Saturday, April 28, 2007

Forum Pick of The Month

Since launching this blog I need hardly tell you my surfing patterns have had to adapt to the job of finding the information needed to digest the subprime crisis and all things 'bubblenomic.' It's certainly become a dizzying learning experience (whether a successful one will be up to the judgement of others). It seems a worthwhile endeavour in any case to share the sources I am coming across and with that end I will try to present one source that I've found particularly rich each month.

This month I am calling your attention to the iTulip Forums which appear on the website of the company of the same name founded by Eric Janszen, co-author with David Wiedemer, Robert Wiedemer and Cindy Spitzer, of America's Bubble Economy: Profit When It Pops. Although there is a premium area of this forum, there is plenty to be had from the free area, including regular commentary by Jansen, and additionally by the respected Investment Analyst & Portfolio Strategist, John Serrapere; Sean O'Toole of Granite Realty; Eric Hodges of Stahlschmidt Financial Group and many other writers with something valuable to say.

As of this writing the Forums have had 6,911,843 visitors since Jan 1999.

(I have no connection with iTulip other than as a public user, but I have added an Amazon link to the book mentioned above).

Tuesday, April 24, 2007

Speculation and The Housing Bubble

Most of us have, or at least think we have, a pretty good idea of what speculation means when applied to the stock market. Financial advisers will give us various rules the first among which is to speculate only with money the loss of which won't be a catastrophe for your portfolio and assets in general. But what form does speculation take in the housing market?

At first glance we think we know the answer to this too. It's obvious in the statistics after all. Just look at the sales in the non-owner-occupied category and there you have it. Formally, in other words, we think of speculative buying in the housing market as involving those units bought by investors, either with an eye to the fastest possible capital gain in a rising market, or for the rental market with the same ultimate intention of realizing a capital gain through resale.

It is not usually the case that a property bought for owner occupation is considered a speculative purchase. However, in the period of a bubble such as the present subprime bubble, (actually, as we are daily learning, it's a general housing bubble), it can be said that in fact a proportion of owner occupier buys have a greater or lesser speculative component. This will have a tendency to be amplified in the course of the bubble. The main indicator of whether this speculative component is present will be to whatever extent the buying decision is being made on the basis of the profits to be had from a rapidly rising market. Anyone with a home that serves current needs perfectly well and even has a substantial percentage of equity built up who then sells with a view to cashing out this equity and leveraging it into a more expensive home is speculating. Worse still, they are speculating against the advice of the staid investment advisor mentioned earlier. For who can afford to lose a home should the speculation not pan out without it being a catastrophe? The position is no different in essence to that of someone stricken with margin madness in a stock market bubble. And the consequences when the bubble bursts are likely to be the same: the margin call that cannot be met from evaporating gains or the mortgage adjustment that cannot be met from increased equity.

Unfortunately, a whole fairytale about the home being the "biggest investment you will make in life" has taken hold almost universally in the last few decades. This idiotic idea may be wonderful copy for the Realty world but it is disastrous for the homeowner. And it is especially disastrous for those homeowners who could have traded down and thereby could now have cash in hand ready to take advantage of the coming bargains at the bottom of the cycle.

Read twice: Don't speculate with an asset the loss of which would be a catastrophe.

Monday, April 23, 2007

Denial Wavering Across The Pond

It is remarkable how quickly the euphoria hitherto evident in the UK housing market is showing signs of a definite mood swing. On Apr 9th, Larry Elliott, economics editor at The Guardian was reassuring readers whilst hedging his bets under the banner Britain is not the US, so don't panic - yet, by Apr 21 the 'pink un', the UK's venerable Financial Times, an organ not known for frivolity, finally announced in the measured tones we have come to expect of it, Subprime market in UK 'has parallels with US.'

Before the bombshell of revised UK inflation expectations and the consequent fall in the dollar against the pound, Elliot was assuring his anxious readers with the Halifax, Britain's biggest lender, announcement that house price inflation had broken through the double-digit barrier for the first time in a year in March, (rising to above 11%) and that the Bank of England decided that a raise in interest rates from their current level of 5.25% was not in the cards; "get on the ladder now before that dream home becomes even less affordable," he urged.

Turns out though that the Brits have been having their own subprime party, just that true to form they haven't called it by name, ever wary of the Yankee's tendency to embarrass with straight talk. But whadda ya know; turns out that UK lenders have attracted first-time buyers with low introductory offers, there has been an increase in 'self-certification' (read liar-loans) for those with 'irregular income' (read $100,000 pa 'lawn care specialists'), and in return for a higher interest rate the usual checks aren't done on the borrower's ability to pay. Also lenders mortgages can be had at five times income and the ratio of house prices to income is higher there than in the US. Sound familiar?

I was particularly amused by Elliot's invocation of US "unscrupulous lending practices," not to be found of course among the saintly denizens of Threadneedle Street. Then there's the hoary old myth of land availability in which the US has limitless open space coupled with lax planning laws so when prices increase supply can easily be adjusted, while the UK is a small island where land availability is additionally limited by usage regulations. All this together with a favourable property tax system leads to an inefficient housing market where high demand leads to inflation rather than an increase in supply. The conclusion Elliot draws: UK house prices have an in-built tendency to rise and low quality UK loans are less likely to lead to negative equity than they would in the US. Amazingly, his argument for the strength of the UK economy appeals to the health of consumer spending, financed through, you guessed it, mortgage equity withdrawal! And so it goes.

Enter Jane Croft at the Financial Times less than (an eventful) two weeks later; ""Banks may be "taking on substantial risks" by ramping up mortgage lending to customers with patchy credit histories, the City regulator warned yesterday." It seems arrears in the UK subprime sector are 20 times those on primes. And shockingly enough, rising house prices are leading some high-debt borrowers to take on additional debt by borrowing against the resulting increase in 'equity.' Clive Briault of the UK regulatory Financial Services Authority: "For example, lenders are in some cases taking on substantial risks through a combination of high loan-to- value ratios and high income ratios, in part because borrowers are using additional borrowing against property as a means not only of debt consolidation but also of increasing their debt at regular intervals by taking as much advantage as possible of rising house prices."

On Apr 20 unmistakeable signs of a sea-change emerged with a host of lenders cancelling fixed rate deals already in the pipeline: Lenders pull fixed-rate mortgages. Is a housing market crash coming?

If it quacks like a duck.

Friday, April 20, 2007


This paper appearing on Financial Sense University deserves serious attention. For one thing it doesn't for a moment indulge in any of the prevalent nonsensical theories of money as 'fiction', 'signs', 'symbolic' etc. In doing so it reasserts the distinction between price and value and correctly identifies gold as the money commodity. One had thought such clarity had died with Classical Political Economy.

The demonstration is accomplished by a series of elegant charting exercises which begins by considering the Dow 1997-2007 which of course is denominated in Dollars. However, "Since January 2002 the dollar has plummeted 31.25%, versus other currencies. This has caused money (gold) to rise measured in currency (dollars) as more and more investors move out of their currency and into real money."

A series of charts is then presented which show the Dow in Gold, Silver and a selection of different currencies. But it is those charts that show the Dow in terms of the values of several commodities, viz. the Commodities Index, Copper, Crude Oil, Industrial Metals and Food that are my favorites.

Part II of the paper critiques the official measurement of CPI where we find another uncommon appreciation of the nature of money; "The true definition of inflation is an expansion of the currency supply (incorrectly referred to as the money supply… currency and money are very different things…)" In carrying out this part of the analysis reference is made to the Fed's action in ceasing the publication of M3 and the significance of this move in masking real inflation. Considered together with the contemporary suspension of the publication of repurchase agreements (RPs) the conclusion drawn is that, "... now the Fed has hidden one of the methods used to inflate (Repurchase Agreements), and they have hidden the measurement that would reveal this inflation, (M3)." Real inflation over the period considered is calculated in the order of ~ 60%.

Constructing the missing M3 figures from other data claims to show that, "there is now 70% more currency in the currency supply today than when the Dow peaked in 2000. This means that today the Dow would have to be above 20,000 to be in positive territory."

Do yourself a favor; read the full article.

Tuesday, April 17, 2007

GEAB N° 14 A Chronicle of America's Very Great Depression

The (free) abstract of GEAB 14 is now available online. This issue claims that the "2007 Very Great Depression has indeed begun."

Two aspects are identified:

1. A historical reversal of global financial balances:

The report chronicles the decreasing role of the US in the field of international trade and wealth production signalling an end to a century-long tendency which began during WW1. This is supported by statistics showing the current dominant place of the EU in the external trade of oil-producing countries. In addition China has now surpassed the US as premier source of EU imports. It also notes that in March 2007, the value of European financial markets surpassed those of the US. This represents "a 'seismic tremor' for the global financial markets as it shows a displacement in the centre of gravity of the global financial sphere out of the US and towards the Old Continent."

The following US trends are identified:
  1. relentless and durable decline of the US currency
  2. decreasing share of the US in international trade and the production of global wealth
  3. geographic remoteness of the US compared to the 'Old Continent's' Eurasian economic centres
  4. impoverishment of the US consumer
  5. collapsing competitiveness related to collapsing quality of education

2. An implosion of the US society:

US income disparity is now comparable to what it was on the eve of the Great Depression. The ratio of incomes between the richest 0.01% and the poorest 90% hovered in the 170-180 range throughout the period 1950 to 1980. It soared to 880 in 2005, this being about the same level (891) as in 1928. It is thought that this disparity will produce severe social and political tensions, a hint of which are already present in the number of foreclosure evictions. The report maintains that the economic recession will grow deeper and that US society is being split into two groups, one poor and the other very rich, with the middle class in increasing danger of falling into the poor group.

Unlike the situation during the Great Depression when the US was in the ascent as an economic power, the current depression will take place in a period when US economic power is eroding. It is claimed that in April 2007, the tipping point of the global systemic crisis is already occuring and that trends will speed up and their impact intensify and become obvious to everyone.

The full report (subscription) describes four other trends that will dominate the coming quarter:

  1. The continuing contagion of other types of home loans and other sectors of the economy by the subprime crisis.
  2. The return of stagflation with US growth falling below 1% by this summer. A further sharp increase in the US deficit by mid-2007.
  3. An intensification of the geopolitical oil crisis in May 2007 with Iran and Venezuela on the frontline and Oil on the rise (USD$100) and the US Dollar suffering a further dramatic fall by summer 2007.

Monday, April 16, 2007

Credit Suisse Mar 12 2007 Mortgage and Housing

The Credit Suisse research report, Mortgage Liquidity du Jour: Underestimated No More, is a must-read for anyone who wants a thorough look at the US Housing Market. The report considers the deteriorating conditions in the mortgage market and their effects on the homebuilding industry and the resale-homes market, indicating that problems are not restricted to the subprime area or entry-level housing only.

The report considers recent trends in the prime, Alt-A and subprime markets and summarizes current guideline and regulatory changes and their effect in contracting the mortgage market further. The conclusion drawn is that tightening liquidity puts current builder inventory backlogs in further jeopardy.

Looking at the performance of current mortgages and the impact on new home sales it estimates that there are approximately 565,000 homes in the foreclosure process and goes on to consider possible projections of the effect on new and existing home sales, concluding that 50% of the subprime market is at risk of default.

The pdf report can be downloaded at Bill Cara's site where there is also a detailed commentary.

Saturday, April 14, 2007

Heebner: "Biggest housing-price decline since the Great Depression."

Bloomberg reports an interview with Kenneth Heebner, co-founder of Capital Growth Management, the top-performing real-estate fund. Commenting on the potential effects of the subprime crisis Heebner inferred that U.S. home prices could fall as much as 20% due to rising defaults on high-risk financing. "It will be the biggest housing-price decline since the Great Depression," he is quoted as saying.

Nor will hedge funds be immune from the effects of subprime-loan defaults. Although to a lesser extent, the same goes for mutual funds that invested in Collateralized Debt Obligations (CDOs) and other instruments secured by this type of loan. However investment banks and the brokers who are in the business of packaging and marketing these products will avoid being hurt, having passed on the bulk of the risk to investors. "They know the product is toxic; they're not going to get caught," Heebner said.

These comments by someone who has a consistently successful track record in calling the market should give pause for thought. A 20% drop in prices would undoubtedly affect many more people than the lower rungs of the subprime borrowers. Those with half-million dollar homes who have over-reached in equity backed borrowing could well find themselves walking away from homes with $100,000 of debt following them. I have witnessed just such situations in the Ontario market in the 80's. This is before the knock-on effects in the rest of the economy are even considered.

Many people have been paying attention to the market and conversations about selling are growing in frequency. This is a difficult matter to decide. Those who leave such a decision to the end in the hope of a recovery can end up being disastrously disappointed. On the other hand, at least one commentator not known for optimism has offered the opinion that a slump in prices that he sees as inevitable in mid-year could be followed by an upsurge in the fall when buyers from Asia will be attracted by the property bargains to be had in the US. But the same writer has been issuing a 'sell now' message for at least a year.

No help will come on this question from anyone who has a vested interest in shoring up the market. This includes politicians and mainstream financial 'gurus'. And it is well to bear in mind that your Financial Planning Associate at the local bank is more often than not speaking on the basis of the minimal requirements for offering such advice that holds in most jurisdictions.

Thursday, April 12, 2007

'Glut is huge - "staggering" home inventory erases hope of a recovery in 2007'

A St. Petersburg Times report mentions a term used by Realtors. In the business it's known as "absorption" and it represents the ratio of sales to listings in the market. It is calculated by dividing the total monthly sales by the total number of homes on the market. In the Tampa Bay area in February, it was 5.4% meaning about one in every 20 homes on the market found a buyer, or 2,225 out of 40,896 single-family homes and condominiums. During the peak of the 2005 boom market the equivalent figure was running over 50 percent. At that time half the listed homes sold in a given month. Realtors have been unable to find a worse absorption rate in the historical data.

This implies home values are likely to stagnate or fall this year. While the Florida Association of Realtors reports that home prices fell 2% in the Tampa area in the past year, declines have exceeded 10 percent in many neighborhoods. The buyers market is already well in place with the figures additionally distorted by the premiums required for a successful sale which can include paying buyers closing costs as well as selling at the reduced prices.

Another figure indicating the character of the boom time market is that roughly 25% of homes bought were "non-owner-occupied", in other words, bought by 'investors'. Many of these investors used riskier loans in hope of quick sales, and many could default as properties await buyers. The situation is further worsened by the 'hidden home inventory' which includes sales by-owner, new construction and condo conversions and bank initiated home foreclosures. A sign of the desperation comes from one agency's report of an area condo converter offering a 12 percent commission, four times the normal rate. Another comments, ""The buyers are on the sidelines waiting for the blood to continue to rise."

Tuesday, April 10, 2007

Feedblitz Email Subscription Added

I've added a Feedblitz subscription service so you can now get posts and comments without visiting the page. This can be handy when accessing email 'on the go' or just when you aren't in the mood for clicking links. When I figure out how I will make it possible to leave comments through this method, assuming it's not already a feature!

Monday, April 9, 2007

Krassimir Petrov - Effects of inflation

An interesting list of the effects of inflation from this writer:

No positive social or economic effect
Increases the level of prices
Distorts relative prices
Creates risk and uncertainty
Income diffusion effect – early comers gain at the expense of late comers
Benefits inflators (inflators=recipients of the inflation tax)
Hurts fixed income groups
Hurts existing creditors
Hurts all holders of money [through] Inflation Tax
Increases the consumption-investment ratio
Lowers national savings
Reduces economic growth & standards of living
Creates illusion of increased business profits
Consumes capital
Imposes “menu costs”
Imposes “shoeleather costs”
Causes a bracket creep
Creates Malinvestments
Causes Business Cycles
Causes currency debasement = currency devaluation
Causes more expensive imports
Strengthens industrial cartelization (predominantly for inputs/resources)
Causes speculation and bubbles

The list appears on and there is a link to a videocast talk on the subject.

This weekend I pulled an old paperback copy of Galbraith's The Great Crash 1929 off the bookshelf and have been engrossed with it since. Galbraith's account of the Crash does not give credence to the common interpretation that it was the result of the onset of a recession that was already occurring but the inverse of this explanation. More later but I am struck by the way in which the work leads to the idea that the credit bubble in the Real Estate market is very like a situation where the stock market is running on no margin.

The book is certainly a gripping read and of course Galbraith was that exception in being an economist who could weave an entertaining story while still adhering to impeccable scientific standards. Haven't looked to see if it's still in print; it ought to be.

Saturday, April 7, 2007

Features added today

I've added some new features. Note especially the News Feed at bottom of page. I will do some placement redesign when I have the opportunity to get this to the top but it will involve a severe (for me) change in my template. Who said Blogger For Dummies? The topics I've set up for the feed should deliver items of interest to anyone finding this blog relevant. I've included Home Foreclosures, the Subprime Crisis, the Economy and China Trade Relations to begin with.

I've also added Google Adsense. Hopefully the ads will bear some semblance to the blog topics.

It is almost impossible to avoid having a US-centric orientation when we think of news. Worse still is the West-centric orientation which really obstructs appreciating the extent to which Global relationships and trading patterns have changed. I highly recommend paying attention to Asian commentary if only to get that sense of looking in from the outside of the box. Shortly I will put up some links to those Asian publications I have found of value.

Thursday, April 5, 2007

Home Foreclosures - What future?

Home foreclosures and the home lending crisis are very much in the public mind right now, or at least they should be. A housing crisis on its own is not a pretty thing as anyone who has lived through one knows. But the present subprime crisis is taking place in the context of other economic forces that many suggest, should home foreclosures continue unabated the consequences for not only the US economy, but for the Global economy would be dire indeed.

My intention for this blog is to act as a clearing house for the many strands of opinion and analysis on these questions. Subprime home loans are only one aspect of a complex picture. To see a macro appreciation of this there is probably no better place to begin than the Global European Anticipation Bulletin which looks at all the global trends that impact each other and which situates the US home lending crisis in the context of international economic forces.

On each post here I will be bringing you links to other items I have researched. It has been my practice daily for some time to use Google News to track what's being said not only in the MSM but among the market commentator blogs. This is extremely time consuming and you may as well have the results of mine rather than duplicate the effort yourself.