Tuesday, May 20, 2008

Debt Rattle, May 20 2008: US home prices will drop 80%

Dorothea Lange: Nothing to Do August 1936 Sallisaw, Oklahoma.
Sequoyah County drought farmers. "Nothing to do," said one of them.
"These fellers are goin' to stay right here till they dry up and die."

Ilargi: I must confess, I am still stunned by the kind of things "experts", "analysts" and reporters manage to push past their larynxes. It doesn’t matter what oozes out, or so it seems, soundbites have a short life-span. But how many of these geniuses predicted today’s 10-20% drop in US home prices, one year, or even just 6 months, ago? 6 months from now they’ll say something else again, and claim “unforeseeable events’.

Let me give you my own analysis.

How much will US home prices fall peak to trough? I see many "experts" now claim numbers like 20%, already a very far cry from what they claimed till recently. But what is that based on? In the LA Times article below, Dean Baker, co-director at the Center for Economic and Policy Research, who either tries hard but just doesn’t have the brains, or plays the lying game from the political left, says this:

”... since 1996, [home prices] have gone up 170%. To bring them back to where they would have been without the bubble, would mean a drop in real prices of about 40%.

Excuse me, but that is mathematical nonsense. If Dean Baker can’t do basic math, what's his use? (NOTE: I’ll leave out inflation numbers, since they don’t represent a real increase in value.)

If prices in 2006-7 were 170% higher than they were in 1996, then they would need to fall 63%, not 40%, to come back to reality. And that is what I think they will do, and probably more, since they have to come down from such a giant high. Which is in line with this 2006 graph, a long-time favorite of mine, from ContraryInvestor:

Look at the low end of the trendline. But don’t stop there.

Note that this graph depicts “US Homes For Sale”. And then realize that foreclosure numbers are through the roof and rising, and inventory, the number of homes for sale, is at record highs, while mortgage standards across the board (except at Fannie and Freddie, who hand out your money) are tightening painfully. What do you think all that will do to home prices?

If the trendline, as you can see, points to a 60-65% drop in home prices WITHOUT rising foreclosures, forced sales, and clogged up inventory, what will the drop be with those trends factored in? How about 80%?

Any idea how many American mortgage holders will be underwater on their loans by then? How about 80%?

Does this sound crazy? Look at the second article below: prices in Sacramento County have ALREADY dropped 40%. Where do you think they’re headed?

Want some more? Meredith Whitney, in an article below, estimates that ”...over $3 trillion of liquidity [will be] extracted from the capital markets by the year-end”. And every $1 that banks lose in capital leads to $10 less available in loans. Moreover, since few are willing to put money into long term investments, long term interest rates (i.e. the bond markets) are under enormous upward pressure. And if (make that when) these rates, which dictate mortgage rates, rise into double-digits, that eradicates yet another very large pool of potential buyers, pushing prices down more.

If you still feel that the housing crisis and the credit crisis are over, or at a bottom, or whatever soundbite is today’s fad, you are a dupe and a sucker. There’s plenty consolation for you, though: there are many people just like you. That’s why the Dow is going up. Good luck, good night and God bless. You'll need it.

Steep drop in home prices may help economy
Nearly two years into a housing decline that has resulted in hundreds of thousands of foreclosures, frozen credit markets and dragged the nation's economy toward recession, many Americans hope the end is near. Most economists believe the worst is yet to come. "I see absolutely no signs of a bottoming, either nationally or in the regions," said Patrick Newport, who tracks the housing market for Global Insight, an economic forecasting firm in Lexington, Mass.

The hard truth is that the housing correction is turning out to be deeper and longer than nearly anyone anticipated. And that's bad news, not just for homeowners and would-be home buyers but for pretty much everyone. With every month of lower home prices, homeowners see their net worth decline. Potential purchasers are paralyzed by a lack of financing and by the fear that if they buy before the market hits bottom, they will lose money too.

Already, several major retailers tied closely to housing -- furniture chains such as Levitz Furniture and home improvement stores including Home Depot Inc. -- have gone out of business or suffered big losses. Smaller companies are feeling the crunch too. In Brighton, Colo., Matt Edmundson says his family's wholesale nursery business has declined 30% in the last two years.

His primary customers -- once accounting for 75% of sales -- were businesses installing new landscaping for newly built homes and businesses. "Our largest customer three years ago was doing 8,000 frontyard homes a year," Edmundson said from his office at Arbor Valley Nursery. "Last year they were down to 3,000 and this year to 1,500 -- that's a pretty drastic decrease. We've shifted focus more into the commercial market, but now the whole pie is smaller."

And the damage has not been confined to those closely tied to housing. Economists estimate that the housing downturn has dragged the country's gross domestic product down by about 1 percentage point for the last year.

Dean Baker, co-director at the Center for Economic and Policy Research, a left-leaning think tank in Washington, said the correction was taking a huge toll on consumer spending. "People's ability to spend depends in part on their housing wealth," Baker said.

"If we're losing more than $4 trillion in housing wealth in the course of a year, that's over $60,000 per homeowner. That has an enormous impact on consumption."

Economists say consumer spending is the economy's main driver, accounting for about 70% of GDP. How much longer will home prices fall, and how much further? In a speech Friday, Treasury Secretary Henry M. Paulson Jr. said the crisis was likely to last into next year.

"We didn't get here quickly. There were years of excesses. And this won't be resolved quickly," Paulson said in remarks at a business luncheon. "Housing is the biggest risk to our economy," he said. Over the last year, index prices have fallen 12% to 14%, and Moody's Chen thinks they have an additional 10% or 12% to go. "I think we're about halfway there," she said.

Yun of the National Assn. of Realtors said prices of existing homes had fallen about 8.5% since their peak in the summer of 2006 and probably had 10% more to go. "Peak to trough, we'll be looking at 20% or even greater," he said. Baker thinks that's too optimistic. Before the mid-1990s, he said, house prices moved up roughly in line with inflation. But since 1996, they have gone up 170% -- well above the rate of inflation.

To bring them back to where they would have been without the bubble, Baker estimated, would mean a drop in real prices of about 40%.

Life at the bottom
The Sacramento Bee just sent me a breaking news alert: DataQuick Information Services is reporting a "big rebound" in home sales in Sacramento County. The statistics are impressive: The first year-over-year sales gains in Sacramento in 37 months, adding up to a 26.3 percent increase over April 2007.

Sacramento County was one of the first regions in California to experience a complete housing meltdown, so signs of a revival there could be a bellwether for other hard-hit areas. With just a couple of caveats. The bulk of the sales jump appears to be coming from "heavily discounted, bank-owned homes" -- which implies that the after-effects of mass foreclosures are driving the rebound.

But even more startling than the sales gain is how far median prices have plunged. Median sales prices -- where half the homes sell for more and half for less -- are down to Feb. 2003 levels in Sacramento County. The county's median sales price in April fell to $232,000 -- down 32 percent from a year ago and 40 percent off its Aug. 2005, high of $387,000.

A 40 percent drop. If those are the kinds of numbers required to goose the market back into action, the entire economy still has a lot of pain coming.

U.S. Fed auctions $510 billion to ease credit stresses
Working to relieve stressed credit markets, the U.S. Federal Reserve has auctioned another $75-billion in loans to squeezed banks, bringing the total to $510-billion since December. The central bank on Tuesday announced the results of its most recent auction — the 12th — since the program to help banks overcome credit problems started in December.

It's part of an ongoing effort by the Fed to help ease the credit crunch, which erupted last August and hit a crisis point in March with the near collapse and forced sale of Bear Stearns, the nation's fifth-largest investment house, to JP Morgan Chase & Co.

Housing, credit and financial problems have weighed heavily on the economy, sharply slowing its growth. In the latest auction, commercial bank paid an interest rate of 2.100 per cent for the short-term loans.

There were 75 bidders for the slice of the $75-billion in 28-day loans. The Fed received bids for $84.4-billion worth of the loans. The auction was conducted on Monday with the results released on Tuesday

Credit crisis to extend beyond 2009: Meredith Whitney
The credit crisis will likely extend well into the next year and beyond, resulting in three years of multi-billion dollar revenue reversals, according to a prominent U.S. banking analyst, Meredith Whitney, who also slashed her earnings outlook for four Wall Street investment banks.

By the end of 2009, over $170 billion of reserve builds will flow through bank earnings on top of "business as usual" loan loss provisions, said the Oppenheimer & Co analyst, who in October correctly predicted that Citigroup Inc would cut its dividend and go on a capital-raising spree. "Either in the form of write-downs or reserve builds, we believe the effect is the same: revenue reversal from years worth of inherently flawed underwriting," Whitney said.

The analyst lowered her 2008 outlook for JPMorgan Chase & Co, Citigroup, Bank of America Corp and Wachovia Corp. She, however, cut her second-quarter earnings view for Bank of America and JPMorgan while raising it by a cent each for Citigroup and Wachovia.

"When most talk about the shut down in the securitization markets, they more often focus on declining profits for the investment banks..., we argue the far more important consequence of the buyers strike in the securitization market is the impact on overall consumer liquidity, consumer spending and ultimately on consumer defaults," Whitney said.

She estimated that over $3 trillion of liquidity would have been extracted from the capital markets by the year-end, due to the considerable stress on consumer liquidity from the "buyers strike" in the securitization market.

"Over time, the bank lending model will reclaim lost lending market share over the mortgage market, but bank balance sheets simply do not have the capacity to provide the liquidity lost by the shut down in the securitization market," she said.

Ilargi: I don’t have the space to publish Karl Denninger’s entire posts here, but he writes good stuff these days. I am, as you may know, as sick as he is of the lies oozing from reporters, experts and politicians. It has to stop somewhere.

Terribly Fraudulent Tuesday!
Well let me practice full disclosure here - I don't know if it will be terrible or not. That's because I'm writing most of it Monday night! But.... some things are terrible, and they are fraudulent. In fact, it seems that The Ticker has become a chronicle of modern-day fraud. Let's get right to it.

We start with Senator Shelby and his "housing bill", which he claims will not bill the taxpayer for any of its $300 billion cost. His claim on CNBC today was that this would be funded by the GSE's "affordable housing" fund. That's a nice fantasy. Where's the money going to come from?

Shelby says this is a $300 billion program with a $1.7 billion cost. Uh huh. Pull the other one. You're going to manage to pull this off with under $2 billion to support $300 billion in loans eh? You really think so? What is the current default rate in the FHA's book? Running north of 10%, right? And what's the severity (recovery) on those defaults? Well, that depends, but let's look at some possibilities.

Let's assume we "buy down" the $300 billion to 85% LTV, and what is picked up are underwater (otherwise you'd just sell instead of foreclosing, right?) So as a result we "haircut" 15% off the $300 billion right up front, which is $45 billion in up front costs. Note that I'm being particularly conservative in assuming that the "haircut" will be right at 100% LTV and not underwater.

And before you say "but someone else has to eat that", uh, no, that's not true. See, the majority of this paper is either guaranteed by Fannie or Freddie or is actually on their book! So this is a gigantic circle-jerk and the haircut will come from these firms. It thus has to be counted against the total program size.

Now we have to look at what part of the $300 billion (once refinanced) will foreclose down the road. Let's assume that 5% does - which is hopelessly optimistic with current rates running about twice that, but heh, I'm being nice. With a recovery of 60 (about right in today's market) we've got another $6 billion in losses. We're up to $51 billion, but Shelby said this program had a $1.7 billion cost.

Bluntly: He's lying, even if none of the original paper was on Fannie or Freddie's books; in that situation it would be around $6 billion in direct costs. But since most of it is, the real number is closer to the full $51 billion!

Mr. Shelby, are you intentionally lying to the American People on CNBC (like the rest of these fraudsters?) This much is certain - if Fannie and Freddie have to eat $51 billion, they're almost certainly both zeros and we the people will eat it.

Get Used to Less: Post-Subprime Economy Means Subpar Growth as New Normal in U.S.
A normal U.S. economy is likely to look a lot different, and worse, after the credit crisis is over and financial markets settle down. Companies will continue to struggle to raise cash for expansion and innovation as investors and lenders remain focused on conserving capital.

Workers, too, may have less flexibility to go after new opportunities, because many will be stuck where they are -- in homes worth less than the balances on their mortgages. "Once you've made terrible, overly optimistic errors, that paralyzes you for some time," says economist Paul Samuelson, a Nobel laureate.

The bottom line: The U.S. may have to get used to a new definition of normal, characterized by weaker productivity gains, slower economic growth, higher unemployment and a diminished financial-services industry. Behind the stricter terms: loans and investments made during the credit boom that went sour. Banks and financial institutions worldwide have racked up more than $340 billion in credit losses and asset writedowns since the start of 2007.

David Rubenstein, chairman of the Washington-based private- equity firm Carlyle Group, says there's more to come, telling reporters May 12 that "enormous losses" have yet to be recognized.

Companies also face a tougher borrowing environment in the bond market. The spread investors charge over Treasury securities for high-yield bonds has narrowed since the height of the credit crisis in mid-March. Still, at 663 basis points, it's well above the 495-point average since 1985. And it's likely to remain higher, says John Lonski, chief economist at Moody's Investors Service Inc. in New York. He sees the spread averaging about 600 basis points next year.

Companies are also issuing fewer high-yield bonds, and Lonski forecasts a drop of more than 40 percent this year, to $80 billion. "Next year, we'd do very well to reach $100 billion," he says. In 2006, before the onset of the credit crisis, more than $150 billion in new junk bonds were sold. Equity capital is also harder to come by. Initial public offerings for fledgling businesses fell to the lowest level in almost five years in the first quarter, the National Venture Capital Association reported.

"There are an awful lot of firms who are having trouble fundraising, no doubt about it," says Mark Heesen, president of the Arlington, Virginia-based association.

Even well-established companies may have a hard time retrenching. Wall Street analysts say General Electric Co. Chief Executive Officer Jeffrey Immelt might have difficulty selling slow-growing financial-services assets, including GE's credit-card unit. The Fairfield, Connecticut-based company might even sell its century-old appliance business.

Workers too are feeling the fallout from the credit crisis. The share of respondents in a May 1-8 Bloomberg/Los Angeles Times poll who described themselves as financially secure fell to the lowest level since 1992. The declining value of houses -- the biggest asset for many Americans -- has a lot to do with their pessimism. The median price for a single-family home fell 7.7 percent in the first quarter, the biggest drop in at least 29 years, according to the National Association of Realtors.

Zoltan Pozsar, senior economist at Moody's Economy.com in West Chester, Pennsylvania, reckons that about 8.5 million homeowners -- roughly 11 percent of the total -- owed more on their mortgages than their homes were worth in the first quarter. He forecasts that the number of people in this predicament will rise to more than 12 million next year.

The depressed housing market may keep some workers from pulling up stakes to pursue new employment. "Many times, job candidates are willing to talk to you about an opening," says Sally Stetson, co-founder of Salveson Stetson Group, an executive-search firm in Radnor, Pennsylvania. "But then reality sets in as they look at their home price and they pull back."

Edmund Phelps, winner of the 2006 Nobel Prize for economics and a professor at Columbia University in New York, says the nation is "in the grip of some structural forces that are moving the economy permanently to a lower level of economic activity, with an unemployment rate somewhere between 5 and 6 percent."

Unemployment in April was 5 percent. The financial-services industry is particularly hard-hit. The world's biggest banks and securities firms have cut at least 50,000 jobs in the past year, with more to come.

ECB’s Trichet calls crisis 'very serious'as troubles reach Europe
The European Central Bank has warned that the world economy is still in the grip of a "very serious market correction" and risks repeating the inflation debacle of the early 1970s if global authorities respond by slashing interest rates too soon.

Jean-Claude Trichet, the ECB's president, said the credit crisis is still extending its shadow over the economy, but cautioned against any easy solution given the cocktail of threatening forces that have come together.

"It is an ongoing, very significant market correction. These are challenging times, obviously," he told the BBC, highlighting the danger of a wage-price spiral should the inflation genie be let out of the bottle.

"We have this accumulation of the oil shock, the food and agro-products shock. In the first oil shock, when we took the wrong decision, we enshrined high inflation, and we created mass unemployment," he said. The comments expose the policy gulf between the ECB and the US Federal Reserve, which has slashed rates from 5.25pc to 2pc - judging that inflation is the lesser of two risks.

Mr Trichet has been widely praised for refusing to cut rates, ignoring a cacophony of complaints from France's Nicolas Sarkozy, Italy's Silvio Berlusconi and industrialists agitating for lower rates to bring down the euro. With eurozone inflation now at 3.3pc, the critics have gone silent. Le Monde newspaper said he had won total "victory".

Yet the ECB is still walking a tightrope. The food and energy spike may prove a short sharp shock that tips the economy into a ugly downturn. Both Société Générale and Dresdner Kleinwort have warned that the bigger danger may prove to be deflation. Since it takes up to two years for monetary policy to work its effects, the ECB will not know whether it has made a mistake until it is too late.

"It's very premature to declare victory, as Trichet himself has repeatedly warned," said Julian Callow, Europe economist at Barclays Capital. "The process of debt deleveraging in Spain, Greece, and Ireland has barely started. The ECB's lending survey shows that banks are still tightening credit," he said.

After a delay of several months, the economic slowdown is now rotating from North America to Europe. The Eurozone held up well in the first quarter, but Mr Trichet warns that the picture will look a lot less "flattering" from now on. A raft of business surveys point to an abrupt slowing in Spain, Italy, and France. Export orders from the Netherlands and Germany have stalled.

The Bank of France said yesterday that French growth will halve to 0.3pc this quarter. Stephen Lewis, from Insinger de Beaufort, said the credit freeze is proving more intractable in Europe than in the US. The Fed's emergency facility is seeing less demand from broker dealers, with loans halving to $17.5bn (£9bn) over the last two weeks.

While spreads on three-month dollar Libor have eased, the spreads on Euribor rates for the eurozone are stuck near record highs. Euribor was 4.86pc yesterday.

AIG Increases Plan to Raise Capital to $20 Billion
American International Group Inc. will raise a total of $20 billion, 60 percent more than the New York- based insurer originally said it needed to protect against further writedowns, Chief Executive Officer Martin Sullivan said. AIG, the world's largest insurer by assets, raised at least $13 billion through last week selling common stock and units that can convert into shares, Sullivan told investors and analysts at a conference in London today.

A sale of hybrid bonds is underway. The new capital "enables us to take advantage of a lot of the attractive emerging markets we're in, as well as obviously be well-positioned for any continued volatility in the credit markets," Sullivan said. AIG said May 9 its capital cushion became "too low for comfort" after a record $7.81 billion first-quarter loss.

Banks and securities firms have raised or announced plans to seek more than $260 billion since July to replenish capital depleted by the collapse of the U.S. subprime market, according to Bloomberg data. AIG fell 51 cents, or 1.3 percent, to $38.44 at 9:30 a.m. in New York Stock Exchange. The insurer is the worst performer in the Dow Jones Industrial Average this year.

Sullivan, who has said some writedowns will reverse, has the support of the board of directors, Chairman Robert Willumstad told reporters last week after the company's annual meeting. Investors including former CEO Maurice "Hank" Greenberg have faulted Sullivan, 53, after more than $19 billion of losses on contracts that protect fixed-income investors.

AIG sold $6.5 billion of common stock at $38 a share, $5.4 billion in equity units and about $1.5 billion in over allotments of both securities, spokesman Chris Winans said in an e-mail statement. AIG has units that originate, insure and invest in home loans. The insurer wrote down its investment portfolio in the first quarter by $6.09 billion as borrower defaults forced down the value of mortgage-backed securities.

Returns from private equity and hedge funds declined 84 percent from a year earlier to $197 million because of gridlock in the credit markets. AIG had $29.4 billion in so-called alternative holdings as of March 31, about 3.5 percent of its investment portfolio. The assets back AIG insurance policies.

Wall Street Brokerages Look To Shed Light on Dark Pools
Goldman Sachs Group Inc., Morgan Stanley and UBS AG announced a series of deals that will allow their clients to share access to all three firms' pools of non-displayed liquidity as they try to address the growing complexity of market fragmentation amid so-called dark pools.

The moves come as dark pools -- the secretive electronic trading networks that match buyers and sellers anonymously -- are booming in popularity as big institutional investors look for ways to trade blocks of stock without triggering ripples in the share price, as can happen on traditional stock markets such as the NYSE and Nasdaq Stock Market.

But all that darkness is causing nightmares on Wall Street because there are now so many that using them is increasingly frustrating and time-consuming. The deals announced Tuesday allow algorithmic-trading orders of each firm to interact with the U.S. equity liquidity found in three of the nation's largest broker-dealer-operated dark pools -- Goldman Sachs' SIGMA X, Morgan Stanley's MS POOL and UBS' PIN ATS.

Forty-two such U.S. trading networks now are competing for orders, up from seven dark pools five years ago, according to Tabb Group, a Westborough, Mass., research firm. Large brokerage firms, trading boutiques and even stock exchanges have designed systems that allow shares to be bought and sold out of the sight of prying eyes.

"We're confident that providing our respective clients access to each other's liquidity will achieve even better crossing results for our clients in an increasingly fragmented market," said Greg Tusar, managing director of electronic trading for Goldman.

Oil Rises to Record Above $129 After Pickens Says Prices May Reach $150
Crude oil rose above $129 a barrel in New York for the first time after billionaire hedge-fund manager Boone Pickens said that oil will reach $150 a barrel this year. Prices will climb because supply isn't keeping up with demand, Pickens, the founder and chairman of Dallas-based BP Capital LLC, told CNBC today.

Oil advanced on May 16 when Goldman Sachs Group Inc. boosted its estimate for the second half of the year to $141 a barrel, from $107, citing supply constraints. "There is so much momentum in the market that it doesn't take much for prices to reach new records," said Brad Samples, commodity analyst for Summit Energy Inc. in Louisville, Kentucky. "We rose today after Boone Pickens basically parroted the Goldman line on prices."

Crude oil for June delivery rose $1.82, or 1.4 percent, to $128.87 a barrel at 9:25 a.m. on the New York Mercantile Exchange. Futures reached $129.31, the highest since trading began in 1983. Prices are 98 percent higher than a year ago. Credit Suisse Group AG and Societe Generale SA raised their oil prices forecasts for 2008 and 2009 in reports today, citing investor flows and supply limitations.

Brent crude oil for July settlement rose $2.05, or 1.6 percent, to $127.11 a barrel on London's ICE Futures Europe exchange. The contract touched a record $127.49 today. Oil prices also rose because the dollar weakened against the euro, prompting investors to buy commodities as a hedge against the currency's decline. The euro gained after an adviser to the German government said European policy makers may increase interest rates as soon as the financial crisis ends

Goldman, Lehman, Morgan Profit Estimates Cut at Citi
Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Morgan Stanley had their earnings estimates cut at Citigroup Inc., which said the investment firms face a "tough operating environment" in the second quarter. Citigroup's Prashant Bhatia said he was reducing the estimates to reflect lower trading volume, losses from hedging and "little in the way of banking activity."

Banks and financial institutions worldwide have racked up almost $380 billion in credit losses and asset writedowns since the start of 2007. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said last week that the bank will post lower earnings from investment banking and credit cards this quarter as the U.S. recession gets under way.

"While the environment seems to have improved considerably in May, it will not offset the considerable weakness in March and April," Bhatia wrote in a note to clients dated May 16. Citigroup's Bhatia expects Goldman to report profit of $3.70 a share in the second quarter, down from an earlier estimate of $4.71. Morgan Stanley may post profit of 75 cents a share, down from a previous forecast of $1.66, while Lehman's profit may be 5 cents a share, down from the previous estimate of $1.66, the analyst said.

Citigroup, the biggest U.S. bank, also cut its profit estimates for Morgan Stanley and Lehman for the next three years and lowered the price it expects Morgan Stanley shares to reach in the next 12 months to $70 from $75. All of the companies are based in New York.

Citigroup CEO Vikram Pandit earlier this month said he plans to get rid of about $400 billion of assets over the next three years. "We expect to see significant asset sales related to leveraged loan inventory, and commercial and residential mortgages as a result of the greater degree of liquidity in the marketplace," Bhatia wrote.

Ilargi: Another case of double or nothing at the crap table. Buying Lehman Bros or UBS right now would be quite a feat. But not very smart: does anyone still doubt there’s much more toxins waiting in their books?

Barclays considers daring takeover bid in the US or UK
Barclays is considering making a daring takeover bid for a rival as part of a move to raise capital from shareholders. There has been intense speculation about whether Barclays will follow Royal Bank of Scotland, HBOS and Bradford & Bingley to raise capital to bolster its balance sheet but the bank itself has remained enigmatic.

Chris Lucas, Barclays' finance director, told analysts last week that "all options are open". Guiding Barclays' decision is understood to be a consideration about whether to try to take advantage of rivals' weakness by launching a large rights issue with a double purpose: to improve its capital ratio and to fund an acquisition.

Barclays' top team feels it has earned kudos with the City by walking away from last year's battle for ABN Amro, which was bought by a consortium led by RBS for £47bn. Barclays is thinking seriously about whether it can snap up a rival bank at a time when the shares of many banks are at record lows. Sources said Barclays could try to buy an investment bank, expanding Bob Diamond's Barclays Capital empire.

Tim Sykes, a banking analyst at Execution, said one option is: "Overfunding an acquisition in support of developing the Barclays Capital strategy." In the past few weeks Mr Diamond is thought to have looked at both America's Lehman Brothers, which has traded as low as 60pc of its book value, and UBS, whose shares have also plummeted following its £18bn of write-downs.

One senior banking source said: "Bob is up to something." Another said that after Mr Diamond, an American, missed out on the top jobs at Citigroup and Merrill Lynch he wants to go on the offensive with an aggressive expansion of Barclays Capital.

UBS would bring Barclays an equities business and its wealth management and private banking arms, which it would dearly like to acquire, sources said. But UBS is still seen as being in the throes of a crisis and Barclays' shareholders may fear the Swiss giant may have to disclose further bad debts.

Lehman would add to Barclays Capital's existing stronghold in the debt market - which could mean bloody job cuts - but would massively bolster its presence in the US. A Lehman deal is becoming increasingly difficult, sources pointed out, because there are signs that the US market is improving, raising the price of acquisitions there.

Fuel costs may thrust airlines into bankruptcy
It is a thrill ride nobody wanted. Just months after reporting their highest annual profits in eight years, U.S. airlines are in a nose dive that could leave some major carriers in bankruptcy. Leaders at Chicago's United Airlines and across the industry are scrambling to devise business models that will hold up to the stresses of $128 per barrel crude oil and a sluggish economy.

If the 10 largest U.S. airlines don't boost revenues and restructure loans, their cumulative cash could shrink 62 percent to about $8.6 billion by year's end, estimated Philip Baggaley, chief credit analyst at Standard & Poor's. That's not sufficient to cover one month's expenses at the carriers, he said. "In other words, in this simplified example, the airlines, as a group, would be at risk of bankruptcy," Baggaley wrote in a research report Friday.

To gain pricing power in a fragmented, overserved industry, U.S. airlines need to cut as much as 20 percent of domestic flights, analysts said. That's equivalent to grounding two major carriers. It is uncharted territory; what American Airlines Chief Executive Gerard Arpey termed "an environment of continuous disruptive change" in a letter to employees last month.

It comes as United's directors ponder one of the biggest strategic maneuvers in the carrier's 77-year history: a high-risk merger with US Airways that could reap rewards if executives can steer clear of potentially ruinous labor showdowns. United is also exploring a code-share partnership with Continental Airlines that would allow the carriers to sell tickets on each others' flights.

Such a virtual merger could lead to the full-fledged combination similar to the deal that Continental executives rejected last month, analysts say. But there's no guarantee either option will pan out, analysts warn.

Airline mergers are unwieldy and notoriously difficult to complete. Continental, meanwhile, has other suitors. The Houston-based carrier has also held talks with American Airlines and could opt to remain allied with its current marketing partners, Delta and Northwest Airlines, which are also merging, sources said.

Deciding on a course is not easy for executives at United or any other carrier, especially given the stakes involved and the volatility of the global fuel markets. Crude oil prices have doubled over the past year, rising about 15 percent in the past two weeks alone. "Fuel is astronomically expensive, to the point of pushing the industry past the point of economic viability," said Henry Harteveldt, travel industry analyst with Forrester Research Inc.

Ilargi: A number to think about for a minute: 40 percent of UK households have negative weekly cashflows !!!. That’s enormous, and very painful. And that’s while the crash is just getting started.

UK mortgage debt fears hit banks' shares
Bradford & Bingley's (B&B) shares slumped to a record low amid fresh fears about the mortgage market. Jitters about a potential increase in bad debts also hit other UK banks, including HBOS, owner of Halifax and Bank of Scotland, and Royal Bank of Scotland.
The further slide in banking shares came as investors focused on problems that could lie ahead for the UK's banks. Sandy Chen, an analyst at Panmure Gordon, warned that the macroeconomic outlook for the UK has deteriorated.

He said that while investors have been worried about British banks' exposure to the US sub-prime market through their investments in credit derivatives, the real fear now will be over the bad debts that UK banks could face. Some 3m homeowners could fall into negative equity if house prices fall by a fifth, Mr Chen warned.

"Negative equity in the UK could be a much bigger problem than what others have been expecting. This will drive another round of rising impairments and capital pressures. And for the 40pc of UK households with negative weekly cashflows, things can get far worse. In terms of writedowns on sub-prime, structured credits etc, the market has been focused on US exposures. Similar problems could appear here in the UK," Mr Chen said.

Britain's banks have warned that the outlook has worsened, but have stressed that their bad debts are low and their mortgage books are good quality. But fears are rising about the mortgage market in general and specialist areas in particular, such as buy-to-let mortgages, which are B&B's number one product, and mortgages with high loans to value, such as the 125pc loans that were offered by Northern Rock.

Mr Chen said the indications on arrears from mortgages that have been securitised - and on which the banks have to give public updates to investors - are not encouraging. "In the recent monthly performance data from mortgage securitisations, there has been a big jump in reported arrears, in both US and UK mortgage portfolios," Mr Chen said.

Using public disclosures on UK securitisations, Mr Chen has estimated that should house prices drop by a fifth, 30pc, or 3m, mortgage holders will have negative equity. This would hit £360bn of mortgage balances, Mr Chen said.

It is widely believed in the City that banks that have launched rights issues - RBS, HBOS, B&B and Paragon - have done so in large part due to their own fears about the housing market and the health of UK consumers. RBS is also rebuilding capital after paying a high price for its acquisition of ABN last year.

There is also a view that while all of the banks made the decision to press the button on their capital raisings, they were strongly advised to bolster their capital by the Financial Services Authority. Banking sources said US investors with holdings in British lenders are worried that America's sub-prime crisis is spreading to the UK.

Gordon Brown faces economic tragedy as public lose faith
Gordon Brown is apparently a Bee Gees fan. Our leader, it emerged last week, likes the 1970s all-male trio, the kings of high-pitched, effeminate pop. I doubt the Prime Minister, complete with gold medallion and chest wig, could sing the entire Saturday Night Fever soundtrack. But so shot is his authority, he may have lately been humming Stayin' Alive.

This has been a terrible week for both Brown and the UK economy. The two are, of course, inextricably linked. Brown's claim to power - apart from being a political hack all his life, then waiting a decade for Tony Blair to move - is his reputation for "sound" economic management.

Those of us who follow the public finances closely have known for years that this reputation was built on spin. But as the UK slumps, the whole electorate can now see Brown for what he is - an economic incompetent who has splattered the Government's books with disgraceful amounts of red ink.

Last Tuesday, Brown pushed Alistair Darling into the spotlight, forcing his Chancellor to deliver a humiliating "mini-budget". No matter that in his regular Budget in March, Darling revealed colossal borrowing of £43bn in 2008/09 - up more than 40 per cent on the estimate just 12 months before.

No matter that the incremental rise in borrowing that day - the extra future borrowing on top of that revealed in the 2007 Budget - amounted to £1,400 for every UK household, every penny of which will need to be met by more taxation.

Despite years of good growth, the UK has a budget deficit of 3.2 per cent of GDP - the biggest of any advanced economy by far. Brown talks about "Britain's stability" and "financial resilience". But the truth is that, just as we need an economic shot in the arm, this Government has nothing in reserve.

That's entirely because of Brown - and his indulgent, six-year campaign of public largesse. As Chancellor, he tried to spend his way to Number 10 after 2001, attempting to buy popularity. Brown borrowed, and borrowed big, in a desperate bid to bribe us with our own money. That ill-conceived strategy has now collapsed.

But, still, Brown last week reached for the borrowing comfort blanket once more. Faced with a Labour revolt over the abolition of the 10p tax rate, the Prime Minister wielded his glove-puppet Chancellor. And - surprise, surprise - the £2.7bn of mini-budget measures were funded, yet again, almost entirely by borrowing.

Political leadership is about making decisions which favour some, but annoy others. Brown spends his life avoiding such choices - spending willy-nilly instead, trying to please everyone. This is la-la land economics - sustained only by borrowing. And Brown has borrowed so much that the state now accounts for a ridiculous 45 per cent of GDP, up from 37 per cent when he took office.

Such leadership is not only expensive and counter-productive, but also cowardly. The public feels Brown lacks the guts to make tough decisions. And that - above all else - explains why this Government now has the lowest opinion poll ratings since the 1930s.

George Soros: worst to come for UK economy
Financier George Soros has warned that the UK economy has yet to feel the full impact of the global credit crisis. Mr Soros said that while the "acute phase" of the credit crunch was over, the fallout has still yet to be felt.

Speaking to the BBC's Today programme, he also disclosed his surprise that it took the Bank of England so long to bail out struggling banks in the city following their hit by the US sub-prime crisis. Mr Soros said: "I think we are past the acute phase of the liquidity crunch, the credit crunch.

"But it is the job of the authorities to provide liquidity and it was actually quite remarkable how long it took them to find the right ways of doing it. "It took much longer than I expected. But that is now largely behind us. The fallout, the impact on the real economy, is yet to be felt."

Mr Soros, who in January said the world was facing its worst financial crisis since the second world war, labelled the claim that the US would ride out the current crisis by the end of the year as "without foundation".

But while he said the US recession would be "more serious than currently anticipated and certainly longer," he warned that in the UK "the situation is in some ways perhaps worse than for the United States." He blamed the UK housing boom and the economy’s heavy reliance upon the financial sector as the main causes for fragility.

Russian Central Bank says has $100 billion in US agencies bonds
The Russian Central Bank said on Monday about $100 billion of its reserves were invested in the securities of U.S. agencies, including home finance firms, at the end of 2007, with the majority in short-term paper. The disclosure was made via a central bank filing to parliament at a time when investments of wealthier emerging countries are under international scrutiny.

A poll earlier this year showed a majority of Americans fear the U.S. economy and national security could be hurt if sovereign wealth funds put more money into U.S. companies. In Russia, previous central bank statements about investments in the United States have outraged some politicians, prompting the bank to explain it was putting money in securities and not shares, and was posting no losses despite financial market troubles.

A steep drop in U.S. home prices which sparked a crisis among risky borrowers has since tainted all types of mortgages. Russian banks have little exposure to U.S. mortgage-backed securities. The Russian central bank, which has the world's third largest reserves of $530 billion, said the share of investments in securities of U.S. agencies, including Fannie Mae and Freddie Mac, soared to 2.475 trillion roubles last year from 1.007 trillion in 2006.

The rouble, which has appreciated substantially over the past few years, had an average rate of 25.57 per dollar in 2007 and 27.18 in 2006. The bank said over four fifths of the paper had maturities of less than one year. Fannie Mae and Freddie Mac, the largest and second largest U.S. providers of residential mortgage funding, have reported heavy losses and their stock prices have fallen sharply.

Russia's central bank has been investing in quasi-sovereign paper for many years. It does not invest in stocks. Apart from Fannie Mae and Freddie Mac, the central bank can also invest in securities of U.S. Federal Home Loan Banks and Federal Farm Credit Banks and quasi-sovereign bonds from Britain, France, Germany, Spain, Austria, Canada and the Netherlands.

During boom in crop prices, lawmakers harvest subsidies
With food prices soaring, it takes some gall to force Americans to pay billions of dollars to millionaire agribusinesses. Yet that's what the latest farm bill would do. Since the last farm bill was enacted in 2002, the five crops that receive the lion's share of farm subsidies have also enjoyed massive price increases: cotton (105 percent price increase), soybeans (164 percent), corn (169 percent), wheat (256 percent) and rice (281 percent).

For consumers, these price increases have caused financial pain domestically and near-riots abroad. For farmers, it's a sunnier story: Total net farm income has leaped 56 percent in just two years, and helped bring the average farm household's income to a record $89,434, and its net worth to $838,875.

During this crop-price boom, continuing to subsidize farmers makes as much sense as paying Apple to make another generation of iPods. Yet instead of cutting, Congress' answer is to harvest even more farm subsidies. The latest version would increase payment rates for more than a dozen crops and increase conservation subsidies. Although the same farmers already receive massive annual subsidies, plus taxpayer-funded crop insurance, Congress would also layer a new permanent disaster aid program. Expect Congress to declare an emergency any week that it rains - or doesn't rain.

Farm subsidies have long been America's largest corporate welfare program. Rather than help small, struggling family farmers, the majority of subsidies go to commercial farmers, who report an average income of $200,000 and a net worth of nearly $2 million. President Bush called on Congress to end farm subsidies for families earning more than $200,000 annually. Instead, Congress decided that married couples with less than $1.5 million in annual net farm income should be barred from one farm subsidy program - but still allowed to collect from all the rest. This is what passes for reform.

And for the vast majority of farmers and agribusiness that remain eligible for farm subsidies, bigger checks await. Agribusinesses have long exploited loopholes to evade the $150,000 annual limit on marketing loan subsidies, including dividing themselves into dozens of separate legal entities and collecting subsidies for each one. Yet rather than better enforce this payment limit, the farm bill simply repeals it altogether. No longer would agribusinesses even need to hire attorneys and find loopholes in order to amass millions in taxpayer subsidies.

Overall, the farm bill is officially listed as adding $10 billion in new spending over the decade. But that ignores the blatant gimmicks - such as shifting costs just outside the 10-year window, and unrealistically assuming all increases will suddenly be repealed in four years - that could add more than $10 billion to the cost. Congressional Democrats who loudly denounced budget deficits are now prepared to bypass anti-deficit rules for this bloated bill.

Thus, farm subsidies will continue costing taxpayers at least $25 billion annually. And for what purpose? Subsidies don't solve farmer poverty because they go to profitable agribusinesses. They don't preserve family farms because agribusinesses use their subsidies to buy them out. They are no longer designed to stabilize crop prices.

Nor do they promote cheap food, as ethanol policies are raising prices steeply. These programs lack any coherent rationale. Instead, they cost billions in taxes and higher supermarket prices. They harm the environment by encouraging over-planting. By undermining America's trade negotiations, subsidies raise consumer prices and restrict U.S. exports.

Cotton subsidies undercut impoverished African farmers desperately trying to make a living. They contribute to obesity and rising health care costs by subsidizing corn and soy (from which sugars and fats are derived) rather than healthier fruits and vegetables.

Farm subsidies don't produce food, but they do produce votes. Despite its economic incoherence, the farm agreement is overwhelmingly popular in a Congress that has mastered the art of distributing tax dollars to favored industries. Although Bush has pledged to veto the farm bill, Congress has stubbornly pledged to override the veto. Is it any wonder why Washington is so unpopular these days?

Brian Riedl is the Grover Hermann Fellow in Federal Budgetary Affairs at The Heritage Foundation.

Ilargi: The banks involved in the insane BCE take-over, the world’s biggest ever buy-out are trying to sabotage the deal. They want out. Every single person in Ontario who hopes to ever see a pension penny, sometime, from Teachers, should be on their knees humbly praying that the banks succeed, and the deal will be off.

Banks, buyers square off over BCE deal
The proposed $35-billion takeover of BCE Inc. turned into a high-stakes game of brinksmanship over the weekend, after a group of banks ratcheted up pressure on the company's buyers to restructure the terms of their record lending agreement. So far, however, none of the banks has threatened to walk away from the table and potentially derail the deal, said sources close to the matter.

The lenders, who have grown nervous by the extent of their financial commitments in this uncertain credit environment, adopted more aggressive negotiating tactics on Friday, and began pushing the buyers to reduce the purchase price and agree to more favourable interest rates on the loans, according to people familiar with the matter.

With only weeks to go before the deal is slated to close, the friction between the banks, led by Citigroup Inc., and the acquirers, led by the Ontario Teachers' Pension Plan, has fuelled concerns that the record buyout could fall apart. Indeed, reports the takeover could be in jeopardy sent BCE's stock price tumbling $2.19 (U.S.) Monday, or 5.64 per cent, to close at $36.62 on the New York Stock Exchange. That's well below the offer price of $42.75 (Canadian).

However, despite the tense discussions, sources said none of the banks has indicated it plans to walk away from the deal. “It was clear that tough negotiations were going to be the order of the day,” said one person close to the talks. “But … the banks were presenting tough conditions – not an outright refusal.”

Both sides are attempting to gain an extra measure of leverage in the lead-up to the planned closing deadline of June 30. By balking at the terms, the banks hope to gain some last-minute concessions from the buying group. However, sources said the Ontario pension fund and its partners believe they have a sound agreement in place, and they would have a strong legal standing if any of the banks abdicated their obligations.

“I cannot comment on discussions with the banks or the company, but we expect everyone will honour their commitments,” said Jim Leech, chief executive officer of Teachers. The buyout group also includes buyout firms Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity as well as Toronto-Dominion Bank.

BCE spokesman Bill Fox would not comment on reports about renewed talks between the company's buyers and their lenders.
“We have an agreement,” Mr. Fox said. “And we have been working since the deal was signed on all aspects of getting the transaction closed, on the basis of the terms set out in the agreement.


Stoneleigh said...

I posted this comment on the bond market on yesterday's Debt Rattle, but some may not have seen it, so I'm reposting it today:

A few people have asked our view of the bond market, given that we have posted warnings of potential upheaval.

To be more specific, what I expect is a decoupling between long and short term interest rates. The Fed has been cutting short term rates, but long term rates are a different story. It seems like the bond market might be close to declaring a vote of no confidence in America's long term finances (surprise, surprise), which would mean long bond yields could rise significantly (and prices would fall). This could lead to a sharp rise in the cost of government borrowing, and by extension all other long term debt.

The effect would be to worsen the credit crunch dramatically in a relatively short timeframe. In relation to the housing market, mortgage rates tied to long term bond rates would rise quickly, meaning that the pool of potential borrowers would shrink substantially almost overnight. This would further depress housing prices on top of the effects of inventory overhang and the expectation of further price falls keeping buyers at home. I expect real estate to become even more illiquid than it is currently.

To add a further comment today, I would say that this view ties in well with Ilargi's title for today's Debt Rattle. This mechanism would certainly add considerable downward pressure to prices, and would do so abruptly. As to when a bond market crack up might begin, it is difficult to say, but my guess is that the beginning could coincide with the next phase of the decline, once the current stock market rally is over (which I am expecting to happen within the next couple of weeks if not much sooner).

My own view of the housing market (as expressed on TOD:C probably a year ago) is that house prices will fall at least 90%, due to the lack of credit. After all, if only those who could pay cash were in a position to buy homes - a very small pool of buyers indeed - how high could prices be?

The lack of credit, as credit deflates and credit availability undershoots for a period of time, would make the remaining 10% far less affordable for most than 100% would currently be however. Falling nominal prices and greater affordability are not the same thing at all.

Anonymous said...

Hi, just dropping in to share a CNN story about a 67 year-old homeless woman. It is sad, but she did make some extremely poor choices, such as spending 75% of her monthly take home on rent.

CNN Homeless Mom

Anonymous said...


Was on TOD (19 May Drumbeat) and people were talking about hyperinflation. So I chimed in, trying to explain why we are looking at deflation. Someone came back, saying no, look at M2 and M3, which are both up sharply.

So I started writing about the Japanese looking at M values in the 1990s and not realising that the money supply (credit) was in fact decreasing. Then went over to Mish and his document on M', but came to the conclusion that I was in over my head, so sent nothing more to TOD.

To make a long story short, could you explain M'? How accurately does it measure credit? What else measures credit? How can we measure credit inflation/deflation?

I notice that the Whitney article says:
She estimated that over $3 trillion of liquidity would have been extracted from the capital markets by the year-end…

Are the terms "credit" and "liquidity" synonymous when speaking about a crunch? Are they generally synonymous?

Thanks for all your help,

. said...

Made tiny for your viewing pleasure, but its a most excellent Reuters article on squatters.


Anonymous said...

Ilargi, you claim in The Automatic Earth of May 20 that ""If prices in 2006-7 were 170% higher than they were in 1996, then they would need to fall 63%, not 40%, to come back to reality."" Is this a new definition of mathematics to better fit your prophecies? 100 is 58.9% of 170, therefore if 170 goes down by 41.1%, it is 100. Reality check: 100 is more than one half of 170, therefore 170 needs to be reduced by less than half to make 100.

Could it be that you are a little bit biased towards doom?

Ilargi said...

Anon 79644789567438956r47385936487

The article says:"Before the mid-1990s, he said, house prices moved up roughly in line with inflation. But since 1996, they have gone up 170%"...

If a price rises 170%, it ends up being 100+170=270%. To get it back to 100%, therefore, 170% must be subtracted, or 62.96% of 270.

I am thus guilty of and/or endowed with one-hundredth of a one hundredth part, which is 1/10.000, of doom bias. And I'm man enough to admit it too.

I don't know what math you were -or still are being-taught, but I didn't need anything that was new to me to get to this conclusion.

Greyzone said...


Some people just don't want to believe what is happening in real estate markets. But let me relate this true tale. Back during the Texas Savings and Loan debacle a nice lady in Austin, Texas who also had about $150,000 in cash waited for prices to settle where she expected them to turn. And she waited and waited some more.

When she finally bought (and she bought lots of houses), she was paying $5000 to $10,000 for houses that previously sold for $120,000 to $180,000. Some were damaged but that didn't matter to her. She bought where she thought we'd hit the low and after a fall that far, well, she couldn't have missed the bottom by too much.

Later she began restoring and selling the houses one by one, for prices ranging from $75,000 to $150,000 at the very end. Each sale provided her with some profits and some working cash to restore another house or two. Ultimately when she was done she had bought, held, restored, and eventually resold over 20 homes. Along the way she turned her $150,000 into almost $2.5 million dollars gross.

Now, this was in one regional market within living memory of most people who are adults today. I'm not talking the Great Depression here. If prices could fall that much in the late 1980s in Texas, then they can fall that much again now.

We will eventually reach a bottom but like Ilargi, I feel that bottom is still a long ways off. And I recall the housing debacle here in Texas within living memory as an example of just how bad it can get (and maybe even worse).

Anonymous said...


I am not great at math, but...

Suppose the price in 1996 is 100 and it increases by 170%. That puts it at 270.

To drop back to 100, it must fall... 62.97%, which is pretty close to 63.

That being said, I wonder if the general rise in home prices (the long-term channel shown in the graph) does not put the percentage required to drop back to 1996 prices at a figure somewhere between 40 and 63%. If the author meant a return to the upper limit of the channel, his figure of 40% is less surprising.

For what it is worth,

Greyzone said...


It seems that everyone is expecting a return to the "normalcy" of the 1990s. I would suggest that this might be an overly optimistic expectation because this financial crisis is not occurring in a vacuum. Instead, this crisis is coming on the leading edge of multiple, physical, global crises that threaten large numbers of humans. And by threaten, I mean their very lives, not some paper abstraction called "money".

The really bad thing about this timing of events is that if we were going to successfully navigate the physical crises that are beginning to manifest, we would have needed our social and political institutions (of which finance is one) to be in their best condition rather than potentially in their worst condition.

Without social and political stability does anyone think it more likely that we will successfully navigate the physical crises now unfolding? I, for one, do not.

A return to the "normalcy" of the 1990s is the last thing I expect.

Ilargi said...


Last week I posted an article that talked about Detroit homes for sale at $5000-$10.000, while their property taxes were calculated on prices over $100.000. The discrepancy was so great that in some cases the taxes were higher than the purchase price.

I didn't think of this when I wrote the comment piece this morning, or I would have referred to that as well.

What got me going in this case was the 170% price rise in 10 years, the 40% drop in Sacramento, and the mental picture of putting those in the trendline graph. My weakness, and I did mention that, may have been the exclusion of inflationary inputs, but then again, as I said, I find that misleading. It would portray a picture that would seem to soften a blow that is in reality not softened at all.

But it's of course possible to estimate a 30% total inflation rate over 10 years. You would then have to go from 270% to 130%, for a 51.9% drop in prices.

Though I of course know the resistance that will come when stating it, I don't think that 80% is such a crazy number. The Detroit homes have dropped 90+% today already, with much more downward motion to come, and so had the Texas homes you mentioned, in the 1980's.

It depends to an extent on geography, but certainly in the burbs, a lot of properties are going to go basically down to zero. If it takes $100 just to drive to work, provided you even have work, it's simply no longer viable.

And don't forget that available credit is about to vanish into thin air. You'll need cash to buy a home. Who has cash in the US, where savings are negative? And who among the few that do, would be willing to put that into buying a home?

I'll get back to this uplifting theme soon.

. said...

South Africa appears to be ready to go off like a bomb; refugees from Zimbabwe are the issue. Not good and certain to get worse as Zimbabwe isn't going to pull out of the spiral they're in.


Anonymous said...


Greyzone, I fully agree on the basic analysis. I see no way the U.S. will return to "normalcy".

I was simply noting that the remark by Baker was pretty fuzzy ("To bring them back to where they would have been without the bubble"), to the point that I would tend to disregard it.


Anonymous said...

I agree with Stoneleigh and Greyzone's comments - a 90% fall in house prices is quite plausible in some markets, especially if people are reduced to paying cash.

For example, there are suburbs in L.A and Sydey where a house sells for 10 times average annual income - people make $60k per year and a house is $600k. Supposedly the long-term, "normal" average is 3 times income, and prices historically drop to about twice annual income during market bottoms.

So if people make $60k, a house should be $180k. $120k at the bottom of a major slump.

But suppose wages drop? If companies are laying off staff, our local residents may have to find other jobs that don't pay as well - maybe $45k or $50k instead of $60k. And if many people are unemployed, some people will earn nothing, which brings the average down.

So now our average wage in suburb X has dropped to $40k, which means houses "should" bottom at $80K.

Given that debt levels today are higher than during any previous housing downturn, it likely that there will be an unusually high number of desperate sellers.

It only takes a few to settle for $60k rather than $80k in our imaginary suburb, and there you have it, a 90% fall.

Of course this is just arguing from historical example.

The other way to arrive at the same conclusion is to ask what prices will be when the market is already down 50% and banks start asking for a 50% deposit.

How many people, earning $60k per year, have even $20k in cash lying around? Not many. And those that do are likely to sit on it until they are confident the worst has past, or prices are so cheap they feel they cannot go wrong.

. said...


This is good historical information ... but it's from the oil age, no?

We're massively overbuilt, values are tumbling, and municipalities will need property tax revenues. I think we're going to see a lot of homes selling for cash ... and that which accumulates in three to six months, so long as the buyer can pay the property tax.