Don’t sweat the financial bloodbath

It looks like Andy from New Haven is trying to pump up the financial stocks.Nobody knows how many houses are going to be foreclosed on,or how many people are depleting every single asset they have to keep their house,or how many people are going to walk away because their house has dropped in value.I’m sure the “smart money” thinks that they know,but isn’t it the “smart people” who got us into this mess.The problem is these financial experts based their models on the fact that houses will alaways go up in price….HOW STUPID!! So Andy,when the “smart money” gets some common sense then I will listen and that will be NEVER!!!!!

Of course I am worried about housing and the banking sector. With an uninterested White House, a historically weak and timid Congress and nothing but greed and self-serving lobbying guiding the Fed’ through all of this, things will certainly continue to weaken. Not to mention the several Trillion dollars yet to come out of the still inflated housing sector…gulp.

Still, my deepest worries are entirely focussed on continued dollar weakening (aka inflation)

Please check out the video right beside Paul’s article. At least it is right beside the article at the moment:

Poppy Harlow’s “FANNIE MAE FLOPS”.

http://money.cnn.com/video/#/video/news/2008/05/06/news.harlow.050608.fannie.cnnmoney

I don’t think the entire economy is going to fall off a cliff overnight. So focusing only on banks and housing may be misleading.

This is going to be a slow process.

There will be lots of opportunities to revisit the issues around this ongoing implosion. The bubbles were a long time being grown and they will be a long time collapsing.

Paul, don’t worry about the heart NOT growing fonder during absences; take as many breaks as you want. We’ll all be here when you come back. No one will think ‘out of sight, out of mind’ — believe me, these problems will not go out of our minds for some time! They won’t likely, and sadly, be the type that we can easily ignore or forget.

The “infection” has not yet badly affected much of the rest of the world, which is still by all measurements growing well — especially the economies of the BRIC countries.

But the American consumer is THE major part of the home economy and America is a critical component of the world economy. The cross-linkages are real and strong. To suggest that Asia can “de-link” and not suffer any fallout IMHO is wrong. (Not that Paul is suggesting that in his article.) And I think there will be more problems for us, the consumers.

So while Paul is right that there are strengths in a lot of other sectors, I am not sure I can be as sanguine and not “sweat the financial bloodbath”.

I think we will get fallout in a lot of other sectors and countries. Those will in turn, and in time, feed back to home shores. And then bounce back offshore again.

The policy makers here are focused on ensuring “liquidity” and lower interest rates.

But this is like focusing on the fog when you are driving through it. Instead one needs to be focusing on the road.

When back in the early 1990’s Japan was dropping its interest rates, the retail bankers were literally going door-to-door to their customers, BEGGING them to take out more loans.

But then there was no way for those businesses to make economical use of the additional offered money. They couldn’t sell the goods and services they were ALREADY producing.

Japan’s Central Monetary authorities and policymakers were trying to get the economy “moving again”. They dropped rates to almost zero. The agents for the retail banks in turn had to in essence only GIVE THE MONEY AWAY for say a quarter of a percent interest rate, to make money for their employers (those retail banks). There were very FEW TAKERS.

Talk about pushing on a string!

That is where we are going IMHO.

The FED has a lot of power in manipulating the financial sector. But if you cannot personally as a consumer take on the debt for which they are dropping the price (which is the interest rates they are selling the debt for) then what good does lowering the interest rate do?

The FED can even drop long-term rates by buying up, at par, every 10-year bond that anyone anywhere decides to sell. It can print paper money (or electronic money) as fast as people (say China) sell their bonds. In so doing the FED will court hyperinflation of course, but hey, if you gotta do what you gotta do… you gotta do it!

What I am saying is that in SOME very special circumstances the economy will not respond the way we are used to it responding. This might not become apparent overnight though. It will take time.

Its just that we are SO ACCUSTOMED to having lower retail interest rates do “good things” we CANNOT IMAGINE lower rates not doing any good this time around.

Enjoy your break Paul! You’ve earned it!

No. they should keep their head in their pants and stuff their ear. Hopefully all these will be over by next week, month, or year…

Of course investors should be worried about bank losses. In a short while (probably after the election) they will be forced by genial Uncle Ben to indemnify the banks so the banks do not lose any money. Great bargains in the bailout sector.

In fact, all the “smart money” is betting that it is a good time to jump into financials since their “kitchen sink” writedowns will mean all the future woes are built into the market. The “smart money” needs to learn and understand the upcoming impact of two upcoming surprises: first “collateral pool loss estimates” which traditionally do not factor “immoral” (but rational) behavior such as homeowners walking away from a mortgage where the loan balance exceeds the property value EVEN IF THEY CAN STILL AFFORD TO MAKE THE PAYMENTS are significantly understimating the actual loss severity on mortgage collateral pools backing securities; secondly “covenant lite” loans which assure that the many LBO companies funded with such debt and now suffering revenue losses will be well past any reasonable hope of financial restructuring by the time they trip debt covenants – these leveraged loans will be written down at a much faster pace than previous recessions. Right now the banks are hoping against hope something will avert these two oncoming trains – trust me, they have not factored either of these scenarios into their estimates as most of the “smart money” will soon understand. The reality is banks will not even be reasonably prepared to attempt a “kitchen sink” writedown until two quarters after the housing market stabilizes – absent a team of highly effective psychics on staff. We are in fact still dealing with the “reset” foreclosures and the foreclosures associated with the ongoing massive layoffs will not begin for another six to nine months when savings acounts are drained and credit cards maxed. This is only the second quarter folks.

Ben has been saying that something “needs” to be done to reduce the flood of foreclosures. But my understanding is the the “problem” is not regular home losses due to job losses or illness (which have always been there and continue to be there) but people (homeowners and speculators) who bought houses in a way that they have NO way of keeping if the price didn’t/doesn’t continue to increase.

Raise your hand if you think housing prices are going UP significantly in the next year?

If Big Ben is actually saying out loud that the coming wave of foreclosures is dangerous, and if it can’t be stopped short of taxpayers flat paying mortgages, (which the government doesn’t have the money to do no matter how much everyone running for (re)election wants to),

Why would we think this is going to not get worse for a while yet?

More fallout will come from the demise of CFC, NCC, and WM, who used to be the top 3 mortgage originators. It’s not clear who will replace them when they are gone. It seems pretty clear that it won’t be FHA, FNM, and FRE, who are rightfully afraid of becoming dumping grounds for banks trying to unload dodgy mortgages.

Mr. LaMonica’s viewpoint seems fanciful to me. The woes of the financial sector are just beginning to work themselves into other areas of the economy and Main Street, USA is in trouble. This is going to take a lot of time folks. Banks and VC are tightening up, consumers are tapped out, and Bernanke’s panic rate cuts to save Wall Street are putting consumers in a vice by driving energy costs through the roof. As he begins to raise rates to slow inflation, S&P 500 earnings will suffer as the dollar rebounds; but U.S. corporate and consumer demand will not pick up the slack for years to come. So many appear to describe the credit crisis as something that has happened; no, it is in the process of happening and we are barely in the third inning right now; if you are investing get ready for the long haul. Sorry, I was cautiously bullish up until early 2007, but I am appalled by the enigmatic positive tone of mainstream Wall Street given the scenarios before us. I have this horrible feeling the retail investor is being led down the path as in 2000. Good luck everyone.

No. The current loan loss provisions are a necessary correction to poor lending decisions made from 2002 through 2007. It took 5 years to make this mess, so it will probably take about 5 years to clean it up, which is 2012 or 2013.

The housing sector is still overpriced. The national household income is about $45k, so the national median home price should be 4x that number to be affordable, or about $180k. It’s still stuck at about $200k, but it’s down from $220k+. Of course, some markets got much more overpriced, and they have been falling faster. This is a needed correction, and it must be allowed to proceed.

Once the finance and housing sectors have fallen back to earth, they will stabilize. Don’t waste any taxpayer money bailing them out; it’s futile.

Investors need to worry about the spillover effect from the finance and housing sectors. Automotive is getting hit hard now and the next big industry to get hit will probably be retail. Almost everyone, I know has changed or is changing their spending habits/ lifestyle to deal with getting less for your money. Retail will hurt because food and energy trump consumer items.

Inflation is for real and the baby boom generation is not too young to forget the 70’s.

Those who do not leran from the past are doomed to repeat it.

I believe that when the worst has come to past (i don’t beleive we’ve seen it yet) that the huge losses still to come will trickle down to the other sectors. Profitability is up in other sectors such as energy and food because people are eating at home more and they have no choice but to put gas in the car and we have to keep the lights on. Rising cost of commodities is somewhat inflated as investors flee the financial sector and invest in commodoties which raises prices at the pump and in the grocery store. The worst is still to come. Hang on America.

Writedowns and losses over the next 12-18 months in the financial sector have already been priced in. The only reason this latest kneejerk market reaction was negative, is because forecasts were narrowly missed. Even if the financials sustain heavy losses, they simply have to be within an acceptable expectation range to avoid selloffs.

So, not only should you not sweat the impact on other sectors, but you shouldn’t sweat the financial sector itself. In fact, in regards to longterm prospects, it will end up producing the most significant gains.

LOTS of bargains in financials right now.

I’m more worried about the ham fisted one dimensional approach taken by government and advocated by presidential wanna bes. Propositions tend to be top down solutions that require minimal action or sacrifice by the populace. For example: whereas our energy dilemma is long term, and whereas conservation and alternatives will become increasingly important, and whereas the summer driving season consists of more optional driving than in the winter months, shouldn’t we be raising gas tax instead of cutting it? If politicians had to work as engineers, they’d suck.

The only thing to worry about is govt intervention. When housing prices fall to levels that average Americans can afford without resorting to shady financing, the housing “crisis” will resolve itself. Banks are another story. With the shadow banking system, derivitaves, etc, who knows what is really going on, or what any financial instrument is really worth.

I loved this comment Paul:

“since we just haven’t seen any clear sign yet that earnings woes are spreading beyond financials.”

Obviously, you haven’t looked at my earnings.

Some Wall St. companies have kept the average up, energy and food, but be serious – does this indicate anything healthy in the economy?

I personally think the fact that I have less (and shrinking) buying power, (as to a gazillion other Americans)actually is going to have an effect.

A few days ago “less bad” then expected numbers meant the worst was over. Today, numbers are more bad then expected. But it still doesn’t seem to mean there is a problem.

Yes! It’s a huge problem with no immediate solution.