The BIG Picture... it all rests on housing?

Discussion in 'Economics' started by gnome, Feb 1, 2008.

  1. The Big Picture… Seems a majority of market commenters are convinced the US is headed for recession and are believers in the bear market. Lately, there has been a veritable blizzard of supportive efforts to stop the market’s decline… stimulus spending and rebates, bailouts of everybody, buyout offers, cash infusion from SWF’s, etc. Virtually daily, some days more than one.

    So what’s the real deal? Will there at some point be enough “support, bailout, stimulus, etc.” to stop the decline and reignite the economy? I don’t know the answer, and the problems are potentially so large and complex it’s like contemplating the universe… the mind boggles. However, these support “efforts” will either work or not. If not, it could be for a basic fundamental of “debt-based consumption”.

    There are various levels of “debt-financed consumers” in the US. The most conservative wouldn’t frivolously borrow against their home equity or carry a balance on credit cards, regardless. If they want something, they find another way… including saving until they have the cash. Another level might “refi or charge it” for something important… like a new roof, college expense, or their car has had it and they really need another. And somewhere up the levels are those who “live on the edge” of credit. They’ve borrowed all they can against their home and have charged their credit cards to the maximum.

    It is the higher levels of credit spenders who are the most interesting here. They’ve already consumed all of their credit capacity and now might be like “the ashes of a burned-out fire”. If the Gummint can somehow get money or credit into their hands, they will spend…. right up the edge to where someone forces them to stop. My premise for this economy is (1) most of us who do not live on the edge of credit will not be induced to do so regardless of any stimulus or bailout, and (2) those who do live on the edge have already burned themselves out. The Gummint may put a few dollars into their pocket for them to spend, but when that is gone (should take about a week), they will once again be completely tapped out.

    The Gummint and Fed created the housing bubble purposely… to put buying power (through increased debt, of course) into the hands of those who would spend it. And they did.

    Unintended Consequence… By creating the housing bubble (including the fostering of irresponsibly lax credit for mortgages) they not only induced spendthrift consumers to “spend everything they have plus all they could borrow”, they created a problem in the housing market. Many weakly qualified (or maybe not really qualified at all) borrowers financed the purchase of a home and became the “demand source” of housing at the margin. Their buying pressure induced an excessive price rise AND excessive inventory to be built. Now, these marginal borrowers are “burned out” and no longer in the marketplace. But the decline in home prices created by their vacating the housing market has left an overhead void which can likely be recovered only through more housing inflation. And with renewed discipline for the “old credit standards” of mortgage lending, those spendthrift borrowers will not be back in the market for years… perhaps never.

    Housing Bottom Line…. While there still may be even a few more YEARS of decline in home prices and regardless of when they bottom, the recovery will likely take a long time. And whether or not there is a recession in the US… mild or severe…. rests with the housing market.
  2. Arnie


    Maybe a recession would be a good thing. The way people act, you would think we will all die. You let some of these banks/lenders/insurers go under and I bet the ones that survive will clean up their act. The way this is going, it will just prolong the inevitable.

    Jim Rogers was on Bloomberg today saying what the fed is doing is exactly what happened in Japan after the RE crash. And they've been wallowing for 18 years. They need to let this bubble finally pop.

    PS. The bubble I'm refering to is the credit bubble. Real estate being just the latest manifestation.
  3. LOL.. I like that. It is amazing how these days we seem to regard a recession as the next Apocalypse. Didn't used to be that way. Before it was just a "cyclical economic phase which adjusted for current excess and set the table for future opportunities".

    (Maybe it's because the politicians have been so egregiously greedy and profligate with taxpayer money that they fear once there is a recession it will lead to deflation and it won't be able to be stopped... then it will finally be revealed, "the Emperor wears no clothes".)
  4. Very well written broad points. I'd go so far to state that we may not see these housing prices occur for another 30 years. And when it does, it'll be a function of broad price inflation, not loose speculative credit.

    But the fact that these bubbles have seemed to occur at higher frequency is sign of where money supply and wealth is. The bubbles only perpetuate because of excess cash being available to invest.

    With that said, we live in a country that embraces expansionary monetary policy, so I don't think its too presumptuous to think we'll come out of this OK (perhaps with a weaker more diluted dollar, however). Our real future hinges on energy policy (and everything connected, which believe me is everything), I firmly believe. If we tackled our consumption issues head-on (and responded to them by offsetting them with a surplus of energy supply), we'd alleviate the inflationary pressures caused by too much money chasing too few supply. In other words, if you double money supply AND double commodity supply, commodity prices don't double.

    With the benefits of expansionary monetary policy comes the responsibility to make sure those dollars are *invested* to increase aggregate supply. THAT is the problem with the US on a structural level. The tax-rebate -> consumption route's gains are too sparse and short lived. basic econ 101 consumption vs investment.
  5. Aok


    The Big picture rests on PAIN.

    Gnome, your argument is all true except only about 20% of the variable home loans have reset.

    What about the other 80? :eek:

    Never underestimate the pimps in govt ability to pander to a increasingly nanny nation as its slips toward socialism because after all "they feel your pain"

    How else could you explain McCain's current frontrunning? Everyone is jocking him because if he wins they get their finger in the pie. As for the other side of the aisle, if the Iraq war wont break us, healthcare for ALL will.

    Pretty soon our choice will be between Nancy Pelosi as the "business friendly" candidate and and Hugo Chavez social populist. By soon I mean 50 years or so. Hope China/India are then what the US once was.

    Housing is toast on the coast(s) Phx, Vegas, Florida. Except maybe in NYC, Connecticut and wherever some investment bankers/ hedge fundies in bed with the FED live.

    Just wait til Credit card $hit hits the fan.

    I didnt think the US would ever go to 0% interest rate like Japan, but never say never.

    Goodbye dollar.
  6. If it does rest on housing, we may be in trouble:;_ylt=AqKd_eNpZKlvvR8QPTVzfJJO7sMF
  7. My pick. Your government will try to prevent it and by doing so will delay it ... this is, after all, election time.

    The problem with delaying it is that it is likely the delaying action will make the wave bigger so that when it finally breaks it will be a worse experience for all involved.

    US, Europe, China, India ... all involved.
  8. Governments stimulate housing in early recovery because of the huge multiplier effect from all the other housing related urchases, unfortunately this is like operating leverage, great on the upside, a killer on the downside.

    Comparisons with 1998, 1999-2001 are invalid IMHO, LTCM was a threat to banks balance sheets and systemic liquidity and thus primarily confidence, which could be solved with a rate cut. !999 was the liquid stock market not illiquid property so it could correct i.e. you got clearing much quicker than you will with a housing led recession. Cutting rates after 9/11 was restoring confidence after a localised event that actually did not even take out the financial markets infrastructure (my condolences to those who lost and my deepest respect for the emergency service - in this context I am just putting things in a factual economic rather than humanistic light).

    The property led recessions of UK and USA in early '90's are a better comparison but it should be noted that in those days banks kept the loans on their books and lent a multiple of stable income. Japan in the '90's and Thailand post '97 are also valid comparisons as there was a major property speculation element and governments who refused to cause losses to influential people and businesses by refusing to allow clearing to take place. Lost decades for both. UK had some mortgage relief many people kept their homes but lost their jobs.

    This will be more of a slow bleed eaccerbated by Gummint interference whether it is rate cuts when the market drops or actioans like FASB delaying the new standad that would have put SIV's on the balance sheet. Sectors such as housing and financials have actually probably NOT discounted the full effect yet, but the longer term effect will be from systemic effects on earnings across the broader market, whether from reduced consumer spending or from the bank calling it's loan to businesses that bought from other busineses etc.

    From a cyclical trading perspective, use puts not short stock (vicious rallies) and don't buy puts less than 6 months, preferably a year out. There will be waves of "we are saved" headlines and cosmetic solutions that will be toted as real solutions..
  9. nevadan


    #10     Feb 2, 2008