Our collective economic ass is about to get kicked, hard and rude.

Lounge
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this is an excerpt from today’s New York Times… it is what you might call a masterpiece of understatement, if you know what I mean… the backchannel rumors are on the brink of sheer terror.. this is, if you read closely, about the potential collapse of a 6.5 TRILLION dollar market, even a minor downturn in this decade long money machine spells major trouble if they can’t unbreak it quick… everybody’s in denial, and de Nile ain’t just a river in Egypt:

"Now, as then, Wall Street firms and entrepreneurs made fortunes issuing questionable securities, in this case pools of home loans taken out by risky borrowers. Now, as then, bullish stock and credit analysts for some of those same Wall Street firms, which profited in the underwriting and rating of those investments, lulled investors with upbeat pronouncements even as loan defaults ballooned. Now, as then, regulators stood by as the mania churned, fed by lax standards and anything-goes lending.
Investment manias are nothing new, of course. But the demise of this one has been broadly viewed as troubling, as it involves the nation’s $6.5 trillion mortgage securities market, which is larger even than the United States treasury market.

Hanging in the balance is the nation’s housing market, which has been a big driver of the economy. Fewer lenders means many potential homebuyers will find it more difficult to get credit, while hundreds of thousands of homes will go up for sale as borrowers default, further swamping a stalled market.

“The regulators are trying to figure out how to work around it, but the Hill is going to be in for one big surprise,” said Josh Rosner, a managing director at Graham-Fisher & Company, an independent investment research firm in New York, and an expert on mortgage securities. “This is far more dramatic than what led to Sarbanes-Oxley,” he added, referring to the legislation that followed the WorldCom and Enron scandals, “both in conflicts and in terms of absolute economic impact.”
While real estate prices were rising, the market for home loans operated like a well-oiled machine, providing ready money to borrowers and high returns to investors like pension funds, insurance companies, hedge funds and other institutions. Now this enormous and important machine is sputtering, and the effects are reverberating throughout Main Street, Wall Street and Washington."

To put it mildly… we could be in for some damn rough weather… I’d plan accordingly…

How bad is the economy in your country?
The financial crisis and the failure of CNBCs financial "experts"
Our Friend tacitus - RIP 12/2010 - A compilation of brilliant and exhilarating posts
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And this lovely additional comment

from Barron’s.. paints an even grimmer picture…

“The powerful impact the great boom in housing has had on the economy – and a measure of how much growth overall will suffer from the end of that boom – is furnished by our friends at the Liscio Report. Each dollar spent on residential construction, they observe, generates $1.27 in additional economic activity. That’s topped only by manufacturing ($1.37) and handily bests the contribution of health care (54 cents to 81 cents, depending on which part of that amorphous field you’re talking about), retail (57 cents) and finance (53 cents).
Not only, as the Report comments, has “the kick from housing…been enormously important in recent years,” as those numbers make emphatically clear, but the actual effect has been far greater since that $1.27 of additional economic thrust doesn’t include the hardly inconsequential economic stimulus of remodeling or mortgage-equity withdrawal.
Housing’s fade seems destined to hurt all the more since nothing else – not capital spending or government largess – seems primed to take up the slack.”

Hoo boy.. it had to happen sooner or later.. and this isn’t the best of times for this to happen… look at it this way… a quick calc… about an 8% decline in the real estate market ( I’d bet that real number for this is more like 6 %) is equal to the entire cost of Iraq War to date, which, by the by, has now gone on longer than World War II.. if that helps see things more clearly… so, cost of war + real estate decline + exploding healthcare costs for aging baby boomers + out of control credit card debt reducing the middle class to debt slavery = what ?

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= Business as usual in Washington DC.

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ok so here’s the thing. I’ve been watching/predicting this for several years now. Especially when ARMs became deriguer, and i started seeing folks i know make only 60K getting homes for 300K.

but this is what i don’t understand. I’m not a mortgage broker. I’m not a financial maven. Hell i went to school for anthopology. And I rent.

Why has this whole thing been painfully obvious to me, for years now, and the folks who went to school for this, who’s livelihoods are based on this, who get paid to study this stuff - are just now waking up and smelling the rather sucky reality of it all?

i don’t get it. but i will prolly take advantage of it in a couple of years. someone’s gotta start cleaning up the mess.

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i’m prolly also gonna have to think about letting my bank stocks go. which is a painful decision because they sure pay some nice juicy dividends. :frowning:

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I’ve been tracking the numbers for years now. House prices, personal and government debts etc. The numbers left reality a long time ago, and are in airy-fairy fantasy land. We are long overdue for a earth-shattering correction.

Brace yourselves. The Second Great Depression is on its way. US Housing Market Crash to result in the Second Great Depression :: The Market Oracle :: Financial Markets Forecasting & Analysis Free Website

Musk

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sadly, tacitus is right… eventually it will end in nasty debt deflation or galloping inflation (just because the cost of living goes up doesn’t mean financial assets and real estate will too). it is possible (likely) we can struggle on for another few years by continuing to inflate financial asset prices but that likely means a continued astonishing rise in inequality between asset flippers and working stiffs.

probably it isn’t a bad idea to keep some assets held with a custodian outside the US. it wasn’t all that long ago that we had capital controls.

FSO Transcription - Dr. Marc Faber “Inflation/Deflation” 07/02/2005

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I can’t say with oracular precision…

The gut feeling I’m vibing on is that we’re seeing the tip of the iceberg of the shit kicker of a generation, the big stock market decline that follwed the tech and telecom blowout were just foreplay… because of one critical distinction… liquidity. The real estate market performs the magic act of taking a normally illiquid investment, real estate.. and permits it to behave like (on the way up… and therein lies the life or death difference) a security in a fluid market… but not so fast, not the same thing at all on the way down, when the slow money to fast money track reverses direction and the vast, unfathomably deep ocean of real estate based product locks up, which it might, and what was once ludicrously liquid due to nothing more than an extrordinary rate of turn-over, or flip plays seizes, and then the disease really sets in with foreclosures, banks severly tightening lending standards, hedge fund collapse here and there, and we’re potentially back to that lethal situation the Fed was privately sweating, big time, about six years ago, deflation… as any student of economic history can tell you, deflation is the super-fucker… probably the real, deep cause of World War II, BTW, since we’re mining that chestnut…

So far we’re seeing private estimates of 10% decline as a reasonable minimum (or about 1.25 Iraqs) and a 30% decline as a not-impossible maximum… the other thing I might add as someone with a theoretical interest in some of the esoteric math behind this, we are dealing here with non-linear dynamics although the public imagination thinks of it as a matter of linear response… X in consistently equals Y out… dynamical systems don’t unfold that way… you could have a fairly well managed, not too painful contraction for the first ten or so percent, and then hit a dynamic inflection point, say -12%, where the beast radically chages its’ character… and nobody on the face of this earth can model, in advance, where that inflection point will occur. Bon Apetit !

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Here are a couple of tales from Marc Faber that explain why…

It’s a bitterly cold day. You have lost all feeling in your nose. Your ears are hurting. You hunch your shoulders together to bury your head under the raised lapels of your greatcoat. You turn a corner and you see a frozen pond. Can you risk taking a short cut across? Or would it be safer to walk to the bridge half a mile down the road? You notice a man on the other side of the pond. He gingerly steps on to it. It holds the weight of one foot. He carefully places the other foot on the ice. A young woman behind follows his lead. As you watch, some children arrive with skates, and more adults follow them. Soon, the whole village is having a party on the ice. Each person has given the next person the confidence to join the party. The more people clambering on to the ice, the safer it feels. It’s logical, isn’t it? Or is it? Something makes you stop. You turn around. You walk away. Behind you, you bear the crack and the first scream.

It was autumn, and the Red Indians on the remote reservation asked their new chief if the winter was going to be cold or mild.
Since he was a Red Indian chief in a modern society, he couldn’t tell what the weather was going to be. Nevertheless to be on the safe side, he told his tribe that the winter was indeed going to be cold and that the members of the village should collect wood to be prepared.

But, being a practical leader, after several days he got an idea. He went to the phone booth, called the National Weather Service and asked, “Is the coming winter going to be cold?”

“It looks like this winter is going to be quite cold indeed,” the meteorologist at the weather service responded. So the chief went back to his people and told them to collect even more wood.

A week later, he called the National Weather Service again. “Isit going to be a very cold winter?”

“Yes,” the man at the National Weather Service again replied, “It’s definitely going to be a very cold winter.”

The chief again went back to his people and ordered them to collect every scrap of wood they could find.

Two weeks later, he called the National Weather Service again. “Are you absolutely sure that the winter is going to be very cold?”

“Absolutely,” the man replied. “It’s going to be one of the coldest winters ever.”

“How can you be so sure?” the chief asked.

The weatherman replied, “The Red Indians are collecting wood like crazy.”

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and that’s just one looming crisis on the horizon.

I find it funny that the news has finally decided that the global warming party is ,in fact, ON now and there’s nothing we can do about it.

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they are witty and they definitely speak to human nature, but those steering the ship aren’t supposed to be lemmings.

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Yep. Of course we have that ‘student’ of the deflation, Ben Bernanke at the helm of the Fed. After last spring’s unpleasant experience with commodity prices getting out of control, he can’t be seen to cut rates aggressively too quickly - there need to be signs of distress first. But in the end the lesson drawn from the Great Depression was that you need to aggressively ease monetary policy. So ultimately byebye the dollar as a store of value - we’ll have a nasty inflationary depression. It’s just not clear how bad the deflationary episode will be before the Fed cracks.

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People running money have no choice. If they underperform even for a few months, investors take the money away. So (most people) have to make bets that at some level they know won’t ultimately make sense and hope they are faster than the crowd. “Better for reputation to fail conventionally than unconventionally”…

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hey Pheroquirk - what’s your take on bernanke so far?

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Nope, they are liars by profession and impressive in their power to deceive, and, it appears, almost sociopathic in their ability to deny what is true in favor of what they’d like to sell you…

Global warming… oh, yeah… that…

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mmm..this is a good point. after all, i conciously made the unethical choice to buy certain banking stocks, knowing exactly what’s going on. i’m still not sure I feel bad about it, to be honest.

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so then here’s a question based on my last comment - is it ethical to humor them and profit from the clusterf*ck, when you see it for what it is?

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Yeah… and the wrench in the clockworks is the yield curve:

5.225.105.134.984.664.584.554.554.594.814.72

which has me asking, in re: the long end of the curve, how much lower can rates be driven since we’re down there near historical lows for the cost of money ?, really not much different that during the great depresssion, if my source is accurate… so we’ve squeezed a lot of reflation potential out of the market already… or you could argue that we bought off a massive deflation the first time around by engineering a real esrate boom, the boom itself was an economic rescue operation, and the great flawed belief, thanks to Donald Rumsfeld & Co. was that the war would be quick, painless, and soon pay for itself with oil revenues… ah yes… predictions, predictions…

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Every price, income and profit in the global economy is distorted by bad monetary policy (or rather the set of monetary institutions we have). So unless you withdraw from economic activity - which might get rather dull - you have no choice but to act upon your understanding of the world as it is…

Here is a nice piece on skyscrapers and Cantillon effects
In and Around Indiranagar, Bangalore: SKYSCRAPERS AND BUSINESS CYCLES
(Not sure if that is what you meant).

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If the Fed buys bonds or promises to keep rates low for quite some time, I would say there is plenty of room for rates at the long end to come down.