September 25, 2006

Contrarian Chronicles: Voodoo debt and the coming recession


HP'ers, don't you feel like you know something that the regular American doesn't? That you've been given a glimpse of the (ugly) financial future we face, yet almost everyone else you know has no flipping idea what's going on?

Well, here's yet another jolt of reality. And again, my only advice at this point is get ready. Whatever ready means.

With debt piled high in a variety of voodoo mortgages, the declining economy will soon turn into a bobsled ride to tears.

Proceeding to the front of the housing ATM food chain, I'd like to spend a moment on how folks' appetite for risk has been enabled by all of this mortgage exotica.

Author Robert Campbell writes: "I always figured the deflation of the housing bubble would resemble a slow train wreck, but there is new evidence that makes me think the correction may occur more rapidly. This is because there is compelling evidence that a recession is dead ahead. … Now that housing prices are going sideways to down -- and incomes and jobs are still sagging -- this 'debt-fueled' artificial-life-support system for continued consumer spending (and an expanding U.S. economy) is running out of gas.

"In the long run, housing prices cannot continue compounding faster than incomes. We are now facing this economic reality. People cannot continue buying homes with creative, voodoo mortgage-loan financing -- that, in the end -- they can't afford.

I don't know who has been more irresponsible, real estate agents, mortgage lenders, borrowers, or banking regulators -- but I do know that the lending standards for mortgage borrowing have dropped to a zero setting for the past five years. If people weren't in prison or earned more than the minimum wage, money essentially was free to all -- whether they could ever hope to pay it back or not."

No happy ending for housing Continuing on, he says: "The United States has experienced the greatest real estate boom in history, but the boom is now turning into a bust, and the aftermath is not going to be pretty.

"The coming recession is not only going to dispel that hope, but it's going to speed up the fall. … The sad fact is that we're living in a debt-fueled economy, as opposed to an income-fueled economy.

Housing prices cannot continue to compound faster than incomes forever. This incredible rise in prices has been driven by artificial demand (ultra-low interest rates and ultra-loose credit), as opposed to real demand (rising incomes and rents)."

He concludes: "Loose mortgage loans that prolonged the boom will worsen the bust. Homebuyers are now going to pay the price for their 'buy now, worry later' spending spree. … With market manias, self-feeding greed on the way up turns into self-feeding fear on the way down. That time is near."

My comment: Yes, it is.

11 comments:

Anonymous said...

I get Campbell's newsletter and it's a godsend for people like me who sold their interest in southern California real estate.

From the charts in the newsletter, he shows that previous downturns have taken 6 years to reach a trough. The trough lasted about 2 years on average before the housing market starting trending up. So, we have at least 6 years before we get to a bargain-hunters' market.

I think that it will take much longer than that.

Anonymous said...

I think it won't! If you look at what the stock market did in the 29 crash. Within a few months of the crash, people were still bargin hunting stocks. These people lost 40% of their investment within 2 years.

This housing crash could very well turn out the same way. Just think, the fed starts lowering the rates by Xmas. Wallstreet cheers! Suckers move in and start to picking up houses by April 07 (housing looses over 20% by then)
China really re-values, Gold explodes, and all the last suckers are cought.

David in JAX said...

Recently I moved all of the money in my IRA into cash (not sure where to go from here, but will hopefully figure it out). Two weeks ago I got a letter from the brokerage firm that holds the account that I would receive a $50.00 gift card if I would come in and talked to a financial advisor. Last Wednesday I went in to listen, get the $50, and hopefully learn something from someone who knows more than I do.

I told the financial planner / branch manager that I thought a recession was coming after the election. I asked him how he would suggest that I recession-proof my retirement account. He looked at me very seriously and said, "there is not chance that we will go into a recession in the near future." He then went on to say that, "The Fed realizes that it made a big mistake raising interest rates. Interest rates are about to move back down to 1% so the stock market is about to see tremendous gains."

I ended up leaving with my gift certificate.

joey said...

That financial advisor said that? He's as bad as a realtor. Atleast say something about diversify or cost average or something more logical. If the fed went down to one percent quickly Im not even sure the suckers would fall for it. They didn't in japan. There stock market is still only 35 percent of what it used to be at its peak. Lowering rates in 2007 may have the opposite effect and scare investors because it means recesion and the dollar would tank. I wished I could have been with you. I would have asked how can we lower are rates when the EU and asia are raising theirs? Why would asia hoard treasuries that pay nothing? Who would support our national debt? Another one of these guys told my mom to be in a gressive stocks even though she's getting older. She lost 30 plus in percent in 2001 and 2002 and will never recoup it. Any retirement model would tell you that you need bonds or cash when you get into your 50's. Anything for a buck.

Anonymous said...

I think that when real interest rates get closer to zero, gold will de-couple from the other metals and go through the roof. In fact, We could be seeing the begining of that shortly.
The smart money is rushing into bonds at any price. They think that having their money there will save them. All of the fools who have their money with the penssion fund will find out that Wall Street offered their accounts up to the hedge fund, and the morgage backed security gods.

Got Gold?

Anonymous said...

Would like to see Campbells' article on the front page of every newspaper in this country.

Let's get this over with FAST.

If they try to slow it down, this country may NEVER completely pull out of it. EVER.

Credit crunch from Heaven. PLEASE.

Anonymous said...

Another one of these guys told my mom to be in a gressive stocks even though she's getting older. She lost 30 plus in percent in 2001 and 2002 and will never recoup it. Any retirement model would tell you that you need bonds or cash when you get into your 50's. Anything for a buck.
++++++++++++++++
That financial advisor should be tarred and feathered and run out of town! These advisors are as bad as Realtwhores!

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Anonymous said...

Hey Casey,
It's me! Bubba BigBeef.
I'm sittin here, in my cell at a fed joint, waitin' for my cellmate.
Guess who that's gonna be?
My suggestion: leave the real estate alone. take up yoga. stretch yo sphincter. an'bring plenty O K-Y.