patrick.net

@DinOR,

Not to mention bread will be about $100/loaf by year's end if the Fed adopts ZIRP. Hard to make even the neg-am payment on your NINJA when the cost of everything else is skyrocketing much faster than incomes. Zimbabwe here we come!

Re ZIRP: One slight difference between the U.S. and Japan is, Japan was (and still is) a nation of inveterate savers. During their ZIRP period, they technically didn't need to attract huge amounts of foreign capital to support government & domestic consumer spending. Perhaps Bernanke is hoping that the USD will become the world's next "carry trade" currency of choice.

It's pretty darn interesting how quickly Gross has moved from being the darling of the housing/economy bears to their villain. My interpretation is that he's way more exposed to a housing downturn and credit crunch that he thought he would be. He is trying to save his own ass.

"bread will be about $100/loaf"

Now there's something I hadn't stopped to think about. Even if you are one of the "lucky ones" that has the job, FICO, DTI and... equity to make a re-fi happen what of your other expenses? You know, the ones that have been crazy cheap over the last 5 years?

@skibum,

Not at all. (I've hated BG for some time!)

You're absolutely right though, he wouldn't be squirming like that if it didn't involve pain down the road. He's calling for this and he's calling for that but the one thing he's not calling for is mark to market.

Nope. All of the problems are elsewhere.

Has all these cutting of rates actually resulted in a drop in mortgage rates? So far, I don't think so.

So what makes morons like BG think that as soon as the Fed cuts rates, the lender will follow suit and people will be afford their million dollar homes immediately?

As soon as it became common knowledge that housing is going down and that people who bought overpriced houses are going to be f@cked, there is nothing that the Fed can do.

By trying to meddle, it can turn a recession into a depression. That's about it.

All the bitching and handwringing going on by BG et al. is merely them trying to save their own jobs. Nobody cares about the FBs, nobody cares about individual banks unless they work there, or individual SIVs unless they bought into them. It's all attempts to keep themselves from getting burned as badly as they're going to be burned, and attempts and keeping delusional hope alive for just a little bit longer.

The long and the short of it is this. There is no more money to borrow for American consumers OR American companies. Right now, we have three options. Quit spending, start saving, and buy down the debt. Default and throw a few nukes around to prove we mean it, and never get lent money again. Print money until nobody will lend us a dime, but force 'em to take worthless dollars until the debts are gone.

All the waving and crying and yelling is trying to avoid the first option. If we don't shut up and get on with it soon, we might accidentally find out we're stuck with only the last two options.

So what makes morons like BG think that as soon as the Fed cuts rates, the lender will follow suit and people will be afford their million dollar homes immediately?

I don't know the details about PIMCO's current positions/portfolio, but my suspicion is that it's more complicated than what you say. BG probably has significant exposure to positions that would be favorable with low bond yields/high prices, and has basically bet on the Fed lowering rates, based on his earlier predictions about the housing market collapse. He's probably trying to urge on the Fed in order not to be caught with his pants down.

Despite how deplorable his recent comments have been, you must admit that the guy is no dummy.

"unless they work there" LOL!

That's probably true. Skibum, I... don't think BG is a dunce either. But I've been in his position. Everything he stands for and believed is being derailed. His little world is falling apart, and that is not exactly a great environment for rational thought. He's second guessing himself now and like FB's and realtwhores blaming the MSM it seems to me he's just lashing out.

He knows this will strain the institutional relationships they've worked long and hard to build. As fiduciaries get together and review their "Investment Policy Statement" they will fall off a lot of ret. plan's radar. This will create a scenario where he'll be forced into liquidations. If there's a method to his madness, I'd love to hear it.

OT - did everyone read the article by Market Watch - at the top of Patrick's list of Housing Crash News for today - we just need to get that into the Mercury News or similar local rags so that everyone in CA gets to read it - Let the bloodbath begin! $200,000 average haircut by their reckoning.

"If Goldman (Sachs) is right, the typical home-owning household in California has about $200,000 less in home equity than it thought it had. Instead of living in a home that's worth $589,000, it's probably worth $380,000."

Surely that article deserves a prominent thread of it's own? Anyone?

I was a victim of the BG funds, well, not quite, but here is the story that I told on this blog before.

I bought one PIMCO fund called unhedged foreign bond fund. Notice the word, unhedged? Notice the word foreign? Ok, that was 2004.

Now fast forward to 2006, I was munching my dinner at the table reading the PIMCO brochure, and I actually took time to go through every single debenture and notes they hold, and I found a whopping 25% exposure to MBS shit (some from the two agencies, some not, but all labeled AAA). I flipped right on the spot. I was betting against the demise of the dollar, and that was precisely why I got UNHEDGED FOREIGN bonds, which should NOT include anything denominated in USD covering housing-related crap! I unloaded this bond immediately.

I suspect that PIMCO management was already aware of the trouble it was in, to save those USD-denominated MBS CDO funds, BG may have asked the managers of other funds to "eat up" some of these crap so as to help prop up the dodgy bonds.

I am keeping the brochure and everything, as I am waiting for a class action suit letter to arrive.

I think the Fed or the US government has long given up on the strong dollar policy. If you are living in a land of debtors, you'd better side yourself with the debtors, if you don't the public policy will.

I never owe a dime on my credit card. This is the year that I started carrying a balance on a newly acquired 0% intro APR credit card and won't bother paying it off until the 0% APR ends. I also learned to transfer balance from my main card to this new card so that I can have a 0% float for another 12 months, while my money is working hard elsewhere.

Let's all use some cheap credit while they are still available.

Claire,
I read the same article. Seems like a rational spread for starters. We'll see if it plays out and I hope it does. Grin, Grin. Chuckle, Chuckle.

With due respect to Alexander Tyler
A democracy will continue to exist up until the time that voters
entrenched interests discover they can vote themselves
generous gifts that which is rightfully theirs
from the public treasury

And their accompanying view of those who will bear their burdens:
"We live in a decaying age. Young people no longer respect
their parents. They are rude and impatient. They frequently inhabit
taverns and have no self control."
Inscription, 6000 year-old Egyptian tomb

DinOr,

You may be right, Bills world may be crashing in on him. Good.

For the privledge of working in a career which pays all of $50k/yr I regularly get my ass kicked much harder than Bill ever will. And I'm living large compared to most of humanity.

Bill Gross gets paid $40 million per year just to be retained by PIMCO.

His world should cave in on him. Nobody, NOBODY should expect to make that kind of money without running the risk of getting totally crushed. For someone of his stature to emply, or to ask, even in the most vague oblique terms, that his situation ought to be helped smacks of total arrogance. This man is respected as (or at least paid as) the best bond trader in the world, and now he's sticking out a cup looking for some change?

Hey Bill, UP YOURS!

OO,
I had some 401k money in a PIMCO "safe government-backed bond fund" myself. A few months back I too read the prospectus from cover to cover and then dumped the fund the very next day upon finding out what its assets really were.

the typical home-owning household in California has about $200,000 less in home equity than it thought it had.
Oh, please oh please let it only be $200,000. Wait... I'm special. Oh, please oh please let it only be $500,000.

Point is the "pain" of chimeric equity disappearing isn't going to be uniform. The real "pain" is the retirement funds and the like that leveraged on that supposed equity.

The crash began in 1891. Land values fell to levels around one half their boom levels. In addition to the picture given by Figure 6, data on individual suburbs are available. In Prahran, prices peaked at an average of over £1 000 per property in 1888 and fell to £520 by 1898. Similarly, in Brighton, average property values peaked at around £950 in 1888 and then fell to around £400 in 1893 and £300 in 1898. A comparison of these data to the accounts in Cannon (1966) suggests that the picture is fairly accurate but may understate the speed of the bust. For example,
Cannon writes that, ‘by the end of 1891 the bottom had completely dropped out of the land market ... In Collins Street, sites for which £2 000 a foot had been rejected a short time before, were now being offered for £600 a foot – and could not find buyers even at that price’ (Cannon 1966, p 18).

The exact trigger for the crash is unclear. Nonetheless, its general nature is fairly clear. From the end of 1887 many reputable banks restricted their lending for land purchase substantially. Regardless, the market continued to grow for another four years largely supported by the activities of the land banks. Many of these financial institutions were obtaining money on deposit from the UK by offering higher interest rates than were available on other investments; foreign investors did not seem to factor in the likelihood of default in making these deposits. However, fundamental
factors were beginning to affect the bubble. The huge amount of land that had been brought onto the market meant that rental yields were depressed. Furthermore, the low rental yields combined with high leverage meant that speculators were experiencing increasing cash flow problems. Mortgage defaults and bank runs eventually led to a number of financial institutions going under. This then started a chain of events that led to the bubble completely deflating. Many of the land banks had only recently
been floated and had issued partly paid shares. In an effort to continue operating they issued calls for the remainder of the capital, which, in turn, required shareholders to sell land to meet the call on their shares. The additional selling pressure pushed prices down significantly, thereby inducing further financial problems. This then became a full-blown financial collapse, which led into a more general depression.

Soros forecasts 'serious' economic correction
November 6, 2007 - 2:28PM

Billionaire investor George Soros forecast on Monday that the US economy is "on the verge of a very serious economic correction" after decades of overspending.

"We have borrowed an awful lot of money and now the bill is coming to us," he said during a lecture at the New York University, also adding that the war on terror "has thrown America out of the rails."

Asked whether a recession was inevitable, Soros said: "I think we are definitely in for a slowdown that I think will be a bigger slowdown than (Fed Chairman Ben) Bernanke is seeing."

Famous for his speculative attack on the Bank of England that made him more than $US1 billion, Soros declined to nominate which currencies are more vulnerable currently. He also declined to comment specifically on the dollar.

"I know exactly where the currencies are going to but I'm not going to tell that to you," he told the audience.

Last week, investment guru Jim Rogers, who co-founded the Quantum Fund with Soros in the 1970s, recommended selling the dollar as well as US investment banks and US housing stocks.

Soros said that, for now, China is the "absolute winner" in economic terms, and will continue to see its economy soaring during the next few years.

"Now it is going through this fantastic transformation but in 10 years time I think you may well have a financial crisis in China," he said.

Reuters

Jim Rogers, now supermodels:

http://www.shortnews.com/start.cfm?id=66231

Where are all the trolls who used to come on and berate people as being jealous? You know, the 'the Bay Area is different, we can never have a downturn here, they aren't making anymore land' types? Where are our Marina realtors (TM)?

"as I am waiting for the class action"

Should be in the mail any day now!

SFWoman,

Well, when you work in the financial media being able to run (and BOY did they run) footage of a mostly naked supermodel it's about as exciting as it gets!

The article posted today, Charles Hugh Smith's, "The Great Unraveling Begins" makes sense to me. It is also totally depressing. In my desire for balance I want to see an counter argument that is compelling. As DinOr has stated, "When is the world not pregnant with down-side risk?" Since we don't have Great Recessions or Great Depressions every day, there has to be a countervailing view to balance the great unraveling.
Maybe something like, "the financial industry is always massively over levereaged and the only problem now is that we are looking behind the curtain at that over-leveraging. If financial markets can create something new to sweep this from public view the markets will work again and in our ignorance we will all again be happy."
And hey, I can live with that. Becasue right now it feels wierd to post to this housing bubble blog about housing affordability when the economic world order seems to be at risk. Kinda like complaining about the broken window on the titanic as the entire boat is going down.
Sooooo, someone please post the rational argument against the great unraveling.

Sooooo, someone please post the rational argument against the great unraveling.

Duke,
Don't you know, there are always Rich Foreigners (TM) to buy up our property, buy our Treasurys, dollars, stocks to prop up our economy! China, India, Europe, Japan, etc.

Oh wait...their economies depend on the US consumer buying nonstop. OK, then. We're totally fu%ked.

I don't believe I'm qualified to pose that argument. I'm not sure anyone is. What I will say is that it's always been my position that the punishment fit the crime. Why should Apple suffer b/c people like John Devaney were naming 200' yachts "Carry Trade"?

It was my fondest desire to keep "the unraveling" as sector specific as possible. Early on (before the broader implications were widely known) I was very confident there would be "containment". Now? I'm not so sure.

One of the reasons I haven't been "too" overly concerned about the likes of Merrill and Citi is that their model was becoming dated anyway. In about another 2 years Charles Schwab will eclipse Merrill in assets under management. It isn't so much that brokers are leaving and the clients are following (it's actually the opposite). Their misadventures in MBS may have just hastened the inevitable demise?

I agree that Merrill and Citi are only so scary. Kinda like scary versions of Enron and WorldCom. The scary part is who has the financial resources to step in and buy once the fire sale starts in earnest? I guess China and Japan have pretty big reserves that are devaluing at the rate of the US dollar. So, umm, the market will take a loss of capitolization at the rate of the loss of the dollar at a minimum? And really more in order to get interest in buying? So maybe Japan and China will end up owning companies like Citi, Merrill, Warner, AMD, Exxon after our 14,000 Dow goes to 10,500 (25% loss). Not sure who else out there has the cash reserves to buy. Makes me wish Buffett wasn't giving away his fortune to philanthropy as I would rather see Berkshire Hathaway manage AMD then China.

Off topic but kinda' on,
I went to my local Home Supply Big Box a week ago Saturday noon and there had to be more employees than customers. I have never, in the last ten years, seen the place that empty. Went the following Wednesday, same thing. It was truly eerie. Same crappy service, though.
Now Gov. Arnie wants to prepare for budget cuts. Hmmmmmm. Tax receipts gettin' light ? Wallets slammin' shut ? Mid-year budget analysis is going to be a nightmare.
I have a lot of communication with local industry, manufacturing and production and for the most part they are busy now, but there is VERY little in the pipeline. It rings of the early '80's and '90's. It's like reading 'The Old Man And The Sea' for the third time. Wonder how it ends ?

Man, leverage is a be-atch on the way down, ain't it?

The wirehouses have been trying (and trying) to "re-invent" themselves for years. Firstly, during the on-line trading revolution they responded by offering "fee for service" type sperately managed accounts. Now that the "Merrill Rule" has been over turned they've been forced back to the drawing board.

What wealthy clients want is more of a "seamless approach" where tax, legal and inheritance issues are addressed under one roof. NO ONE wants to refer clients to wirehouses any more! So they've been trying (yet again) to give the investing public they are more like a Raymond James or LPL (Linsco Private Ledger) type firm but again they're failing to gain any traction. Matter of time.

Duke,

I had a conversation with my broker, an old hand, on the subject of IBs yesterday morning. He believes the banking system will get through this. Conglomerates like Citi or BoA, he says, will take the necessary steps - spinoffs, stock dilution, write downs, even the BK of overburdened subsidiaries - in order to maintain the solvency of core banking operations. In his view, a much-changed financial landscape will emerge, but the banking system will remain intact here.

Well, I hope he's right. Feel a little better?

Bruce,

That was pretty much my take on it as well. I'd read that H&R Block was bitin' the bullet on their ill fated "Option One" mortgage arm and they are *not having fun right now. It seems to offer something of a glimpse into what these other firms will confront. Perhaps though the big difference is that H&R is really showing a desire to get it over with?

No brow beating the Fed or calls for changing legislation, just taking their lumps like a man.

I agree that Merrill and Citi are only so scary. Kinda like scary versions of Enron and WorldCom.

Awww... c'mon guys, why all the gloom-n-doom?

Just remember: Every time you say you don't believe in real estate, a Realtor® dies. All you need is trust and a little bit of pixie dust!

Everyone join in now (in your best Monty Python voice): "Always look on the briiight side of life..."

Bruce and DinOR,
Thanks! But I need *more* bucking up.
For me, its not about whether or not the banking system will survive. It will. Even after doing an amazingly crappy job the world must have a finance system. And they will get a large dose of regulation and like it, thank you very much.
What scares me still is the magnitude of the economic problem. The devaluation of the American dollar, foreign loss of confidence in US debt, the potential decapitalization of stock markets, the resulting political ramifications of the 'lost wealth'. When you are talking $2 trillion to as much as $60 trillion dollars of problem (which is quoted is some areas) we are talking about a massive, global recession. They say transperancy is the best disinfectant, but too much transparency after too much opacity might be a bigger problem. Best I can come up with is to cover my ears, shout "lalalalala" at the top of my lungs and close my eyes for the next 2 years.

I wonder what kind of world I will wake up to?

Some great comments guys. Seems like after a long time we have a vibrant thread.

DinOR :

It was my fondest desire to keep “the unraveling” as sector specific as possible. Early on (before the broader implications were widely known) I was very confident there would be “containment”. Now? I’m not so sure.

Stealing a line from a comment I read at some other housing bubble blog

The containment is spreading !

Look Who Still Can't Sell His Home! (Hint, He's In The Industry)
Posted By:Diana Olick
Topics:Housing | Real Estate

I’ll admit right at the top here that what I’m about to do is cheesy, but honestly, I just can’t resist. A little over a year ago, mid-September 2006, there was a little blurb in the Washington Post about the then-president of the National Association of Realtors, Tom Stevens, not being able to sell his Virginia home. It was really the beginning of our coverage of the housing downturn, and so we found it marvelously ironic.

The house had been on the market for a year, with an unchanged price of $1.45 million. Being the annoying reporter that I am, I cornered him after a hearing on the Hill, just to needle him a bit and see what he’d say: “I didn't listen to my agent. That's what consumers need to do. They need to listen to their agent. If the agent says you need to adjust the price, then you need to adjust that price, we're in a different market today,” Mr. Stevens admitted politely.

And it’s an even more different market today. Stevens, who is a Senior VP of NRT, the nation’s largest residential real estate brokerage, still can’t sell the house. I have to give a shout out to whoever is behind the handle soldatthetop@xxx who pointed out the info in www.paper-money.blogspot.com (I’m so netty!).

Mr. Stevens pulled the house off the market in early 2007, and now it’s back for $1.285 million. So if you start from the top, that’s approximately 766 days on the market, $165,000 price cut, and still no bites. Talk about a REALTY CHECK!!

Someone Wrote:

> The typical home-owning household in California
> has about $200,000 less in home equity than it
> thought it had.

Then Rob Dawg Says:

> Oh, please oh please let it only be $200,000.
> Wait… I’m special. Oh, please oh please let it
> only be $500,000…

I was talking to my Dad last night and he said that (according to Zillow) the house I grew up in is down in value by almost a million since early 2006. So it looks like Zillow is actually reporting drops in the Bay Area (94010)…

Here's something that I have been pondering:

What rule did the last 20 years of banking deregulation play in the bubble? Would an SIV even have been possible without it?

As for Bill Gross, maybe he should change his day job to playing poker in one of those B-list celebrity poker tournaments in Las Vegas.

SFWoman Says:

> Where are all the trolls who used to come on and
> berate people as being jealous? You know, the ‘the
> Bay Area is different, we can never have a downturn
> here, they aren’t making anymore land’ types?
> Where are our Marina realtors (TM)?

I think there were a lot of Realtors™ sitting around at open houses Blogging on their Treos that don’t have time to Blog when they are working at Target…

http://marinrealestatebubble.blogspot.com/2007/10/owners-face-selling-at-loss-now-that.html

PS - By the way, I'll share an anecdote with you all. I was up at the Novato Target the other day (because I am too cheap to pay South Marin prices if I don't have to) and guess who I saw working at a cash register? A former Marin real estate agent acquaintance of mine. How sweet it is! I didn't have the heart to ask if she still had the leased Lexus.

Justme,
To my mind its not banking de-reuglation. Usually there is a funny game of chase in the US. Market manipulators (and fraudsters) 'innovate' and then along comes the regulator to test the innovation and say yea - or ney. In this case, Mr. Ayn Rand, sorry, Alan Greenspan, decided that by NOT regulating the market we would get the best of all possible results. What we received was entirely predictable. The very few rule makers made hundreds of millions and 'retired' and the rest of us watched as the world wealth rose up paper mache foundations only to be burned down when the hedging and over leveraging and off balance sheet liabilities caught fire.
When that one banking institution (was is Sachs?) made more on its hedge then it lost on its bad CDOs it did not take a rocket scientist to think, "Man, the hedging company cannot pay out like that and stay solvent", then think "Um, that is going to mean a lot of people who thought they were hedged were not and wow are we in trouble.
So, the real legacy of Greenspan will be just how much abuse Wall Street was able to pack into the 18 years that no-one was regulating for prudence and the public good. I am not normally anti-Greenspan, but the post-mordum on this sad economic chapter will read like Upton Sinclair's The Octopus. "Banks, emboldened by the lack of regulation, paid themselves hefty bonuses predicated on magnified gains coming from massive over leveraging. Risk was mispriced as hedging models failed to account for a general broad downturn. This, of course, would have been obvious to a regulator given the relatively recent experience of Long-Term Capital Management, except that the Fed did not think regulation was its job. This the Great Unwinding of 2008 was born."

Bleh. Who want to live the part of the suffering masses scripted by a lack of oversight?