Monday, September 22, 2008

We are way past the tipping point now.

Fair Warning.

I've been watching CNBC, MSNBC, and Bloomberg for a couple of hours.

They scared the shit out of me.

My experience with bubbles has never been good. Sports cards, comics, non-sports cards, ccg games, pogs, beanie babies, pokemon; all crashed spectacularly. It got so I'd look at a bubbles at their peak, and just stripped it all away, trying to see the skeleton underneath. I looked at what I thought would be the worst case drop off, and THEN DOUBLED IT!

And that never failed. It was always at least that bad. The crash was always bigger than I expected or hoped, and laster longer.

So...once again, I'd hoped I was wrong, but it's turning out I was right.

The big thing to watch for was always the underlying psychology. When it turned negative, it was all over.

I'll tell you what; if people were still holding out hope they could sell their houses for any kind of premium price, I figure they're waking up now.

They may not be able to sell their house at ANY price, nor borrow money no matter how good their credit or how much they put down.

Capitulation is coming soon.

Been watching CNBC, and here's a couple of eye-openers. You know all those latte coffee machines that McDonald's was planning on installing in all their franchises?
Bank of America has cut off their credit.

To McDonald's. Ditto Dow Chemical. There was an analyst who seemed utterly shocked that Dow wasn't able to borrow money. You could tell she was stunned, disbelieving.

So good luck for all the average shmoes with trying to borrow money.

I'm sort of expecting my credit cards to be taken back -- even though, or maybe because -- I owe ZERO balance. Risk adverse banks aren't going to look at the credit history, they are going to look at the credit risk.

And when they start punishing the people who can actually pay, the whole thing has pretty much fallen apart.

This is the real deal.

And people are sitting on their wallets.

8 comments:

Duncan McGeary said...

So I'm watching a couple of these fat cats, and they're against the bail-out for this reason:

It might take away from their corporate bonuses!

Jesus, talk about tin ears.

It might limit their bonuses!

How about we pass legislation that every single bonus from a company that's lost money in the last five years has to be paid back.

How about that.

Might limit their bonuses!

O.K. RDC explain this to me.

Of all the reasons to be against the bailout -- and there are many -- this is what concerned them the most.

Duncan McGeary said...

That's the "Let them eat Cake" moment for me.

RDC said...

of course you also have people like the CEO of AIG. He was brought in a month ago. Consequently he did not have time to make corrective changes and was forced out as part of the bailout. He would have been due a 22 million severance package. He declined it.

As far as the two you are talking about cannot comment without knowing who you are specifically talking about. Hard to react to a comment without context of the full conversation.

While the actually law is still being negotiated, I did hear some things about what the treasury is requesting. Basically that the fund will operate more like a line of credit. That is that it will loan money to the financial institutions against the bad debt. The fund will hold the assets until they are redeemed, mature or the fund sells them.

Now what is interesting about this is that the loans will be made a discounted level, not face value and that the firms will need to pay interest on the debt.

I expect that the Government will make a profit on the transaction. After all the governments pays 3% on the money it borrows (Treasuries) and will be collecting 10 or 11% on the amount it loans under the fund (expected to be similar to the AIG terms). Becuase the value on the paper it is buying is discounted, it is also unlikely that it will lose out if it holds until maturity or decides to seel once the credit markets free up.

Actually I expect that the financial institutions will try and redeem the paper and repay the money as soon as they become more liquid because those debt payments will pretty much eat into their profits until it is retired.

That is the good side. Now for the down side.

The program will require a substantial increase in the amount of national debt. Now it will also bring in offsetting assets. However, the issue is what will the government do with the money generated from the interest payments or from the redemption of the paper. My concern is that those funds will flow into the general fund and the massive increase in the national debt will remain in place. It will be very tempting for Congress to use that revenue to fund all kinds of pet projects.

It is improtant that the new law include a provision that any money received from the fund must go directly to reduce principal of the national debt. If they do that then this action will end up pretty much neutral on true costs, and provide the stability to the finance sector needed.

Duncan McGeary said...

Here's a little headbanger for you. Wells Fargo, by all accounts one of the more solid banks, has fixed 30 Year Mortgages at .9%.

That's going to sell alot of houses....

RDC said...

fixed at 9% or 0.9%. With the first you will not sell many, with the second you will get a lot of activity. THe bank will go broke, but you will get a lot of activity.

RDC said...

For those of you viewing that the requested package is all Wall Street and nothing for the homeowner:

Among the provisions of the Housing And Economic Recovery Act of 2008 is the Hope for Homeowners program, which was designed to provide up to $300 billion for the refinancing of about 400,000 mortgages whose default might lead to foreclosure. The program starts Oct. 1 and runs for three years.

RDC said...

Notice the difference between conforming and non-conforming. Used to be around a point difference. This is a good indication of what happens when noone is buying jumbo loans, the spread is now 2.8 and going higher.


as of 09/23/2008 05:39 PM Eastern
Product Interest Rate APR
Conforming1 Loans
40-Year Fixed 6.625% 6.827%
30-Year Fixed 6.125% 6.353%
20-Year Fixed 6.125% 6.427%
15-Year Fixed 5.875% 6.252%
5-Year ARM 6.000% 6.072%
Jumbo Loans – Amounts that exceed conforming loan limits1
30-Year Fixed 9.000% 9.176%
15-Year Fixed 8.250% 8.512%
10-Year ARM 8.625% 7.913%
5-Year ARM 7.500% 6.606%
FHA – loan limits vary by county.
30-Year Fixed 6.500% 7.268%

Duncan McGeary said...

Oh, you know. What's decimal point or two among friends.