patrick.net

So it's official!

The First Baby Boomer is now collecting Social Security! (I'm told she was born one second after midnight on 1 January, 1946) In true boomer fashion (she elected to draw early).

Let the Boomer Death Clock Countdown begin!

Anecdotally I can say that I have little or no luxury and no sense of entitlement. And yet I am a bit embarassed when this blog turns to a food forum as I cannot imagine when I will be able to afford to dine out.

Duke,

Honestly, that attitude's a bit self-righteous, IMO. Maybe you've been feeling the pinch - I'll give you that, and I hope you're doing okay overall. But to begrudge others for doing things that are (a) within their financial means, and (b) an effort to actually enjoy their lives rather than slaving away trying to make ends meet seems sanctimonious to me.

There's a real difference between leisure activities and consumption within your means and spending beyond your means using MEW and what not to "keep up with the Joneses." I doubt most of us here are advocating a monk's ascetic life.

Skibum,
Woa. At what point did I begrudge anyone anything? Was it my embarrassment at not being able to participate in food discussions on a housing blog? Let me clear up this misunderstanding right away. I think any who can afford to dine out and who wish to dine out should dine out. Free of guilt. Honest.
I am also not sanctimonious in the least.
I believe my words stand for themselves fairly well. I simply stated that the position that the middle classess' reckless luxury and rampant entitlement was not supported by statements of fact and that anecdotaly at least I believe this to not be true. I am very open to rebutal.

Duke,

Sounds like it was a misunderstanding re: "embarrassment" - my read on your "embarrassment" comment was how can we on this blog be so decadent and trite as to discuss enjoying food. Seems more like you were expressing personal embarrassment about not feeling you have the means to do so. Sorry about the misunderstanding.

However, aside from that issue, I do still firmly believe the so-called middle class, which clearly is not monotonic, has a significant segment that spends way beyond their means. I think your personal example of not overspending is much more an exception than the rule. If only more Americans had your financial restraint, we wouldn't be in this mess.

Here's a timely piece from the MSM - are consumers finally tapped out?

http://money.cnn.com/2007/10/15/news/economy/colvin_buyingbinge.fortune/index.htm?postversion=2007101609

I think the more relevant question is, why is it always assumed (like in this article) that tapping MEW to spend on crap was EVER a good thing???

Another FB selling fancy car...

http://sfbay.craigslist.org/sfc/car/449367125.html

"..I am in no rush to sell, so PLEASE DO NOT email me with LOW-BALL OFFERS. "
Really?! Guess where these pictures are taken? The school in the background of one of the pictures tells it all. It is Edward Harris Jr. in Elk Grove.

There’s a real difference between leisure activities and consumption within your means and spending beyond your means using MEW and what not to “keep up with the Joneses.” I doubt most of us here are advocating a monk’s ascetic life.

This bubble taught us that we ought to live outside of our means. We just need to time the anticipated bailout correctly.

"Responsibility" is well out-dated. We must adapt. In order to defeat the boomers we must become the boomers.

Interesting article. I still wonder at the magnitudes of things. How many people used MEWs to fund consumer spending versus how many used the money for more appropriate purchases? How many of the middle class used MEWs at all?

I am trying to grapple with the realities of the economy as it pertains to the middle class using hard facts,; neither absolving the middle class by stating obvious distortions of income inequality, nor condeming the middle class by using equally loaded examples of rampant consumerism.

I keep coming back to the following. A huge cost shift has occured over the last few decades to the American worker. Some say this is globalization. Okay. But in the same period we have seen corporate profits and equities valuations soar. I think an article was once posted on this site stating where Henry Ford understood the fact that you can't sell cars if you don't pay your workers enough to buy them. I think we are closer to that reality then the entitlement reality.

My personal experince has certainly seen some of the middle class playing the keeping-up-with-the-Jones game, the majority of my direct observations are with struggles and escalating cost burdens, especially in those areas not reported in the inlfation index.

So, how to put this discussion on an analytic footing? The CPI is flawed. The PPP is flawed and frankly, I just want to compare income and expenditures today versus 20 years ago, WITHIN the US.

Ideas anyone?

skibum,

I just wanted to point out that "Tappin dat' MEW" was originally recorded in 1934 by "Blind Melon Chittlin'" on the Starvation Acres Label.

For those that haven't heard it, the song is about a sharecropper that begin "livin' dat "evil ways" as he begins to borrow against the only thing in his life of any real value. Predictably as his "low down, sorrowful drinkin' n' "carryin' on wit' dos' wild women" grows beyond his control he is forced into renting his shack back from "da' lo-down dirty bank".

Considered by many folk music historians to be an "enduring classic".

Duke, if you could answer those questions, you'd be able to make a name for yourself as an economist...

I think there are many factors at play. First, most people would probably agree that official measures of expenditure costs, and hence, inflation, used today are clearly way off from reality. Even Bernanke has admitted this much. Yet, the Fed continues to use these measures in their decisions on policy.

Also, I don't think you can directly take median income, less taxes, even in a specific geographical area, and then do the simple math of subtracting housing, food, transportation, etc. expenditures to calculate the true % of take home pay spent. The median is just too blunt a measure, and who is to say the median income earner is the same person who spends the median amount on housing?

A partial answer might be possible by looking at MEW usage and revolving debt usage. Over at CR, they had some posts with charts showing the beginnings of the unwind in MEW starting this year, which will almost certainly translate into a consumer pullback. Revolving debt is increasing, which may mean that the closed spigot of MEW has "forced" consumers to hock themselves back into credit card debt.

RE: globalization, that's also an interesting factor. I think most economists agree that the massive industrialization of China leading to cheap exports has been a huge factor in keeping inflation at bay over the past 10-15 years. Now there is real concern that this trend will reverse. With labor costs, standards of living, and raw materials all going up, it's likely that cheap plastic crap from China sold at Walmart will begin to increase in price. Now that'll be another unpleasant phenomenon for the "middle class" as well.

As to what that means for the survival of the so-called middle class, who knows. My opinion is that other than those in abject poverty and those with extreme wealth, quality of life will be worse within the next few years. The post WWII expansion may have made daily life more comfortable for the masses (electricity, running water, homes, cars, vacations, toys to play with), but in the end the mindset of most Americans is still one of being a slave to the job, having to work to afford these basics and extras. Those who don't HAVE to work, either because they are on government subsidy or because they are truly wealthy, that is what defines those outside of the middle class.

SoCal September DQ numbers are out, and they are UGLY:

http://www.dqnews.com/RRSCA1007.shtm

Of course, the ever-optimistic Marshall Prentice sees the bottom not too far ahead:

"Some of last month's drop was part of the longer-term slowing trend, but most of it was due to mortgage market turbulence and difficulties in getting jumbo financing. There's a good chance there will be some "catch-up" sales activity between now and the end of the year as jumbo loans become more available. Still, we can't expect the market to re-balance itself until sometime in 2008," said Marshall Prentice, DataQuick president.

hugel said: Another FB selling fancy car…

And how do you know he is really a FB... oh wait, there it is, a telltale sign: the willingness to commit fraud (don't worry everyone does it).
From the ad:Willing to also help with taxes:)

"drinkin' that wicked brew

Tappin' dat MEW.....

C'mon now honey

(you know I just had a "few"?)

Oh! Tappin that MEW

til I'm satis...fied!

"mortgage market turbulence"

Get used to... and start liking it! Aaron Krowne ran a great article yesterday "Dead Man Walking" (also covered by Blind Melon) detailing why the "wholesale distribution channel" is.. well effectively being shut down!

Let's face facts, investors don't want to buy loans originated by "Three Guys and a Desk Mortgage Company"! They want "tidy" loans, originated under the supervision of a BANK EMPLOYEE! Aaron's "insider" is giving "wholesale" another 6 mos. of "Dead Man Walking".

That reminds me!

"I'm gonna' beat my woman til I'm satis...fied!"

From AP: Treasury Secretary Hank Paulson says -
"The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth."

Why are falling housing prices a penalty to economic growth? In what kind of kool-aid filled universe does this hemorrhoid live?

Falling housing prices will liberate Americans from indentured slavery to oversize mortgages. This drop in debt-service burden will:
1. dramatically improve their equity positions in their homes, and help them achieve the true American Dream of actually owning their home some day.

2. free up more discretionary income that they can use to save, contribute to local community events and shop at the mall.

What part of this does the Treasury Secretary pretend not to understand?

SP

Bruce Says:
If you’re following M-LEC/SIV graveyard stuff - you are, aren’t you? - Yves Smith put up a string of ripsnorters overnight: www.nakedcapitalism.com/

Thanks for the link - I had read about the M-LEC/SIV stuff, but not seen that site. The thing I don't understand is that at some point this debt will have to be sold to an investor - exactly who will that be? pawned off on the taxpayer - exactly how will that be engineered?

SP

DinOR said:The First Baby Boomer is now collecting Social Security!

Oh man, you've got to read the Washington Post article. It sounds like it was written by surfer-X.
"Why should Boomers who have earned it and who may need that extra support in their retirement - for medicine, for food, for whatever - why should they wait if they really don't have to?" she asked.
That makes her, at 61, the first member of the 80 million-strong Baby Boom generation, which, starting next year, will begin to bankrupt the nation by crashing the Medicare and Social Security systems.

For those of you who didn't have time to read the DQ link for SoCal numbers, I will sum up the highlights: sales volume off ~50% in ALL counties (except San Diego, which has been in freefall for over a year). The highlight for me was that explanation that prices weren't really falling, it was just the Mix.

Have any of the pundits/experts even mentioned or contemplated the possibility that this whole "credit crunch" might (in the best of worlds) be the precipitating factor that forever dooms the concept of securitizing mortgages?

Maybe, just maybe, there will be a realization that taking a bunch of heterogeneous loans and "packaging" them into a "product" that can be "traded" is not such a good thing after all. Maybe residential mortgages should be serviced by the guys who originated them after all. Maybe when you buy a home, you should have a real business relationship with the lender. Does that seem just way too nutty?

SP,

Thank you, and exactly! When Americans are no longer adjudicating 65%+ of their take home pay toward "The Care and Feeding of Alligators" we will be in a much better place. Well said.

I'm so glad you bring up the point about "oversized mortgages" (and homes priced SO... high) they will likely NEVER be owned! Unless any of us are planning on having 4 or 5 kids we can scratch the 3,500 s/f homes from our "Search list" and get back to reality.

I thought Hank was clear on *not bailing out speculators, etc. though?

SP,

I read Paulson's comments too, and found them highly offensive. I will continue to harp on these 2 points, but why is it always an assumption that (a) falling housing prices are a bad thing, and (b) having an entire house of cards economy supported by consumer spending, which in turn is supported by MEW, a good thing?

I mean, those who bought at the top are unfortunate and will see loss of equity, but the benefits for millions of future buyers is immense. And again, every damn economist, from Bernanke to Greenspan, even Shiller, has assumed the pullback in MEW is a bad thing. I just don't get it. Since when was spending fake money good for the economy? In the end, it's going to come back to bite us all, guaranteed, and all we'll have left to show for it is a bunch of granite slabs leftover in crumbling McMansions and garages full of Harleys and ATVs that folks can't sell on EBay because no one wants to buy them.

Notice

I thought Hank was clear on *not bailing out speculators, etc. though?

DinOR,

Notice that Paulson specifically makes the point of not bailing out speculators in real estate. He very clearly does not include speculators in commodities, ie, his Wall Street friends who have made so much money on packaging, selling and reselling MBS's and now are in deep doo-doo because they all of a sudden have to "mark to market", er, write down, er, admit that their numbers were fake...

Why are falling housing prices a penalty to economic growth? In what kind of kool-aid filled universe does this hemorrhoid live?

It just means that the government will ensure that the bubble burst be well-cushioned, at the expense of someone.

Prices ought to come down. But what ought to be and what is are not necessarily the same thing.

@skibum,

I should have been more specific by stipulating: "specuvestors" (meaning basically everyone at SDCIA) who are too low on the food chain for Hank to be in the least bit concerned with!

EBGuy,

Really funny responses in the comments section! Lord. A new phrase is born:

Militant Boomers (TM)

In Your Face Boomers (TM)

"I started in the workforce at age 24 and I'll be damned..."

24? Really? Can you say s-h-e-l-t-e-r-e-d? Look @SSHOLE, many of us were "haggard veterans" in the workforce by age 24! Oh and btw if they're taking out FICA and State taxes you'd better believe they're taking out for SS. Dipsh!t.

Kathleen Pender from the Chronicle seems to be a little skeptical of Paulson's plan. Is it just me or are columnists starting to get surly. See
Bank bailout plan doesn't solve underlying problem.

The three banks participating in the supposed bailout plan engineered over the weekend by Treasury Secretary Henry Paulson are calling it a "master liquidity enhancement conduit," probably because that sounds much better than "shell game."

Why investors would be willing to fund these assets by buying commercial paper from the new entity but not the old ones is not clear to me.

DinOR - there are still music stores in the area, there's that one in Sunnyvale, that folkie one in Palo Alto (don't let that folkie imagine fool you though, they worship GW Bush and I caution you to never say anything bad about any Republican in there while the owner's around) and Starving Musician on El Camino Real in the porn shop and whore house district. Starving Musician's probably the coolest - always a jam session going on, cool message board, etc.

As our economy crashes and we attain a standard of living that would make most Albanians cringe, I see a large future for those who can build, adjust, teach, etc musical instruments. After all, the traditional ones work when the lights are out, and we will have the lights out a lot - just like when I was a kid in the 1970s, no money to pay the bill = no lights. A worthless dollar means no more Chinese and Korean etc guitars and clarinets and so on too. Any old instruments need to be treasured and restored for use, and those who feel the call would be really wise to learn how to make instruments, anything from ukes and banjos to guitars, violins, thumb pianos etc. Poor people, really poor ones like we're about to become, ALWAYS have musical instruments if they can.

ex-sunnyvale-renter,

Funny! I always remember the owners at the more viable shops saying, "kid you've been in here for FOUR hours! You gotta' buy... "something?"

What never ceases to amaze me is that I'd much prefer a cheap knock-off (that's properly set up and adjusted) than some high dollar number with BRUTAL and un-playable action! Since I seldom if ever play a note "natural" even being in tune isn't that important to me. Besides I couldn't live with myself if I scratched somebody's "highly collectible" Les Paul Custom or whatever. Oh, and amps sound best right before the transformer blows!

Wasn't patrick supposed to be on Nightline?

http://www.sfhomeblog.com/2007/10/battle-of-blogs-part-deux-nightline-abc.html

Did it happen?

BTW, I would like to thank the posters here as I finally made some cash off this giant turd called the housing bubble. Using the Peter Lynch strategy of "go with what you know" I shorted my bank when it was near all time highs last week (maybe it was doubling down as I still have some 2009 puts that are slightly underwater).

Today they announced earnings:
The mortgage business, which comprises about 20% of Wells Fargo’s operations was rocked by the subprime crisis. Wells Fargo took a $490 million hit in mortgage writedowns. Who would have thought.

“Given real estate market conditions, credit losses in the home equity portfolio are likely to increase in fourth quarter 2007 and remain at elevated levels into 2008,” said the company’s Chief Credit Officer Mike Loughlin on Tuesday. Well Fargo’s gloomy forecast, echoes a sleigh of recent announcements by financial firms, which believe that the credit crisis will last longer than initially expected. Really?!

I will not be buying a BMW any time soon, but will keep my eyes peeled for "high definition" resale items on CL. I guess I owe Patrick and Ben a bit of a cut when the stops kick in.

nice article in response to Paulson’s comments

http://www.fool.com/investing/general/2007/10/16/more-housing-hanky-panky.aspx

EBGuy,

Good for you! Feels good don't it?

You know (and I was just wondering) it wasn't that long ago BG (Bill Gross) was something of a hero on bubble blogs for his ever bearish stance on equity markets? Now b/c he has his boo-boo in a ringer I don't see as many people quoting him as if "from the burning bush".

Is Peter Schiff the new BG?

DinOR :

Bill Gross (and the entire bond market) confuses me. Just a few months ago he was claiming to be in a bear market for bonds - higher yield, lower prices.

After his prediction exact opposite has happened in treasury market. Now he is calling for lower yield on short term bonds.

The bond market has been acting like being afraid of recession - inverted yield curve - for more than a year now. That recession just doesn't seem to materialize. I don't want a recession. But the bond market still acts like one is coming.

Anyway, I am glad I have been staying away from bonds and concentrating on stocks. Till I get more yield than CD, I have no interest in buying a long term bond.

Here's an extremely bearish, but interesting piece on the state of the credit crisis, and where it might be headed:

http://articles.moneycentral.msn.com/Investing/SuperModels/AreWeHeadedForAnEpicBearMarket.aspx?page=1

skibum :

Regarding your query about mortgage securitization going away. CR has a small post on it. I think I agree. Combining things in a basket is not a bad thing, as long as things that are put in the basket are OK.

I loved that quote from the MBA chairman. We're going back to lending the way it was in the 1950s and 60s.

About time, I suppose.

StuckInBA,

What's more is that if he was THAT wrong about the quality of MBS... what ELSE is he wrong about? I never could stand the guy so I guess I'd better admit that upfront, but he seemed to be such a "darling" amongst bears but now it looks like they've begun to abandon him too.

Now it's my turn to be a bit surprised. I was really expecting the -ve indicators to stabilize by now. Don't get me wrong. I did not expect things to get better, but just slower descent.

ABX index are in free fall again. The SoCal sales are a shock. And what to say about new home sales. Shouldn't cancellations at least stabilize ? I mean if no one is booking, no one can cancel, right ? The homebuilders' confidence keeps getting worse. Guess these things can actually go close to zero.

The downward acceleration is still in place. Speed is increasing as the free fall continues.

@StuckInBA,
I started noticing the SoCal sept sales falling by 50% in september.

I thought it might be an anomoly, but the 50% drop from YOY sept 06 is across the board in SoCal(and other states,areas too).

So far the October sales look to be just about the same in volume as september 07. Meaning lower than 20 year low. Lowest ever recorded since computer recordkeeping began(per DQ)!!and SoCal has a much much larger population now, and more realtors than ever so this stat has end-of-world consequences for many industries.

"Realtor Famine" is right. To be followed by Construction Worker Bust, and Government Hiring Freeze, etc...

Stuck,
I'm all for free fall in housing indicators - it would mean a more rapid correction back to "normal." However, I'm not surprised by the HB confidence numbers, nor the SoCal sales data. They are both lagging indicators.

HB confidence won't pick up until they've already seen a pickup in sales or at least a significant clearing of inventory. I think there is probably more than one major HB seriously worried about going under from all of this.

The So Cal numbers (we'll see what the Bay Area numbers show later this week, but I suspect a similar direction of badness, just not nearly as nasty) reflect completed sales in September for contracts signed in July and August. The heart of the credit crunch hit late August into September. Hence, I'd even expect October's numbers to be just as bad.

DinOR - isn't it amazing how some of the cheapest POS guitars can be the most playable?

I have some thing, a "parlour guitar" made in Canada, I need to dig it out of the closet, got a tuner, finger-ease (spray stuff) and new set of strings....... I got it and it seemed OK, the strings chew me up but of course they do, it's a guitar and that's what they do....

Well, I just discovered Django Reinhardt about 6 months ago, so what's a little finger skin right? I signed up for a class at the Ostensibly Folkie Republican Capitalist Pig guitar place, and worked on buildin' up those calluses on the basic chords....... had to drop the class as my own financial situation was really imploding, and the ugly Birkenstock-wearing moneygrubber teacher wouidn't even give me a partial refund ......but I digress..... I ended up a few weeks later going into the Guitar Center in Santa Clara woops Slumma Clara, you see I thought I'd be bunking (and paying rent to) some friends, living there, but they turned out to be druggies, Heroin anyone? Err, No Thanks. So I was visiting the G.C thinking it might become a jam place for me...... they have imitations of the Selmer guitars Django and his gypsy coherts played, and I was jamming around, I can't play but I can remember what I heard so I was doing little sets of notes from the Django stuff I'd listened to, and a guy in there was impressed with how I was doing all those bends (Django hardly played any note without some bend involved) and I thought it was pretty weird myself - this is a guitar with I think a larger than standard fretboard and I have tiny-ass hands. How could it be easy on this monster when my own smaller than standard guitar is hard? Hence the new set of strings and finger-ease, which I think are both on those shop guitars so they'll play nice...... I think the shops, the smart ones anyway, make sure the strings aren't getting rusty and wipe the guitars down with finger-ease or Pledge or something so of course they all play terriffic lol.

I didn't think the high-end guitars came with horrible actions though, I thought that's part of what you're paying for, is a decent neck and action when you pay the big bucks?

I notice the "greats" never had good guitars when they were on their way up..... hehe.

It really has me wondering, how hard might it be to learn to make guitars, maybe start out making ukes lol.

The CR post on Mortgage Lending Going back to the "1950s and 60s" also included the commentary Securitization is here to stay. I've said this before, and a little table pounding never hurts, and I'll say it a little differently this time: the REIC is about to be disintermediated. Mortgage brokers, realtors, appraisers(?) and the other nice folks who poisoned the securitization stream are in for a rude awakening. And look for fabprefab.com and modular houses to hit the homebuilders where it hurts.

Well, I just discovered Django Reinhardt about 6 months ago, so what’s a little finger skin right? Finger skin -- heck, you don't even need all your fingers...

Well, maybe securitization is here to stay, but I wonder if it will be in the same form as it stands today, and to the same extent. I guess the crux of the matter is, will investors ever regain an appetite for these instruments to the extent where they will be created and traded to any significant extent. Given human nature, my bet is that in several years, a new generation of bankers will be too young to have gone through today's mess, and they will rehash this scenario, unless the government decides to heavily regulate the industry (fat chance).