'The Crunch' is on the loose
Global financial scene changes rapidly
By Lou Barnes, Friday, August 8, 2008.
Mortgage rates are a hair lower, under 6.75 percent now, but spreads to Treasurys have widened despite overt Treasury backing of Fannie and Freddie.
There is a three-track story unfolding today: the U.S. economy, the ex-U.S. global economy, and The Crunch. To maintain clarity and composure, keep 'em separate!
The domestic economy is weakening. New claims for unemployment insurance spiked last week to 448,000, and all hands expected some pullback. Instead, 455,000 this week -- the worst in six years. The collapse in auto sales to the annual range of 12 million (from the 15.5 million forecast) has been a recent, June-July event. However, modern "just-in-time" delivery of components means instantaneous negative feedback all the way back through the supply chain to labor and raw materials. Credit-default measures and bond prices indicate imminent bankruptcy by all of the used-to-be Big Three.
Housing shows no bottom, and without one soon and tentative recovery, credit losses will be unbearable. The best marker of U.S. condition: the Fed's post-meeting statement abandoned its June observation that "downside risks have diminished," and despite its new recitation of inflation risks made clear there is no intention to raise its rate.
The global scene is changing very rapidly, all for the good here and bad elsewhere.
In this past year, a tribe of economic astrologers have claimed that a weak dollar was the cause of high oil and all other U.S. woes, and if only the Fed would tighten all would be well. This alternate universe collapsed in today's trading.
The dollar was weak because our Fed properly eased into the crunch (interest rate differential is a prime driver, and European Central Bank rates have been double our Fed's), and because of our immense trade deficit. This week marks the beginning of dollar reversal and reversal of a lot of other things.
The Euro-zone sag to recession means the ECB is done with rate hikes. It may take well into 2009 for 4.1 percent Euro inflation to break, and the ECB to ease, but that event is no longer a theory but visible on the horizon. German bond yields are in free-fall in anticipation. As the Euro-zone tanks along with us, so do markets for Asian exports, and weakness there is daily more plain and will further undercut commodities.
The consequences of these shifts are profound in today's markets. Oil has dropped to $116, natural gas to $8.39, and gold all the way to $858. The dollar is rising fast (certainly not because of some imaginary Fed defense): the euro barely holding $1.50, ditto sterling at $1.90 and yen at 110 to the U.S. dollar. Europe is inheriting our currency problem: the anti-inflationary benefit from lower energy prices will be delayed by falling euro value.
Then there's the crunch. Credit scarcity as measured by spreads to Treasurys now affects all borrowing. The notion that the crunch is confined to mortgages and structured securities stands exposed as urban legend: top-quality municipal and corporate borrowers are suffering. Consumers show signs of last-ditch credit-card defense: consumer credit outstanding jumped $14 billion in June, with borrowers unable to pay down month-end balances and having nowhere else to turn for a loan.
The best model for the crunch dates to January with Jan Hatzius (Goldman Sachs) and the Bank Credit Analyst with the same insight: capital shortage means insufficient credit. Here's the equation: system write-offs in the last year total about $500 billion, and only $350 billion in new capital has been raised. That $150-billion shortage, by the miracle of 12-to-1 bank leverage (and 25-to-1 broker-dealer and hedge-fund leverage) leads to a credit shortfall of at least $2 trillion. This shortage shows up as price-rationing: if you want to borrow, you have to pay a hefty spread over Treasurys or do without.
Losses yet unrecognized are at least double the ones taken, and market capital is almost unobtainable. Despite the excellent news on the dollar, energy, commodity, and inflation front, "The Crunch" is the dominant force, and worsening. That's why the Dow is still lurching around in the 11,000s instead of rocketing on that good news.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
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Submitted by Alexis Eldorrado on August 8, 2008 - 12:40pm.
As a managing broker active in the Chicago real estate market, we in the field saw this coming gradually as early as the Spring before 9/11. That was the actual first slow down that we felt.
The Feds lowering rates to an all time low to keep the housing market alive was a good idea that became too unsupervised and too lenient in terms of good lending. The Fed concept was good, as this extremely well-written and informative article by Mr. Barnes is exactly what the Feds were trying to avoid.
The housing market affects all other areas of the economy, locally and globally, more than anything else.
This type of excellent informative data is what the public needs to be aware of in whether investing in Chicago condos to any and all other forms of real estate and other diversified forms of investment.
Thank you.
Alexis Eldorrado
Eldorrado Chicago Real Estate
www.Eldorrado.com
Submitted by Lenn Harley on August 8, 2008 - 1:42pm.
Funny thing. We real estate agents, the Rodney Dangerfields of the housing industry, in our own quiet way, one house at a time, listing and selling, kept a multi $$Trillion Industry chugging along for decades, generations.
The "smart" folks on Wall Street managed to bring it down without even looking a buyer or seller in the eye.
There cannot be enough perp walks to satisfy this real estate broker.
Lenn Harley
Broker
Homefinders.com
http://www.homefinders.com
Submitted by Jon Astaris on August 9, 2008 - 3:31am.
-"There is a three-track story unfolding today: the U.S. economy, the ex-U.S. global economy, and The Crunch. To maintain clarity and composure, keep 'em separate!" says the article, and then it says, by way of description: "...The domestic economy is weakening"..."The global scene is changing very rapidly, all for the good here and bad elsewhere and "'The Crunch' is the dominant force, and worsening." Am I quothing quorectly?
-Fragmentarily so.
-If we take thine advice and "keep (the stories) separate" why are we ad-dressing all o'them in one article of clothing, why not three? A hat, a shirt, a pair of shorts maybe.
-For simplification's sake. You only get so many words to say so so much. You gotta be brief.
-Looks like the brief is way too tight, there's all sorts of connecting tissue spilling out of that thing. We need to either re-arrange the subjects or Photoshop the picture 'coz it don't add up.
-Look. I don't do tricks. I write'em as I see 'em.
-Am I glad we don't have the same eye guy!
-The problem I am sure lies in some misunderstanding of my affirmations.
-Will you help me?
-Reluctantly.
-Are "We" a part of the Global Economy?
-Of course we are.
-You say it's getting bad everywhere but good here. You also say we're weakening which is a sensitive way of saying it's "getting bad" here as well. SO, are you saying that it's getting bad all over but they're jumping head first into the toilet whereas we sorta swish around the bowl hoping they get there first...
-A supremely inelegant, pedestrian, decidedly escathologic manner of stating a complex point...
- ...and plug the toilet so they go down and we don't?
-Uugh!
-First, you can't keep separate the things you want to separate, as you demonstrate along the way. The world economy, the world period, is so intricately interconnected that no one can deign to segregate it. And it all functions on credit, which in turn functions on the belief that the borrower is willing and able to pay back what he borrows.
So, if them across the pond are not willing to lend my bank any more money which my bank lends me to buy me a house, I'll ask the seller to extend me the credit. If he wants to sell his house, he'll have to have faith in my ability to pay, and some patience.
-What of the mortgage broker of whom I am one?
-Many shall dig ditches. Some will dig out from under the floor boards the Wraparound, the AITD, the Subject to, the Contract for Deed, the 24 Month Escrow, the Lease Memorandum.
-The old can of worms...
-...The world goes on, and NOTHING shall demean, nor diminish, the American Spirit, which in turn (chords of Glory Halleluiah crescendoing in the background) shall lift the World Spirit, and people everywhere shall live in peace and prosperity, the globe awash in cheap Chinese Goods, cheap American dollars and once again cheap oil, crowds will faint and adore some virtual Messiah who decrees thousand dollar checks to be used to buy ever newer, ever more violent, computer games. Or wind mills for the new abundant national wind.
-Are you saying that the computer so profoundly altered the world that the very nature of Man is in question?
-I am saying that society as we knew it 20 years ago no longer exists, that it has changed so profoundly and so rapidly no one has any idea what is going on. Drawing conclusions about today based on what we learned yesterday will produce self contradicting assertions. That's all I am saying.
-What about the credit crunch?
-There's plenty of money out there, we've been throwing it around for decades now. Everybody has our money. We have become as irresponsible as three year olds, we want our toy and we want it now, there is no restraint at any level. The moment we start acting like adults, they'll lend it back to us.
-If we dont??
-We sharpen the shovel.
Submitted by Justin Britt on August 9, 2008 - 4:18am.
The trade deficit is what irks me the most. We keep borrowing money from the Chinese to buy their goods. If we don't do something soon, the US is going to fall from grace.
--
Justin Britt
Head-Web-Head
Hawaii Life Real Estate Services, LLC
Real estate in Hawaii | Real Estate Marketing
Submitted by Ki Gray on August 10, 2008 - 12:00am.
I have heard different theories as to when things will start getting better. What should be the early indicators of an economic recovery.
Site Austin real estate.
Search Austin MLS
Submitted by Commercial Mortgage Loans - Privately Funded - MasterPlan Capital LLC on August 10, 2008 - 12:47pm.
Recent comments by the Fed Chairman do seem to indicate that the easing is done and the dollar might be helped along a bit. Looks like the Fed and Treasury might coordinate to boost the dollar to help in the fight against inflation.
MasterPlan Capital LLC
Commercial Real Estate Investment Bankers
Commercial Mortgage Loans - Equity Financing - Asset Management
Online: http://www.masterplancapital.com - Quick Answers - Fast Closings - Professional Service.
Submitted by Tom Dawson on August 15, 2008 - 3:53am.
It does not appear that the Fed will lower rates which should be good from an inflation perspective. It also appears that consumers can't get financing due to ever tightening lending standards. At least that's what I'm hearing everyday. I sold homes in the past when rates were ridiculously high using an AITD. That could come back again if sellers aren't terrified of the due on sale clause. Other solutions are available and will likely be required to get the market moving again
Tom Dawson
http://www.fastsellerfinancing.com