now anticipating QE2 to be announced as early as November 3rd barring a sudden improvement in the news flow.

Although there will be plenty of economic data between now and the two day meeting on November 2nd and 3rd, the two key releases are the September employment report (to be released on October 8th) and the Q3 GDP advance estimate (to be released on October 29th). Barring a significant upside surprise in one or both of those reports, it appears QE2 might arrive as early as November.

7--Raters ignored proof of unsafe loans, Gretchen Morgenstern, New York Times

Excerpt: As the mortgage market grew frothy in 2006 ... ratings agencies charged with assessing risk in mortgage pools dismissed conclusive evidence that many of the loans were dubious, according to testimony given last week to the Financial Crisis Inquiry Commission. ...

... almost half the mortgages Clayton sampled from the beginning of 2006 through June 2007 failed to meet crucial quality benchmarks that banks had promised to investors. Yet, Clayton found, Wall Street was placing many of the troubled loans into bundles known as mortgage securities.

Mr. Johnson said he took this data to officials at Standard & Poor’s, Fitch Ratings and to the executive team at Moody’s Investors Service. “We went to the ratings agencies and said, ‘Wouldn’t this information be great for you to have as you assign tranche levels of risk?’ ” ... But none of the agencies took him up on his offer, he said, indicating that it was against their business interests to be too critical of Wall Street. “If any one of them would have adopted it,” he testified, “they would have lost market share.”

8-- Republican Economics as Social Darwinism, Robert Reich, economist's view

Excerpt: Boehner and other Republicans would even like to roll back the New Deal and get rid of Barack Obama’s smaller deal health-care law. The issue isn’t just economic. We’re back to tough love. The basic idea is force people to live with the consequences of whatever happens to them. In the late 19th century it was called Social Darwinism. Only the fittest should survive, and any effort to save the less fit will undermine the moral fiber of society....

This defies economic logic. When consumers aren’t spending, businesses aren’t investing and exports can’t possibly fill the gap, and when state governments are slashing their budgets, the federal government has to spend more. Otherwise, the Great Recession will turn into exactly what Hoover and Mellon ushered in – a seemingly endless Great Depression.

9--Morning cup of coffee, Housingwire

Excerpt: Sales of distressed properties will peak in 2011 at 2.3 million transactions before falling to more normal levels at 850,000 in 2016...

Because lenders are transferring more of the shadow inventory of foreclosed and defaulted mortgages into real property ready for the market, analysts at John Burns estimate these properties will account for more than 40% of the all resale activity through 2012.

Many market analysts have predicted home sales and prices to trend downward again without the homebuyer tax credit. How fast and deep the market falls depends on how financial institutions manage the flow of these foreclosed and REO homes onto the market.

According to John Burns, a typical market shoulders 6% to 7% of distressed sales taking up the resale market. "We are closely tracking an increase in REO activity this year, which will result in a peak for distressed sales next year. This forecast significantly impacts our belief that prices will fall 8% to 11% through 2012," according to the report. (Prices set to fall)

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