“It is useless to attempt to reason a man out of a thing he was never reasoned into”

Jonathan Swift
"The Democrats have moved to the right, and the right has moved into a mental hospital." - Bill Maher
"The city is crowded my friends are away and I'm on my own
It's too hot to handle so I gotta get up and go

It's a cruel ... cruel summer"

Sunday, August 05, 2007

Lets Talk About Market Meltdown

I have been getting pummeled by friends/family about the last 3 weeks. Yikes . . . lets call it a correction and move on. What does it mean, and why did Cramer go into hypertensive meltdown? (Sorry for the poor vid) BTW, every biz school will be showing that vid for the next 100 years. LOL

If you took out an adjustable rate mortgage in the last 2 years, your payment is going waaaayyyy up next Jan or Feb. So much equity was withdrawn from homes (to pay for lifestyles that people couldn't afford) that despite a housing boom, people now own less of their homes than before the housing boom in certain areas.

Four points on the macro level:

1. Without mortgage equity withdraws, America's economy would hardly have even budged these past few years. We have seen $197 billion of mortgage resets so far this year. That is less than we will see in two months (February and March) of next year. In the first six months of next year we will see more than the total for 2007 or $521 billion. This means that the number of foreclosures will dump MORE homes into the market.

2. The direct effect of all this real estate implosion is leaking out onto the rest of the bond market in the form of higher interest rates. The higher rates mean companies that want to expand/build or buyout competition can't afford it anymore. And the banks lending the money to theses companies were backing it up with bonds holding . . . you guessed it. Real estate.

3. Under Bush, the U.S. now borrows $2 billion a day from the rest of the world. So what? A weak dollar makes food/gas/living more expensive, which means fewer bucks to offset a higher mortgage payment.

4. The financial troubles aren't limited to America. The rest of the world has been buying our mortgage-backed securities for years, and in an interesting call last week, Jochen Sanio, head of Germany's financial regulator, warned of the worst banking crisis since 1931.

The good news is that this is for the most part simply a re-pricing of risk and that this will get done over the next few weeks and months. It will take longer for Wall Street to come up with new, more credible securities to package debt to get deals done. Transparency will be the watchword.

The bad? If the overseas lending slows down, we will go into recession this year, and President Numbnuts will be the first Pres to be in office for two.

-Prodigal Son