For the original HP'ers, Fall 2005 was kinda fun - as we were dealing with a theory of an economic bubble, many of us had figured it out, and against the advice of our friends, families and realtors, sold our houses (at the peak).
We were debating if we were in an economic bubble, what were its proofs, its causes, and what would lead to its collapse.
Now that we're here, without a doubt post-peak, post-bubble-pop, well, its time we really think hard about what the world will look like in 3 months, 6 months, 12 months, 24 months, 48 months.
For your personal situation, for your neighbor, for Bob Toll, for realtors, for mortgage brokers, for illegal immigrants, for married couples, for families, for the kids of investors, for Ben Bernanke, for the poor, for the rich, for retailers, for Lexus salesmen, for George Bush, for returning soldiers, for Greenspan, for Trump, for job seekers, for condo flippers, for developers, for Fannie Mae, for China, for stock investors, for renters, for new homebuyers, for America and for the world.
Really. Stop and think about it. Now. Think hard. Visualize it. The bursting of the largest financial bubble in human history.
Because it's all going to end badly. For almost everyone. Really, really, really, really badly.
Really, really, really, really, really, really, really, REALLY badly.
Really badly. And that's not good.
April 12, 2006
I'm starting to think this is going to end badly. No, really, really badly
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35 comments:
Erudite Host,
So things will end really badly. That helps (seriously).
And how will they end really badly? What will thing be like in 12/24/48 months.
I mean we really really really really really badly wanna know. Please enlighten.
Waiting expectantly.
Bluzer
Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really, Really!
Keith,
Human being is weak a creature, especially one with unstable mind and scared. Bringing panic into society is not practical – you won’t save all, just make many enemies. I tried to talk to people about their doomed future (based on solid facts), but they refused to listen to me more than 15 minutes. ORDINARY PEOPLE DON’T WANT THINK ABOUT THEIR DOOMED FUTURE !!!
Better be focused on something positive, OK?
Oh, now let's not go overboard here...sure plenty of people went overboard and will lose their present home/investment...they will have to rent for a while and then get back into the saving habit. It will be good for them in the long run.
But there are millions of deserving people who would like to buy a home and can't swing the hyper-prices. The RE crash will be their chance to score at more reasonable prices.
The banks and federal Fannie-may will have a temporary crises which will be worked out with a combination of targeted taxbreaks and funny money...or so we hope.
Sorry but this won't happen in Boulder and I have the local economic data to demonstrate that. Our RE will keep rising because Boulder is such a great place to live
Get your facts straight, Keith.
ozman -
Is it pleasant in your imaginary world?
Do you know anything about economics? Banking? Anything?
Didn't think so.
Agree with ecobuilder: I tried to talk to people about their doomed future (based on solid facts), but they refused to listen to me
I have been talking about the bubble to friends and relative in Las Vegas and they are either apprehensive ("What's your vendetta against Las Vegas homeowners? RE investors are healthy for our economy. But the LVRJ says all is well.") or dismissive ("Las Vegas RE can't go down. We're special. Everyone wants to live here. We'll never run out of water - there's too much corporate interest, we'll steal water from Utah.")
that's not osman - it's someone hijacking his name
right?
it was funny though
ORDINARY PEOPLE DON’T WANT THINK ABOUT THEIR DOOMED FUTURE !!!
Go read a book called "Bankruptcy 1995" and consider all the bad things that didn't happen. The older I get the more I realize the doom and gloomers are always wrong. The thing that gets us won't be predicted ;)
John,
Are you old enough to remember the Great Depression?
It's going to be something like this, but even bigger, because this sh1t spreaded around the world.
I just saw something hilarious on the news. A contractor working for Centex in the Northeast got rid of all his American union workers and hired Hispanic illegal aliens at half the pay the Americans got. The illegal aliens started complaining about benefits, dangerous work conditions etc etc and he ended up firing 8 of them. The next day, the rest of his crew showed up with "strike" signs picketing in front of the development. The greedy bastard got his just desserts.
This will NOT "end" badly.
Sure, there will be some rough spots for over-extended people. That was their choice. They took their chance. And they had to know it was chancey. Afterall, nothing goes up FOREVER.
And the economy will have to get off the debt train and back to solid positioning. After what we've been through the past several years, yeah it'll be a shock for those who've tried to maintain an upper income lifestyle on a lower income salary.
But in the longterm, that is VERY GOOD for the US.
Bring it on, the sooner this thing is over with, the better.
There is no way it could have lasted forever.
REALITY !!!! YES!!!!
The older I get the more I realize the doom and gloomers are always wrong. The thing that gets us won't be predicted
Always wrong? What about the doom and gloomers who called the Nasdaq crash?
This will be bad, but it won't be the Great Depression because they didn't have any controls back then.
Look at what happened in the 1980's. We have just gotten out of a recession much worse than the 2000 recession. Then we were hit with the stock market crash in late 1987 which we didn't break out of until 1992. At the same time, we went into the real estate meltdown, S&L crisis, oil prics hit record highs etc etc
It wasn't a nice time, but we made it then and we'll make it again.
This thing will blow because what we have is a giant credit liquidity bubble ponzi scheme that has many self-reinforcing constituencies. Each tier in the ponzi pyramid derives enormous benefits from the continuation of the liquidity.
At the lowest level are the sheeple who are buying homes at inflated prices. They obviously benefit since the asset inflation of their homes allow them to fund their precarious, over-extended lifestyles through the widely acknowledged housing ATM (mortgage equity withdrawal).
At the next tier are the leeches we call realtors who provide no added value other than to act as a distribution channel/intermediary to the next tier. The benefits to the realtors are obvious.
The banks and mortgage companies comprise the next tier. They of course benefit from loan orgination fees mainly, not very much from carrying the assets on their balance sheets due to the flat yield curve which virtually eliminates their commercial margins on their loans. This realty is clearly manifest in their desire to free up more capital from their balance sheets through loan securitization or outright loan syndications. This allows them to originate even more loans which, of course, brings in more fee-based revenue.
The next tier are the GSE’s (Fannie Mae, Freddie Mac) that purchase the loans from the banks and package them as mortgage-backed securities. The benefits they derive are manifold since the bubble has: inflated their earnings (to such extent that they have had to restate FAVORABLE earnings that were hidden by improper derivative accounting); allowed them to provide even more loan guarantees which justifies their existence by enabling even more housing and extends their political cloat.
The tier above the GSE’s is really the lynch-pin in the whole process: the investment banks. They, of course, act as the financial engineers and distribution channels for the derivatives securities that they “derive” from the securitized loan portfolios (CMO’s, CLO’s, etc). They sell slices of these loan portfolios to yield-starved investors based on their risk appetite. It is true they provide a valuable service of risk-transference from the banks to the investors who (presumably) have a higher risk appetite/tolerance; however, we don’t know if that is true. Although the Banks have to hold less risk capital, it would appear if systemic risk in the banking system is reduced. But it could be that the AGGREGATE market/credit/pre-payment across the entire financial sphere has been greatly amplified and we don’t know if the investors are being adequately compensated for the risks they are taking.
The next tier of course is the investors as described above. They purchase the tranches of the CLO’s and derive benefit from a greater fixed income yield, in a world with an acknowledged paucity of yield. As stated above, the question is: are they really being adequately compensated for the incremental risk they incur give the meager credit spreads or risk-free securities. These investors include the foreign central banks that derive benefit from the well known carry trade. They need to keep their currencies weak to encourage exports. So, they borrow money from their citizens at very low rates (basically 0% in Japan) and lend to the US by purchasing our MBS, agency and government debt. This allows them to earn a “riskless” yield while at the same time weakening their currency vis-à-vis the US dollar.
This brings the whole ponzi-liquidity-credit-bubble full circle to the US consumer. The massive injection of liquidity into the US financial system through the purchase of our debt securities keeps interest rates low, which keeps them borrowing, which keeps house prices inflating, which starts the cycle all over again.
Of course, the peripheral players benefit as well. The US administration benefits from a false, but growing economy and can point to the increasing net worth of individuals. The FED benefits because it “appears” they have engineered a growing economy with virtually no (core) inflation – since asset inflation is not factored into their bogus consumer price indices.
What can break this “virtuous” cycle? The cycle can break within any tier:
1. Protectionism: we force the foreign governments to allow their currencies to appreciate which stops the liquidity infusion into the US
2. Housing bubble collapses under its own weight: homes get so expensive, that first-time home buyers cannot enter the market. Investment property owners panic and begin to sell en masse. Housing price deflation ensues, loan origination ceases, securitization halt, defaults crush derivatives securities investors, etc…
3. Inflation: the bond market tanks because investors no longer believe the lie that inflation is truly contained. This drives up financing costs, bursts the housing bubble, etc.
We see aspects of all three of the above occurring now. When the deleveraging begins, each of these constituencies will try to exit at the same time to preserve their wealth. The whole cycle will work in reverse an we will have a depression like deflation across all asset classes – except precious metals which will be perceived as a store of wealth and the ultimate flight to quality.
No, that wasn't me.
BTW, as I've written repeatedly, I think a number of markets are seriously overvalued. As with many industries, it's cyclical.
And, unless you're thinking (or dreaming, Keith?) of moving to Boulder, the real question you should be asking yourself is what's the future of your local real estate market.
The areas of greatest speculative activity are most prone to fall. The areas that saw reasonable growth driven by long term trends have less to be worried about.
BUT, if you must keep chomping on the bit about Boulder, I posted several times with a detailed market analysiss. (p.s. March sales were down significantly from the previous year, inventory and DOM are not noticeably different. I included charts showing how the market varies by price point.)
Now, here's the real question.
What kind of sicko sticks a cigarette into the mouth of a dead cat and stages a picture? Did they kill the cat?? I can't imagine a live one allowing somebody to pose it like that.
Do you need the Ad Clicks that badly Keith? Damn, I'll gladly click a few banners if you promise to not post pictures of dead and mutilated animals.
I feel a little nausea coming on...
It's called computer manipulation! Hello, are you in the 1800's? Also, the cat's probably asleep!
KITTY GONE WILD
Osman or Somebody Pretending to be Osman Said . . .
"Now, here's the real question.
"What kind of sicko sticks a cigarette into the mouth of a dead cat and stages a picture? Did they kill the cat?? I can't imagine a live one allowing somebody to pose it like that.
"Do you need the Ad Clicks that badly Keith? Damn, I'll gladly click a few banners if you promise to not post pictures of dead and mutilated animals.
"I feel a little nausea coming on...'
That cat is just sleeping. I've been rescuing cats for years, and I think it's a very funny picture. I have two cats now who try to do everything I do, and I quit smoking last year for THEIR health.
My economy as a self employed person is shrinking. Competition is fierce. There is less disposable income coming to my products. My raw materials have doubled or better. My wage or gross profit per job has gone down. My cost of living has gone up. Food, gas, lodging, housing, etc. is through the roof. I am competing with China and Mexico. I am unable to keep my nest egg safe. This is just the begining.Really, Really, Really,
Have you ever watched clouds in the sky during a big outbreak of tornadic thunderstorms? The clouds at various altitudes are moving in different directions, seemingly disconnected from each other and the surface. Then all hell breaks loose.
The federal government is telling us that the economy is A-OK, never better, with strong growth, low unemployment, and low inflation (core rate). Meanwhile, 70% of Americans surveyed are worried about the economy and the future of their jobs. Gold and silver are advancing, but the U.S. dollar is holding its own too. Public and private debt is at record levels, but no one seems to care as the stock markets march upward. People eagerly agree to buy houses with payments totaling half of their disposable income.
I've lived 51 years, and I can't remember a time when this many cross currents were flowing in the economy and politics. The recessions of '74, '81 and '91 were easy to understand in comparison to what I'm seeing today.
And I'm 54 - duck and cover.
I'm 52 and lived through one of these housing crashes in Colorado in the 80s. And that preceding bubble was nothing compared to the current national bubble...better grab whatever floats cuz there's a RE Tsumani coming.
This is just doom and gloom arm-waving. No different than the arm waving on the other side by the realtors. Where is the evidence? What are the facts? Anyone can throw out wild opinions. But why should anyone listen if there isn't a real argmuent being made?
Where is all this "liquidity" coming from?
I know GSE's recycle money from borrowers to lenders...but where do the lenders get money? Is it just from accumulated savings overseas? Or are the "lenders" borrowing it with leverage? Are they borrowing from the Japan central bank? Don't they have currency risk?
How can central bankers be inflating a bubble and at the same time acting like they don't understand where it's coming from?
I'm 57 and remember driving past housing development after development 1989-90,that all of a sudden stopped building. Big housing projects laying vacant with closed sales offices and barriers accross the streets to prevent access. I thought that maybe one single large builder had gone bankrupt. I didn't know about bubbles back THEN. People I try to warn don't want to know about them NOW. After all,housing only goes up,its differant this time! Really,really........,really bad!
I am 43 and lost everything by buying at the top in 1990.
I liked the notion of the cat being dead. I am a card carrying cat hater. You popped my "bubble".
The Federal Reserve sees it coming:
http://tinyurl.com/om8hl
Oh well, we'll have a Democratic President and Congress by then, and you know what that means. Hey boys and girls, it time for WWIII!
The liquidity is supplied by many sources: from the FED via the fractional reserve lending system and, from bank debt issuance and from liabilities in the form of term deposits (there is still a lot in cash deposits on banking balance sheets).
But that is why the investment banks are the lynch-pin. They allow banks to leverage up their balance sheets by moving their loan assets off their balance sheet. This lowers their capital requirements and allows them to lend EVEN MORE MONEY. This process can continue indefinitely as long as their are investors in mortgage back securities. These investors provide the "demand" for those loan pools that are purchased by the GSE's and securitized and sold by the investment banks. The demand will remain as long as the yield's on loan derivatives remain attractive AND their are no major default events.
Thank God we have next years new car models and those good GM jobs to get us OUT of this one
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