February 28, 2007
Fleck: The game is over. Subprime helped cause the housing price bubble, and it's over. The Great Unwinding is here.
When it's over, it's really over. I'm amazed at the swiftness of the subprime implosion, and now come the spillover effects. Less housing demand (and ability to purchase). Lower housing prices. Hundreds of lenders imploding. Hundreds of thousands of REIC out of work. Stockholder and bondholder wipeouts. Hedge fund implosions. Financial market havoc.
Got popcorn? The Great Unwinding is here.
What's remarkable is that Wall Street was surprised by the implosions of lenders NovaStar Financial and New Century Financial. What we don't know is how quickly this mess will impact the economy.
Why does the stock market at large seem not to care about the many problems that exist? My best explanation is this: The stock market, which is normally thought of as a discounting mechanism, doesn't work that way at the moment.
When the market reverts to discounting and ceases to be the price-discovery animal it is today, there will be a tremendous amount of violence on the downside.
Ignorance aside, it pays to state the obvious: The subprime industry was absolutely critical to the inflating of the real-estate bubble. If loans had been made only on a responsible basis -- to people who put money down and looked like they could actually repay the money, irrespective of rising house prices -- that bubble would never have achieved anything close to the heights it did.
That game is obviously over. Let me repeat that -- over. The real-estate market of the past few years will not be seen again in our lifetimes. The only thing we don't know is at what rate this unwinding will play out across the economy and, more importantly (to me), in the minds of the Goldilocks-enthralled community on Wall Street.
"Slowly but surely, people are starting to get it, and slowly but surely, I am starting to think that the tipping point in credit -- via a subprime-generated shambles in CDO (collateralized debt obligation) land -- is closer than anybody imagines."