any ideas?
Don't worry, be happy:
market-ticker.denninger.net
creditbubblestocks.com
market-ticker.denninger.net
Credit Crack-Up Being Ignored
You have undoubtedly heard that "the worst is behind us" or "the credit markets are returning to normal."
Really?
Where have you seen write-downs on CDOs from 06 and 07?
Uh, nowhere, right?
Yet Friday morning CNBC was reporting that thirty percent of the CDOs issued in 2007 are currently in default! That's not "downgraded", that's defaulted. As in "unable to make the payments as agreed."
The really bad news is that most of these deals are "wrapped" by the monoline insurers. When they go into default that insurer figures out how to best protect itself from losses (they get that right in exchange for issuing the "wrap"), which means that only the top classes of debt in the CDO get protected (theirs) and the rest get screwed. In some cases this is "just" a coupon loss but in many cases it is also a capital loss, especially for the mezzanine tranches, and equity (the lowest tranche) is almost always wiped out completely.
How big of a problem is this? Who knows - there's no accurate and honest reporting available on it thus far, but best guess is that its somewhere around (another) $100 billion - entirely unreported and accounted for thus far.
(As an aside, the bad deals are essentially all 2006 and 2007. See, as the market started to dry up the issuers of these fantastic mortgage products went from "a little" diligence to zero, and literally issued them to anyone who asked no matter whether they could pay or not - with predictable results. If this isn't raw fraud - intentionally issuing debt to people who you have every reason to believe can't pay - I don't know what is. Of course we're not interested in seeing those crooks prosecuted, are we?)
And don't go believing the heads of investment and commercial banks - the US Treasury doesn't:
"Steel called Citigroup Inc. Chief Executive Officer Vikram Pandit's statement that the global credit-market contraction is closer to the end than the beginning, 'a bit simplistic.'"
That's a nice way of saying "they're lying."
A few other commentators on CNBC Friday morning, including Nobel Winner Joseph Stiglitz, were more blunt, saying outright that these firm's CEOs are engaging in what amounts to disinformation for the explicit purpose of propping up their stock price.
That, of course, isn't supposed to happen and in fact is felonious (market manipulation!) and yet we know the SEC is only interested in manipulation that causes stock prices to go down, not up.
Now let's pay attention to another area for a minute I've talked about before - the bond market.
When PIMCO goes short the long end of Treasuries, you better pay attention. And they have - negative 18%, from their last disclosure. That means 18% of their position (in total!) is net short treasuries.
This is a bet on a massive crack-up in the bond market, with rates skying higher and prices falling through the floor. I've written about this before, but folks, believe me, if Bill Gross is on this, you better pay attention. If he's wrong he's going to get murdered, but if he's right the entire economy, especially housing, is going to get murdered.
Yes, murdered worse than it already has.
How?
Simple - right now 30 year fixed mortgages are about 6%. If we get a bond market crack-up and the 10 year goes up 200 basis points (2%), for example, Bill's short bet (assuming he's short the 10) is worth 2% x 10 (duration) or an instantaneous 20% profit.
But what happens to your house? Well, mortgage rates will probably rise by the same 200 basis points, or go from 6-8%. That's a 33% increase, which will result in a roughly 28% loss in buying power for home purchasers!
It will also hit other types of debt such as credit cards but the difference 200 basis points makes on a 20% credit card interest rate (10%) is far less than the impact on debt with less "spread", such as mortgages.
So this "crack up", should it occur and be mild, results in your house losing 28% of its value. Should that "crack up" be severe, say, a 500 basis point rise (not out of the realm of possibility; see the late 70s into 1980) the consequences would be catastrophic (a loss of 50% of value, essentially "all at once.")
And that's on top of what your home's value loses from bubble deflation - this change is additive but immediate, as the impact on money available happens now, not through the process of the bubble unwinding.
Now let's add to that the fact that we got housing numbers this week that showed that March actually registered declines in new home sales over February.
Let that sink for a minute, because March is supposed to be the "Spring Buying Season", remember? What buying? There is none going on, basically, with inventory on new homes now sitting at about 11 months of supply, or roughly double "normal" levels. Add to this decimation of purchasing power from a bond market crack-up and you may as well put a fork into what's left of the housing market - its done.
This effect, by the way, would not be limited to housing and credit cards. It would also hit auto loans, commercial and industrial loans, basically all sorts of debt issuance. If would have an absolutely catastrophic set of consequences for the real economy, likely knocking a solid 3-4% off GDP immediately, and blowing us down into what could only be characterized as a deep recession.
Now let's talk about yet another kind of debt that hasn't been discussed at all, but its another ticking bomb - so-called "PIK Toggle" notes. These are bonds that are issued, typically for an acquisition (LBO money) that offer the issuer the option of paying the the interest with...... more debt! In other words, instead of you getting an interest payment (coupon) in cash, the company that you buy them from can give you even more debt instead (usually at a higher interest rate.)
The cascade failure potential for these ought to be obvious, in that in tough economic times the companies that issued them will of course pay in "more debt" and there's nothing you as a holder can do to stop it! Of course once this starts people will detect the distress and start discounting the underlying bonds in a big way, which sure as hell won't do anything good for the value of those notes either. The end result is that the holder gets screwed twice - they not only wind up holding a whole bunch of worthless paper but they don't even get coupon payments along the way!
There are a lot of market callers running around CNBC and elsewhere claiming that "the bottom is in" and "we're headed for a new bull market."
Before you listen to them, square that with your own experience.
Go to the mall. Is it as busy as it usually is?
Go out to eat, somewhere you know the traffic patterns. Do you have to wait as long as you usually do?
Go talk to some people in business in areas you know, and ask them - how's biz?
Look at truck freight tonnage - down 3.3% in one month - March alone.
The bottom line is this - you can't have a "new bull market" without the credit markets supporting it. That means lending and borrowing capacity must expand, not contract.
Until the over-leveraged consumer works off (or defaults) on that excessive debt he is carrying, that's not going to happen.
Invest, especially in financials, at your own peril. |
