Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: MulhollandDrive who wrote (8150)	8/23/2007 7:29:09 PM
From: Hawkmoon	Read Replies (1) \| Respond to of 33421

my problem with your analysis, hawk, is that i'm doubtful that a rate cut will prevent a recession.... You may be correct.. It's really hard to say since the economy is still running strong (unbelievably) and low unemployment (except in the morgage lending area.. ;0) Now.. I have two opinions on the sub-prime mess. For those people who purchased a home in the past 3 years, they're going to feel considerable pain. If they locked in their rates, they will see their assessed value of their home decrease. But they took out their mortgage at a specific monthly payment and that won't go up. So as long as they are employed, they can cover it, just as they had before. If they had an ARM or a "Liar" loan, they're in a world of hurt. These are people who probably had no business having a mortage in the first place, or they are contract workers, or even independently wealthy (perhaps self-employed as a stock trader... ;0) Those folks who would never have met the standards for a conventional loan (not enough income, illegal aliens,... well, as I said.. they're screwed and likely to file for bankruptcy. HOWEVER, THEN it becomes a legal issue. As I mentioned in the previous post, will it become a "truth in lending" violation? And if they go bankrupt, can the courts take their previously overpriced home, especially since the circumstances of their bankruptcy is externally driven by mortage rate adjustments, and not their previous ability to pay their mortage at the originally agreed upon rate? You just don't, politically speaking, get away with kicking millions of Americans out of their homes without a firestorm developing. The voting public just won't stand for it. They'll stand for an internet bubble collapsing.. They'll stand for higher oil prices (commodity bubble).. They'll even stand for higher inflation. But they won't stand for nightly headlines of Americans being kicked out of their homes, simply because they were (as they and their class action lawyers will certainly assert) taken advantage of by predatory lenders. But just how bad is it? I have a lot of friends here in the DC area who purchased their homes before the real estate bubble really kicked off here and they are comfortably in the green and can handle a decrease of 20% or even 50% before they find themselves underwater. And I have one friend who, unfortunately, bought an overpriced condo back in Nov,2005, and we've all feared for her. But there are millions of others who have held their homes for decades (because that's what retirees do), and they've pocketed huge profits (as my father did this summer on the rental properties he'd held for 15 years).. And where do these people put their profits? My father put it in a number of CDs and is currently looking for a better place to invest it so he can live off the interest for the remainder of his retirement. (and I have to admit, I hope he never has to touch a dime of principle so I can have it for MY retirement.. ;0) You mentioned savings.. What are savings? Why must they strictly be defined as "cash in the bank"? Isn't a 401K a form of savings? Aren't owning bonds a form of savings? I have very little money in the bank.. but I have a good sum in my brokerage account, much of it invested. Is that "savings"? If they purchased a home back in 2001, seeing the hand-writing on the wall that the drastic rates cuts would lead to nice appreciation of their real-estate investment a form of "savings"? Bottom line, high "cash" savings are "wasted" funds, drawing minimal return on investment. Cash savings are for people who can't find a better return anywhere else. Excessive Cash savings results in deflationary spirals, as we've seen in Japan, where banks have so much money being deposited they have to loan it to Americans at 1.5 - 2.0% interest. And it leads to a highly appreciated currency that increases our already tremendous trade deficit and reduces our global competitiveness. (look at the battle the BOJ has with the value of the yen).. I hope we avoid a recession. You may be absolutely correct that one is on the way. But it's depth and length are yet to be measured. But I think we're at an inflection point where the Fed is unwilling to provide the longs too much ammunition with which they would obliterate the heavy short interest in the equity markets and create ANOTHER speculative short squeeze in the stock market (those quarterly 401K deposits have to go somewhere and if people aren't investing in real-estate, they'll add to their retirement contributions). That's going to add a lot of liquidity to the equity markets because they can no longer trust the CDO markets. I don't know.. (as none of us really do, I think).. But there are 3 primary asset classes people can invest in; bonds; stocks; and real estate. And investment capital slushes from one class to anther, depending upon the market sentiment. Bonds are obviously sub-divided into commercial and government paper, but stocks are stocks.. and government debt is government debt. And the Fed has to follow the market interest rates being demanded by the government debt markets eventually. Just my opinion. Hawk

To: MulhollandDrive who wrote (8150)	8/25/2007 5:44:31 AM
From: Augustus Gloop	Read Replies (5) \| Respond to of 33421

Many good points! I'd like to add a few thoughts but I need to do that with some disclaimers. 1) I'm a free market guy but I think we may have a situation that requires some outside the box thinking. 2) I'm on brain (pain) killers (jaw infection) so I'm sure this wont be my best post. 3) I'm not a great writer anyhow and disclaimer number 2 doesn't help so sorry for what I suspect will be a long winded post. Some of this I wrote last week but it works for this discussion with a few modifications RATE CUTS On the surface that sounds great but I'm not sure its the right move. I tend to not believe the inflation numbers we're being fed. I think inflation is afoot and cutting rates is not generally what you do in the face of inflation. Your point about low rates being one of the things that got us here is exactly what I'm thinking - more on that in moment. Mortgage loans I heard or read that next year 650 billion in ARM's come due. Of that 650 billion, 511 billion are considered sub prime notes. We're already seeing default rates at fairly high levels (I think I heard we're at a 37 year high) and this will increase when those ARM's ratchet up. Property values are down and banks are holding notes with greater loan amounts than the property values themselves. That would seem to suggest we need a general rate cut. The problem is how do we cut rates without stoking inflation and creating more of a housing bubble? Unless we do this right people will just walk away from their homes and the banks will be left with an inventory of real estate with declining value (See Las Vegas for a great example of this). The Golden Goose Make no mistake about it - the American consumer is the global golden goose. When they're strapped for cash the entire globe suffers. That's what makes this banking issue so critical. You mentioned lowering rates probably wont prevent a recession. I think you're right! What worries me is that this has the makings of 'the perfect storm' - so are we talking recession or potentially the D WORD! We can politicize this and play the blame game but in the final analysis we need to fix the consumer credit/mortgage issue or we could be facing the big ugly. So lets talk about that outside the box thinking - i.e. bailout. I know nobody who believes in the 'free market' would approve of this (and I know this would never happen) but since this is all hypothetical just humor me as I try and make a few points. What if the FED came up with a plan for a one time bailout in an effort to stave off an event? Extend money to the banks at 3% to refinance existing mortgages. In turn the banks would be forced to refi ALL existing mortgages at say 4 - 4.5% fixed. In this scenario certain guidelines would apply 1) No new home purchases would qualify for this rate - only existing mortgages. 2) No new home equity loans would qualify for this rate. 3) Commercial property would not qualify. The reason for the above restrictions would be to avoid a new bubble as well as not allow people to ENHANCE their debt load. Yeah....it sounds crazy and could never happen (Nice Garage Economics Gloop LOL - have another pain pill) but we may find ourselves looking at many crazy things if an event unfolds next year. I bet the notion of .25 - .50% interest rates sounded crazy in Japan before their Real Estate market died for 20+ years. The point being that we may be in a pickle that requires us to do some things to avert a real crisis