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The worst is ahead of us rather than behind us in terms of the housing recession and its economic and financial implications

Author: Nouriel Roubini  ·   ·   › Share This Print

How bad is the US housing recession and are we close to its bottom? In recent interviews and remarks I have argued that the worst is ahead of us – rather than behind us – for housing, the real economy and the losses in financial markets.

The blogger Calculated Risk has certainly provided, by far, the best coverage of the US housing recession; a most excellent blog. This week he first linked to the Canadian TV interview where I expressed my concerns about the consequences of the US housing slump; he next provided three arguments on why he is not as pessimistic as me about this housing recession and its economy-wide and financial implications. His three arguments go as follows: first, by now housing starts have fallen as much as new home sales; so we are close to the point where the excess supply of new homes is reaching its peak. Second, he argues that in California if the borrower has refinanced the mortgage becomes a recourse loan and the lender can pursue a deficiency judgment; so the number of folks who will walk away is more limited than what I have estimated. Third, he argues that losses for banks from the credit crisis may be less than my estimate of $1 trillion.

There is certainly some uncertainty on each one of the issues that Calculated Risk has highlighted. Let me provide some additional details for the pessimistic case…

On the first issue discussed by Calculated Risk, when I was interviewed by the Canadian TV the latest figures on another drop of 11% in housing starts were not out yet; so my remark that starts had fallen less than home sales was then strictly correct. Since then the data on starts have revealed a further significant fall in new housing activity with now starts being closer to new home sales. But for several reasons this does not mean that the housing recession is near its bottom:

a) home completions rather than starts are the correct measure of the supply of new homes and, since it takes 9 to 12 months to complete a home, completions have fallen much less than new home sales; thus the excess supply of new homes is still rising. Only by year end the effect of the fall in starts will show up in the completions data reducing the excess supply;

b) new home sales are distorted by cancellations that – according to some estimates – run to the rate of 20 to 30%; thus the excess supply of new homes (the difference between completed homes and the true figures for sales) is still growing;

c) the inventory of unsold homes is still extremely high, both in absolute terms and as a share of sales (about 9 months now); thus homes sales will have to rebound a lot or new starts fall a lot more in order to stabilize the housing market;

d) housing starts are still way too high and they have to fall significantly below new homes sales to start reducing the excess supply of unsold homes. When a year ago I wrote – with Christian Menegatti – a paper arguing that housing starts would fall to 1.1 million we were considered as lunatics as no one believed that starts would fall that much. Too bad that we turned out to be too optimistic – rather than too pessimistic – as starts are now at about 940k. But even this further fall in starts is not enough. Given the excess supply of new homes – and the likely further fall in new home sales – starts will have to fall another 20% or so to reach a level close to 700k before the excess supply of new homes is stabilized;

e) given the massive excess supply of new homes home prices have now fallen – based on the Case-Shiller index – by about 11% relative to their 2006 peak and the rate of price fall has accelerated in the last few months to an annualized rate closer to 20%. I predict that in 2008 alone home prices will fall another 10% for a cumulative fall in home prices – relative to peak – of about 20%. And home prices will fall through 2009-2010 for a cumulative fall of about 25% to 30%.

f) the excess supply of both existing and new homes will worsen in 2008 for a variety of other reasons: the credit crunch has led to a collapse of new origination of subprime and Alt-A mortgages that – for all practical purposes – are close to zero; this will limit the demand for new homes; also homeowners that cannot refinance will be forced to sell their homes – in short sales if the value of the home is below the mortgage – and this will increase the excess supply; the homes that go into foreclosure will also increase the excess supply of existing homes; and the condo flippers or those who bought for speculative reasons with little equity will dump their homes into the market to reduce their capital losses; this will also increase the excess supply. All these factors imply that the excess supply of unsold new and existing homes will get worse rather than better and will put further significant pressure on new and existing home prices.

On the second issue, my most recent estimates have been that credit losses on mortgages could be as high as $1 trillion and total credit losses for the financial system could be as high as $1.7 including all the other losses (commercial real estate loans, credit cards, auto loans, student loans, leveraged loans, industrial and commercial loans, corporate bonds, muni bonds, losses on credit default swaps). How many of these losses are borne by banks (I meant both commercial and investment banks in my use of the term “banks”) depends on the allocation of these impaired assets among banks and non-banks.

The argument for a trillion dollar of losses on mortgages alone is based on the following three parameters (two of which are undisputed while a third is more subject to uncertainty). First, let’s conservatively assume that home prices fall about 20% rather than 30% so that only 16 million households are underwater; this assumption is not very controversial as most now would agree that a cumulative fall in home prices of 20% is a floor, not a ceiling to such price deflation. Second, lets assume – as Goldman Sachs does – that a foreclosed unit causes a loss of 50 cents on a dollar of mortgage for the lender as, in addition to the fall in the home price, one has to add the large legal and other foreclosure costs including loss of rent on empty properties, risk of the property being vandalized and cost of maintaining an empty property before resale. Third, lets assume – and this is more controversial – that 50% percent of households who are underwater eventually walk away or are foreclosed. Then, since the average US mortgage is $250k total losses from borrowers walking away from their homes are $1 trillion. Goldman Sachs agrees with me on two parameters (20% fall in home prices and 50% loss on a mortgage) but more conservatively assumes that only 20-25% of underwater home owners will walk away. In this case mortgage losses would be “only” $500 billion. But home prices may likely fall more than 20% and with a 30% fall in home prices 21 million households (40% of the 51 million with a mortgage) would be underwater. So, there is certainly uncertainty on how many underwater households will walk away but given the recent evidence of subprime – but also near prime and prime borrowers – walking away even before they are foreclosed one can be pessimistic on this.

On the third issue, Calculated Risk emphasizes that in California refinanced mortgages are recourse loans; thus borrowers may be less likely to walk away. To me this is not a big deal: I have for a while argued that in the US mortgages are de-facto, if not always de-jure, non recourse. Indeed, even in states where mortgages (or refinanced ones) are de jure recourse loans these mortgages become de facto non-recourse as the legal cost f
or lenders to pursue such legal action against jingle mail borrowers can be massive. In my view other factors – such as how much the household is underwater, whether it has lost jobs and whether many other homes in their neighborhood have been abandoned thus reducing the value of the community – are as important as the legal issue of whether the loan is non-recourse or not in determining the jingle mail decision. And with entire web sites – such as walkaway.com – being devoted to giving advice on how to safely walk away the cost of this option may be rapidly falling.

The above considerations lead me to conclude that the worst for the housing market and its financial implications is ahead of us rather than behind us. Over a year ago the Fed – like most observers – repeated three mantras that turned out to be totally utterly wrong: first the Fed argued that the housing slump would soon bottom out in late 2006; but this most severe housing recession – the worst since the Great Depression – has not bottomed out yet and will not bottom out until the end of 2008; second, Bernanke argued that the subprime was a niche and contained problem that would not affect the rest of the financial system; instead we have had a massive contagion and a massive liquidity and credit crunch that is getting more severe in what is the worst US financial crisis since the Great Depression; third, the Fed argued that the housing crisis would not lead to an economy-wide recession; instead, that myth was also shattered as the combination of three bearish forced that I identified over a year ago (the housing recession, the credit crunch that ensued and high oil prices) has now led to an economy-wide recession.

Final observation: this past week I was a keynote speaker at an annual conference organized by State Street – one of the largest global asset managers – for their clients. My address was right before the one by Alan Greenspan. The analysis of Greenspan – while not being as pessimistic as mine – stressed that the adjustment in the housing market – driven by the excess supply of unsold homes driving home prices down – is still quite far from being over and will continue throughout 2008. The way he put it commenting on my scenario was: “the NYU professor [i.e. Roubini] thinks that the sky is falling; I believe that it is only party falling”. So we may agree or disagree on whether the sky is partly or fully falling but it is obvious that this is a most severe crisis even if the sky is only partly falling. And we may debate whether this is the worst financial crisis since the Great Depression (as I have argued) or the worst since World War II (as Greenspan has recently argued). But either way things are still very ugly and worsening in the housing market; things are ugly in financial markets where – in spite of orthodox and very unorthodox monetary policy actions – interbank spreads are as high as they have been since onset of this crisis; and things are getting ugly in the real economy where the recession is now in full swing. So, in my view, the worst is still ahead of us.

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161 Responses to “The worst is ahead of us rather than behind us in terms of the housing recession and its economic and financial implications”

sam • April 20th, 2008 at 7:55 pm

so I had to read this before I go to bed. This was gloomier than gloom\’s posts. Where is my quart of Nyquil?

Guest • April 20th, 2008 at 8:01 pm

Professor,I wish you would tell us by what mechanism the recession will be able to end in 12-18 months. It is hard for me to see it ending for many years. Will you please elaborate on this point? Thank you.

cpa • April 20th, 2008 at 8:23 pm

In response of OR in previous thread:I had a client couple (retired Harvard/Radcliff) who were treated very well by TIA/CREF. They have long since passed away. Thus, I have not looked at those funds in a very long time.The point of my post is principles do not change but facts do – including the integrity of those who run these things.First of all, I think it says a lot that you had to pull in chits just to see what was really in the portfolio. Exactly why is that not a mouse clic or two away? Why did you feel a need to do so – you do not trust the folks managing your wealth?In my experience, whenever one sees things masked (directly or indirectly) or there is immense complexity beyond any rational business purpose (either side – buyer or seller), there are problems and there is usually monkey business (and not the kind of little folks in the trees down at our beaches). 750,000 pages for a CDO squared is, per se, beyond the pale.There is a fundamental change out there with these “finance folks” since my clients used them and since I used them when starting out. It is called morals, ethics, greed and self destructive behavior. E.g., those Carlyle funds never had a chance of success from the git go. I assume, but do not know, that the fee for the fund manager was 2 and 20. When you run a reasoned guesstimate of the expected return which the true equity folks who owned those funds could expect with 31 to 1 leverage, the math does not work. When you overlay that with a potential misapplication (and I am being kind) of a FAS 157 or similar asset valuation process (also used to calculate the fee), it is not kewl (I will not use a legal term).The behavior that I see in those funds and mutual funds leads me to conclude that I cannot trust management. Nothing more and nothing less. I care not what kind of fund management claims it to be – index, equity, other style or “government bond money market fund being used under the direction of the US bankruptcy court and Justice Department”.I referenced self destructive behavior as ultimately this stuff is and will collapse around them very much to their detriment – as well as many others. It is the others I worry about.Thus, I will not put wealth under their management as a matter of the industry – let alone any one fund, style or management group.The integrity issue appears to be pervasive. The professor’s observations on this thread I believe are correct. But this issue of “walking away” also has an aurora of changed facts about it – i.e., the integrity within the system as a whole. Without integrity and trust, economic and social systems implode.

Guest • April 20th, 2008 at 8:28 pm

National City Nears Accord With Corsair for $7 Billion Infusion Another bank gets bailed out. http://tinyurl.com/5atogc The new investors will pay $5 a share, about 40 percent less than National City\’s closing price on April 18, and take ownership of about half of the company\’s stock. SHAREHOLDER DILLUTION as always. JP MORGAN is behind this. Something smells fishy on Gall Street.

kilgores • April 20th, 2008 at 8:39 pm

This week, I picked up a copy of Kevin Phillips\’s new book, Bad Money. It pulls together in a cohesive and thought-provoking way many of the ideas and observations I\’ve gleaned from reading Dr. Roubini\’s blog these past six months or so. I commend it to everyone who may be struggling, as I am, to put current economic events into a broader historical context.SWK

cpa • April 20th, 2008 at 9:03 pm

Written by Guest on 2008-04-20 20:28:10Is not shareholder dilution the first tier essence of moral hazzard? The shareholders are the first to \"dillute\" typically to zero in an insolvency then the creditors take the hit. It is inherent the relative risks of holding \"debt\" v. \"eqity\". I frankly have no idea why anyone (especially \"retail\") would buy stock in these enterprises.The the indirect involvemnt of JPMorgan does pique one\’s interest. It seems odd for a financial institution to find a \"source of strength\" (direct or indirect) through another finanical institution in today\’s environment.

sd • April 20th, 2008 at 9:09 pm

Consumer spending has been supported almost solely by home refinances. Unless wages increase exorbitantly, expect consumer spending to decline by an exponential amount. Nobody seems to be addressing the purchasing power consumers have had in the past 5 years or so. I don\’t see any way that households\’ buying power, through increased wages or otherwise, can support this level of spending. Home depreciation only exacerbates this problem. Folks are maxed out and the only way to increase their spending power is to walk away from pricey mortgage payments and rent something cheaper.

K J Foehr • April 20th, 2008 at 9:35 pm

Octavio Richetta on 2008-04-20 19:29:40“I love the sharp, super smart, humor of some of the folks at CR:”Harsh Realty writes: REITs are forward looking. They had already priced in a slump.Deer are forward-looking too. :-) Looking ahead seems to be all the rage right now.Asian Stocks Advance to Seven-Week High on Outlook for Earnings By Patrick RialApril 21 (Bloomberg) excerpt“We seem to have run out of bad news,\’\’ Tomochika Kitaoka, a strategist at Mizuho Securities Co., said in an interview with Bloomberg Television. “The possibility of a downturn in corporate earnings has already been priced into stocks, and probably won\’t rattle the market.\’\’ http://www.bloomberg.com/apps/news?pid=20601087&sid=azj7FgrE_j8I&refer=home

Guest • April 20th, 2008 at 9:51 pm

I must say I don\’t care to understand much of what is said.All I care about is that prices fall to around 3 times average household income.If they do, I will buy. If not, I won\’t.It seems all these big words and discussions are trying to find \"signs\" and \"portends\" that are somehow stemming from this.Basically beating around the bush, very roundabout.

Average Jane • April 20th, 2008 at 10:18 pm

I am the Average Jane, living in the upper Midwest (Minnesota) and have been following this blog for weeks simply because I\’ve been beyond horrified at the housing market collapse and the attendant horrors in the financial markets. I\’ve been trying to buy a house seriously for the past 3 years on my very modest salary. Prices in the upper Midwest have increased 64% in the past 4-5 years. My salary has not. Whereas 3 years ago banks were very creative in trying to shoehorn me into a home 4 to 5 to 6 times\’ my annual salary, that is not the case now. I resisted mightily the thought of at least half my take-home pay going toward a mortgage payment and am glad I didn\’t jump. Meanwhile the sellers here are hanging on for dear life to their overinflated home prices, as of course they\’re mortgaged and HELOC\’d to the hilt. Do not underestimate the fact that the goings-on on Wall street (the market keeps going up when jobs are disappearing as is the easy credit) are like manna from heaven to the sheeple. (The stock market is going up–things MUSt be okay. Right? Right?) I have to ask, what do us average people do? Most of us have no idea where to put our Roth IRA contributions. How do we save ourselves from the greedy, incompetent, moneychangers in the temple of Wall Street, these Masters of the Universe who control our IRAs and modest retirement accounts? The Fed has mortgaged my taxes (not to mention the Bush Administration) and we are all, I fear, going to be wiped out. It is taking everything I have to not yank every penny out of my credit union and stuff it under my mattress–but that\’s no good either, since the dollar is becoming more and more worthless. O people of the blog, what do we Average Janes do?

Octavio Richetta • April 20th, 2008 at 10:24 pm

Professor, you da\’ man! Thanks for clarifying your views. You are sticking to your views Pancho Villa style because you have the analysis to back up your views. Even Buffet seems to be coming into the long and deep camp (He wasn\’t there when he came out in NBC last February – Even though he says he doesn\’t consider macro views in his decisions) BTW, you say:b) new home sales are distorted by cancellations that – according to some estimates – run to the rate of 20 to 30%; thus the excess supply of new homes (the difference between completed homes and the true figures for sales is still growing)This is a minor detail. Somewhere (CR?) I read cancellation rates are leveling/falling for some builders. This makes sense as people ordering last August and beyond were aware of the market. They probably got the price they wanted. But, if it was a falling knife, they probably cancel anyway. Is your number reflecting this?Written by cpa on 2008-04-20 20:23:33Thanks for your detailed views. IMHO, a lot of fixed income managers, including those at TIAACREF, which are usually very conservative fell into the \"stop thinking when you see a AAA\" syndrome. That plus the low default rates in corporates did them in. It is not like you are going to see a negative return in TIAACREF\’s bond account in 2008, but, IMHO, they will have writedowns that will eat into their performance.Written by Todd on 2008-04-20 20:42:18How much do you write? how much experience do you have in writing? How long do you think a piece needs to brew before it can come out typo free and more? Check out the time stamp on the CR post:Saturday, April 19, 2008 2:20 PM.Professor\’s response: 2008-04-20 18:33:40 That is just a bit over 24 hours. Can you guess what the regular obligations for a full Professor of Dr. Roubini visibility are? I can assure you getting material posted in a blog on a Sunday evening does not come on top.

K J Foehr • April 20th, 2008 at 10:27 pm

@PeterJB on 2008-04-20 16:33:23 in the previous thread“IMO Wisdom is a simplicity derived out of a complexity of intellect and not associated with \"Intelligence\" – something that is learned via rote and imitation but natural to the animal classes; a process.Intellect, as aforesaid, I suspect is a very different state of being; which was associated with a past as evidenced in Egypt and which will again appear in the future.Intellect has no need of ethics or morality where the crazed and evolving states of emergent intelligence demand Law, ethics and morality, a priori.Or, intelligence + ethics produces no more than a highly volatile and dangerous state (as is most obvious) of temporary stability.”IMO, there is no end to debate about abstract verbal concepts as intelligence, intellect, and wisdom, so I won’t continue it. Your meaning may well be profound, but your words do not convey it to me. This may be due to the inadequacy of my intellect. But I will stand by my belief that what this country, this planet, and all the sentient beings on it need to survive and to minimize suffering is really nothing more than common sense and the application of same with ethical and moral intentions. I believe the way IS simple, and complexity is not our salvation, instead in many ways it is our undoing.Ancient Egypt was an absolute monarchy with aspects of a feudal society and with slavery. How is this an exemplar of a country / system based on intellect that we should aspire to?

Octavio Richetta • April 20th, 2008 at 10:38 pm

Another thing to consider when unenployment hits: (from CR)Harsh Realty writes: Let\’s not forget that unlike the the case of the 1970\’s recession, these days the ability to pay a mortgage requires two wage earners. Therefore if the unemployment rate doubles, the foreclosure rate with quadruple.Harsh Realty | 04.19.08 – 7:55 pm | #The statement is not quite right, but it makes an interesting point.

Octavio Richetta • April 20th, 2008 at 10:43 pm

Written by K J Foehr on 2008-04-20 22:27:40Have you tried any more SM? (Single Malts that is:-)BTW, WB makes a point (article in previous thread)that if forecasting the economy is hard, try the stock market:-) He also stocks are cheaper than a few years back.I guess I should follow his advice but I am a stubborn kid.

Octavio Richetta • April 20th, 2008 at 11:00 pm

CR already responded:http://calculatedrisk.blogspot.com/2008/04/roubini-worst-is-ahead-of-us.htmlIMHO, too much worrying about technicalities. IMO, 50% default on mortgages under water sounds high. But there is no question that even at 25%, with the coming wave of resets coming and the Alt-A tsunami defaults, foreclosures, etc. will get A LOT WORSE, no matter what uncle SAM does. Have a a gazillion elements contributing to the supply of homes for sale (old and new) coupled with the CC/recession lowering demand. That is a recipe for DISASTER!Somewhere I read: Cannot come out of the recession without housing making an upturn. Are we gonna pull out of recession on our wonderful exports and Mickey Mouse tourists? There are three huge cards in play in this recession: 1)The strangled US consumer, 2)the effect this will have in exporter countries. IMHO, the recoupling scenario is the most likely outcome despite CAT\’s earnings.3) energy and food prices 4) throw in the financial crisis, CC as a freebie.

Octavio Richetta • April 20th, 2008 at 11:22 pm

This ain\’t no LTCM fall of 98, nor Mauldin\’s y2K miss. This is a lot worse: (from CR)jg writes: Repost from last thread…CR, households are in terrible trouble. And, when it is all said and done, it is all about households, which own the companies, hold the life insurance policies, and fund the government.In \’29, (mortgages + consumer credit)/GDP was 54%.Today, it is 94%, a ratio 73% higher.And, today, mortgage and consumer credit rates are near historic lows. But, they will be moving up as defaults pile up and CPI keeps marching north.That is why I look to \’29 and its aftermath to get a sense of what might happen this time: because the \’20s were the last time that we had a run up in debt and asset values like this.Per the Statistical Abstract, tangible assets (i.e., real estate) fell 25% from \’29 to \’33 as did mortgages and consumer credit.The run up was much greater this time and the run down will be much greater.Roubini is right, but understates — purposely, to preserve credibility? — the magnitude of the upcoming mess.jg | 04.21.08 – 12:10 am | # Please note that very well known economists. Just a fast example, Stiglitz think it is going to be bery, bery, bery, bad:http://commentisfree.guardian.co.uk/joseph_stiglitz/2008/04/the_financial_crisis_being_fel.html…We should be clear, however, that monetary policy and these last-minute rescues can only prevent a meltdown of the economy; it can\’t resuscitate it. As Keynes pointed out, it\’s like pushing on a string – and even more so in this era of globalisation. With housing prices falling, new liquidity won\’t make -homeowners borrow more – or banks lend more. The money will look for safer and higher returns elsewhere, like China, which is now worried about US irresponsibility showing up in asset -bubbles in its own economy….Given where we are, the downturn is likely to be the worst in at least the last quarter century, probably since the Depression. But the US has more than just a trade and fiscal deficit; it has a leadership deficit. The result is likely to be a downturn longer and deeper than need be. And the whole world will suffer.Professor, lots of smart guys moving over to your side…

Anonymous • April 20th, 2008 at 11:39 pm

Average Jane, save whatever you possibly can. Keep a third in greenbacks at home, a third in gold/silver coins (buy at coin or pawn shop), and a third in long-term food storage (rice, beans, corn/barley/soy, sugar and salt, pasta, canned fish and vegetables.Then you\’re covered as broadly and safely as possible.

K J Foehr • April 21st, 2008 at 12:34 am

Octavio Richetta on 2008-04-20 22:43:59“Have you tried any more SM? (Single Malts that is:-)”No, I haven’t tried the Caol Ila or the Talisker yet; I want to explore Lagavulin a little more first. I had about two teaspoons of it again last night, and I enjoyed it a little more than the first time. I think you are right: it is best in VERY small doses. I sometimes think an eyedropper is the best way to “drink” SMs. The flavor is so powerful that a drop or two is all you need. Plus I don’t like the \"burn\" of alcohol and that is diminished with drop sized sips.I let you know about the others when I pull the cork on them. I am planing to try the Caol Ila next as I have heard some good things about it too.Thanks, I’ll check out the WB article. If he says stocks are cheaper now, he is probably comparing them to ’99 – ’00, which is true of course, but that doesn’t mean we couldn’t see further multiple compression from the current “cheaper” level, especially in a declining E environment.

AfA • April 21st, 2008 at 12:46 am

@ OR\"Professor, lots of smart guys moving over to your side…\"Thirty percent of economists now believe the economy will shrink in the first half of this year, up from 10 percent who thought this in January, according to a survey being released Monday by the National Association for Business Economics, known by its acronym NABE.http://biz.yahoo.com/ap/080421/economic_outlook.htmlWB said prices are now lower than few years ago, but he never implied they are low enough and won\’t be depressed further in the future.

Rob Mould • April 21st, 2008 at 12:55 am

We Australians are mightily confused by the US financial markets. Every time a financial company writes off a few billion your equity markets soar. Therefore either the professor is correct and we should all get into the market today as the doomsday bull run is just starting or you have a lot of very dumb gamblers (I can\’t call them investors) who are betting with their bus money home.

Alessandro • April 21st, 2008 at 3:05 am

@Octavio RichettaMauldin\’s article is interesting and I probably need some of his \’less extreme\’ views. But I find it a big inconsistency that he considers the Bear Stearns near-collapse something big enough to cause a soft depression, without pointing fingers at a number of other possibly bigger collapses in the waiting. How can the US and the world meddle through this financial minefield without risk of one or several more blow ups?Furthermore, I have the impression that the romantic idea of the \’American dream\’ is really a thing of the past as pointed out by Jeremy Rifkin in \’the European dream\’, most native US citizens and immigrants have no chance to move up in the social ladder, no matter how hard they work. And if you consider that the last 7 years the US economy has almost solely growing out of debt, the outlook for the America dream seem even gloomier.In conclusion, I respectfully disagree with Mauldin about the shallowness of the recession, but I will keep hos points into account.Written by Alessandro

GSM • April 21st, 2008 at 3:06 am

@Average Jane,You are already ahead of the pack. Most importantly, you are getting the right information. You have good information allowing you to make informed choices. Certainly here and over at CR as well that information will continue. I would not be worried about dimensions (big or not so big recession), comparisons (worst since ’45 or worst since the GD) etc etc. That is posturing. More important to anybody is trajectory. Are things still going down? The “things” you want to be looking at are the various metrics and indicators you will see discussed time and again here on this and CR’s blog. The question then becomes- “what do I do while things are getting worse”. To that question I would respond – remain protected;- Focus on your income, your job and securing your employment future. Make yourself more valuable (added training/skills, helping out more, proactive cost cutting etc).- Kill all debts. To be cashed up in this and the future environment will be a very important asset.- Cut costs wherever and whenever possible. Thrift is IN. Re-use, recycle, mend, darn, wholesome cooking, cost free entertainment etc.- Do healthy things, eat healthy things. You are sharper when you are healthy.- Investments- I won’t go there except to say you should get a variety of qualified advice that fits with what you believe to be right for the macro environment as spelled out by NR here and CR. You mentioned the dollar. I am sure that you can find sound advice for your investments that suite your ( and many others view too) about the dollar’s future that will not expose you to undue risk. Oh, and don’t be worried about timing a turn. You won’t. Better to be sure than sorry.- Think PROTECTION first and foremost for your investments- “if my premise is wrong, what is the downside” and “ at what point do I know my premise is flawed”. Often, it’s not about being right, it’s about doing right. The housing market is coming your way as your cash pile grows. That is a handy place to be in the housing market, one which should not be abandoned without very well researched motives (taking a chance on “this is a bottom” isn’t a good motive.)

Guest • April 21st, 2008 at 3:39 am

wow krugman talking bout peak oil etc etchttp://www.nytimes.com/2008/04/21/opinion/21krugman.html?_r=1&ref=todayspaper&oref=sloginNine years ago The Economist ran a big story on oil, which was then selling for $10 a barrel. The magazine warned that this might not last. Instead, it suggested, oil might well fall to $5 a barrel. In any case, The Economist asserted, the world faced “the prospect of cheap, plentiful oil for the foreseeable future.”Last week, oil hit $117. It’s not just oil that has defied the complacency of a few years back. Food prices have also soared, as have the prices of basic metals. And the global surge in commodity prices is reviving a question we haven’t heard much since the 1970s: Will limited supplies of natural resources pose an obstacle to future world economic growth? How you answer this question depends largely on what you believe is driving the rise in resource prices. Broadly speaking, there are three competing views.The first is that it’s mainly speculation — that investors, looking for high returns at a time of low interest rates, have piled into commodity futures, driving up prices. On this view, someday soon the bubble will burst and high resource prices will go the way of Pets.com.The second view is that soaring resource prices do, in fact, have a basis in fundamentals — especially rapidly growing demand from newly meat-eating, car-driving Chinese — but that given time we’ll drill more wells, plant more acres, and increased supply will push prices right back down again. The third view is that the era of cheap resources is over for good — that we’re running out of oil, running out of land to expand food production and generally running out of planet to exploit.I find myself somewhere between the second and third views.There are some very smart people — not least, George Soros — who believe that we’re in a commodities bubble (although Mr. Soros says that the bubble is still in its “growth phase”). My problem with this view, however, is this: Where are the inventories? Normally, speculation drives up commodity prices by promoting hoarding. Yet there’s no sign of resource hoarding in the data: inventories of food and metals are at or near historic lows, while oil inventories are only normal.The best argument for the second view, that the resource crunch is real but temporary, is the strong resemblance between what we’re seeing now and the resource crisis of the 1970s. What Americans mostly remember about the 1970s are soaring oil prices and lines at gas stations. But there was also a severe global food crisis, which caused a lot of pain at the supermarket checkout line — I remember 1974 as the year of Hamburger Helper — and, much more important, helped cause devastating famines in poorer countries.In retrospect, the commodity boom of 1972-75 was probably the result of rapid world economic growth that outpaced supplies, combined with the effects of bad weather and Middle Eastern conflict. Eventually, the bad luck came to an end, new land was placed under cultivation, new sources of oil were found in the Gulf of Mexico and the North Sea, and resources got cheap again.But this time may be different: concerns about what happens when an ever-growing world economy pushes up against the limits of a finite planet ring truer now than they did in the 1970s. For one thing, I don’t expect growth in China to slow sharply anytime soon. That’s a big contrast with what happened in the 1970s, when growth in Japan and Europe, the emerging economies of the time, downshifted — and thereby took a lot of pressure off the world’s resources.Meanwhile, resources are getting harder to find. Big oil discoveries, in particular, have become few and far between, and in the last few years oil production from new sources has been barely enough to offset declining production from established sources. And the bad weather hitting agricultural production this time is starting to look more fundamental and permanent than El Niño and La Niña, which disrupted crops 35 years ago. Australia, in particular, is now in the 10th year of a drought that looks more and more like a long-term manifestation of climate change. Suppose that we really are running up against global limits. What does it mean?Even if it turns out that we’re really at or near peak world oil production, that doesn’t mean that one day we’ll say, “Oh my God! We just ran out of oil!” and watch civilization collapse into “Mad Max” anarchy. But rich countries will face steady pressure on their economies from rising resource prices, making it harder to raise their standard of living. And some poor countries will find themselves living dangerously close to the edge — or over it.Don’t look now, but the good times may have just stopped rolling.

Mark • April 21st, 2008 at 6:00 am

Finally, someone, Krugman, starts talking about the unthinkable (but clearly logical)- resource depletion halting economic growth!It appears that Krugman, once believer of the \"Flat Earth Economy,\" now sees that we\’re living on a finite planet.We\’re now starting to tip toward the reality which Derrick Jensen has been speaking. We\’re all kings now and we have no clothes…Mark (the original? one)

Guest • April 21st, 2008 at 6:25 am

Bank of America Earnings Fall 77% on Writedowns for Bad Debt By David MildenbergApril 21 (Bloomberg) — Bank of America Corp., the second- largest U.S. bank, said profit dropped 77 percent as job losses and falling house prices caused more people to miss payments on credit cards and home loans. Overdue U.S. credit-card bills are the most in more than three years and foreclosures soared 57 percent in March.

JP • April 21st, 2008 at 6:46 am

NR is speculating that 50% of underwater folks walk. How do you predict the psyche of the upsidedowners?Supporting the walk away:60 Minutes piece on the trend – others are, why shouldn’t ISame people that didn’t understand the mortgage product they were buying, or if they did, they knew there would be trouble down the road, but “hey, let’s live for today”“victims” of Wall Street, mortgage brokers, bad product“not my fault” housing market went softI had bad credit and no downpayment and they gave me a loan, it’s their faultAdvertisements for “bad credit” or “no credit” ok, we’ll finance anybody! Make it seem like bad credit is not that big of a dealMy Congress people have not been financially responsible with Social Security and Medicare, so why should I be financially responsible with my mortgage?Every mortgage payment has a component of “principal” that is getting flushed down the toilet if you have negative equity. Ouch!I’ll lose my downpayment…wait, I did 100%LTV on the first, and took a second to buy a plasma TV that they won’t take away. Not supporting:I’ll lose my downpayment. (but what % of those that made a down payment have negative equity?)I care about my credit.A future hiring manager may see my credit report as a reflection of my work ethic and propensity to follow through and be honorable.

Octavio Richetta • April 21st, 2008 at 6:47 am

Written by Alessandro on 2008-04-21 03:05:55\"Mauldin\’s article is interesting and I probably need some of his \’less extreme\’ views. But I find it a big inconsistency that he considers the Bear Stearns near-collapse something big enough to cause a soft depression, without pointing fingers at a number of other possibly bigger collapses in the waiting. How can the US and the world meddle through this financial minefield without risk of one or several more blow ups?\"Thanks. Very smart observation.

Octavio Richetta • April 21st, 2008 at 7:20 am

Written by Guest on 2008-04-21 03:39:29I recall a presentation about work of The Club of Rome during my high school days. Forrester developed a huge following, even among MIT faculty. One of my profs. told me stories from his hippie days on how he had even decided not to have any kids (he reversed this later:-). As you all know, Forrester and his \"stuff\" fell from grace. Just one big thought about forecasting the future* which I have mentioned here before:Forecasting the event is not the hardest part. The hard part is the timing. The fact that Forrester looked like a clown for almost three decades does not imply he was wrong on the event. Coming from such a smart guy, couldn\’t it be that his \"\’mistake\" was the timing?http://www.greatchange.org/ov-simmons,club_of_rome_revisted.htmlhttp://dieoff.org/page25.htmBTW, on the Krugman piece, one thing stayed in my head:\"There are some very smart people — not least, George Soros — who believe that we’re in a commodities bubble (although Mr. Soros says that the bubble is still in its “growth phase”). My problem with this view, however, is this: Where are the inventories?\"*I cannot forecast the future, but the art of probabilistic forecasting is one of the few things I know a bit about (I know a lot more about forecasting than I know about accounting:-)

Alessandro • April 21st, 2008 at 7:43 am

@OctavioKrugman: \"There are some very smart people — not least, George Soros — who believe that we’re in a commodities bubble (although Mr. Soros says that the bubble is still in its “growth phase”). My problem with this view, however, is this: Where are the inventories?\"I thought about the Krugman point yesterday, the only possibility is that speculative hoarding has been moved into the derivative market (futures) with continuous rollover, but I couldn\’t find a convincing mathematical model for it to work. I\’ve read that future contracts in precious metals have at times a notional value larger than one year of production, all to be delivered in the following month! But I can\’t go much further.

Octavio Richetta • April 21st, 2008 at 8:08 am

Professor, The Goldilocks mantra has moved from soft landing to soft recession. The consumer is 70% of GDP and we know well where that stands. So by default, the soft recession view must be counting on exports and, as the ECRI people said, entering the recession with low inventories.Could you and others please elaborate?

Guest • April 21st, 2008 at 8:33 am

Bank of America Net Income Falls 77% on WritedownsApril 21 (Bloomberg) — Bank of America Corp., the second- largest U.S. bank, said profit dropped for a third straight quarter as the company set aside $6.01 billion for bad loans.First-quarter net income declined 77 percent to $1.21 billion from $5.26 billion a year earlier, the Charlotte, North Carolina-based bank said today in a statement. Results included $1.31 billion in trading losses and $2.72 billion in costs for uncollectible loans. Earnings per share shrank to 23 cents from $1.16, falling short of analysts\’ estimates.The slide casts doubt on Chief Executive Officer Kenneth Lewis\’s goal to increase profit by at least 20 percent this year. The bank\’s consumer unit, which contributed more than 60 percent of operating income in 2007, faces a nationwide jump in unpaid debt and the highest unemployment rate since 2005. Overdue U.S. credit-card bills are the most in more than three years and foreclosures soared 57 percent in March.\"The decline in housing prices has to be solved for things to get better,\’\’ said Chris Hagedorn, portfolio manager at Fifth Third Asset Management in Cincinnati, in an interview before earnings were disclosed. \"In terms of the maximum point of pain, I don\’t think we\’re there yet.\’\’A potential problem is that: the solution may be as…hmmm…\"good\", as the solution for solving the Iraq situation. In other words: a working solution may not be coming.

ignatius • April 21st, 2008 at 8:52 am

@Octavio Richetta on 2008-04-21 08:08:53But how can \"hording\" in the future market possibly affect spot prices? After all when the stuff is due to delivery, the tanker, ship or train has to go somewhere. Maybe I\’m missing something here, but I cannot see how – other than maybe psychological effects on price expectations – holding futures can influence the supply/demand side of a product when inventories are constant.Precious metals like gold should be a different beast in that respect, as the inventories are huge as its main use is to sit there in a vault anyway, so for bullion, hoarding and consuming are the same thing. This is not the case for other commodities.

Guest • April 21st, 2008 at 9:13 am

Well, well, well…if you are a fan, as I am, of the Chicago Fed National Activity Index, than you should be looking for a POSITIVE Q1 GDP number around 0.4%. The index (3 mo moving average)has been near or below there recession threshold for 4 consecutive months now but runs on that \"inconclusive line\". Maybe stock got this one right. Discount trouble in housing and banking and everything else is ok…

Guest • April 21st, 2008 at 9:16 am

Inching closer to my disaster number 0f $121.00. If we cross that line before month-end, look out!10:11 Futures Movers: Crude hits new high of $117.60 a barrel

Guest • April 21st, 2008 at 9:19 am

Average JaneThis is a very tough time for the US consumer. Most citizens will have a hard time trying to preserve whatever assets they have accumulated. There is an undeclared fight going on now – between the Wall St banks and the American consumers. It\’s simply not possible for both sides to \"live long and prosper\". GSM gave you some good suggestions. The winners on the \"consumer\" side will be those who can minimize their debts, keep the greedy banks from stealing their cash (high interest rates), try to be frugal, and stay PATIENT. Protect yourself during the turbulence.PeteCA

Guest • April 21st, 2008 at 9:23 am

WASHINGTON (Reuters) – Business economists are turning pessimistic about the U.S. outlook and increasingly fear economy will slip into a recession in coming months.The National Association for Business Economics said on Monday that the 109 members who responded to its quarterly survey between March 24 and April 8 were \"notably downbeat\" about their first-quarter experience and about near-term prospects.\"For the first time in five years, reports of falling profit margins outnumbered reports of rising margins in the first quarter of 2008, while demand at respondents\’ firms grew more weakly than at any time since the recession of 2001,\" said Ken Simonson, chief economist for Associated General Contractors of America.

Alessandro • April 21st, 2008 at 9:28 am

ignatius: \"But how can \"hording\" in the future market possibly affect spot prices? After all when the stuff is due to delivery, the tanker, ship or train has to go somewhere.\"This is Krugman point. But futures long speculators do not want to receive the stuff and short speculators do not want to deliver it. Both the classes roll their contracts over to the next scheduled date just before the market sizes up for actual delivery. As long as you have enough derivative activity and people do not get trapped into unwanted delivery you might actually have derivative hoarding.I\’m not say this it the explanation, I\’m only proposing it for people more knowledgeable than me to prove it wrong (or right!). As far as I have understood this is how retail ETFs work.BTW: obviously this does look like an unstable dynamics anyhow.

Guest • April 21st, 2008 at 9:44 am

OctavioMore and more I also find myself thinking back to the old \"Club of Rome\" predictions. Some of those forecasts do indeed appear to be coming true. The first-tier and second-tier nations in the world are struggling for possession of resources (wealth, oil, minerals, food & energy). Meanwhile, the third-tier nations cannnot even keep access to the essentials for survival – we\’re starting to see food riots and civil unrest. I have the uncomfortable feeling that the world is disintegrating. Someone once said that WWIII would not start as one major conflict, but rather as many regional disturbances that grew to envelop the planet. I wonder if they were right.Meanwhile, the massive global derivatives market looks to be the hugest malinvestment ever made. If this money had been devoted to smart long-term investment, instead of pointless short-term trading, we might have had a chance to avert some of the real problems we face.PeteCA

Guest • April 21st, 2008 at 10:39 am

How Safe is My FDIC-Insured Bank Account?http://www.financialsense.com/fsu/editorials/martenson/2008/0414.htmlvery eye opening and scary.

Rightofcenter • April 21st, 2008 at 11:12 am

PeteCAWrote: If this money had been devoted to smart long-term investment, instead of pointless short-term trading, we might have had a chance to avert some of the real problems we face.Irrelevant. The real problem the world faces is overpopulation and the fact that certain peoples are breeding like rabbits with no ability to sustain themselves. Wars, plague and pestilence are Mother Natures way of keeping things in check.

Giraf • April 21st, 2008 at 11:21 am

@Medic et alFYI, Dennis Gartman, who has been very right about gold for a very long time, has changed his view.This piece is from his daily publication, The Gartman Letter:SPOT GOLD: We Are Abandoning Ship!:We shall shock everyone thismorning in the doing of this, but weare abandoning our long held bullishoutlook on gold this morning, notingthat the relative strength of themarket has been waning since earlythis year… a circumstance that hasbothered us but which we werewilling to overlook so long as newhighs were being made. They are nolonger… and as the market fails inthat manner, it has broken this welldefined bullish trend line and itfailed… miserably… on Friday. It hasbounced today, and we shall sell thatbounce and exit… entirely!

Guest • April 21st, 2008 at 11:41 am

More good news….Apr 20, 2008 10:50 pm US/Central Minneapolis, WCCO, Weak Economy Forcing Restaurants To Close Doors

Octavio Richetta • April 21st, 2008 at 11:43 am

I highly respect the ECRI guys. But their models have limitations. I think they are the best in calling turning points in the economy, but at most a few months before a recession hits. I see their prediction of when the economy is turning up again more useful.You see, their problem is that no matter how good, fine-tuned, and sophisticated, their leading indicators may be, they are all based on historical data. So they work as long as the future has some resemblance to the past.Forecasting is an art as much as it is a science. The kind of forecasting the Professor does is impossible for ECRI to replicate. An approach that combines the best of both worlds is best: i.e., the \"artistic part\" the Professor provides aided by tools such as ECRI\’s for fine-tuning.I say all this because I am totally puzzled by ECRI\’s piece in Forbes. They make it sound as if preventing this recession was as easy trivial matter. That given the consumer a few bucks earlier was all that was needed despite the huge consumer ponzi debt scheme we are in. Am I missing something?

K J Foehr • April 21st, 2008 at 11:59 am

Rightofcenter on 2008-04-21 11:12:01“Irrelevant. The real problem the world faces is overpopulation and the fact that certain peoples are breeding like rabbits with no ability to sustain themselves. Wars, plague and pestilence are Mother Natures way of keeping things in check.”Spoken like a true conservative, witharrogance: “Irrelevant”, absolutism: “with no ability to sustain themselves”, self-righteousness and racism, blaming “them” without considering that you and your ethnic group / country, etc. may have contributed to their condition: “the fact that certain peoples are breeding like rabbits”,and without compassion for others nor feeling any moral obligation to help them: “wars, plague and pestilence are Mother Natures way of keeping things in check”. “A human being is part of a whole, called by us the Universe, … . He experiences himself, his thoughts and feelings, as something separated from the rest … . This delusion is a kind of prison for us, restricting us to our personal desires and to affection for a few persons nearest us. Our task must be to free ourselves from this prison by widening our circles of compassion to embrace all living creatures and the whole of nature in its beauty.” Albert Einstein “The whole idea of compassion is based on a keen awareness of the interdependence of all these living beings, which are all part of one another, and all involved in one another.” Thomas Merton “In seperateness lies the world\’s great misery, in compassion lies the world\’s true strength.” Gautama Siddharta, 563-483 B.C.

K J Foehr • April 21st, 2008 at 12:09 pm

TED is fairly high and rising: 1.61Change 0.064% Change 4.108. The deer may soon be caught in the headlights!

Guest • April 21st, 2008 at 12:14 pm

Octavio, ECRI\’s point is that inventories were sooooooo low that if the consumer was given a couple-a-hundred billion $\’s to spend, it would have forced a surge in hiring to meet production demands to replentish inventories, thus overting a recession in the near term. However, that is based on an the awful large assupmtion, the consumer would have spent this money on \"stuff\" rather than bills or savings. My work show that this time really is different, the consumer is all wore out from the struggle, the water is now up to their nostrils and they have already used their last gasp oif air to call for help one last time…

Octavio Richetta • April 21st, 2008 at 12:19 pm

WALKING AWAY….In phase one of the foreclosure crisis, distressed homeowners started to mail in their keys to the bank and walk away from their houses. Apparently we\’re now in phase two: homeowners are beginning to set fire to their houses instead. What comes next?http://www.washingtonmonthly.com/archives/individual/2008_04/013565.phphttp://www.latimes.com/business/la-fi-arson21apr21,0,3776892.story

Guest • April 21st, 2008 at 12:22 pm

@KJ FoehrGood show! The great qualities of humanity are the only things that create, innovate, prosper, and make a refined world. Self-centered greed and lack of compassion put us all in this \"temporary\" bad position.Repudiation of godlike qualities will truly lead to pestilence, famine, war, disease, and pure apathy. Jungle law. I wouldn\’t encourage it in myself or others.

Octavio Richetta • April 21st, 2008 at 12:24 pm

GREEN!Written by Guest on 2008-04-21 12:09:37One of this days this is gonna change:-) We should have a bear complain-o-meter. When the bear noise meter gets this loud, a market drop usually follows. I am waiting for a big one… i.e., resumption of the pre-BSC bailout trend.

The Russian • April 21st, 2008 at 12:25 pm

Written by K J Foehr on 2008-04-21 11:59:02Spasiba, well said!See everything, overlook a great deal, improve a little (John XXIII)

Octavio Richetta • April 21st, 2008 at 12:30 pm

From CR:bzb writes: This gloom and doom is a bit too much. OK, the RE prices may not always go up–we learned that, but we know the stock market always goes up. So let\’s just pile in and make a fortune there.bzb | 04.21.08 – 1:24 pm | #

Anonymous • April 21st, 2008 at 12:39 pm

At Guest\"CMBS delinquency and soon defaults rising; CRE is next!\" I don\’t disagree that CRE will be challenged over the next 2 years, especially as the business cycle continues to slow and retail and office properties struggle. Additionally, the lack of available capital in the CRE space with I-banks, insurance companies and pension funds on the sidelines will put performing but maturing loans in trouble (there are, however, a number of private capitalized debt funds and large institutional balance sheet programs doing business here). The multifamily segment is doing well, but this is typcial as this market is more insulated because people must live somewhere and Freddie and Fannie are active in the finance arena. Notwithstanding my comments, I would like for you to expand on your very matter of fact comment. Delinquincies and defaults in CRE are still at historic lows, and while I-banks (through securitization and CDO\’s) got sloppy, it was no where near the credit deterioration that permeated through the residential market as underwriting was still based on a commercial property\’s ability to generate income, not on downright lies.

tutterfrut • April 21st, 2008 at 12:40 pm

While there were manifestations today at Carrefour(the french kind of Walmart) branches across China in protest of the French position towards the Tibetans, the Paris council voted today to make the Dalaï Lama \’Citoyen d\’honneur\’(honoured citizen) of the City of Paris.The French may not always understand economics very well, but when it comes to make a fist or rather show a middle finger, they already won the Olympic title.

Mark • April 21st, 2008 at 12:42 pm

Written by Rightofcenter on 2008-04-21 11:12:01Irrelevant. The real problem the world faces is overpopulation and the fact that certain peoples are breeding like rabbits with no ability to sustain themselves. Wars, plague and pestilence are Mother Natures way of keeping things in check.Are you really that ignorant?The \"problem\" is total resource consumption. The average US citizen consumes 35x that of the average Bangladeshi; US population 300,000,000, multiply that by 35 to get a comparative number (you do the math!).And just like there is never a supply shortage, demand cannot exceed supply, there never really is an overpopulation problem (it corrects, just as with every other population in nature); it\’s the West that has coined overpopulation in order to allow exploitation of the third world countries: remember, they\’ve been around a LOT longer; if you look at their histories you\’ll likely find that the \"population problems\" didn\’t really exist until the West encroached.If you don\’t understand the problem you have little likelihood of solving the problem.Mark (the original? one)

Octavio Richetta • April 21st, 2008 at 12:43 pm

How far can greed go, or I want all the toys now!If you look at what the US consumer was forced to do so that he could buy all the junk despite not having the income; you will realize that what capitalists were doing was accelerate the run down of the world resources. Jack up consumption as high as they possibly could so that they could get their wealth upfront, as fast as possible. I mean that is the ultimate show of greed. Rob the masses of their future wealth by scorching the earth. It was like putting thee economy on crack cocaine; burning the candle at both ends. Little guy has no money? No problema; Lend him the money, after they also own the banks so this is extra income! The model of economic well-being is going to have to change from maximizing GDP to something else. Given what we are doing to world resources, it would appear that a global slowdown would be a good starting point to ending the madness.

Detlef Guertler • April 21st, 2008 at 12:52 pm

@K J Foehr on 2008-04-21 11:59:02Thx a lot for your clear words against rightofcenter. I thought the time for malthusianism was over forever, as it looks like global population growth will end in a soft landing within the next decades. But obviously it\’s not so easy to eliminate that kind of pseudo-elitist thinking. By the way: If we\’re talking about populations that are not able to sustain themselves the best guess in the world is of course still the USA.

Alessandrot • April 21st, 2008 at 12:53 pm

Question to the chart oracles around. The DOW hit resistance at 12800 time and again, resistance breakes to the upside, bulls are sucked in and the big sell-off starts.Does it looked like a bull trap?

ptm • April 21st, 2008 at 12:54 pm

Rice, flour, & cooking oil purchase restrictions on East & West coastshttp://www2.nysun.com/article/74994Major retailers in New York, in areas of New England, and on the West Coast are limiting purchases of flour, rice, and cooking oil as demand outstrips supply. There are also anecdotal reports that some consumers are hoarding grain stocks…\"It\’s sporadic. It\’s not every store, but it\’s becoming more commonplace,\" the editor of SurvivalBlog.com, James Rawles, said. \"The number of reports I\’ve been getting from readers who have seen signs posted with limits has increased almost exponentially, I\’d say in the last three to five weeks.\"

Octavio Richetta • April 21st, 2008 at 1:24 pm

Written by Mark on 2008-04-21 12:42:44You have to have big cojones to call JFK (initials juggled on purpose) an ignorant:-) You are a regular here, you know the guy. From the discussion, it is clear that the problem is not the 2.5 billion Indian+Chinese but what they will consume as their economic situation improves. Of course, the US has to come way down in resource consumption. It looks like the process has started…

Alessandro • April 21st, 2008 at 1:42 pm

@Octavio Richetta and Guest on 2008-04-21 12:14:01IMHO the problem with ECRI is not their model, but their focus. They are looking at the wrong harmonic of the business cycle, the debt bubble is inflating since the \’90s and we last saw something similar in the \’30.Want to see inventory? Look at the stockpile of debt that is going to hit the a frozen market looking for a kind soul willing to refinance it.This is not a downturn in the manufacturing cycle, so who cares about low ipod inventories when most consumers have already bought all ipods they will be able to afford in their entire life.Written by Alessandro

Detlef Guertler • April 21st, 2008 at 1:45 pm

@ Octavio Richetta on 2008-04-21 13:24:52Mark didn\’t call KJF an ignorant. For Mark and for KJF and for you and for me the ignorant is rightofcenter.

Octavio Richetta • April 21st, 2008 at 1:48 pm

If anyone tries the Hussman Bingo game while watching cnbc/bloomberg, please report on the time it takes you to call bingo.Alessandro: debt inventory. That is a cool concept.

Giraf • April 21st, 2008 at 1:50 pm

@Mark the original.Rightofcentre certainly put the cat amongst the pigeons!Wrong blog.I was confused about the economics part of your response:\"And just like there is never a supply shortage, demand cannot exceed supply, there never really is an overpopulation problem (it corrects, just as with every other population in nature)\"Demand cannot exceed supply? Isn\’t that why commodity prices are going up? There is never a supply shortage? Haven\’t you been the peak oil proponent, saying supply is in fact running out?

Gloomy • April 21st, 2008 at 1:53 pm

A CRYSTAL CLEAR MIND WITH 20/20 VISION\"To begin with, the U.S. (and the global) economy is decelerating faster than anticipated. Fed officials are already expecting an economic contraction by the first half of the year. In March, the U.S. posted the largest unemployment increase in 15-years. More than 230,000 Americans lost their jobs during the first quarter, and there are some areas, such as Tampa/St.Petersburg, that are in the midst of an economic depression. Home sales in New Zealand are plunging. Unemployment in Spain is soaring. Although the Fed\’s actions averted a cataclysmic event, the deleveraging continues. M&A activity is at a four-year low. Debt issuance is a trickle, IPOs are stagnant, and hedge funds are suffering outflows. In addition to an increase in redemptions, prime brokers are reducing credit lines forcing portfolio managers to reduce positions. Some hedge funds were forced to restrict redemptions in an attempt to forestall an uncontrolled liquidation of assets. However, such measures are suicidal, since investors will run for the door as soon as they can. All of these factors are converging at the same time, explaining the rapid slowdown in economic activity.\"\"Therefore, the economic deceleration will continue, with the real slowdown occurring in 2009, when many of the construction projects that were funded several years ago will be completed. The problems will eventually spread throughout the globe and manifest themselves in lower commodity prices and reduced liquidity. As a result, the emerging markets will suffer.It is at that time that the Fed will wish that it still had the monetary ammunition needed to boost the level of global demand. However, it will find itself in a Japanese-styled liquidity trap, out of bullets and out of ideas.\"http://www.rgemonitor.com/euro-monitor/252500/overview_running_out_of_ammo

Guest • April 21st, 2008 at 2:18 pm

\"I believe the way IS simple, and complexity is not our salvation, instead in many ways it is our undoing.How is this an exemplar of a country / system based on intellect that we should aspire to?\"@ K J Foehr on 2008-04-20 22:27:40Yes, simplicity is an answer where simplicity arises out of complexity: a process. An answer is integrity; so simple but yet, looking around, do you see any integrity from \"leadership\". I don\’t; au contraire. All I see is a feeding frenzy designed to maintain a well and truly broken system. The root cause of which is \"ignorance\". Ignorance of physics, which infers that we do NOT understand how things work; in the context of this blog; economics. Because of this, what is substituted, is theft. Simple.The obvious prediction economically speaking is that the USA will soon enter depression where depression is a state of mind. Such a state will be brought about by \"leadership\"; don\’t believe? Look at the state of US investors; all the news is not just bad; it is horrific; but look at the Dow. This is the normal signature of \"extremis\" or the death throes of a life entity.PeterJB

Guest • April 21st, 2008 at 2:25 pm

Ian Wishart grows beans, corn and canola on his farm near Portage la Prairie, Man., and watches commodity markets closely to see what he\’ll get for his crops. But he\’s finding it harder to follow the markets these days because the prices don\’t always make sense.\"Nowadays it\’s not sending the same market signals that it used to,\" Mr. Wishart said. He blames investment funds for distorting prices. \"The commodity market was designed to provide a forward pricing tool to protect farmers, not to provide an opportunity for someone else to make profits.\"http://www.theglobeandmail.com/servlet/story/RTGAM.20080421.wrcommodity21/BNStory/Business

London Banker • April 21st, 2008 at 2:25 pm

@ ToddI look forward to reading one of your essays published in Professor Roubini\’s native Turkish with no spelling errors.@ KJ FoehrMany thanks for an elegant repudiation of rightofcenter\’s ignorant and arrogant hatefulness. I wondered as I read his rant which of his children or grandchildren he was willing to watch culled by poverty, war or disease to curb overpopulation. As any development expert would attest, the surest curbs for overpopulation are female education, access to healthcare and food security. Given these, any society naturally approaches replacement level population growth – whether Catholic Italy, Hindi India or Muslim Iran.@ AllToday\’s Bank of England mortgage swap facility is actually a quite sensible, limited, targeted measure. The fear here is a sharp drop in the housing market, caused by the drought in the MBS market which accounted for 60 percent of funding. With the 1 to 3 year swap facility imposing a fee of up to 1 percent and haircuts of 10-30 percent on MBS with AAA ratings, the market should shift back to a commercial footing with any recovery of confidence. Meanwhile, mortgage lenders can continue to make well documented, well supported mortgage finance available at reasonable rates.If the market still goes down, at least it will be cushioned and more gradual, giving the banks time to adjust portfolios and capital to changing conditions.

Octavio Richetta • April 21st, 2008 at 2:31 pm

Watching graphs for the US equity indices while reading the news headlines, posts here, CR, etc. Is a fun exercise. What a big joke! I hope the next down leg is around the corner.http://www.bloomberg.com/index.html?Intro=intro3Oh, yes! I forgot:-It is all already priced in.-CAT shows decoupling is feasible.-Google results show problems are confined to banks and housing.-it is past April 15, checks are coming. It will be short and shallow.

Octavio Richetta • April 21st, 2008 at 2:36 pm

Written by London Banker on 2008-04-21 14:25:23The Professor ain\’t Turkish. He is Italian. I would settle for a simple essay from Todd in plain English; no cheating allowed (I\’ve read somewhere, that now a days many students hire paid services to complete university applications at all levels; they even write the personal essays for them!).

Gloomy • April 21st, 2008 at 2:38 pm

@London BankerThe Fed\’s actions have neither lowered mortgage rates nor increased home sales. Why do you think the result will be any different in the U.K.?

Octavio Richetta • April 21st, 2008 at 2:46 pm

citi continues to bleed:Citigroup reportedly launches $6 billion preferred share sale 3:28 p.m. 04/21/2008 NEW YORK (Reuters) – Citigroup (C) on Monday will sell $6 billion in non-cumulative perpetual preferred shares, said International Financing Review, a Thomson Reuters publication. The shares are expected to pay a fixed 8.4 percent dividend for 10 years and pay a floating rate after that. (Reporting by Karen Brettell) Of course, this is good news.

Guest • April 21st, 2008 at 2:51 pm

Demand cannot exceed supply maybe when investment funds act like farmerMany farmers say the price problems stem from a surge in investment fund activity. Investment funds have been in commodities for decades but a key rule change by the CFTC a couple of years ago helped open the floodgates. The commission gave index funds an exemption to limits on commodity trading that applied to market speculators. The change meant the funds were treated like farmers and food processors, who are also exempt.Experts say that boosted trading volumes in some wheat contracts fivefold. In January, the CFTC said investment funds accounted for 40 per cent of the wheat trading.The CFTC and CME argue investment funds provide needed liquidity. But others say they do much more.\"The hedge funds swing up and down with the technical signals in the markets, and our markets aren\’t deep enough to absorb that,\" said Roy Huckabay, director of market research for commodities at the Linn Group in Chicago. \"So we\’re seeing weekly trading ranges as big as we used to see in a whole year

Octavio Richetta • April 21st, 2008 at 2:52 pm

This has got to be DA\’ news of the day. What a suiper smait guy!http://www.marketwatch.com/news/story/irwin-kellner-dont-fear-deficit/story.aspx?guid=%7BEF658AD0-9C18-4125-A9E3-18E63C9C7869%7DIRWIN KELLNERBetter red than dead Commentary: Don\’t be surprised if Fed stops cutting ratesBy Dr. Irwin Kellner, MarketWatchLast update: 2:11 p.m. EDT April 21, 2008PORT WASHINGTON, N.Y. (MarketWatch) — Fear not Washington\’s rising budget deficit, for it will take some of the pressure off the Federal Reserve in its quest to cushion the downturn in the economy. Irwin Kellner is chief economist for MarketWatch and for Capital One Bank.

Guest • April 21st, 2008 at 2:52 pm

Ya like my double bottom call at around 11:00 this morning! Going green into the close! Stocks are in their own little world unfortunatly, they are used in the Conference Board LEI numbers and in ECRI\’s numbers! So, the better stocks perform, the better those leading indicators will look

Miss America • April 21st, 2008 at 2:59 pm

Dear Bank of England, My initial reaction to reading about your 50GBP loan was that it sounded better then what the FED had rushed out so far. …but at the same time, there were a couple of things that weren\’t sitting well with me. (much like on the RGE when I immediately called out Buffet\’s offer on the Monolines as being bogus)First off, The whole AAA thing needs no comment from me. We all know about that crap. The big issue for me was that relative to the Wall St/USGov\’s bailout, the size a speed of this move wreak of something??? The current \"stress\" on the market has loosened significantly. The same credit crunch issues still exist and I believe will continue to deteriorate… but at the present moment, they do not warrant anyone coming out with this sizable of a move. (UNLESS THERE IS SOMETHING LOOMING THAT THE PUBLIC DOESN\’T KNOW ABOUT!!!) …So that\’s what doesn\’t smell right to me.Sorry, but I smell a rat here. Otherwise, if it\’s just a 3 year lease on bad debt, allowing institutions to spread out their realized losses over that 3 year term, (and keep inter-bank lending and credit markets flowing) then we\’ll pass better judgment on this at the end of the 3 year period. If this is the case, as advertised, then my prediction is that 3 years from now we will have seen new instruments rolled out that assist with the socialization of those losses regardless. (a trickle absorption) This debt won\’t find its way back to being a hard dollar hit on the originator\’s books. Sorry for my cynicism, it\’s nothing against BoE or its policies… rather it\’s my lack of faith in \"the system\".Have there been many others on this site that are as skeptical as I am about this move??? I’m searching for a consensus opinion on it\’s \"smell\"? As LB stated, it can act as a cushion, but since this move mirrors in many ways, the Fed’s moves… What will it truly wind up helping??? (Home loans (“the public”) rates in the US haven’t reaped any benefit yet???) So if that’s BoE’s target… then they should look at the Fed’s example as ineffective. If it’s cronyism… Then let’s just call it that.Regards, Miss Americap.s. I’m surprised the equity markets didn’t react better to additional cash in play. (or at least the prospect of an additional 100billion in laundered gov’t tax bucks)

The Other Jane • April 21st, 2008 at 3:02 pm

Average Jane,I\’m another average jane who has been reading this blog, along with Calculated Risk, for several months. This has now become my favorite blog. I have learned a lot here. My job doesn\’t pay a great deal, but I do have good benefits, and I chose TIAA CREF as my fund manager. Within TIAA CREF I didn\’t find a lot that appealed to me, so for now, my pretax income goes into their TIPS fund. It hasn\’t done well lately, but I figure at least my principal is safe. I also put some of my income in the voluntary investment program here at work, and that goes to Vanguard\’s Energy Fund (VGENX). These are the only stocks I\’m in. I\’m long and extremely bullish on oil, and expect to see another good year with VGENX. It doesn\’t make me feel great to be investing in oil, but peak oil is something I have been convinced is real since 2002. If I can do it, I may try to invest some more discretionary income in some ETFs offered by Fidelity, specifically, some agricultural and consumer staples sorts of stuff. Not sure if this is offered to my work account, though, so am checking on that. I thought about investing in foreign currencies, but it strikes me as too risky, not knowing enough about the markets, so I have resisted doing that.Otherwise I don\’t want to be in the equities market at all, and just will take my meager long-term income on TIPS if I can get it.Every now and then I\’ll buy a silver 1 oz. coin for fun. I live very frugally in a cheap apartment in the center of a west coast city. I can walk or bus to work and don\’t drive a lot. I buy clothing, earrings, etc. on ebay or at thrift stores or otherwise always buy on sale. Like some others here, I am slowly stocking up on canned food, rice, toilet paper, etc., just in case things spiral out of control. I hope and pray that they don\’t, but it\’s good to be prepared. That includes buying some extra food for my incomparable cat. Finally, I remember reading a comment by Prof. Roubini here that he invests only in index funds. I thought that showed an admirable kind of common sense, given his profession (though don\’t know if he\’s still in \’em of course).

London Banker • April 21st, 2008 at 3:18 pm

@ Octavio, Professor Roubini and ToddApologies for not checking the wikipedia first. Okay, Todd, I will take an essay from you in your choice of English, Italian, Hebrew, or Farsi (Professor Roubini\’s languages).

Octavio Richetta • April 21st, 2008 at 3:24 pm

Written by London Banker on 2008-04-21 15:18:36Ups! similar apologies. I hadn\’t read a bio for the Professor either!

K J Foehr • April 21st, 2008 at 3:26 pm

Octavio Richetta on 2008-04-21 14:52:39“This has got to be DA\’ news of the day. What a suiper smait guy!http://www.marketwatch.com/news/story/irwin-kellner-dont-fear-deficit/story.aspx?guid=%7BEF658AD0-9C18-4125-A9E3-18E63C9C7869%7DBetter red than dead Commentary: Don\’t be surprised if Fed stops cutting rates”I’m not sure what you are referring to as the news of the day, the end of the rate cutting cycle? I thought that Wall Street was already anticipating that as part of “the worst is behind us” and “a rebound in the second half” pipe dream. But I am still wondering how the market is going to react if Ben actually does indicate that he is ready to stop cutting next week. In the current inflationary environment with the risk / fear of rising long rates, I am thinking that after they really stop and consider what is likely to happen to long rates going forward, they are not going to like that scenario at all!What’s your take? Do you think they will really celebrate higher rates?

K J Foehr • April 21st, 2008 at 3:34 pm

*DJ Texas Instruments 1Q Rev $3.27B Vs $3.19B, +2.5% >TXNDJ Texas Instruments Sees 2Q Rev $3.24B-$3.5B >TXNDJ Texas Instruments 1Q EPS 49c Vs EPS 35c >TXNDJ Texas Instruments Sees 2Q EPS 42c-EPS 48c >TXNGuidance looks light, trading lower AH.

Octavio Richetta • April 21st, 2008 at 3:38 pm

Written by K J Foehr on 2008-04-21 15:26:23I meant that was the most stupid commentary I\’ve read today. Goldilocks is amazing! They\’ve cooked up a new mantra to replace the previous one! If their mood ever changes for good, watch down below! I think what is driving markets is the fed actions around the BSC bailout. It looks like they did avoid financial meltdown (at least for a while), and the PDs, primary beneficiaries of this generosity, are still partying.Once the attention goes back to the economy, housing, and the fact that financials will not be what they were for a a long long time…IMO, if the FED cuts less than 50 bps the market will fall. They are getting down to a level where rates won\’t matter anymore…IMO, if things are as bad as the Professor forecasts, they will eventually cut down to 1%.Don\’t forget, the consensus has become short and shallow. Deviations from this will come as a big surprise…

Little Saver • April 21st, 2008 at 3:40 pm

@Guest on 2008-04-21 15:01:19:How do you get a comment to actually post here without losing it? Is there a primer anywhere?First press preview, it opens a separate window with your comment, from which you can recover it in case it gets lost afer sending.

Mark • April 21st, 2008 at 3:51 pm

Written by Giraf on 2008-04-21 13:50:55Demand cannot exceed supply? Isn\’t that why commodity prices are going up? There is never a supply shortage? Haven\’t you been the peak oil proponent, saying supply is in fact running out?Supply isn\’t running out, oil is :-( )Supply on the whole meets demand. Before anyone balks at this consider that probably most of us would want a really nice beach house somewhere, for really cheap- for free! For free would mean a huge demand. But we know that things aren\’t free and that the market sets prices in order to \"ration\" goods (and whatnot).Increasing prices cause demand destruction. Lowering prices mostly increase demand, but the supply is usually there; yes, there can be supply shortages, but usually when this happens prices are adjusted, causing demand destruction.In the end prices level demand. Again, one cannot expect to set the price of commodities to \"free.\"All of this aside, I really don\’t think that it\’s proper to price people out of food.Mark (the original? one)

K J Foehr • April 21st, 2008 at 4:24 pm

Octavio Richetta on 2008-04-21 15:38:27“I meant that was the most stupid commentary I\’ve read today. Goldilocks is amazing! …IMO, if the FED cuts less than 50 bps the market will fall. They are getting down to a level where rates won\’t matter anymore…IMO, if things are as bad as the Professor forecasts, they will eventually cut down to 1%.”Ok, I see. You don’t think Ben will be able to stop cutting. I agree with that; I have thought for many months that they would eventually need to cut to 1% or less in this cycle. But it does seem to me that the Fed has really started to worry about the USD and inflation, therefore, I think they really may take a pause. And I agree that the market is going to become very disappointed if the Fed has changes its bias to fighting inflation and the economic news continues to worsen! The rock and the hard place are not going to get any softer for many more months, IMO.I suppose that also means you don’t think long T rates are going significantly higher any time soon. I agree with that too. I expect a slight increase in the near term, but that will probably fizzle as the economy slows further and short rates continue lower. Although I suppose there is the possibility of more curve steepening, but I don’t expect a big rise – more than about 75bps. A larger increase will probably come later, after the recession really does end – in maybe 12 to 18 months, as the Prof estimated.

Anonymous • April 21st, 2008 at 4:33 pm

It is increasingly frustrating for everyman, for the common man. As if it\’s not enough to have to learn one\’s profession extremely well, and master the myriad daily details that fill a life, lately everyone must be cognizant of the random, shifting, fast-evaporating nature of finance. Never again can one be content to work, economize daily in acquiring needs, set aside a little gain to grow slowly by investment; presently everyone must know all the indices, currency fluctuation, real and reported inflation and GDP, all the exotic instruments WS uses to strip out gain for themselves while giving illusion that the bearer is actually going to profit. Nothing is holding its value or stability. Everything\’s price is swinging around in a month\’s time like it took years in times past to do. Foodstuffs, fuel, housing, currency, fixed income instruments, precious metals — well, except, stocks they are only allowed to ascend — but everything else is in high flux and volatility.Most people simply don\’t want to devote spare time to the extreme gameplaying going on now in our capital markets. A seeping paralysis is soaking into everyone\’s pysche. I know of no one who is anxious to take ideas and inventions and start a business in this environment. Everyone IN business is wearing the haggard look, everyone in \"shock line\" employment looks haunted. The Grosse Luge perpetrated throughout our globe is seeping into a guarded pessimism among everyone I know.Make it go away.

HousingDepression • April 21st, 2008 at 4:55 pm

http://www.cnbc.com/id/24245172 You\’d think with the 3-plus percent rally in Texas Instruments\’ shares headed into tonight\’s earnings, this company would be plunging now, after missing numbers across the board. But that\’s the joy of the markets right now: good news is great; great news is stratospheric; and bad news is, well, just expected — so it\’s not all that \"newsy.\"

Guest • April 21st, 2008 at 5:00 pm

The Federal Government deficit strategy has resulted in a Federal Government direct debt which is now almost $10 trillion and climbing with no end in sight. Every dollar run up in debt results in interest due which takes away money that could otherwise be spent by the Federal Government on things that matter to Americans such as infrastructure and other needs. The rate of increase in the Federal debt has been astronomical since the 1970s: Year Federal Debt President 1976 $ 653,544,000,000 Gerald Ford 1977 $ 718,943,000,000 Jimmie Carter 1978 $ 789,207,000,000 Jimmie Carter 1979 $ 845,116,000,000 Jimmie Carter 1980 $ 930,210,000,000 Jimmie Carter 1981 $1,028,729,000,000 Ronald Reagan 1982 $1,197,073,000,000 Ronald Reagan 1983 $1,410,702,000,000 Ronald Reagan 1984 $1,662,966,000,000 Ronald Reagan 1985 $1,945,912,000,000 Ronald Reagan 1986 $2,214,835,000,000 Ronald Reagan 1987 $2,431,715,000,000 Ronald Reagan 1988 $2,684,392,000,000 Ronald Reagan 1989 $2,952,994,000,000 George HW Bush 1990 $3,364,820,000,000 George HW Bush 1991 $3,801,800,000,000 George HW Bush 1992 $4,177,009,000,000 George HW Bush 1993 $4,535,687,054,400 William Clinton 1994 $4,800,149,946,140 William Clinton 1995 $4,988,664,979,010 William Clinton 1996 $5,323,171,750,780 William Clinton 1997 $5,502,388,012,370 William Clinton 1998 $5,614,217,021,190 William Clinton 1999 $5,776,091,314,220 William Clinton 2000 $5,662,216,013,690 William Clinton 2001 $5,943,438,563,430 George W Bush 2002 $6,405,707,456,840 George W Bush 2003 $7,001,312,247,810 George W Bush 2004 $7,596,165,867,420 George W Bush 2005 $8,170,424,541,310 George W Bush 2006 $8,680,224,380,080 George W Bush 2007 $9,120,549,682,470 George W Bush If a family racked up debt at this rate, they would long ago have been bankrupt. Our American family is creating a debt that can never be repaid if we keep increasing it and this approach to debt will ultimately bankrupt America. This is nothing other than extremely bad financial management and a failure to live within our means. If we keep doing this, then the ultimate downturn will have no cushion at all.

Guest • April 21st, 2008 at 5:23 pm

THE GOLD HACK: \"A MarketWatch article reports that Citi had its second quarterly loss I a row now, totaling almost $12 billion. At the same time, the reporter (if you can call him that) is brazenly stating that \"investors welcomed the aggressive write-downs\", causing Citi\’s stock to rally 6.5% on the news. How can that be explained? How do you manufacture a positive spin out of that? Easy. Just serve up an obscure financial analyst who is willing to say on the record that the losses were “smaller than anticipated” because his company “modeled” closer to a $20 billion loss, and – viola. good news!The Ministry of Propaganda has spoken – but investors aren\’t stupid. Just read the comments posted right next to the story. Here is one:\"Will it be death sentence to market, may be with this approach they can invite the inevitable earlier.\"Somebody is paying attention. I would bet that 80 percent of real investors share the same perception, yet still the propaganda machine is fooling itself into believing that it can control public perception by mouthing such obvious bullcrap.\"http://www.marketoracle.co.uk/Article4396.htmlPeterJB

Gloomy • April 21st, 2008 at 5:33 pm

@PeterJBThe beauty of the recent views of the financials is that:1) If they report an expected writedown or larger than expected writedown the stock goes up because they are getting the worst over with now.2) If they report a less than expected writedown the stock goes up, because it is good news that the writedowns were less than expected.In other words there is no level of writedowns which can make the stocks go down at the moment. This situation will change over the coming months as dividends get cut and reality rears its ugly head.

Gloomy • April 21st, 2008 at 5:35 pm

@London BankerThe Fed\’s actions have neither lowered mortgage rates nor increased home sales. Why do you think the result will be any different in the U.K.?I\’d love to hear an answer…

Gloomy • April 21st, 2008 at 5:53 pm

When you add up all the Level II assets by just the eight largest holders in the U.S: JP Morgan (JPM), Citibank (C), Bank of America (BAC), Merrill Lynch (MER), Goldman Sachs (GS), Bear, Morgan Stanley (MS) and Lehman Brothers (LEH), it comes to a staggering $5 trillion – nearly half the size of the economy. Level III assets are nearly $600 billion. Is the Fed big enough to bail out all these assets? My best guess is probably not, and more firms will fail. If the loans and economy both don’t start performing, these failures will happen more quickly, which is why my firm continues to avoid credit risk. It\’s not hard to envision an acceleration of this process if the market starts to believe the special loan facilities and other funding processes artificially created to deal with this mess cease to work.http://www.minyanville.com/articles/index.php?a=16812

K J Foehr • April 21st, 2008 at 6:56 pm

Interesting debate tonight on Kudlow. And it was one of the few times when he actually was making some sense. He is blaming the slowing economy on high oil prices, and blaming the weak dollar for the high oil prices. Therefore, he says, Ben needs to pause on lowering rates – no rate cut next week – which would boost the dollar and break the back of rising oil and all other commodity prices. That in turn would, supposedly, boost the economy. I.e., in Kudlow’s opinion, apparently, our whole problem now is the weak dollar. I agree that high oil / energy prices are hurting the economy significantly at this point. And I also think, as he stated, that the Fed, and the G-7 may be behind this move (if it happens) to support the dollar and bring down commodity prices before all hell breaks loose with food shortages and more serious riots worldwide. But if what he is expecting / advocating (support by the G-7 and the Fed for a stronger USD) comes to pass, the stock market will tank, IMO. This economy would worsen mightily because of higher interest rates, and the global growth export story would also be undermined, and that, as we know, is the last leg supporting our teetering economy.These are the most interesting economic times I can recall in my life, and the show is not half over yet!It is amazing that we may be near another inflection point in the stock market! Which way will it flex this time?On March 16 we were rapidly slipping into the abyss of financial collapse. Now, just five weeks later, we are ready to call an all clear, stop cutting interest rates and start fighting inflation! Since when does the economy change so much so fast?

Average Jane • April 21st, 2008 at 7:25 pm

If I may, my heartfelt thanks to those of you who replied to my recent post. Your advice is sound and I am happy to take it. I do live far more frugally these days. I got caught up for years in the easy credit merry-go-round and it took me years to become debt-free. Yet as a simple wage earner, a Cog in the Wheel as it were, I am under no illusions about being able to afford retirement. Wage earners have the deck stacked against us. How can it be that I pay approximately 31% of my earned income in taxes whilst the hedge funders pay 15%? It boggles my mind. We in the middle class are scared, O People of the Blog. We are helpless against the Masters of the Universe. We quite honestly do not know what to do and what that engenders is a sort of paralysis, if you will. We cannot afford to educate our children (Citi\’s recent decision to no longer offer student loans for two-year institutions as an example). We most certainly cannot afford health care. For the past 5 or 6 years we can\’t afford housing, either renting or buying. And now gasoline is in the stratosphere as are our grocery bills. Doesn\’t anyone in Washington hear our cries? What did we do wrong? I guess the answer is, we drank the Kool-Aid. Pretty much every economic and financial blog, newspaper article, book, any information out there laments the drubbing of the middle class and yet no one does anything about it. And we, the middle class, are quite simply paralyzed with fear. So we continue to buy at Wal-Mart. (And by the way, Wal-Mart has nearly decimated every single business in my home town in North Dakota. The town is destroyed. And it\’s in the middle of a huge oil boom. They\’re drilling in the Bakken shelf over by the Teddy Roosevelt park, for heaven\’s sake. Home prices are out of sight but unless you work for Halliburton you\’re making six dollars an hour and trying to buy a $150,000 home on that salary. See how far you\’d make it on six dollars an hour being a CNA at the nursing home.) So the bloodletting continues. Where are our leaders? Why didn\’t the auto industry jump on the bandwagon of electric cars two decades ago? Why hasn\’t the home building industry embraced affordable housing that\’s energy efficient? The most horrifying statistic I know of to date is that 70% of America\’s GDP is spending, for crying out loud. That makes no sense to me at all. So if we are to spend, let us spend on energy efficient cars and home. Like the movie: If you build/make it, we will come. But we are hamstrung, exhausted, and sick with worry about our own futures, never mind our children\’s. I hang onto a slim thread of hope that the Great American Spirit will rise again someday soon. Let the billionaires move to Dubai and build their castles on the sand. We will start new businesses. We will take care of ourselves and our neighbors. We just need the right spark. So my thanks again to all of you for your entertaining and sage posts, thanks to Dr. Roubini for telling it like it is, and I will continue to read all of you with enthusiasm and hope for the future.

WAWAWA • April 21st, 2008 at 7:30 pm

Who would have thought this would happen here.Major retailers in New York, in areas of New England, and on the West Coast are limiting purchases of flour, rice, and cooking oil as demand outstrips supply. There are also anecdotal reports that some consumers are hoarding grain stocks. Costco \"Due to the limited availability of rice, we are limiting rice purchases based on your prior purchasing history,\" a sign above the dwindling supply said.http://www2.nysun.com/article/74994?page_no=1

jd • April 21st, 2008 at 7:34 pm

Written by Average Jane on 2008-04-21 19:25:17Thank you for your post. I am basically in the same boat you are but am in PA and holding on by my fingertips. If I thought there was oil in my backyard I would be getting the shovel out right now. You are not alone. All we are looking for is some relief, am I correct. I need relief so bad and I get it for a fleeting moment and then the worries come back. Bless you Jane and you are not average.

Free Tibet • April 21st, 2008 at 8:13 pm

@ Miss America>>Re: Sorry, but I smell a rat here….Have there been many others on this site that are as skeptical as I am about this move???My sense of smell isn\’t as good as so many here who have their ear to the ground. My first thought was, \"critize the yanks then do exactly as they do.\" Seems BoE has had enough Bagehot. To be fair they have been more upfront in explaining the haircuts. My second thought was, \"after the Fed has already tricked everybody how does BoE think they can get away with it too? People will be watching. Well, maybe people will be watching the Fed now too.I have the idea they can get away with it because almost nobody understands what\’s happening. Probably the same in Britian. We\’ll have to wait to see how they socialize the loss. But I\’ll give them credit for being very smart, and very slippry.aok

Babbit • April 21st, 2008 at 8:55 pm

Hard to smell a rat in a pack of rats in a colony…\"Wicked smart\" are TPTB and making Mr. Peabody wistful for any other time. Even strip away all the creature comforts of this supposed modern age and he\’ll take simplicity and honesty over any present comforts.Once the sour vinegar of this iniquity hits the ring patterns of all the oaks in this forest, it will be a long, long time until they forget…or die. The unseen, intangible buttresses to any economy are more fragile than paper thin eggshell — without defect they can withstand tremendous stress; one dent, one uneven shock and the dome explodes.

Guest • April 21st, 2008 at 8:56 pm

My favorite, This guy is my hero: He is right, they do not want people with “critical thinking”http://www.youtube.com/watch?v=oI5EY5kqiBU

Guest • April 21st, 2008 at 8:58 pm

Guest on 2008-04-21 15:01:19: How do you get a comment to actually post here without losing it?Don\’t know. Been posting every few hours and I\’m still loosing it!

the Guest • April 21st, 2008 at 9:27 pm

Any politician not on the side of the wolves doesn\’t make it. The sheep are asleep. Wake up. Time to be sheared.

Guest • April 21st, 2008 at 9:42 pm

jd on 2008-04-21 19:34:27 Bless you Jane and you are not average.Dear Average Jane, you are a fraud! I have met Ms. Average Jane and you are not her! Rather your verbal skills, madame, reveal a lively, insightful, and all around intelligent individual who happens to be suffering from near a clinical depression (like the rest of us;).

jo6pac • April 21st, 2008 at 10:41 pm

To Post use review 1st, I never seem to have a problem.Thanks Dr.jo6pacThe race to the bottom contiues.

Guest • April 21st, 2008 at 10:44 pm

gartman said the gold rush is coming to an endcorn/rice have reached their limiti think he\’s right, TPTB have seen the effect of REAL inflationmaybe just maybe FED will stop lowering / start raising rateshowever 1 mystery remains,Oilwe know now that Oil price movement is in fact Not affected by USDhoarding? there\’s no big inventories..if ya\’all been following commodities, gold is the only one having a volatile trend,correlating with USD as for the restoil dropped about 8-9 USD, but since then remains on the upsidethis trend can also be seen in corn/rice movement sh**, what if they start raising rates but food/oil price continues to soar

Anonymous • April 21st, 2008 at 11:09 pm

@Written by Guest on 2008-04-21 22:44:22Do you not suppose a corollary betwixt food commodities and the base materials whence their fertilizer bases?Eh?Who sticks a fish in the hole with a seed today no?

Gloomy • April 21st, 2008 at 11:11 pm

China Stocks Fall; Shanghai Composite Index Drops 50% From Peak By Zhang Shidong April 22 (Bloomberg) — China\’s stocks dropped, driving the Shanghai Composite Index to 50 percent below its October record, as investors retreat from a stock market that had climbed almost sixfold in the past two years. Yunnan Chihong Zinc & Germanium Co. slumped by the daily limit after saying it will reduce metal production. Zhuzhou Smelter Group Co. sank after reporting lower profit.

Guest • April 21st, 2008 at 11:36 pm

Gloomywhen the dust finally settledBen and friends will blame the econ implosion onNibiru 2012.. (scientist from japan hv acknowledged the existence of X-planet, its bigger than earth)\"sorry guys, we have tried our best, but its way out of our league… its a cosmic thing\":D

London Banker • April 21st, 2008 at 11:39 pm

@ GloomyI don\’t think the BoE mortgage swap facility is necessarily aimed at changing the market to prevent prices in real estate falling, but it is carefully targeted to ensure that mortgage finance is available to those banks willing to lend on new mortgages going forward. The facility comes with fees and above market haircuts on AAA collateral, making it unattractive except on an as needed basis, so it is still consistent with Bagehot\’s dictum about only providing central bank liquidity at penalty rates against good collateral.The Fed\’s programmes by contrast have provided central bank funds at below market rates, with below market haircuts on toxic collateral, without any constraint at how those funds have been used, so that they money has poured into speculative plays on equities and commodities rather than supporting mortgage finance. Also, the Fed has made its money available to those who don\’t need it, leaving those who do even more illiquid.Structurally and politically, the UK is very different than the US. We only have 50 banks – not 7,000+. A handful of people can meet and decide policy quickly here because all the principals are in London and know one another – and that tends toward long term accountability. Only the party in power can propose legislation, but can do so quickly – no corrupt earmarks and competing lobbyists to complicate the process. Also, the UK is thoroughly infused with executives from all different regions and nationalities as the capital of the global markets, so tends to take policy decisions with an eye on international perception and implications – rather than the unilateral, screw the world US arrogance. Because our government can fall at any time, the ruling party has a huge incentive to fix problems rather than make them worse.We might well have a nasty, sharp crash here in real estate and finance. I\’d still rather be here than the USA, and expect we\’ll take the hard choices to make a good recovery possible.

I2nh • April 21st, 2008 at 11:45 pm

It appears Australia taking similar step to UK. Any other countries doing it?http://business.smh.com.au/rba-takes-1bn-risk-to-help-banks/20080421-27mv.html

Detlef Guertler • April 22nd, 2008 at 1:11 am

@ LB:Hopefully the Bank of England is indeed more bagehoty than others. Than we at least have a chance to compare within months, years or decades, which strategy and mindset works better to survive the actual turmoil.But concerning the collateral: Is British AAA better than other AAAs? US AAA is crap because they did the wrong math. Spanish AAA is crap because they did (and do) wrong valuations manipulating loan-to-value rates. If British AAA is something nearly as sound as AAA should be than the BoE is definitely on the right way. Is it? If not: Does the BoE some test to seperate the real AAA from the nominal AAA? The ECB doesn\’t.If not: Is someone out there working to establish some other kind of rating system? Or at least other rating agencies?

Andrew Bernhardt, ST.Louis • April 22nd, 2008 at 1:17 am

I see no catalyst whatsoever for the stock markets rise in the past two weeks. First Quarter GDP is going to be negative, then Q2 will be worse. The equities markets will depreciate fast and hard on that news. The Dept. of Commerce releases Q1 GDP on April 30th, then the selloff will begin fast. Hide in fixed income! tickers: pcy, emb, fnmix, pemdx, plmdx, tip, agg, they should all do well— I like PCY, EMB, fnmix, and plmdx best.

Prt1stAskQLater • April 22nd, 2008 at 1:26 am

@Guest on 2008-04-21 09:44:37:Excerpt from the Berkshire letter.This deal was done in the way Jay would have liked. We arrived at a price using only Marmon’s financial statements, employing no advisors and engaging in no nit-picking. I knew that the business would be exactly as the Pritzkers represented, and they knew that we would close on the dot, however chaotic financial markets might be. During the past year, many large deals have been renegotiated or killed entirely. [Bold added for emphasis]With the Pritzkers, as with Berkshire, a deal is a deal.That\’s Integrity at its best. That\’s what the doctor needs to order.Given what the professor is predicting, we need to print more. The trouble with too many people threatening to walk away is that they might end up electing a person who might advocate that the US \’walk away\’ – that would be a credit risk manager\’s nightmare. That possibility is a real black swan. To forestall a national walk away black swan(Politics drives Economics), Ben has to go nuts with the printing. As Taleb would say, recognising the possibility of a black swan helps prevent it.On the other side of the pond, BoE has finally come off its self-righteous high horse and understood the gravity of the situation and gone loose with the printing. Exchanging dubious securities with pristine treasuries helps restore integrity. It\’s called detoxification. Ciao,Print First Ask Questions Later

Mark • April 22nd, 2008 at 2:21 am

Written by Anonymous on 2008-04-21 16:33:12Most people simply don\’t want to devote spare time to the extreme gameplaying going on now in our capital markets. A seeping paralysis is soaking into everyone\’s pysche. I know of no one who is anxious to take ideas and inventions and start a business in this environment. Everyone IN business is wearing the haggard look, everyone in \"shock line\" employment looks haunted. The Grosse Luge perpetrated throughout our globe is seeping into a guarded pessimism among everyone I know.Make it go away.In case my recent postings didn\’t scare everyone away (sorry, sleep deprivation and, OK, maybe some ignorance too!

Little Saver • April 22nd, 2008 at 2:24 am

Royal Bank of Scotland to Sell $24 Billion in Shares After Markdowns (Update1) By Ben Livesey and Jon Menon April 22 (Bloomberg) It plans to issue 11 new shares for every 18 existing shares at 200 pence a share, which means a 46 percent discount from yesterday\’s closing price. The new meaning of a bank hold-up? And than the Royal in their name, a Royal hold-up, to soften the pain a bit.

Mark • April 22nd, 2008 at 2:48 am

CRAP! Lost part of my last post! This is getting to be just too unnecessarily difficult!To continue…Everyone is free to partake in monitoring economic conditions. Pay me now or pay me later… Some decide to spend their time engaged in mindless entertainment; those that do will eventually have to engage their mind, most likely in trying to figure out what the hell happened. If you sleep at the wheel it should be no surprise to wake up one day and find out that you\’re dead.As to what we can do about all of this, I offer this Bertrand Russell quote:You never change anything by fighting the existing. To change something, build a new model and make the existing obsolete.Mark (the Original? one)

Octavio Richetta • April 22nd, 2008 at 5:50 am

These are the most interesting economic times I can recall in my life, and the show is not half over yet!Written by K J Foehr on 2008-04-21 18:56:46You bet. Look at Hussman, a reasonably skillful guy, fully hedged, he went down almost 2% last week:http://hussmanfunds.com/wmc/wmc080421.htmThe pullback in the Strategic Growth Fund last week (-1.87%) was primarily attributable to those divergent industry returns, away from defensive sectors (staples, non-cyclicals, healthcare, etc) and toward risk sectors (financials, materials, cyclicals, internet) not heavily represented in the Fund.

Giraf • April 22nd, 2008 at 5:52 am

Written by Little Saver on 2008-04-22 02:24:45\"Royal Bank of Scotland to Sell $24 Billion in Shares After Markdowns.It plans to issue 11 new shares for every 18 existing shares at 200 pence a share, which means a 46 percent discount from yesterday\’s closing price.\"At least the existing shareholders get an opportunity to buy \"cheap\" shares by way of a rights issue. Not like the thievery at WaMu or National City, where PE and favoured institutions only have got to buy the cheaply priced stock, diluting existing shareholders into the bargain. The latter abuse of existing shareholders is outrageous.

Octavio Richetta • April 22nd, 2008 at 6:04 am

Written by Guest on 2008-04-21 20:56:02Great video! I loved the closing: \"it is called the American dream Because you have got to be asleep to believe it!\". That video plus the article posted by sam on 2008-04-21 19:04:19 give you a pretty good hint on why I sped up my retirement from academics. I was teaching college students many of which could not do elementary school algebra/write a coherent sentence.

Little Saver • April 22nd, 2008 at 6:39 am

Written by Giraf on 2008-04-22 05:52:15:At least the existing shareholders get an opportunity to buy \"cheap\" shares by way of a rights issue. Not like the thievery at WaMu or National City, where PE and favoured institutions only have got to buy the cheaply priced stock, diluting existing shareholders into the bargain. The latter abuse of existing shareholders is outrageous.That is correct, and it shows how much respect those financial institutions have for their shareholders. As savers, we can only try to avoid to feed the wolves.

Giraf • April 22nd, 2008 at 6:56 am

@Little SaverI sent the following e-mail to chairmanoffice@sec.gov yesterday.\"The raping and the pillaging of the small investor continues.The Washington Mutual deal and now the National City refinancing are being done to the detriment of existing shareholders. The discounts from market price to private equity firms and “favoured” institutions are outrageous. The existing shareholders are being diluted, without any say. The SEC should investigate this practice and step forward and insist that existing shareholders of companies be offered new shares, by way of rights issues, at the same attractive terms as the plunderers are receiving.\"Maybe they will take a look, maybe not. Nothing ventured, nothing gained.

Octavio Richetta • April 22nd, 2008 at 7:19 am

Written by JLarkin on 2008-04-22 06:57:22A great one by Mish!it is never ending. Look at the headlines and futures are flat! Yes, it is all already priced in!http://www.bloomberg.com/index.html?Intro=intro3http://finance.yahoo.com/indices?e=futuresJust did a quick and dirty Cash Flow (CF) analysis for MER, 2007, 2006, 2005 And there is a HUGE discrepancy between their bottom line int the Income Statement and CF from operations. The earnings they show are all paper earnings from recognizing gains on securitization ahead of time. The Bank Fiesta will go on for a long long time.From my email:From the 10-k table of contents, This link will take you right into the CF statement (just scroll up a bit) Look at the HUGE discrepancy between reported income and cash flow from operating activities. This guys were booking HUGE profits from the securitization business before they got the cash. The CF statement is produced by what they call the indirect way. they make adjustments to the Income Statement that are not cash. The biggest item that is not a cash flow is below****http://www.sec.gov/Archives/edgar/data/65100/000095012308002050/y46644e10vk.htm#127 YEAR ENDED LAST FRIDAY IN DECEMBER (DOLLARS IN MILLIONS) 2007 2006 2005Cash flows from operating activities: Net (loss)/earnings $ (7,777 ) $ 7,499 $ 5,116 …Cash used for operating activities (72,362 ) (23,763 ) (24,275) Note the HUGE difference! Cash flow from operations negative like hell for the last three years (second row of numbers). Yet, income reported is about a lot higher (first row)*** Warning These are all the earnings they booked from securitization:Other changes in loans, notes, and mortgages held for sale 07, 06, 05: (86,894 ) (47,670 ) (34,554)

Octavio Richetta • April 22nd, 2008 at 7:55 am

Note how for a healthy business, a grosso modo, cash flow from operations are on line with net income. Specially if taken over a number of years. Check BRKAhttp://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=5769408-340912-347095&type=sect&dcn=0000950134-08-003848check the lines: 2007, 2006, 2005 million usdNet earnings $ 13,213 $ 11,015 $ 8,528 andNet cash flows from operating activities 12,550 10,195 9,446

Guest • April 22nd, 2008 at 8:33 am

@jlarkinI can easily imagine a homedebtor visit his local, neighborhood branch with the keys of a future foreclosure in hand: \"Welcome to Bank of What-Happened-to-America.\" \"Hey, I just wanted to drop off these keys. We\’re not going to make payments anymore. We\’re in a recession, and the payments in the apartment complex across the street got $40 cheaper.\"

Guest • April 22nd, 2008 at 8:39 am

Canadian CutCentral bank lowers key rate by a half-point, citing intensified concern over U.S. economy.

Guest • April 22nd, 2008 at 9:11 am

Existing home sales down again. Median price drops 7.7% in past year! Oh, but wiat, a govt agency, OFHEO, reprots its price index ROSE .06% in Feb and prices only fell 2.4% in the past year…geee, who to believe….

Octavio Richetta • April 22nd, 2008 at 9:22 am

Written by Guest on 2008-04-22 08:39:35ECB and others will slowly follow as rest of the world catches the flu. USD should then rebound from the lows.

Anonymous • April 22nd, 2008 at 9:48 am

The idea that speculators are driving the price of oil is not consistent with the math of the current situation:- from the Committment of Traders Report (COT), the sum of the net longs for both categories of speculators is 70,000 barrels- this equates to 70,000 x 1,000 barrels per contract = 70,000,000 barrels- of this, about 2% will actually take delivery, the other 98% negate their purchases with sales – 2% of 70,000,000 barrels equates to 1.4 million barrels- on any given day, the demand is about 86 million barrels- therefore, the demand due to speculators is about 1.6%- therefore the price increase due to speculators is about $2 per barrel out of the current price of about $117 per barrel

Anonymous • April 22nd, 2008 at 10:16 pm

Correction to Calculated Risk: for California refinances, the primary loan is still non-recourse. If there is a second it may become recourse.

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