FetteredChinos
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evening DC... long time no waffle..
arent you expecting a trend day north today?
arent you expecting a trend day north today?
Charlie is bearish !
It LOOKED innocent, beginning like all of the rest of the little pullbacks since last July, what appear to be "just another wiggle" within the Dow and the NASDAQ channels. I would have missed this too, if I had not been told well in advance to look for it by various charts I've shown, including "Mr. Happy Face."
I BELIEVE THAT WE NOW HAVE BEGUN WHAT WILL BE THE WORST Q4 IN YEARS. BUT, TAKE HEART, AS I ALSO BELIEVE THAT WE ARE GOING TO FOLLOW IT WITH THE BEST Q1 IN THE SAME NUMBER OF YEARS.
Of course, I've been making that call for months now, but buried within the charts are numerous bits of evidence that "the trigger has been pulled." The most obvious tip off that the pullback has begun comes to those who follow my favorite indicator, the Williams %R, which for the Dow, has just gone down to the minus 20 level, demarking the overbought region. A further drop of the index will cause that indicator to shoot through, producing a sell signal.
Now, by itself, that would be perhaps only an early warning. We've had 2 other such breakthroughs, in Aug. and in Sept. which swing traders could have used to short, and longer term traders could have used for "buy on the pullbacks." This, with the TV hype of a great Q4, likely will be looked at as another of the same. What makes this different is that there is another steeply slanted H&S Top formation, with a 5-week-long neckline which has just completed, and validated, buried in the end of this run. I've heard no other analyst pick that one out, so I'll leave it as "an exercise for the student" to find it.
The importance of such a formation, again, is that it is a long time warning of a future pivot. I previously indicated that I had enough confidence, indicating that this will begin a pullback, rather than merely a wiggle. The next expected pivot would be some sort of a bottom, which will come on Nov 10th.
It LOOKED innocent, beginning like all of the rest of the little pullbacks since last July, what appear to be "just another wiggle" within the Dow and the NASDAQ channels. I would have missed this too, if I had not been told well in advance to look for it by various charts I've shown, including "Mr. Happy Face."
I BELIEVE THAT WE NOW HAVE BEGUN WHAT WILL BE THE WORST Q4 IN YEARS. BUT, TAKE HEART, AS I ALSO BELIEVE THAT WE ARE GOING TO FOLLOW IT WITH THE BEST Q1 IN THE SAME NUMBER OF YEARS.
Of course, I've been making that call for months now, but buried within the charts are numerous bits of evidence that "the trigger has been pulled." The most obvious tip off that the pullback has begun comes to those who follow my favorite indicator, the Williams %R, which for the Dow, has just gone down to the minus 20 level, demarking the overbought region. A further drop of the index will cause that indicator to shoot through, producing a sell signal.
Now, by itself, that would be perhaps only an early warning. We've had 2 other such breakthroughs, in Aug. and in Sept. which swing traders could have used to short, and longer term traders could have used for "buy on the pullbacks." This, with the TV hype of a great Q4, likely will be looked at as another of the same. What makes this different is that there is another steeply slanted H&S Top formation, with a 5-week-long neckline which has just completed, and validated, buried in the end of this run. I've heard no other analyst pick that one out, so I'll leave it as "an exercise for the student" to find it.
The importance of such a formation, again, is that it is a long time warning of a future pivot. I previously indicated that I had enough confidence, indicating that this will begin a pullback, rather than merely a wiggle. The next expected pivot would be some sort of a bottom, which will come on Nov 10th.
mark twain uk
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kriesau said:
Superb article, it just shows how the media ande the specialists can't tell the truth. Why do I say that?
Well, have a look for yourself. The study says "The odds of a recession in the United States in the next year are now greater than 50-50@ but the title of the article says "yield curve model shows 50% odds of slowdown." No, it does not say that, it says greater than 50%, DOH!
Another point to make: "The model, ... has been extremely accurate at predicting recessions in the past." What do the specialists say? "the model may be delivering a misleading message today" Why? Why would a model that has been extremely accurate in the past be misleading today? Don't tell me is a paradigm shift.
Recession odds growing, Fed model shows Yield curve model shows 50% odds of slowdown
WASHINGTON (MarketWatch) -- The odds of a recession in the United States in the next year are now greater than 50-50, according to a simplified version of a model developed by an economist at the Federal Reserve.
The model, which relates the shape of the yield curve to the Fed's interest rate target, has been extremely accurate at predicting recessions in the past. But economists who study the business cycle say the model may be delivering a misleading message today.
Fed economist Jonathan Wright developed the model in a paper published earlier this year, based on research by, among others, new Fed Gov. Frederic Mishkin and New York Fed economist Arturo Estrella. Read his paper.
If bond yields stay at current levels for the next three months, Wright's model would predict a recession. Current yields have been in a recession-zone for only a day so far.
mark twain uk
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It 's always useful to look at the bigger picture, these are the dailies for the last few months:
On the dow, we had a perfect doji on the 26th followed by five down days in a row. I am minded to reopen my short tonight, and even add to it as appropriate. One of the most valuable advice that I found in a book was this: once you have an open position and a trading plan, do not be influenced by small daily or intradaily changes, ask yourself two questions: are the reasons that caused you to open the position still valid? Have the market conditions changed fundamentally since you opened your position? If the answers to these questions are Yes and No, then keep your position open, doing nothing is the best course of action. I went in and out of short positions several times over the last few days but I think I will re-open my shorts and keep them open until I get a confirmation of an upturn. When, and only when that happens, I will close my short, otherwise I will look at these charts and think of all the time the market caught me short and bounced up in the last few months, I took the pain and carried on. Now the market has been going down for five days maybe it's the time to batten down the hatches and stay short for a little longer.
If the dow starts to tumble, the nearest meaningul support is at the July lows, that's 10,672 cash. A stop loss on the upside would be above the highest high, that was 12,180. As I type the dow cash shows 12,005. That's 175 points upside versus 1,333 points downside. That's better than 1:7 risk/reward. Of course it is difficult to believe that we will get back to 10,672, but why should this be more difficult to believe than a bull run of 1,500 points between Mid-July and End of October? If somebody would have told me in July that we will see nearly 12,200 before the end of October I would have reacted with total incredulity. I could see 11,200, but 12,200? Not a chance. The same applies to our current position. It could go either way, but with a recession looming, a trade deficit unprecedented in the history of mankind, a housing market that is in free fall, the chances are that the market will have to give back some of its gains.
Of course it could go up tomorrow and then carry on for another 1000 points, everything is possible, and that is why a stop loss must be in place. Looking back to July, I was actually long in the beginning, but I soon got out thinking it could go no higher. All I had to do was to leave the long positions open and just use a trailing stop. So that's what I am going to do, I will open a short during the night, I will wait to see what the nikkei will be up to, and put a stop loss above the recent highs. I will then open and close new positions for intrady scalping, it worked really well recently.
I hope the above is not too much of a rant and I would welcome any comments.
On the dow, we had a perfect doji on the 26th followed by five down days in a row. I am minded to reopen my short tonight, and even add to it as appropriate. One of the most valuable advice that I found in a book was this: once you have an open position and a trading plan, do not be influenced by small daily or intradaily changes, ask yourself two questions: are the reasons that caused you to open the position still valid? Have the market conditions changed fundamentally since you opened your position? If the answers to these questions are Yes and No, then keep your position open, doing nothing is the best course of action. I went in and out of short positions several times over the last few days but I think I will re-open my shorts and keep them open until I get a confirmation of an upturn. When, and only when that happens, I will close my short, otherwise I will look at these charts and think of all the time the market caught me short and bounced up in the last few months, I took the pain and carried on. Now the market has been going down for five days maybe it's the time to batten down the hatches and stay short for a little longer.
If the dow starts to tumble, the nearest meaningul support is at the July lows, that's 10,672 cash. A stop loss on the upside would be above the highest high, that was 12,180. As I type the dow cash shows 12,005. That's 175 points upside versus 1,333 points downside. That's better than 1:7 risk/reward. Of course it is difficult to believe that we will get back to 10,672, but why should this be more difficult to believe than a bull run of 1,500 points between Mid-July and End of October? If somebody would have told me in July that we will see nearly 12,200 before the end of October I would have reacted with total incredulity. I could see 11,200, but 12,200? Not a chance. The same applies to our current position. It could go either way, but with a recession looming, a trade deficit unprecedented in the history of mankind, a housing market that is in free fall, the chances are that the market will have to give back some of its gains.
Of course it could go up tomorrow and then carry on for another 1000 points, everything is possible, and that is why a stop loss must be in place. Looking back to July, I was actually long in the beginning, but I soon got out thinking it could go no higher. All I had to do was to leave the long positions open and just use a trailing stop. So that's what I am going to do, I will open a short during the night, I will wait to see what the nikkei will be up to, and put a stop loss above the recent highs. I will then open and close new positions for intrady scalping, it worked really well recently.
I hope the above is not too much of a rant and I would welcome any comments.
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mark twain uk
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No Andy, I was saying that journalists cannot tell the truth, they can't even quote correctly from their own article.
mark twain uk
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The fed have an impossible task. On one hand, they need to fight inflation, so the rates should go up. On the other hand they have to fight the recession, so they should lower the rates in order to stimulate the economy. They're damned if they do and damned if they don't.
mark twain uk said:
This contradiction is due to the false economies we are living in the UK and US.
We always hear stories about how things are getting transferred to cheap labour locations, and companies cutting cost.... but then why haven't I seen any of my bills coming down?
- I still pay 20+ quids for a t-shirt made in china for less than a quid
- I still pay 1000+ quids for an LCD made in taiwan for less than 100(?) quids
- I pay 33% more for my gas bills - even though the oil prices have come down heavily.
- I pay 15+ quids for a DVD legally manufactured by record companies in thailand for
less than 40p!
- Still costs 70+ quids for a pair of trainers which cost no more than 2 quids to make and ship
from the sweatshops of indonesia.
- Won't even comment about house prices in the UK!!! - credit goes to the estate agents.
They are like our home grown PPT for the housing market
)and so on....
Inflation is here to stay - and will continue to go up.
So.. where is all this cheap labour "cost-saving" going to??
Its going into the CEO's and taxmans pockets.
More interesting times to come.
We haven't yet fully experienced the long term impact of offshoring, job losses and cost-cutting.
Pat494
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The economy reminds me of a trough full of holes. Pour the money in and the fat cats, greedy pigs etc are scooping it out so fast the customers never see the benefits.
The huge pay rises on already huge salaries are justified by keeping up with US executives and politicians - about 30% wasn't it Tony ?
They offer NHS workers about 1.5% on pathetic salaries.
I am surprised that they have the time to do any work at all they are so busy spending it, when they aren't bonking the staff or playing croquet !!
FAIR - not blooming likely
The huge pay rises on already huge salaries are justified by keeping up with US executives and politicians - about 30% wasn't it Tony ?
They offer NHS workers about 1.5% on pathetic salaries.
I am surprised that they have the time to do any work at all they are so busy spending it, when they aren't bonking the staff or playing croquet !!
FAIR - not blooming likely
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Watch this trailer..........go see the documentary film............and be afraid !
http://www.oilcrashmovie.com/film.html
http://www.oilcrashmovie.com/film.html
THE TRILLION DOLLAR PROPERTY LIE
In the fall of 2006, the news appeared that Donald Trump
had put his Palm Beach mansion on the market for $120
million. He had bought the place less than 10 years
before for less than $50 million. If he were to get his
price, the profit would be about $7 million for every
year he held it. Which is good work if you can get it –
earning more than half a million dollars per month –
just for owning one of America's greatest beach houses.
But pity the poor next owner. He'd have carrying costs
of $6 million per year ($120 million @ 5% interest),
plus property taxes, plus upkeep, plus staff costs and
other expenses. Instead of earning money, he'll probably
be out of pocket more than a million dollars per month.
And here, we let the fellow in on a little secret:
houses don't go up every year, especially those that
rose $70 million in the last decade.
We thought The Donald had set the pace for
extravagantly-priced houses when, only a few weeks
later, came news that Saudi Arabia's former ambassador
to the US, Prince Bandar bin Sultan, put his ranch near
Aspen, Colorado, on the market for $135 million – making
it the most expensive private house ever offered for
sale in America; perhaps in the whole world. But that
was the charm of the housing bubble; one absurdity
always seems to lead to an even bigger one later on.
And all over the world, the rich were on a spending
spree. They bought ranches in South America; even the
Bush family bought one – a 98,000 acre estancia in
Paraguay. (In the interest of full disclosure, and a
confession of partial insanity, your editor admits that
he, too, bought a little spread south of the Rio Plata.
He is pleased that the Bushes have chosen to locate
north of the river; he was concerned for property values
in his area.)
Rich people pulled out their fat wallets and bought
diamonds...art...apartments in Mayfair...on the Place
Vendome...and at the Puerto del Sol. Prices soared, as
the cost of living it up headed for the moon.
But down at the other end of the income spectrum, the
lower and middle classes were having a rough time. In
the 10 years leading up to 2006, they had added $5.2
trillion to their debts most of it on house loans. This
was nothing to worry about, said the experts. Because
their net worth also had gone up. The price of the
average house in America rose approximately 60% in the
period. Compared to the type of gains the rich were
getting in Malibu, Manhattan and Miami, a 60% gain was
peanuts. But it was enough to lift the spirits of
millions of ordinary people.
Besides, in the preceding 100 years nothing like it had
ever happened. Normally, house prices merely followed
income and GDP gains, like a good hooker, walking 10
paces behind so no one notices. But in last 10 years of
Alan Greenspan's reign, they took off at a sprint and
were soon racing past everyone.
A rich man can watch his property go up in price with a
calm detachment, as though he were watching a beer truck
overturn. But a poor man can barely contain himself. He
feels he much seize the opportunity. Before you know it
he is feeling a little loose and reckless. And after a
while, he becomes light in the head.
Rising property prices were caused by a lie – that the
feds could increase the world's purchasing power by
introducing additional 'money' into the economy. Then,
the lie led to a humbug after which followed a delusion
trailed by a hallucination.
At the centre of all these swindles was the idea that
houses actually can go up in value. Readers may be taken
aback. Everybody in America now knows that houses always
go up in value. But it is not true. For 100 years, from
1896 to 1996, houses went nowhere at all – merely
keeping up with GDP, inflation and income growth. Then,
in the following 10 years – they rose remarkably.
The homeowner didn't know what to think. Predictably, he
made the wrong thing of it. He came to believe that his
pile of blocks, bricks, 2 x 4s and faded paint had
somehow grown in real worth – like a fine wine that had
aged or a bond that had matured.
This sentiment was extraordinary for two reasons. First,
it was completely at odds with the evidence before his
very eyes. He had only to open them to realize that his
house was not, in fact, becoming a better thing.
Instead, with each passing day it became a worse thing.
He knew damned well that the wooden floor joists rotted
and warped. The concrete foundation cracked. The
aluminum windows corroded. The shingles on the roof wore
away. The gutters clogged. The pipes rusted. The carpet
matted down and stained. Every item - big and small –
about the house actually lost value as it aged. How was
it possible that the ensemble of them went up?
As the years passed, he turned the front door knob; it
squeaked. He turned on the hot water in the bathroom;
the faucet leaked. He turned on the air-conditioning and
it sputtered and creaked. How was it possible that the
aggregated collection of all these corroding,
deteriorating things put together actually became more
valuable? It seemed to defy reason and good sense.
But out came the theorists, the economists, and the real
estate salesmen. Property was rising, he was told,
because there were so many new people coming in. But how
could it be that houses in the US were rising everywhere
– throughout the 50 states? Where were all these new
people coming from? And it was rising, they said,
because the country was running out of buildable land
and building codes were more restrictive. New houses
were actually becoming rare; that's why older houses
were so sought after.
But here too, he opened his eyes and saw it wasn't so.
That was the second reason he might have been sceptical.
Everywhere he looked, houses were going up. There was
clearly a US house building boom, not merely a house
price boom. In some areas, every available lot was under
construction. Single family homes went up in former cow-
fields and old auto lots. In other areas, single family
homes were knocked down to make room for condominiums.
Acres - no square miles - of previously empty land was
being converted to housing.
How was it possible – with all this new supply – that
prices would go up? The very idea of it contradicted his
intuition if not also his instruction. Rising supplies
drive prices down...not up.
What's more, these new houses had none of the defects of
his old barrack. The paint was fresh. The doors opened
and shut properly. The air-conditioning made no funny
noises. The faucets didn't leak. The new houses were
bigger, cleaner, brighter, more modern. How was it
possible, in face of this competition, that his hulk of
a house was going up in price? It should go down.
What was a house really worth, he might have asked
himself. What is it, after all? It is shelter: it is a
place to hang our hats. It is home sweet home. But who
ever heard of home sweet home making anyone rich.
Then, his mind working on the problem like a gorilla
trying to do long division, he realized that he had to
look upon his house, not as a dwelling, but as an
investment! Thus did another brick in the lunatic wall
of the great housing bubble get laid in place. Between
2002 and 2006, in many areas of the country, residential
housing rose at 20% per year or more. As an investment,
it was actually a superb one, he noticed. What stock
would do that? And what stock had granite countertops in
the kitchen?
The more he looked at it as an investment, the more
attractive it became. He could buy a house with no money
down. That was another madness – which we'll get to in a
minute. But let us imagine that he acted as a
conservative, prudent investor. He could buy a $200,000
with a 20% down payment. So, he put down $40,000. Then,
he got two forms of pay off. Like a stock or a bond, he
got a 'dividend' – in the form of a place to live. A
$200,000 house might rent for $2,000 a month. So, he
figured he got $24,000 there. Plus, he got a capital
gain – when the house went up in price. At 20% per year,
this came to another $40,000. Whoa...what a bonanza! His
$40,000 initial investment was throwing off $64,000 in
'profit' – every year. All he had to do was pay a loan
of say, $1,000 a month...and, of course, property taxes
and expenses.
One absurdity led to another; each one bigger than the
last. The US householder began to see that not only was
his house a great investment, but that he must be an
investment genius for taking advantage of it. The
average wage in the US in 2000 was only $37,565. He was
making more than that – much more – just by living in
his own house.
A thoughtful man, left alone with his private
reflections, might have wondered how it was possible. He
might have considered his own good fortune and thought
more deeply about what actually lay behind it. How is
money made, he might have asked himself? By work. By
saving. He knew the answers. And he knew he was doing
neither. Ah, by investing! 'Yes, that's it,' he said to
himself, 'I am an investor, like George Soros or Warren
Buffett.'
Only smarter. Buffett still lived in the same house he
bought 40 years ago, he noticed. What a dolt! He should
have traded up, flipped and refinanced.
Then, another monstrous delusion developed. The
homeowner came to believe that he had the equivalent of
an ATM machine in his bedroom. If his house was making
him so much money, he said to himself, surely he could
take some of that money out and spend it? Using home
equity lines and refinancings, homeowners found that
they could make regular withdrawals from the Bank of
Their Own Homes. Borrowing against the house was easy –
lenders saw little risk. And interest rates were low.
It seemed like a no-brainer. A house that was bringing
$60,000 a year in wealth to a family could easily
provide $10,000 to help the family live better. Heck,
the family was still $50,000 ahead of the game. And so
the money flowed. And what began as a trickle soon
became an Amazon; a great river of no return. In the two
years 2004 and 2005, homeowners 'took out' more than $1
trillion from their houses.
Experts told them they were being very prudent. They
were shrewdly 'managing their household wealth,' it was
said. House loans was cheap credit; better to borrow
from a home equity line than a credit card. And besides,
with their houses rising in price, how could they go
wrong?
We answered that question in these pages. It was not the
price of the house that counted; it was the ability of
the homeowner to repay the loan. Yes, he could sell his
house to get cash. But then where would he live? It
wasn't as if his was the only house in America going up
in price. The only way he could actually realize the
inflated value of his house was by dying, or moving out
of the country. Not many householders were ready to do
that. Short of that, he had to service his loan, just
like any other borrower. And as the weight of his
borrowing increased, his legs began to wobble and
buckle. Nor did it help that his house was pricier – his
insurance, his maintenance costs, and his property taxes
were rising too!
By 2002, US houses were clearly going up in price –
faster than they ever had before. And the homeowner was
about to swallow his next big absurdity.
The rise in US housing prices between 2002 and 2006 in
certain markets – San Francisco, San Diego, Miami, Las
Vegas, Washington, Manhattan – was breathtaking. By
2005, the average house in San Francisco was selling for
$$820,482. In the Washington suburbs, ordinary split
levels and colonials had doubling in price in five
years' time. And along the California coast even
trailers passed the $1 million mark.
Mobile home madness:
In the year of our Lord, 2005, on the Pacific coast of
the North American continent, a two-bedroom trailer was
offered for $1.4 million. This was hardly a first or
even a most. Other mobile homes had sold for $1.3
million and $1.8 million. Still another was on the
market for $2.7 million.
Why would people pay so much for mobile homes? Well, the
views were said to be spectacular and they were good
investments. That is, they were good investments in a
time when prices were going through the aluminium roofs.
Still, unlike most single family dwellings, trailer
owners don't own the land upon which their houses rest.
Instead, they must rent it. In addition to the house
loans trailer buyers have to pay 'space rent' which, for
the $1.4 million mobile home was $2,700 a month. Not a
fortune, but still a drain on your money.
And oh yes, we mentioned 'housing loans'...but housing
loans are hard to get on trailers. Because the trailer
might be pulled off the land...and then what would it be
worth? Almost nothing. In Malibu, in 2005, the average
house sold for $4.4 million. A trailer is a very simple
home. But put it on a lot overlooking the Pacific and it
is worth a fortune, at least in the great bull market of
'96 to '06. The $1.4 million trailer, we were told, was
in a gated community and on a 'triple-wide lot.' Wow.
Meanwhile, in Florida, buyers were taking up condos that
hadn't even been built. In Miami, 'flipping' condos came
to be a profitable speculation in the early 21st
century. Speculators would buy a group of 5 or 10 condos
– even before a single shovelful of dirt had been
displaced. The idea was to sell the contract to another
speculator while the place was being built. The second
buyer would then sell to yet another buyer when it was
completed. Neither the first, nor the second, nor the
third buyer had any intention of living in the condo.
They were just speculating.
The trouble was that the object of their speculation
looked rather lonely and forlorn when it was finally put
up. Driving by at night, you would notice that few of
the condos had the lights on. Most were empty; waiting
for the ultimate buyer, the poor sap who would actually
live in the place and, presumably, pay for it.
This eventually became such a problem for developers
that they tried to squeeze out the speculators,
insisting that buyers take up only one of the condos and
move in within a specified period of time. In some
projects, developers announced special offers, which had
prospective buyers camping out all weekend in order to
get a good place in line to buy when the doors opened on
Monday morning.
While buyers were leaping from one absurdity to the
next, they were provided special shoes...with wings...by
the lending industry.
In the autumn of 2006, the regulators began to wonder. A
group of regulatory agencies began to think they had
allowed too many marginal buyers to take off. The air
was full of them...and many were beginning to crash.
Even Ben Bernanke, speaking just yesterday, warned that
borrowers might need some flying lessons; a little more
'awareness' of lending practices was what was needed,
said he.
Bernanke's comments followed the release of a new set of
standards, in a report entitled "Interagency Guidance on
Nontraditional Mortgage Product Risks."
And then, about the same time, the Comptroller of the
Currency, John C. Dugan, spoke about the innovations of
the mortgage industry:
"Lenders who originate these types of loans should
follow sound underwriting practices that consider the
borrower's repayment capacity."
Traditionally, the lender judged both his man and his
market, we recall pointing out. If both were deemed
solid, he would take a chance, lending the man a
mortgage and hoping that the market was strong enough to
allow him to recover his money if the man failed.
Nontraditionally, however, lenders didn't even bother
with the man; instead, they judged the market and judged
it foolproof. This proposition they then set off to test
– by making outrageous loans to both fools and knaves.
Reading the popular press – not to mention the
advertisements in the popular press – we learned about
the number and variety of non-traditional house loans
that have flourished in the last six years. Adjustable
rates, of course, became common. But so did housing
loans with zero down payments, alluringly low starter
rates, including interest-only mortgages, flexible
payments, and 'stated income' applications in which the
borrower is left to use his own imagination in
describing his financial circumstances.
When the 21st century first budded out, only 5% of
mortgages were of the so-called 'sub-prime' variety,
that is, house loans to marginal borrowers. Five years
later, one in four was to a subprime borrower.
Also in 2000, only 25% of these sub-prime house loans
were of the 'stated income' variety. Only 1% consisted
of 'piggyback loans' – junior loans designed to
eliminate the need for a real down payment. And none
were I.O., or interest only.
By September 2006, 44% of sub-prime loans had "limited
documentation," 31% were piggyback loans, and 22% were
I.O. This was the very moment at which regulators were
asking the lending industry to be more careful – that
is, after they had already let the weasels in the
chicken yard.
Daily Reckoning readers laughed heartily at empty
conceit; the stated purpose of both the US federal
government's housing policy and that of the lenders
themselves was to 'help Americans buy their own homes'
or words to that effect. Easy credit was meant to
increase homeownership. (Renting a house was a kind of
social failure, like dropping out of high school or
driving an old Pinto.) They had 'democratized' the
credit market, they claimed; now not only rich
speculators could lose their shirts. The common man
could too!
The obvious effect of EZ credit was to turn Americans
into a race of housing speculators, not of homeowners.
Instead of actually buying and paying for a house,
marginal buyers were enticed into these innovative loan
products, which were more like options to buy a house
rather than an actual purchase of one. An I.O.,
interest-only, house loan gave the speculator the right
to buy the house sometime in the future – if things went
well. And as the I.O.'s, limited doc, flexible payment
ARMs reached farther and farther into the general
population of homeowners, fewer and fewer people really
owned their homes at all. More and more of them became
gamblers, betting that property values would rise fast
enough for them to keep on refinancing until they
actually pulled in enough dough to make a down payment.
The problem with this little pleasantry was that the
joke was on the people who could least afford it – the
gullible borrowers of the subprime market. Much more
funny was the gullibility of the sub-prime lenders.
Cheap suits, expensive suits – when you got down to it,
they all fell for the same line of guff.
While the marginal lumpen took out ARMs, the hedge-fund,
pension fund, and insurance fund geniuses bought MBSs,
mortgage-backed securities. The securities were backed
by the mortgages which were in turn backed by the
imaginary incomes of the borrowers and inflated house
prices. The credit agencies rightly judged the quality
of the mortgages as less than perfect, BBB-. And then
with the miraculous powers of modern finance these same
mortgages were put into MBSs and turned into triple-A
credits!
The transformation of bad credits into good ones, in
front of the very eyes of Ph.D. mathematicians and hedge
fund quants, must be rated along with Christ's
performance at the marriage of Cana, where the Nazarene
turned ordinary tapwater into wine. Scientists often
suggest that the Gospels lie. But as to the veracity of
modern finance, they were mute.
Asked to explain, the institutional salesmen resorted to
a logic little different that of the ordinary homeowner.
The component parts may be a little greasy, they said,
but put together the sliced and diced, processed
mortgage packages were less risky than individual
mortgages. It was as if you were less likely to get sick
from eating a can of Spam than from eating any
particular cut of meat. How that could be was never
explained. Presumably, the glop that went in didn't get
any better by mixing it with more glop.
Just how bad some of this glop was became apparent only
recently. After swindling themselves and each other for
so many years, the real professionals decided their way
into muscle into the house loan bubble.
As reported in Forbes:
"The real estate market has never offered such
opportunity for graft. Since the US housing market
started to soar in 2001, loan fraud has become the
fastest-growing white-collar crime, according to the
FBI. Last year crooks skimmed at least $1 billion from
the $3 trillion US mortgage market.
"Now that the market is slowing, fraud is only rising.
As business dries up, there's increasing pressure on
lenders, brokers, title companies and appraisers to be
profitable. That means loan and title documents aren't
scrutinized as carefully as they might be, and courts -
many of them so low-tech they resemble Mayberry - can't
keep up with the volume of paper.
"Then there's the mad rush to sell, particularly by
people who paid high prices for homes and suddenly can't
afford the loans.
"It's like a tasting menu for con artists and grifters,
so tempting that in some cities drug dealers have turned
to mortgage fraud, plaguing lower-income neighbourhoods
with crooked mortgages rather than crystal meth."
The Forbes article told the story – related here earlier
this week - of a pair of thieves, known as the Bonnie
and Clyde of house loan fraud. The two did very naughty
things – pretending to be who they weren't, borrowing
money to buy houses at inflated prices, forging
documents, stealing identities, defrauding sellers and
lenders alike - and made off with millions of dollars.
Elsewhere it was reported that lenders made millions in
housing loans to inmates in the Colorado prison system.
A whole group of miscreants issuing out of the Rocky
Mountain state pen was able to buy 17 houses for
inflated prices and take away $2.1 million in excess
loan proceeds. According to the report, hundreds of
houses were sold in what was called 'price puffs' – at
prices above real market value.
By the autumn of 2006 these houses were going into
foreclosure at the rate of 1 out of every 13. The price
puffs began modestly – with buyers taking out $5,000 to
$10,000 at the time of settlement. But amounts grew
until they were walking away with 30% of the purchase
price, or amounts over $100,000.
Then, the feds got on the case and people started going
to jail again. But that is how these stories tend to
end. In court, in chapters 7 and 11.
Every public spectacle ends in correction of some sort.
Often, in a house of correction. And the force of the
correction is equal and opposite to the deception that
preceded it. This one ought to be a doozie.
In the fall of 2006, the news appeared that Donald Trump
had put his Palm Beach mansion on the market for $120
million. He had bought the place less than 10 years
before for less than $50 million. If he were to get his
price, the profit would be about $7 million for every
year he held it. Which is good work if you can get it –
earning more than half a million dollars per month –
just for owning one of America's greatest beach houses.
But pity the poor next owner. He'd have carrying costs
of $6 million per year ($120 million @ 5% interest),
plus property taxes, plus upkeep, plus staff costs and
other expenses. Instead of earning money, he'll probably
be out of pocket more than a million dollars per month.
And here, we let the fellow in on a little secret:
houses don't go up every year, especially those that
rose $70 million in the last decade.
We thought The Donald had set the pace for
extravagantly-priced houses when, only a few weeks
later, came news that Saudi Arabia's former ambassador
to the US, Prince Bandar bin Sultan, put his ranch near
Aspen, Colorado, on the market for $135 million – making
it the most expensive private house ever offered for
sale in America; perhaps in the whole world. But that
was the charm of the housing bubble; one absurdity
always seems to lead to an even bigger one later on.
And all over the world, the rich were on a spending
spree. They bought ranches in South America; even the
Bush family bought one – a 98,000 acre estancia in
Paraguay. (In the interest of full disclosure, and a
confession of partial insanity, your editor admits that
he, too, bought a little spread south of the Rio Plata.
He is pleased that the Bushes have chosen to locate
north of the river; he was concerned for property values
in his area.)
Rich people pulled out their fat wallets and bought
diamonds...art...apartments in Mayfair...on the Place
Vendome...and at the Puerto del Sol. Prices soared, as
the cost of living it up headed for the moon.
But down at the other end of the income spectrum, the
lower and middle classes were having a rough time. In
the 10 years leading up to 2006, they had added $5.2
trillion to their debts most of it on house loans. This
was nothing to worry about, said the experts. Because
their net worth also had gone up. The price of the
average house in America rose approximately 60% in the
period. Compared to the type of gains the rich were
getting in Malibu, Manhattan and Miami, a 60% gain was
peanuts. But it was enough to lift the spirits of
millions of ordinary people.
Besides, in the preceding 100 years nothing like it had
ever happened. Normally, house prices merely followed
income and GDP gains, like a good hooker, walking 10
paces behind so no one notices. But in last 10 years of
Alan Greenspan's reign, they took off at a sprint and
were soon racing past everyone.
A rich man can watch his property go up in price with a
calm detachment, as though he were watching a beer truck
overturn. But a poor man can barely contain himself. He
feels he much seize the opportunity. Before you know it
he is feeling a little loose and reckless. And after a
while, he becomes light in the head.
Rising property prices were caused by a lie – that the
feds could increase the world's purchasing power by
introducing additional 'money' into the economy. Then,
the lie led to a humbug after which followed a delusion
trailed by a hallucination.
At the centre of all these swindles was the idea that
houses actually can go up in value. Readers may be taken
aback. Everybody in America now knows that houses always
go up in value. But it is not true. For 100 years, from
1896 to 1996, houses went nowhere at all – merely
keeping up with GDP, inflation and income growth. Then,
in the following 10 years – they rose remarkably.
The homeowner didn't know what to think. Predictably, he
made the wrong thing of it. He came to believe that his
pile of blocks, bricks, 2 x 4s and faded paint had
somehow grown in real worth – like a fine wine that had
aged or a bond that had matured.
This sentiment was extraordinary for two reasons. First,
it was completely at odds with the evidence before his
very eyes. He had only to open them to realize that his
house was not, in fact, becoming a better thing.
Instead, with each passing day it became a worse thing.
He knew damned well that the wooden floor joists rotted
and warped. The concrete foundation cracked. The
aluminum windows corroded. The shingles on the roof wore
away. The gutters clogged. The pipes rusted. The carpet
matted down and stained. Every item - big and small –
about the house actually lost value as it aged. How was
it possible that the ensemble of them went up?
As the years passed, he turned the front door knob; it
squeaked. He turned on the hot water in the bathroom;
the faucet leaked. He turned on the air-conditioning and
it sputtered and creaked. How was it possible that the
aggregated collection of all these corroding,
deteriorating things put together actually became more
valuable? It seemed to defy reason and good sense.
But out came the theorists, the economists, and the real
estate salesmen. Property was rising, he was told,
because there were so many new people coming in. But how
could it be that houses in the US were rising everywhere
– throughout the 50 states? Where were all these new
people coming from? And it was rising, they said,
because the country was running out of buildable land
and building codes were more restrictive. New houses
were actually becoming rare; that's why older houses
were so sought after.
But here too, he opened his eyes and saw it wasn't so.
That was the second reason he might have been sceptical.
Everywhere he looked, houses were going up. There was
clearly a US house building boom, not merely a house
price boom. In some areas, every available lot was under
construction. Single family homes went up in former cow-
fields and old auto lots. In other areas, single family
homes were knocked down to make room for condominiums.
Acres - no square miles - of previously empty land was
being converted to housing.
How was it possible – with all this new supply – that
prices would go up? The very idea of it contradicted his
intuition if not also his instruction. Rising supplies
drive prices down...not up.
What's more, these new houses had none of the defects of
his old barrack. The paint was fresh. The doors opened
and shut properly. The air-conditioning made no funny
noises. The faucets didn't leak. The new houses were
bigger, cleaner, brighter, more modern. How was it
possible, in face of this competition, that his hulk of
a house was going up in price? It should go down.
What was a house really worth, he might have asked
himself. What is it, after all? It is shelter: it is a
place to hang our hats. It is home sweet home. But who
ever heard of home sweet home making anyone rich.
Then, his mind working on the problem like a gorilla
trying to do long division, he realized that he had to
look upon his house, not as a dwelling, but as an
investment! Thus did another brick in the lunatic wall
of the great housing bubble get laid in place. Between
2002 and 2006, in many areas of the country, residential
housing rose at 20% per year or more. As an investment,
it was actually a superb one, he noticed. What stock
would do that? And what stock had granite countertops in
the kitchen?
The more he looked at it as an investment, the more
attractive it became. He could buy a house with no money
down. That was another madness – which we'll get to in a
minute. But let us imagine that he acted as a
conservative, prudent investor. He could buy a $200,000
with a 20% down payment. So, he put down $40,000. Then,
he got two forms of pay off. Like a stock or a bond, he
got a 'dividend' – in the form of a place to live. A
$200,000 house might rent for $2,000 a month. So, he
figured he got $24,000 there. Plus, he got a capital
gain – when the house went up in price. At 20% per year,
this came to another $40,000. Whoa...what a bonanza! His
$40,000 initial investment was throwing off $64,000 in
'profit' – every year. All he had to do was pay a loan
of say, $1,000 a month...and, of course, property taxes
and expenses.
One absurdity led to another; each one bigger than the
last. The US householder began to see that not only was
his house a great investment, but that he must be an
investment genius for taking advantage of it. The
average wage in the US in 2000 was only $37,565. He was
making more than that – much more – just by living in
his own house.
A thoughtful man, left alone with his private
reflections, might have wondered how it was possible. He
might have considered his own good fortune and thought
more deeply about what actually lay behind it. How is
money made, he might have asked himself? By work. By
saving. He knew the answers. And he knew he was doing
neither. Ah, by investing! 'Yes, that's it,' he said to
himself, 'I am an investor, like George Soros or Warren
Buffett.'
Only smarter. Buffett still lived in the same house he
bought 40 years ago, he noticed. What a dolt! He should
have traded up, flipped and refinanced.
Then, another monstrous delusion developed. The
homeowner came to believe that he had the equivalent of
an ATM machine in his bedroom. If his house was making
him so much money, he said to himself, surely he could
take some of that money out and spend it? Using home
equity lines and refinancings, homeowners found that
they could make regular withdrawals from the Bank of
Their Own Homes. Borrowing against the house was easy –
lenders saw little risk. And interest rates were low.
It seemed like a no-brainer. A house that was bringing
$60,000 a year in wealth to a family could easily
provide $10,000 to help the family live better. Heck,
the family was still $50,000 ahead of the game. And so
the money flowed. And what began as a trickle soon
became an Amazon; a great river of no return. In the two
years 2004 and 2005, homeowners 'took out' more than $1
trillion from their houses.
Experts told them they were being very prudent. They
were shrewdly 'managing their household wealth,' it was
said. House loans was cheap credit; better to borrow
from a home equity line than a credit card. And besides,
with their houses rising in price, how could they go
wrong?
We answered that question in these pages. It was not the
price of the house that counted; it was the ability of
the homeowner to repay the loan. Yes, he could sell his
house to get cash. But then where would he live? It
wasn't as if his was the only house in America going up
in price. The only way he could actually realize the
inflated value of his house was by dying, or moving out
of the country. Not many householders were ready to do
that. Short of that, he had to service his loan, just
like any other borrower. And as the weight of his
borrowing increased, his legs began to wobble and
buckle. Nor did it help that his house was pricier – his
insurance, his maintenance costs, and his property taxes
were rising too!
By 2002, US houses were clearly going up in price –
faster than they ever had before. And the homeowner was
about to swallow his next big absurdity.
The rise in US housing prices between 2002 and 2006 in
certain markets – San Francisco, San Diego, Miami, Las
Vegas, Washington, Manhattan – was breathtaking. By
2005, the average house in San Francisco was selling for
$$820,482. In the Washington suburbs, ordinary split
levels and colonials had doubling in price in five
years' time. And along the California coast even
trailers passed the $1 million mark.
Mobile home madness:
In the year of our Lord, 2005, on the Pacific coast of
the North American continent, a two-bedroom trailer was
offered for $1.4 million. This was hardly a first or
even a most. Other mobile homes had sold for $1.3
million and $1.8 million. Still another was on the
market for $2.7 million.
Why would people pay so much for mobile homes? Well, the
views were said to be spectacular and they were good
investments. That is, they were good investments in a
time when prices were going through the aluminium roofs.
Still, unlike most single family dwellings, trailer
owners don't own the land upon which their houses rest.
Instead, they must rent it. In addition to the house
loans trailer buyers have to pay 'space rent' which, for
the $1.4 million mobile home was $2,700 a month. Not a
fortune, but still a drain on your money.
And oh yes, we mentioned 'housing loans'...but housing
loans are hard to get on trailers. Because the trailer
might be pulled off the land...and then what would it be
worth? Almost nothing. In Malibu, in 2005, the average
house sold for $4.4 million. A trailer is a very simple
home. But put it on a lot overlooking the Pacific and it
is worth a fortune, at least in the great bull market of
'96 to '06. The $1.4 million trailer, we were told, was
in a gated community and on a 'triple-wide lot.' Wow.
Meanwhile, in Florida, buyers were taking up condos that
hadn't even been built. In Miami, 'flipping' condos came
to be a profitable speculation in the early 21st
century. Speculators would buy a group of 5 or 10 condos
– even before a single shovelful of dirt had been
displaced. The idea was to sell the contract to another
speculator while the place was being built. The second
buyer would then sell to yet another buyer when it was
completed. Neither the first, nor the second, nor the
third buyer had any intention of living in the condo.
They were just speculating.
The trouble was that the object of their speculation
looked rather lonely and forlorn when it was finally put
up. Driving by at night, you would notice that few of
the condos had the lights on. Most were empty; waiting
for the ultimate buyer, the poor sap who would actually
live in the place and, presumably, pay for it.
This eventually became such a problem for developers
that they tried to squeeze out the speculators,
insisting that buyers take up only one of the condos and
move in within a specified period of time. In some
projects, developers announced special offers, which had
prospective buyers camping out all weekend in order to
get a good place in line to buy when the doors opened on
Monday morning.
While buyers were leaping from one absurdity to the
next, they were provided special shoes...with wings...by
the lending industry.
In the autumn of 2006, the regulators began to wonder. A
group of regulatory agencies began to think they had
allowed too many marginal buyers to take off. The air
was full of them...and many were beginning to crash.
Even Ben Bernanke, speaking just yesterday, warned that
borrowers might need some flying lessons; a little more
'awareness' of lending practices was what was needed,
said he.
Bernanke's comments followed the release of a new set of
standards, in a report entitled "Interagency Guidance on
Nontraditional Mortgage Product Risks."
And then, about the same time, the Comptroller of the
Currency, John C. Dugan, spoke about the innovations of
the mortgage industry:
"Lenders who originate these types of loans should
follow sound underwriting practices that consider the
borrower's repayment capacity."
Traditionally, the lender judged both his man and his
market, we recall pointing out. If both were deemed
solid, he would take a chance, lending the man a
mortgage and hoping that the market was strong enough to
allow him to recover his money if the man failed.
Nontraditionally, however, lenders didn't even bother
with the man; instead, they judged the market and judged
it foolproof. This proposition they then set off to test
– by making outrageous loans to both fools and knaves.
Reading the popular press – not to mention the
advertisements in the popular press – we learned about
the number and variety of non-traditional house loans
that have flourished in the last six years. Adjustable
rates, of course, became common. But so did housing
loans with zero down payments, alluringly low starter
rates, including interest-only mortgages, flexible
payments, and 'stated income' applications in which the
borrower is left to use his own imagination in
describing his financial circumstances.
When the 21st century first budded out, only 5% of
mortgages were of the so-called 'sub-prime' variety,
that is, house loans to marginal borrowers. Five years
later, one in four was to a subprime borrower.
Also in 2000, only 25% of these sub-prime house loans
were of the 'stated income' variety. Only 1% consisted
of 'piggyback loans' – junior loans designed to
eliminate the need for a real down payment. And none
were I.O., or interest only.
By September 2006, 44% of sub-prime loans had "limited
documentation," 31% were piggyback loans, and 22% were
I.O. This was the very moment at which regulators were
asking the lending industry to be more careful – that
is, after they had already let the weasels in the
chicken yard.
Daily Reckoning readers laughed heartily at empty
conceit; the stated purpose of both the US federal
government's housing policy and that of the lenders
themselves was to 'help Americans buy their own homes'
or words to that effect. Easy credit was meant to
increase homeownership. (Renting a house was a kind of
social failure, like dropping out of high school or
driving an old Pinto.) They had 'democratized' the
credit market, they claimed; now not only rich
speculators could lose their shirts. The common man
could too!
The obvious effect of EZ credit was to turn Americans
into a race of housing speculators, not of homeowners.
Instead of actually buying and paying for a house,
marginal buyers were enticed into these innovative loan
products, which were more like options to buy a house
rather than an actual purchase of one. An I.O.,
interest-only, house loan gave the speculator the right
to buy the house sometime in the future – if things went
well. And as the I.O.'s, limited doc, flexible payment
ARMs reached farther and farther into the general
population of homeowners, fewer and fewer people really
owned their homes at all. More and more of them became
gamblers, betting that property values would rise fast
enough for them to keep on refinancing until they
actually pulled in enough dough to make a down payment.
The problem with this little pleasantry was that the
joke was on the people who could least afford it – the
gullible borrowers of the subprime market. Much more
funny was the gullibility of the sub-prime lenders.
Cheap suits, expensive suits – when you got down to it,
they all fell for the same line of guff.
While the marginal lumpen took out ARMs, the hedge-fund,
pension fund, and insurance fund geniuses bought MBSs,
mortgage-backed securities. The securities were backed
by the mortgages which were in turn backed by the
imaginary incomes of the borrowers and inflated house
prices. The credit agencies rightly judged the quality
of the mortgages as less than perfect, BBB-. And then
with the miraculous powers of modern finance these same
mortgages were put into MBSs and turned into triple-A
credits!
The transformation of bad credits into good ones, in
front of the very eyes of Ph.D. mathematicians and hedge
fund quants, must be rated along with Christ's
performance at the marriage of Cana, where the Nazarene
turned ordinary tapwater into wine. Scientists often
suggest that the Gospels lie. But as to the veracity of
modern finance, they were mute.
Asked to explain, the institutional salesmen resorted to
a logic little different that of the ordinary homeowner.
The component parts may be a little greasy, they said,
but put together the sliced and diced, processed
mortgage packages were less risky than individual
mortgages. It was as if you were less likely to get sick
from eating a can of Spam than from eating any
particular cut of meat. How that could be was never
explained. Presumably, the glop that went in didn't get
any better by mixing it with more glop.
Just how bad some of this glop was became apparent only
recently. After swindling themselves and each other for
so many years, the real professionals decided their way
into muscle into the house loan bubble.
As reported in Forbes:
"The real estate market has never offered such
opportunity for graft. Since the US housing market
started to soar in 2001, loan fraud has become the
fastest-growing white-collar crime, according to the
FBI. Last year crooks skimmed at least $1 billion from
the $3 trillion US mortgage market.
"Now that the market is slowing, fraud is only rising.
As business dries up, there's increasing pressure on
lenders, brokers, title companies and appraisers to be
profitable. That means loan and title documents aren't
scrutinized as carefully as they might be, and courts -
many of them so low-tech they resemble Mayberry - can't
keep up with the volume of paper.
"Then there's the mad rush to sell, particularly by
people who paid high prices for homes and suddenly can't
afford the loans.
"It's like a tasting menu for con artists and grifters,
so tempting that in some cities drug dealers have turned
to mortgage fraud, plaguing lower-income neighbourhoods
with crooked mortgages rather than crystal meth."
The Forbes article told the story – related here earlier
this week - of a pair of thieves, known as the Bonnie
and Clyde of house loan fraud. The two did very naughty
things – pretending to be who they weren't, borrowing
money to buy houses at inflated prices, forging
documents, stealing identities, defrauding sellers and
lenders alike - and made off with millions of dollars.
Elsewhere it was reported that lenders made millions in
housing loans to inmates in the Colorado prison system.
A whole group of miscreants issuing out of the Rocky
Mountain state pen was able to buy 17 houses for
inflated prices and take away $2.1 million in excess
loan proceeds. According to the report, hundreds of
houses were sold in what was called 'price puffs' – at
prices above real market value.
By the autumn of 2006 these houses were going into
foreclosure at the rate of 1 out of every 13. The price
puffs began modestly – with buyers taking out $5,000 to
$10,000 at the time of settlement. But amounts grew
until they were walking away with 30% of the purchase
price, or amounts over $100,000.
Then, the feds got on the case and people started going
to jail again. But that is how these stories tend to
end. In court, in chapters 7 and 11.
Every public spectacle ends in correction of some sort.
Often, in a house of correction. And the force of the
correction is equal and opposite to the deception that
preceded it. This one ought to be a doozie.
Get ready for a rally in the oil price and a downturn in the US indices.
http://www.marketwatch.com/news/story/Story.aspx?guid=%7B1F05D3D4%2DC64A%2D450D%2D95BC%2D7A5EE221F1AE%7D&siteid=
http://www.marketwatch.com/news/story/Story.aspx?guid=%7B1F05D3D4%2DC64A%2D450D%2D95BC%2D7A5EE221F1AE%7D&siteid=
$100 within FIVE years ....he's hardly going out on a limb ? Still something's whirring away in the background - another rumoured attack on Bp refinery has been thwarted.... so they say.
I would not want to have any index longs over the weekend......
I would not want to have any index longs over the weekend......