I guess if we examine everything, real estate has to come back, Lucent will rise back to $100 per share. And every one will retire rich and give scads of cash that is left over to the kids. The retiree's won't have to spend their own money, they have Social Security and Medicare/Medicaid to keep them from dipping into their cash reserves.
The Wizard of OZ was a great movie, but reality is a different creature. Something has gone wrong with the system and its probably going to "fix itself."
There are a lot of people out there that are stretched out to the max with one thought, "Hold on things have to get better."
The question that comes to my mind, is what will get better? Crime is down 25% in LA. What's that mean? The cop's aren't any better, there are less young people. So with less young people entering the work force, the unemployment rate drops.
Hey unemployment is low, ergo the economy must be doing good--WRONG! Actually from here in San Marcos, English is a second language at Taco Bell and other establishments. It looks like immigrants are filling the work slots because of the shortage of first time young people entering the work force.
So what happens next? Nobody that's young can afford to buy a house. Nobody American is around to fill the vacant job openings. Who's going to buy these homes priced at one half mill to one mill?
Right, reality is just around the corner, the trouble is, are you standing on the right corner?
Wednesday, November 29, 2006
Sunday, November 19, 2006
The Low Bond Yield Conundrum
The bond market is at a point right now that leaves an awful lot of long bond holders (buyers of the 30 year) very vulnerable.
With the coming vaporization of the second trust deed market, there should be a scarcity of funds. Add to that, marking to market of foreclosed homes adds even more to this up and coming "enterprise." Seventeen interest rate increases by the fed and the long term rate comes out very little changed.
In Greenspans speech to Congress last year June 9, 2005 he is quoted:
What it really boils down to is; there is a very large demand for long term bonds. More than the market can supply. Otherwise interest rates would rise to attract buyers (this is backwards, the price of the bond drops and that raises the interest rate). The Baby Boomers could be going to less risk in their portfolios. An insurance company locking in rates on an annuity for thirty years is a smart call.
Where it gets kinky, is the fact that everyone is loaning 30 year money at about par for the one year note. lets look at a 30 year bond issued today at say 5%
Value of Face amount-------interest rate--------interest paid
----$1,000,000-----------------5%-----------------$50,000
No problem with the investment, but if the interest rate went to 10%, the dynamics change. Now we have:
Value of face Amount-------interest rate--------interest paid
------$500,000------------------10%-----------------$50,000
What this shows, is that your market portfolio could, if marked to market have a haircut of 50 percent. Notice however, if you hold on to maturity, there is no "real" loss of principle. 30 years is a long time to wait if you are already 60 (I turned 60 yesterday).
The real pure play for the bond market is to buy when the market is at 10% and sell when it goes to 5%. That play, a reverse of the first example, would net a cool half million. This is where the money is made in the bond market.
The only thing that makes today a buying opportunity, is the belief that the interest rate will drop to 2.5%, this would double your bond portfolio's value, and it just ain't going to happen.
Another thing that Greenspan mentioned, that people were willing to accept more risk with less reward. Everything except Delta Airlines Bonds are trading as if they are US Treasury's (admittedly an exaggeration, but the rates commanded are rather unrealistic).
Its only a personal opinion, but I believe that we have a market running on the herd mentality of "If it works, go with the flow." At some point there will be a demand for funds that could raise the interest rate to quite a spectacular level, even if for a short period of time. It is at that point, that cash can buy into the bond market and make a killing.
A stock has to double to double your money. With a bond a 50% drop in the interest rate doubles your return. The thing to remember in a panic, it's like going into a pawn shop with a $10,000 wedding ring, you're not going to get list price or anywhere near it. You're are going to take what you can get according to how desperate you are for cash funds.
What you really have, is a mistake being made by retirement funds, that will take 30 years to come out even. Your clients only have 15 to 35 years to live. They just might need the money before the call date.
With the coming vaporization of the second trust deed market, there should be a scarcity of funds. Add to that, marking to market of foreclosed homes adds even more to this up and coming "enterprise." Seventeen interest rate increases by the fed and the long term rate comes out very little changed.
In Greenspans speech to Congress last year June 9, 2005 he is quoted:
Among the biggest surprises of the past year has been the pronounced decline in long-term interest rates on U.S. Treasury securities despite a 2-percentage-point increase in the federal funds rate. This is clearly without recent precedent. The yield on ten-year Treasury notes, currently at about 4 percent, is 80 basis points less than its level of a year ago. Moreover, even after the recent backup in credit risk spreads, yields for both investment-grade and less-than-investment-grade corporate bonds have declined even more than Treasuries over the same period.
What it really boils down to is; there is a very large demand for long term bonds. More than the market can supply. Otherwise interest rates would rise to attract buyers (this is backwards, the price of the bond drops and that raises the interest rate). The Baby Boomers could be going to less risk in their portfolios. An insurance company locking in rates on an annuity for thirty years is a smart call.
Where it gets kinky, is the fact that everyone is loaning 30 year money at about par for the one year note. lets look at a 30 year bond issued today at say 5%
Value of Face amount-------interest rate--------interest paid
----$1,000,000-----------------5%-----------------$50,000
No problem with the investment, but if the interest rate went to 10%, the dynamics change. Now we have:
Value of face Amount-------interest rate--------interest paid
------$500,000------------------10%-----------------$50,000
What this shows, is that your market portfolio could, if marked to market have a haircut of 50 percent. Notice however, if you hold on to maturity, there is no "real" loss of principle. 30 years is a long time to wait if you are already 60 (I turned 60 yesterday).
The real pure play for the bond market is to buy when the market is at 10% and sell when it goes to 5%. That play, a reverse of the first example, would net a cool half million. This is where the money is made in the bond market.
The only thing that makes today a buying opportunity, is the belief that the interest rate will drop to 2.5%, this would double your bond portfolio's value, and it just ain't going to happen.
Another thing that Greenspan mentioned, that people were willing to accept more risk with less reward. Everything except Delta Airlines Bonds are trading as if they are US Treasury's (admittedly an exaggeration, but the rates commanded are rather unrealistic).
Its only a personal opinion, but I believe that we have a market running on the herd mentality of "If it works, go with the flow." At some point there will be a demand for funds that could raise the interest rate to quite a spectacular level, even if for a short period of time. It is at that point, that cash can buy into the bond market and make a killing.
A stock has to double to double your money. With a bond a 50% drop in the interest rate doubles your return. The thing to remember in a panic, it's like going into a pawn shop with a $10,000 wedding ring, you're not going to get list price or anywhere near it. You're are going to take what you can get according to how desperate you are for cash funds.
What you really have, is a mistake being made by retirement funds, that will take 30 years to come out even. Your clients only have 15 to 35 years to live. They just might need the money before the call date.
Saturday, November 11, 2006
Problem? What Problem?
Thank goodness the election is over. I never could completely understand how this government could be run so poorly for 2 to 4 year spurts and nobody complains until a month before the election. And then it's like two kids arguing over whose fault it was. Both sides are blameless.
In the two party system, you are either a Republican or a Democrat. The irritating thing is that the other side is lying by implication. The only thing that a Congressman can't hide, are their alleged improprieties, like groping, fondling, or what ever. They still find the time to give away the candy store.
In the 1930's when Congress passed Social Security, 95% of the population never reached the age of 65. To paraphrase the law, "We're raising your taxes and we're going to spend it before you die at age 65.
Carry forward 50 years and now people are not dying on the old schedule. A while ago, the Congress decided to add Medicare. Now, you open up the paper and see the headline, "77 Million Baby Boomer's to retire in the next 20 years." The largess of Congress has boosted our retirement benefits from non existent to substantial.
Notice in the real world, how many retirement plans have dropped dead. Just pick an airline. General Motors could be next, but I get the feeling that they may have to wait in line.
You really have to marvel at the way our government can accomplish Social Security and Medicare together. Private medical insurance, if you are over 60, can really crimp your life style.
Everybody worries about Social Security going broke and that's a good thing. It keeps your mind off the bigger problem, Medicare and Medicaid. We've finally figured out how to make our children fund our retirement package and that's a good thing. Otherwise, the kids would probably spend their money foolishly, just as we did.
In a book review I was reading, they mention a humorous rhyme written on a bathroom wall in 1931, encountered by Andrew Mellon (Secretary of the Treasury): "Mellon pulled the whistle, Hoover rang the bell, Wall Street gave the signal, and the country went to hell."
Somehow, I get the feeling it will be different this time. Not only will we be able to read about it, we will experience it. Nothing beats a front row seat.
In the two party system, you are either a Republican or a Democrat. The irritating thing is that the other side is lying by implication. The only thing that a Congressman can't hide, are their alleged improprieties, like groping, fondling, or what ever. They still find the time to give away the candy store.
In the 1930's when Congress passed Social Security, 95% of the population never reached the age of 65. To paraphrase the law, "We're raising your taxes and we're going to spend it before you die at age 65.
Carry forward 50 years and now people are not dying on the old schedule. A while ago, the Congress decided to add Medicare. Now, you open up the paper and see the headline, "77 Million Baby Boomer's to retire in the next 20 years." The largess of Congress has boosted our retirement benefits from non existent to substantial.
Notice in the real world, how many retirement plans have dropped dead. Just pick an airline. General Motors could be next, but I get the feeling that they may have to wait in line.
You really have to marvel at the way our government can accomplish Social Security and Medicare together. Private medical insurance, if you are over 60, can really crimp your life style.
Everybody worries about Social Security going broke and that's a good thing. It keeps your mind off the bigger problem, Medicare and Medicaid. We've finally figured out how to make our children fund our retirement package and that's a good thing. Otherwise, the kids would probably spend their money foolishly, just as we did.
In a book review I was reading, they mention a humorous rhyme written on a bathroom wall in 1931, encountered by Andrew Mellon (Secretary of the Treasury): "Mellon pulled the whistle, Hoover rang the bell, Wall Street gave the signal, and the country went to hell."
Somehow, I get the feeling it will be different this time. Not only will we be able to read about it, we will experience it. Nothing beats a front row seat.
Friday, November 10, 2006
Real Estate, the Deer in the Headlights.
We can all be right in our assumptions. The key to that concept is that something can be true at one moment and false at the next. Notice everyone can be right, it just won't happen at the same moment.
Real estate fits into that concept. Everything you've ever heard about real estate can be true or false, right or wrong at any particular point in time. The bubble bloggers I believe, have correctly diagnosed the bubble, as very real at this point in time. What is not so apparent is the assumed collapse of the price structure of the housing market. Its not happening as fast as most would like it to happen. You hear the words "housing prices are sticky on the down side."
As you drive your car down the highway, due vigilance allows you to avoid accidents. But what happens if you are approaching another car head on in your lane going the wrong way? Both of you will take evasive action and swerve into the empty lane. Bang, you have a head on collision. So the point being, it takes at least two mistakes for a real accident.
The real estate market is not going to collapse on its own. Its a smoking gun. It points to impending issues. "Who financed all of this?" is a valid question, but the answer is really a moot point. The real question that needs to be answered is: "Who's going to pay for the clean up?" The sad part about that question, is that we know the answer to that question, don't we?
So here we get to the second to the last analogy. The real estate seller is like a deer in the headlights, he's not going to move (price wise) and he's probably going to get hurt in a falling market.
The other shoe still has to drop, what it will be I can only guess; Stock Market Crash, Fannie Mae Meltdown, or maybe an Earthquake. At this point, the real estate seller will begin to feel the pangs of panic.
An economics professor Nouriel Roubini got blown away in a 3 way TV interview last week on his assumption that we were in a recession. Here is a Link to his blog. The point being, is that he failed to mention that no one knows that they are in the beginning of a recession or depression until two years after the fact. Thats what really makes the home seller seem so much like the deer in the headlights.
Real estate fits into that concept. Everything you've ever heard about real estate can be true or false, right or wrong at any particular point in time. The bubble bloggers I believe, have correctly diagnosed the bubble, as very real at this point in time. What is not so apparent is the assumed collapse of the price structure of the housing market. Its not happening as fast as most would like it to happen. You hear the words "housing prices are sticky on the down side."
As you drive your car down the highway, due vigilance allows you to avoid accidents. But what happens if you are approaching another car head on in your lane going the wrong way? Both of you will take evasive action and swerve into the empty lane. Bang, you have a head on collision. So the point being, it takes at least two mistakes for a real accident.
The real estate market is not going to collapse on its own. Its a smoking gun. It points to impending issues. "Who financed all of this?" is a valid question, but the answer is really a moot point. The real question that needs to be answered is: "Who's going to pay for the clean up?" The sad part about that question, is that we know the answer to that question, don't we?
So here we get to the second to the last analogy. The real estate seller is like a deer in the headlights, he's not going to move (price wise) and he's probably going to get hurt in a falling market.
The other shoe still has to drop, what it will be I can only guess; Stock Market Crash, Fannie Mae Meltdown, or maybe an Earthquake. At this point, the real estate seller will begin to feel the pangs of panic.
An economics professor Nouriel Roubini got blown away in a 3 way TV interview last week on his assumption that we were in a recession. Here is a Link to his blog. The point being, is that he failed to mention that no one knows that they are in the beginning of a recession or depression until two years after the fact. Thats what really makes the home seller seem so much like the deer in the headlights.
Monday, October 30, 2006
Common Cents
Normally when you make a bad investment, you walk away from it and take the loss. But that can change, if the size of the investment is too big to walk away from. Your common sense thinking gets turned upside down.
When disaster strikes, there is the urgency to raise cash fast. In this sort of decision-making, you end up saving the crap for last. It doesn’t really sound rational, but there is the hope that the “dogs” will come back. So it appears that we have a lot of homeowners in this dilemma right now. Their situation is just now becoming obvious.
If we examine the group that holds the mortgages, it gets a little less visible. Large institutions can hide their problems just by being so big. Second, if the amounts of cash managed are large, the financial institution can use the cash to stall for time. It’s very easy to pretend that nothing is wrong. You will get caught, but probably just not this year.
Another thing that is quite invisible right now is embezzlement. Take an embezzler, he purloins the funds and the person bezzled, is none the wiser. In fact both can be at the same resort spending money, and having fun. The only difference is, the embezzler knows he's spending your money, while at the same time you think your money is safely tucked away. This can go on until the eventful day when cash demanded from the enterprise exceeds what they can cover. It's only at this point that the person embezzled will feel the pain. Knowledge will not only set you free, it can send your blood pressure into the stratosphere.
Notice that the perceive problem is the over extended homeowner. If you carry things forward, the rest of the systemic problems will become apparent. At that point, it will be too late. The assets will be non-existent.
We have yet to see a retirement fund under the stress that will be produced by the baby boomer’s retirement. There has been no real call for funds yet. Common sense suggests that the assumed assets are safely tucked away.
Q.E.D. The Tooth Fairy lives!!!
When disaster strikes, there is the urgency to raise cash fast. In this sort of decision-making, you end up saving the crap for last. It doesn’t really sound rational, but there is the hope that the “dogs” will come back. So it appears that we have a lot of homeowners in this dilemma right now. Their situation is just now becoming obvious.
If we examine the group that holds the mortgages, it gets a little less visible. Large institutions can hide their problems just by being so big. Second, if the amounts of cash managed are large, the financial institution can use the cash to stall for time. It’s very easy to pretend that nothing is wrong. You will get caught, but probably just not this year.
Another thing that is quite invisible right now is embezzlement. Take an embezzler, he purloins the funds and the person bezzled, is none the wiser. In fact both can be at the same resort spending money, and having fun. The only difference is, the embezzler knows he's spending your money, while at the same time you think your money is safely tucked away. This can go on until the eventful day when cash demanded from the enterprise exceeds what they can cover. It's only at this point that the person embezzled will feel the pain. Knowledge will not only set you free, it can send your blood pressure into the stratosphere.
Notice that the perceive problem is the over extended homeowner. If you carry things forward, the rest of the systemic problems will become apparent. At that point, it will be too late. The assets will be non-existent.
We have yet to see a retirement fund under the stress that will be produced by the baby boomer’s retirement. There has been no real call for funds yet. Common sense suggests that the assumed assets are safely tucked away.
Q.E.D. The Tooth Fairy lives!!!
Thursday, October 19, 2006
The Googleiots
Google, here is a company that if you thing about it, its whole infrastructure could be recreated for less than one billion dollars. All of the stock is valued at over 129 billion dollars.
It doesn't really make much money, because if it did, it would pay a dividend.
Creative accounting? Maybe, but where is the income stream? I really don't think that it is there.
What do you call these investors? If you combine the two words google and idiot, you get google-iots. Best spelling I can offer is Googleiots. This would be defined as a person who will buy anything on the hope that it goes up forever. There has to be an end to this outrageous price, it certainly doesn't seem to be in the reality of the present time. So I guess that it can be said that we are in the midsts of Googleiots trying to sell to the greater fool.
What is the stock really worth, about $8 bucks a share. A reality check tells you , that if you are buying toilet paper for $2,000 a roll, you will find a cheaper source for the purchase of toilet paper.
It doesn't really make much money, because if it did, it would pay a dividend.
Creative accounting? Maybe, but where is the income stream? I really don't think that it is there.
What do you call these investors? If you combine the two words google and idiot, you get google-iots. Best spelling I can offer is Googleiots. This would be defined as a person who will buy anything on the hope that it goes up forever. There has to be an end to this outrageous price, it certainly doesn't seem to be in the reality of the present time. So I guess that it can be said that we are in the midsts of Googleiots trying to sell to the greater fool.
What is the stock really worth, about $8 bucks a share. A reality check tells you , that if you are buying toilet paper for $2,000 a roll, you will find a cheaper source for the purchase of toilet paper.
Thursday, October 12, 2006
Who are the Sellers?
There are several groups of people that have real estate inventory for sale, contractors, real estate brokers, flippers, home owners and banks.
Who's going to offer you the best price? The builder probably has the most leeway on price, next the bank repo, then the real estate broker (flipper), next the investor (flipper) and then the homeowner.
Builders tend to know the market and if they need to discount, it’s going to be real.
Banks offering repo's would theoretically have a 20% discount of the property to break even, if the loan was an 80/20. The second trust deed would drop off.
Real Estate Brokers especially if they are named “Stretch,” will be more eager to sell you their property. They’re going to give you a good price (hell you already told them your bottom line). Flipping is a realtor's second job (only a 3% commission to pay). There are a lot of realtors holding inventory at this time.
Investment flippers have two areas of concentration: condos and detached houses. The Condo market is between a wish and a prayer and the regular house market isn't doing much better for price appreciation.
The regular homeowners are dropping prices in $10,000 increments. They know the rudimentary fundamentals of selling, but they are only a “garage sale retailer.” It’s their price or it isn’t for sale. Can you imagine a super market offering hot dogs on sale regularly $3.95 now only $3.85? They mise well be glued to the shelf. They are not going to move.
So who is really selling houses? The answer has to be the contractor! The machine works very efficiently.
The contractor can finance through limited partnerships. If the land is bought at a reasonable price, the LLP investor can expect a 20 to 50 percent return on the investment. Even in the worst market you can imagine, the contractor can undercut the home owner. There is a limit to that, and it’s around $80 dollars per square foot. I could be a little off on that, my figures are about 6 years old. So when the houses start selling for $80 per square foot and condos for $30 per square foot, the contractors will melt into the sunset as they did in Detroit. Who gets the houses if they don’t sell? Most probably the bank. Who wants the houses at this price, only the uninformed (they're easy to spot; there is no newspaper in their driveway in the morning).
So what do we have? We have home owners wanting to move and sell their house. We have builders building more houses; there is a profit to be made. The supply is increasing, but why buy an old home when you can buy a brand new one? (Colorado is in this scenario right now, the contractors are still building and inventory is going through the roof, and prices are very reasonable).
As long as used housing prices are sticky going down in price, the contractor is going to eat the home seller’s lunch, and laugh all the way to the you-know-what. What makes it interesting is that the banks can play both ends. They loan to the contractor and to the homeowner.
So the banker says “Belly up to the bar, HELOC's for everyone, and if you need money to build, just tell me where to mail the check!”
Then you have the homeowner, he’s already spent the equity in the house, his world of dreams is now a nightmare. His wife is packing up and ready to leave him.
The typical buyer is not going to buy that used house; they’re going to buy a brand new one from that contractor down the street.
The contractor is going to keep on building until housing prices drop to where he has no profit margin. His profits will tend to be real profits. On the other hand, the homeowner's prices tend to be from some dream hoping for a sense of reality. Equity created out of nothing.
Who's going to offer you the best price? The builder probably has the most leeway on price, next the bank repo, then the real estate broker (flipper), next the investor (flipper) and then the homeowner.
Builders tend to know the market and if they need to discount, it’s going to be real.
Banks offering repo's would theoretically have a 20% discount of the property to break even, if the loan was an 80/20. The second trust deed would drop off.
Real Estate Brokers especially if they are named “Stretch,” will be more eager to sell you their property. They’re going to give you a good price (hell you already told them your bottom line). Flipping is a realtor's second job (only a 3% commission to pay). There are a lot of realtors holding inventory at this time.
Investment flippers have two areas of concentration: condos and detached houses. The Condo market is between a wish and a prayer and the regular house market isn't doing much better for price appreciation.
The regular homeowners are dropping prices in $10,000 increments. They know the rudimentary fundamentals of selling, but they are only a “garage sale retailer.” It’s their price or it isn’t for sale. Can you imagine a super market offering hot dogs on sale regularly $3.95 now only $3.85? They mise well be glued to the shelf. They are not going to move.
So who is really selling houses? The answer has to be the contractor! The machine works very efficiently.
The contractor can finance through limited partnerships. If the land is bought at a reasonable price, the LLP investor can expect a 20 to 50 percent return on the investment. Even in the worst market you can imagine, the contractor can undercut the home owner. There is a limit to that, and it’s around $80 dollars per square foot. I could be a little off on that, my figures are about 6 years old. So when the houses start selling for $80 per square foot and condos for $30 per square foot, the contractors will melt into the sunset as they did in Detroit. Who gets the houses if they don’t sell? Most probably the bank. Who wants the houses at this price, only the uninformed (they're easy to spot; there is no newspaper in their driveway in the morning).
So what do we have? We have home owners wanting to move and sell their house. We have builders building more houses; there is a profit to be made. The supply is increasing, but why buy an old home when you can buy a brand new one? (Colorado is in this scenario right now, the contractors are still building and inventory is going through the roof, and prices are very reasonable).
As long as used housing prices are sticky going down in price, the contractor is going to eat the home seller’s lunch, and laugh all the way to the you-know-what. What makes it interesting is that the banks can play both ends. They loan to the contractor and to the homeowner.
So the banker says “Belly up to the bar, HELOC's for everyone, and if you need money to build, just tell me where to mail the check!”
Then you have the homeowner, he’s already spent the equity in the house, his world of dreams is now a nightmare. His wife is packing up and ready to leave him.
The typical buyer is not going to buy that used house; they’re going to buy a brand new one from that contractor down the street.
The contractor is going to keep on building until housing prices drop to where he has no profit margin. His profits will tend to be real profits. On the other hand, the homeowner's prices tend to be from some dream hoping for a sense of reality. Equity created out of nothing.
Sunday, October 08, 2006
The Roller Coaster is approaching the Top
Here's a financial news article from Friday:Link The Guardian Newspaper
Its certainly going to speed things up. The human element was like a braking mechanism. So we ought to be at full throttle by December with no emergency brake. The mutual fund traders with their star wars technology buy and sell programs will be matching wits with twits.
This could be as much fun as the automated bathrooms at Washington DC airport when the power went out. You couldn't flush a toilet, wash your hands or get a paper towel. It gives more meaning to the quote; "The road to hell is paved with good intension's."
20 years after London, NYSE has its Big Bang
Andrew Clark in New York
Friday October 6, 2006
The Guardian
The New York Stock Exchange will take its first step towards London-style electronic dealing today in the face of increasing international competition.
In a gradual transition, the NYSE is introducing a "hybrid market" allowing traders to buy and sell big chunks of stock at the touch of a button.
Its move is comparable to the London exchange's "Big Bang" in 1986 which led to the end of the City's trading floor - except that the Big Apple's changeover will be slower, more considered and, it is hoped, less likely to contribute to a crash akin to Black Monday in 1987.
Technology will vastly increase the NYSE's capacity. In a test on Saturday, more than 6bn shares changed hands in two hours - exceeding the exchange's record of 3.1bn for an entire day.
The changeover is nothing if not cautious. On the first day, just two stocks - American Express and Equity Office Properties Trust - will be traded under the new technology. In a gradual roll-out, all 3,600 listed companies will be included by December.
Previous electronic transactions at the NYSE were limited to small deals of 1,099 shares at a time. The new limit will be a million shares and a restriction of two trades a minute will be lifted.
Its certainly going to speed things up. The human element was like a braking mechanism. So we ought to be at full throttle by December with no emergency brake. The mutual fund traders with their star wars technology buy and sell programs will be matching wits with twits.
This could be as much fun as the automated bathrooms at Washington DC airport when the power went out. You couldn't flush a toilet, wash your hands or get a paper towel. It gives more meaning to the quote; "The road to hell is paved with good intension's."
The Non Existent Banking Crisis
Right now in California, there has been 3,855 houses that have been foreclosed on. Let's just round it up to 4,000 and figure that each loan is $500,000. So it's 4,000 times 500,000. Just count the zeros and multiply the whole numbers together. The answer is 20 with 8 zeros added to it. Two billion dollars of real estate is in default in California so far this year.
Its highly probable, that on the way to foreclosure, the owner has also maxed out their credit cards. Let's figure the amount owed on credit cards, for a family in this predicament, would probably range between $10,000 to $50,000. Here would be a real, on the books, banking loss of between 40 to 200 million dollars.
There have been 23,000 bankruptcies so far this year and about 49,000 pre-foreclosures. Here is a Link to the numbers I am quoting. If we figure that the 23,000 bankruptcy's have between $10,000 and $50,000 in credit card debt, that calculates out to between 230 million and 1.15 billion dollars of bad debt.
Speculate further, that about 4,000 of the 49,000 pre-foreclosures go into foreclosure. That's another two billion of real estate in default and of course another 40 to 200 million of bad credit card debt.
This leaves a range of between 310 million (20+20=230) to 1.5 billion (1.15+.2+.2) in bad credit card debt. If the banks can pull out 80% of their loan value on the 4 billion of real estate in foreclosure, then that would result in a loss of about 800 million.
The most optimistic numbers, would be 310 million in non collectible credit card debt and a zero loss on all real estate foreclosures (the Tooth Fairy lives!). The worse case for the banks would be 1.5 billion in credit card debt and close to 1 billion in real estate write offs.
This is kind of boring stuff, but remember, this is only one state, California. Visualize all 50 states together, now it begins to have some size and body.
One person in bankruptcy or foreclosure is not the end of the world. But a bank, with a couple hundred foreclosures and a lot of bad plastic, knows the reality of their problem right now, at this present time.
The first signs of fire in the movie theater will be after the end of the fiscal year for these banks, when they have to present their profit and loss statements.
As if things couldn't get worse, two trillion in bank loans are due to reset in the next 12 months. Here cometh the Anti-Tooth Fairy. So with the banks Federally insured (and you thought the Tooth Fairy was dead) the New Year could prove very distracting.
Its highly probable, that on the way to foreclosure, the owner has also maxed out their credit cards. Let's figure the amount owed on credit cards, for a family in this predicament, would probably range between $10,000 to $50,000. Here would be a real, on the books, banking loss of between 40 to 200 million dollars.
There have been 23,000 bankruptcies so far this year and about 49,000 pre-foreclosures. Here is a Link to the numbers I am quoting. If we figure that the 23,000 bankruptcy's have between $10,000 and $50,000 in credit card debt, that calculates out to between 230 million and 1.15 billion dollars of bad debt.
Speculate further, that about 4,000 of the 49,000 pre-foreclosures go into foreclosure. That's another two billion of real estate in default and of course another 40 to 200 million of bad credit card debt.
This leaves a range of between 310 million (20+20=230) to 1.5 billion (1.15+.2+.2) in bad credit card debt. If the banks can pull out 80% of their loan value on the 4 billion of real estate in foreclosure, then that would result in a loss of about 800 million.
The most optimistic numbers, would be 310 million in non collectible credit card debt and a zero loss on all real estate foreclosures (the Tooth Fairy lives!). The worse case for the banks would be 1.5 billion in credit card debt and close to 1 billion in real estate write offs.
This is kind of boring stuff, but remember, this is only one state, California. Visualize all 50 states together, now it begins to have some size and body.
One person in bankruptcy or foreclosure is not the end of the world. But a bank, with a couple hundred foreclosures and a lot of bad plastic, knows the reality of their problem right now, at this present time.
The first signs of fire in the movie theater will be after the end of the fiscal year for these banks, when they have to present their profit and loss statements.
As if things couldn't get worse, two trillion in bank loans are due to reset in the next 12 months. Here cometh the Anti-Tooth Fairy. So with the banks Federally insured (and you thought the Tooth Fairy was dead) the New Year could prove very distracting.
Friday, October 06, 2006
Kondratieff Wave Revisited
A while back, in May I covered the Kondratieff wave May8th Link and it seems to be more to the point as time goes by. Here is a link to a history lesson that's well worth reading.
The Kondratieff Wave
This gentleman's theories were published before the great depression in 1925. For those of you that don't click on the link, here is a quote from the above article dealing with the autumn just before the winter labeled Depression.
These cycles tend to be about 60 to 70 years long. If you think about it, everyone that was about 30 years old during the last depression is no longer with us. The group memory of the past depression is gone and most of the financial shenanigans going on, are "new" in our mind's eye.
The point about perceiving a depression, is that its only visible in your rear view mirror. The investment trusts that collapsed in the 1930's smell a lot like the hedge funds of today.
The Kondratieff Wave
This gentleman's theories were published before the great depression in 1925. For those of you that don't click on the link, here is a quote from the above article dealing with the autumn just before the winter labeled Depression.
Excesses of an unpopular war, along with fiscal liberalism, cause popular reaction toward stability or normalcy. A mood of isolationism permeates . The plateau period generally lasts seven to ten years and is characterized by selective industry growth, development of new ideas ( both technological and social ) and a strong feelings of affluence, terminating in a feeling of euphoria. The inflated price structure from the primary recession, along with the desire for consumption, produces a rapid increase in debt. Eventually, wealth consumption expands beyond all practical limits, and economy slips into a severe and protracted depression.
These cycles tend to be about 60 to 70 years long. If you think about it, everyone that was about 30 years old during the last depression is no longer with us. The group memory of the past depression is gone and most of the financial shenanigans going on, are "new" in our mind's eye.
The point about perceiving a depression, is that its only visible in your rear view mirror. The investment trusts that collapsed in the 1930's smell a lot like the hedge funds of today.
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