Negative Equity in Auto Loans and the Bust of the Auto Bubble
We have been worrying for a while about the collapse of home sales, the free fall in home prices, reckless lending practices that occurred in mortgages and now millions of households being “under water” or with negative equity on their mortgages.
But guess what? The same kind of credit mess did occur in auto sales and auto loans. The latest auto sales for April have been an unmitigated disaster. As Reuters put it:
“U.S. auto sales fell to their lowest annual rate in more than 15 years in April as weak consumer confidence and rising gas prices hit the industry’s most profitable vehicles hardest.”
So auto sales are free falling and desperate car makers are cutting on prices and providing further price cuts via loose financing terms. But at the same time a time bomb of negative equity in auto loans is emerging. For the last few years auto loan lenders sharply loosened their lending standards, used aggressive, deceptive and predatory lending practices, allowed households to buy cars with little equity in them (as zero down-payment deals became the norm) and thus caused a bubble in car production and in car sales (individuals with cars too big and too many cars each) that was financed with a reckless lending bubble.
Sounds familiar? The car lending bubble was as reckless as the subprime and mortgage bubble. And now this credit bubble is going bust leading to rising default rates, significant negative equity in car loans (25% of all car loans are “under water”), massive losses to auto loan firms and a severe recession in the auto industry.
A brilliant piece on National Public Radio described this car loans disaster:
Drowning in Debt
Being ‘Upside Down’ and Other Car Loan Hazards
Morning Edition, May 1, 2008 · Americans who bought cars beyond their means are falling behind on their loans in record numbers.
Auto loan delinquency in the United States hit a 17-year high in the fourth quarter of 2007, according to the American Bankers Association. Some 3.13 percent of car loans were overdue 30 days or more.
“Most consumers are carrying much more debt for their car than ever before,” says Philip Reed, a consumer adviser for Edmunds.com, an automotive information site.
Edmunds.com estimates that nearly a fourth of borrowers are “upside down” in their car loans, meaning the car is worth less than the loan balance.
“These people don’t have much flexibility…. They can’t even walk away from the loan,” Reed tells Steve Inskeep. “They actually have to pay to get free from the debt that they have.”
Putting Less Money Down
The rule of thumb used to call for putting down 20 percent of the car’s purchase price.
But these days, Reed notes, many people are buying higher-end vehicles and they’re buying cars when they’re younger. “So as a result they’re putting less down,” he says. “They’re keeping that money so that they can make car payments. There has been a trend to being more upside down than ever before.”
The cost of a car has risen in relationship to most people’s earning power.
Auto manufacturers’ financing arms “have struggled to find ways to keep putting people in cars. So they’ve had to become more creative,” Reed says. They’ve offered incentives, leases and longer-duration loans — averaging almost 64 months in 2007.
“We are … encouraged to buy vehicles, to finance vehicles, to get more car than we need as kind of a patriotic move to keep the economy going,” Reed says.
Beware the Finance Office
After settling on an initial price, car buyers end up in a dealer’s finance and insurance office — and that’s where the car’s cost can go up.
“It’s at this point that they begin to sell you extra products,” Reed says. “They also begin to work on your loan. They may have a credit application all ready. But if you’re not on your toes, they can actually inflate the interest rate at that point and you can end up paying quite a bit more than you should be paying.”
People who get victimized “have some problems with their credit rating,” Reed says. “So they go into the … room and the finance officer says, ‘You know, we both know you’ve had a few problems, but you’re nice people so I’m going to take care of you.’”
Then the rate rises. Say you qualify for a loan with an interest rate of 6 percent, Reed says. Financial officers “may sell it to you at 8 or 9 percent. So they’re making quite a bit of money on you over the term of the loan.”
Troubled Borrowers In Denial
Borrowers behind on their loans tend to avoid dealing with the situation, Reed says. “They don’t want to answer the phone, they don’t want to open the mail, they don’t want to confront the problem that’s in front of them….”
But they have more options than they realize, such as selling an expensive vehicle and buying a more affordable one with more reasonable loan terms, he says.
“People need to be much more realistic about the vehicle that they buy and what they are willing to pay for it,” Reed says. “It really begins … with deciding what you’re able to afford. People have been sold the American dream, which is a beautiful, sexy, hot car that’s going to make everybody envy them. And now they’re sort of paying the price for making a poor decision.”
93 Responses to “Negative Equity in Auto Loans and the Bust of the Auto Bubble”
concerning the climate for stocks: a permanent rise in the stock markets until 2011 will be announced this week. stocks fall sharply, market expectations already priced in a rise until 2019
First Belgian…\"\"People need to be much more realistic about the vehicle that they buy and what they are willing to pay for it,\" Reed says. \"It really begins … with deciding what you\’re able to afford. People have been sold the American dream, which is a beautiful, sexy, hot car that\’s going to make everybody envy them. And now they\’re sort of paying the price for making a poor decision.\"No pal, you got it wrong. Your whole economic model is based on this. And when it no longer works, Uncle Fed will just keep sending checks, as long as the rest of the world envies your nation\’s economic magic…
Former IMF De Rato joins Buffet in suggesting that the global credit crisis is nearing the end:http://www.bloomberg.com/apps/news?pid=20601068&sid=adxAi6l8Jt6Q&refer=economyWish they\’d explain why they think so, instead of just popping out with these conclusory statements. SWK
Wish they\’d explain why they think so, instead of just popping out with these conclusory statements.Koolaid, grape flavoured
Written by tutterfrut on 2008-05-04 17:15:31\"First Belgian…\"Funny
If more and more \"experts\" and recognised names keep saying that the worst of the credit crunch is over, us bloggers on NR\’s website might start to believe it.But then again….Chuckle, chuckle.
Ben and the Fed merit some appraisal.Check this out and say with me. http://www.youtube.com/watch?v=4o29VoxtsFkSuperBen ………………………… DuperBen,Does whatever ……………….. a duper can.Spins a net ……………………… any size,Caches thieves ……………….. by telling lies,Look out! Here comes SuperBen.Is he wrong? ………………….. F***k you FedHe lives on a Hell……………. enistic cloud.Can he steel ………………….. piece of bread?Take a look ……………………. the poor starving dead.Hey there! There goes SuperBen.In the wing ……………………. of the Right,With new scam …………….. paradigm,In the dark ……………………. with no sight,He strives ……………………. What a shame.SuperBen …………………….. DuperBen,Frankly number one hood SuperBen.With this game …………… he got boredHas a plan …………………… with his board.To him,Market is a great gang bang-up Whenever you hear “hands up!”You’ll find the SuperFeeeeeeeeeeeeeeeeeeeeeeeeed.Good karaoke
LIBOR Think for a moment what the tired, worn phrase \"banks are fearful of lending to each other\" means. It means each bank knows that it is insolvent and fears that its peers are also insolvent. The Fed has not changed and cannot change the fundamentals. The crisis is over??!!! One fine day in the coming months we will open the morning paper to find that Fannie and Freddie have been nationalized (or the equivalent). At that moment the insolvency of the US will be undeniable and all hell will break lose.
Why are steel stocks going through the roof? Is it time to go short steel or will I get decimated in trying to predict a top for the steel/commodity bubble? I just can\’t understand how steel stocks could be doing so well when the fundamentals are so bad?
Who Will Tell the People? By THOMAS L. FRIEDMAN Traveling the country these past five months while writing a book, I’ve had my own opportunity to take the pulse, far from the campaign crowds. My own totally unscientific polling has left me feeling that if there is one overwhelming hunger in our country today it’s this: People want to do nation-building. They really do. But they want to do nation-building in America. They are not only tired of nation-building in Iraq and in Afghanistan, with so little to show for it. They sense something deeper — that we’re just not that strong anymore. We’re borrowing money to shore up our banks from city-states called Dubai and Singapore. Our generals regularly tell us that Iran is subverting our efforts in Iraq, but they do nothing about it because we have no leverage — as long as our forces are pinned down in Baghdad and our economy is pinned to Middle East oil. Our president’s latest energy initiative was to go to Saudi Arabia and beg King Abdullah to give us a little relief on gasoline prices. I guess there was some justice in that. When you, the president, after 9/11, tell the country to go shopping instead of buckling down to break our addiction to oil, it ends with you, the president, shopping the world for discount gasoline. We are not as powerful as we used to be because over the past three decades, the Asian values of our parents’ generation — work hard, study, save, invest, live within your means — have given way to subprime values: “You can have the American dream — a house — with no money down and no payments for two years.” That’s why Donald Rumsfeld’s infamous defense of why he did not originally send more troops to Iraq is the mantra of our times: “You go to war with the army you have.” Hey, you march into the future with the country you have — not the one that you need, not the one you want, not the best you could have. A few weeks ago, my wife and I flew from New York’s Kennedy Airport to Singapore. In J.F.K.’s waiting lounge we could barely find a place to sit. Eighteen hours later, we landed at Singapore’s ultramodern airport, with free Internet portals and children’s play zones throughout. We felt, as we have before, like we had just flown from the Flintstones to the Jetsons. If all Americans could compare Berlin’s luxurious central train station today with the grimy, decrepit Penn Station in New York City, they would swear we were the ones who lost World War II. How could this be? We are a great power. How could we be borrowing money from Singapore? Maybe it’s because Singapore is investing billions of dollars, from its own savings, into infrastructure and scientific research to attract the world’s best talent — including Americans. And us? Harvard’s president, Drew Faust, just told a Senate hearing that cutbacks in government research funds were resulting in “downsized labs, layoffs of post docs, slipping morale and more conservative science that shies away from the big research questions.” Today, she added, “China, India, Singapore … have adopted biomedical research and the building of biotechnology clusters as national goals. Suddenly, those who train in America have significant options elsewhere.” http://www.nytimes.com/2008/05/04/opinion/04friedman.html?ref=opinion&pagewanted=print
Written by Anonymous on 2008-05-04 19:42:41\’Cos people think the fundamentals in the BRICs are still o.k.
Federal Reserve, along with other central banks, said Friday that it was increasing the funding it is providing to banks and announced that, for the first time, it was willing to accept bonds backed by auto loans and credit cards.http://www.marketwatch.com/news/story/fed-expands-auction-accepts-wider/story.aspx?guid=%7BBD25FFE1%2DEF18%2D45C1%2DB984%2D3CD33807727B%7DI am speechless. Now Fed is accepting auto loans and credit cards as collateral.
wawawatheir tennis game is about to end
Looks like the whole page is in italics…including the \"Post A Comment\" section;-PAnyway, what\’s the point with bringing out auto loans being upside down? Aren\’t auto loans mostly always upside down? After all a car hardly appreciates or even retains its value after you drive it out of the showroom. Unless perhaps if you are buying a Rolls Royce?
that\’s rightwhats the pointthey are desperate
\"Now is a good time to buy or sell a car\" -Henry Lereah
I\’ve always said that the main reason many people can\’t get ahead was because they bought too much car. Aside from the actual cost of the auto, you usually have higher insurance costs and get less milage. Every thing required to keep it up, such as tires and batteries tend to be larger and more expensive. Then, when they manage to pay it off, they trade it in on a new one and start the process all over again.
Hey ECB,And when they trade their vehicle in, they roll over the balance of their current loan into the new car loan…after a few times of doing this, that\’s a pretty hefty balance. But as the car dealers say,\"we\’ll payoff your existing car loan!\" Sure….and extend the payments out for 10 years.
Written by Gloomy on 2008-05-04 19:46:20“You can have the American dream — a house — with no money down and no payments for two years.”
@Written by Gloomy on 2008-05-04 19:46:20“You can have the American dream — a house — with no money down and no payments for two years.” No no no no no! This sentence structure is simply ALL WRONG! WRONG!!! Where in this green earth did you learn your English might I ask; hmmm?? Clearly the correct wording of this sentence is “for the next two years you can have the American dream — a house — with no money down and no payments.” Of course the unspoken boilerplate must also be applied…..\"After which we will renegotiate the terms of the loan to something that is completely unpalatable to us but mealy crushing to you. Deal OR NO DEAL!!!!\"
zero downzero percent interestzero payments for one yearit was about one year ago that nissan (and others)were pushing this offer just about time to make the first pmt? jingle mail car keys? or just keep the free car or maybe the Fed will take on your balance sheet.
ES,price of metal/steel is quite high nowdays,so selling sCRAP metal should be good for business:)
I need to sell Agency Paper in huge size-NOW!My car payment is due.STILL shakin\’ my headThanks for the help. jingle jingle
I thought you might like this humor:http://tinyurl.com/6pd7q3
Italics on and off
or just off
Basta Aldino!\"….This Aldine italic became the model for most italic types. It was very popular in its own day and was widely (and inaccurately) imitated. The Venetian Senate gave Aldus exclusive right to its use, a patent confirmed by three successive Popes, but it was widely counterfeited. The Italians called the character Aldino, while others called it Italic….\"(Wikipedia about the history of italics)
….get more car than we need as kind of a patriotic move to keep the economy going..Always the best (almost only) argument to stimulate the american psychos.
Buffet and Munger get mad?http://www.bloomberg.com/apps/news?pid=20601087&sid=a8bkof8fyCB0&refer=home
ES,price of metal/steel is quite high nowdays,so selling sCRAP metal should be good for business:)Written by Guest on 2008-05-04 22:52:19I have a feeling the price of metal/steel is about to sh!t a BRIC, the wheels are turning, the fix is in, patience patience, it\’s on a time-delay.Take 3 Excedrin for that headache
….one in five American adults think the sun revolves around the Earth.http://www.boom2bust.com/2008/05/02/america-the-ignorant/And this is not a coincidence.Why teaching shepples?So this sh!t can go on forever.
The continuing Countrywide saga:BofA may renegotiate Countrywide deal pricehttp://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSBNG17385120080505?pageNumber=1&virtualBrandChannel=0Countrywide\’s loan portfolio has deteriorated so rapidly that it currently has negative equity and the proposed takeover of the company will be a drag on Bank of America\’s earnings due to the elevated credit expenses at Countrywide, analyst Paul Miller wrote in a note to clients.
But the sun does revolve about the earth — with respect to the earth, and the earth revolves about the sun with respect to the sun. There is no contradiction.This question, so trivial to the layman, is complicated to the professional.Ph.D. physics 1956
The slowdown in auto sales is going to trigger major problems for the massive automotive supply chain, which will see an amplified reduction in their forecasted sales. This is what happened during the telecom bust of 2001. I wonder how many LBO\’s were done of companies in automotive. Falling auto sales will reinforce Nouriels expectation of higher LBO defaults on corporate and junk bonds.
@Uncle Ben on 2008-05-05 08:04:35http://www.boom2bust.com/2008/05/02/america-the-ignorant/• One-quarter of teenagers could not identify Adolf Hitler• One-third did not know that the Bill of Rights guaranteed freedom of speech and religion• Fewer than half knew that the Civil War took place between 1850 and 1900• One-fifth did not know who the United States fought during World War II• Eleven percent thought Dwight Eisenhower was the president forced from office by the Watergate scandal, while a similar percentage thought it was Harry Truman
The credit mess is old news and priced in. Stocks have it right-look, recession over:10:01 U.S. April ISM services above consensus 49.4%10:01 U.S. April ISM services index 52.0% vs 49.6 March
On the real estate front, I set up a martin condo in my back yard two weeks ago. 12 units, 10 furnished with pine straw and two units un-furnished. Unlike the rest of the town\’s real estate, I seem to have sold at least one unit and more purple matins are showing interest in the property.
Markets green and headed higher on ISM suprise.
He`s only been gone a day but I`m already suffering OR withdrawal!
10:13[FMD] First Marblehead cuts 500 jobs to lower operating expenses
don\’t look now, but there may have just been another better than expected number that the market as of right now decided to \"flow\" down on after an initial pop. this has happened 3 times in the last week or so. the minute by minute BS of the market is currently DOWN, who knows where to from here… we still dance around the critical levels of 13000 and 14000ish
10:43 June crude last up 2.5% at $119.20/brl after a $119.70 high
FOXBusiness: Gas Prices Up 15 Cents in Two Weeks
This oughta rally shares higher!11:19 Crude futures rise to above $120 a barrel for the first time
11:49[AMR] American Eagle April load factor 70.8% vs 74.2%11:48[AMR] American Eagle April traffic falls 7.6%11:47[AMR] American Airlines April traffic falls 6.6%
@ ptm on 2008-05-05 09:07:51How did you attract purple martins? I got a brand new purple martin house, set up 24 feet in the air and all I can get are squatter sparrows. Since it is too late to attract purple martins this year, no sense in evicting the sparrows. Hmmm have the sparrows learned anything from the US homeowner and the Banks?
From Hussman:May 5, 2008 Deja Vu John P. Hussman, Ph.D.All rights reserved and actively enforced.Reprint PolicyWell, having declined nearly 20% from its peak, the S&P 500 has recovered about half of its loss in a period of several weeks, taking the index within about 10% of the all-time high it registered in the mid-1500 range a few quarters ago, with the Dow Industrials down even less. Transportation stocks, in particular, have enjoyed a scorching rally in recent weeks, bettering their prior bull market highs. Despite the fact that our most reliable recession indicators registered a clear warning late last year pointing to an oncoming economic downturn, the unemployment rate stands only about a half-percent above its lows and remains modest on a historical basis. The option volatility index has declined significantly, while credit spreads and advisory bullishness are on the mend. All of this suggests that market participants believe the worst is over, thanks largely to the actions of the Federal Reserve. For our part, the Strategic Growth Fund has achieved positive returns since the market\’s peak. Still, the Fund has not participated in the recent advance, and remains a few percent below its all-time high, but we are willing to take a more constructive position if market internals improve. But enough about January 2001. Talk about deja vu. At that time, market conditions could be precisely described by the preceding paragraph, including the optimism of investors. As I wrote in my weekly market comment then, “Everybody seems to believe that the Fed has bought a market bottom, and that the current economic slowdown is \"old news\". We\’re skeptical. Mainly because the current economic downturn is coming off of a capital investment boom financed with a great deal of leverage. We believe that the economy is in the early phase of a \"deleveraging cycle\". Investors who believe in the omnipotence of the Fed have evidently forgotten phrases like \"liquidity trap\" and \"pushing on a string\", which are ways that economists describe the failure of easy money to stimulate the economy when spending is sluggish. Well, that\’s what we\’re likely to get.”
RE: \"martin condo\" by ptm on 2008-05-05 09:07:51Three years ago I put up a bird condo, but it only attracted one couple. Since then I have read many bird species are not social nesters and are in fact very territorial. This year I put up 12 separate nesting boxes around my property. Now the problem I have is that the boxes intended for screech owls and flickers are being occupied by European starling. The best thing I am aware of for filtering species is the size of the hole, but this obviously only works for encouraging smaller birds.Does anyone have concrete evidence of government intervention in the gold market? There was quite a drop in the last couple weeks, but now it seems to be coming back. The Don Coxe webcast suggests that it moves counter to the financial stocks which are unnaturally inflated at the moment.
goldorcash on 2008-05-05 11:46:22 Does anyone have concrete evidence of government intervention in the gold market?Gold Anti-Trust Action (GATA) Committee has documented no less than 11 public statements by the Federal Reserve and International Monetary Fund that they actively \"lease\" or sell gold reserves to intervene with (suppress) the price of gold on the open market. GATA has filed a freedom-of-information request with the Federal Reserve and the Treasury in December of 2007. The Fed has reported it is reviewing approximately 400 pages of \"gold swap\" related documentation for release to GATA. World-wide consumption of gold exceeds production by 1,000 tones per year (2,400 versus 3,400) and the Western central banks must sell off their stockpile to suppress prices. Since bank activities are secret, central banks have never been audited to confirm that they hold the amount of claimed gold reserves. GATA estimates that Western central banks have sold off approximately half the 32,000 tonnes of gold claimed to have in their vaults, so price intervention can not be continued indefinitely. http://www.gata.org/node/6241
Hubbs on 2008-05-05 10:55:08 – How did you attract purple martins?goldorcash on 2008-05-05 11:46:22 – The best thing I am aware of for filtering species is the size of the hole, but this obviously only works for encouraging smaller birds.Yup, bery difficult to get martins, that\’s why me so proud.Actually, my neighbor is a birder and patiently prepared and waited five years for his first set of martins. I simply set up a sister house and took over his excess population. These birds are actually swallows that take their insect prey in mid-flight. They like open areas with water and they like to be next to humans to minimize attacks by hawks. I set the condos up next to the swimming pool where they can dine on red wasps and mosquitoes. As I understand it, they can eat their body weight in mosquitoes each day!
An interesting Wall Street Journal article details the increasing number of hardship loans being taken out against 401k savings. At the end of 2007, 18% of employees with 401k plans had loan balances outstanding from their plans, up from 11% in 2006, the Journal reported citing a survey by the Transamerica Center for Retirement Studies, a nonprofit corporation funded by Aegon NV\’s Transamerica Life Insurance Co.
a recent survey by the National Association of Government Defined Contribution Administrators shows nearly 25% of 170 local governments that sponsor 401(k) plans report participants lowering contributions because of economic stress.
2:00 80% of banks tighten standards for commercial real estate2:00 Record number banks less willing to give installment loans2:00 60% of banks tighten standards for prime mortgages2:00 Banks tightening lending standards for consumers, firms
Can you get a car loan for \’this\’ car that uses no oil?http://www.xpress4me.com/photos/gallery.jsp?article=/channels/xpress4me_com/news/uae/dubai/20007183.html&index=1&referer=/channels/xpress4me_com/news/uae/dubai/20007183.html&folder_uri=/channels/xpress4me_com/news/uae/dubai/
Very good article on liquidity, worth a read in full.\"Liquidity isn\’t apple pie…Similarly, in financial markets, we want liquidity at some times and in some places. But there are times and places where we want, even need (gasp!) illiquidity!Illiquidity. That word is so ugly. What might be another word for the same phenomenon? How about \"commitment\"? When a person invests in something that is not very liquid, they are committed. They are necessarily betting on its fundamental value. Liquid securities can be bought or sold as a trend or a trade or a play for a greater fool. But if the thing you are buying can only be sold with a big haircut, you\’d better hope for a really gigantic fool if you have no confidence in its underlying value. (Clever managers did find ways around this problem, but let\’s put principal/agent issues aside for the moment.) When financial markets are too liquid, everything looks like cash. Superfluous distinctions — like the economic meaning of the assets bought or sold — fall by the wayside. Sure, investors always prefer liquidity to illiquidity. An option to buy or sell quickly and cheaply is preferable to an option to buy or sell slowly and with large transaction costs. But just because investors like something doesn\’t mean that it\’s good. Investors like rainbows and ice cream and free money from taxpayers. But the rest of us prefer that investors make serious, informed decisions about what is and isn\’t of value, and that they be paid for evaluating and actually bearing risk, rather than artfully shifting it (or whining when it cannot be shifted, because omigawd-there-is-no-liquidity!)….\"http://www.interfluidity.com/posts/1209978923.shtml
The \"rally mites\" stand ready and liquid…
WASHINGTON (MarketWatch) — Consumers and businesses found it harder to borrow money over the past three months, the Federal Reserve reported Monday, a sign that the historic credit crunch now hitting the economy is still worsening despite Herculean efforts by the Fed.More than half of the banks surveyed by the Fed said they had tightened the screws on commercial and industrial loans, commercial real estate loans, residential mortgages, and home-equity lines of credit. Almost no banks eased credit terms for any type of loan, the Fed said in its quarterly senior loan officer survey. Read the full survey results. The credit squeeze has moved far beyond the subprime segment to affect nearly every borrower. Tighter credit could slow economic growth, especially consumer spending, economists say. Lack of credit could sink the commercial real estate market as well. The crunch showed few signs of abating. The net fractions of banks reporting tighter lending standards \"were close to, or above, historical highs for nearly all loan categories in the survey,\" the Fed said.
EMERGING MARKETSA ban on food futures?India reportedly considers halting trades, as the government struggles to curb soaring inflation and the rising cost of food becomes a major issue around the globe.
More good jobs news!4:31[MRK] Merck to cut 1,200 U.S. sales force positions
BIG NEWS FROM THE ISM REPORTThe ISM report, despite the misleading headline number, which seems to be par for the couse lately, was full of very negative information (see link below). However, one item really stood out to me. This is what I\’ve been waiting for:\"Export orders, a source of strength for businesses in recent months, fell sharply\"Remember that exports are really the only thing keeping corporate profits from falling off a cliff. This confirms that this supporting leg has now been removed, setting the stage for a dramatic drop in corporate profits with accompanying major drop in the market.http://www.nytimes.com/2008/05/05/business/05econ-web.html?partner=rssyahoo&emc=rss
Digging still deeper into the ISM reports — Manufacturing export orders rose; non-manufacturing export orders fell. Included in non-manufacturing industries are agriculture, which surprises me. I guess all our surplus farm produce is going into ethanol.
Based upon the wonderful news y\’all keep posting, here is my big picture view to date. I cannot see anything changing this scenario through 2008. Maybe in early 2009 the new president does something dramatic?1. Recession Begins (4th quarter 2007) – Consumers are broke and cannot carry any more debt. Housing market stalls. Poor holiday retail sales.2. Monetize the Debt, Phase I (1st quarter 2008) – Sub-prime residential mortgage defaults begin -> CDO losses -> CDS called in as backup -> under-funded insurance and hedge funds cannot pay -> Bear Stearns investment bank goes bankrupt -> Federal Reserve issues ~500 Billion in loans to banks, primary dealers, and investment banks (Fed pays JP Morgan Chase $30 Billion to take on Bear Stearns credit derivative debt).3. Banks are Broke (2nd quarter 2008) – Banks (Citigroup, Merrill Lynch, JPMorgan, and Wachovia) are issuing new stocks (diluting existing shares) to raise cash. Commercial losses mount. America\’s most trusted investment company, Berkshire Hathaway Inc., first-quarter 2008 profit fell 64 percent mainly because it recorded an unrealized $1.6 billion pretax loss on its credit derivative contracts.4. Stock Market Crashes (3rd quarter 2008) – Stocks no longer based upon value. Market mechanisms draw assets from investment mode to a \"mania\" trading mode. The current period parallels the prior manias of both 1929 and 2000. Financial sector problems are now pushing recessionary forces onto the real economy which, in turn, fuel another wave of loan defaults that will force mid-size and smaller banks into failure. The credit squeeze has moved far beyond the subprime segment to affect nearly every borrower. Tighter credit could slows economic growth, especially consumer spending, economists say. Lack of credit could sink the commercial real estate market as well.5. Monetize the Debt, Phase II (Late 2008) – Recession continues to spiral with many more job losses. Eighteen months have passed since bulk of sub-prime residential mortgages were issued and now defaults multiply -> more CDO losses -> more CDS called in as backup -> more under-funded insurance and hedge funds cannot pay and go bankrupt -> investment banks go bankrupt -> recession deepens. Process repeats with other ABSs in early 2009 including credit card debt, automobile loan debt, student loan debt, etc. Process repeats a third time in 2009 for commercial mortgage debt, commercial leases, and so on.6. Monetize the Debt, Phase III (2009) – Deep recession leads to Alt-A and prime mortgage defaults. The Federal National Mortgage Association and Federal Home Loan Mortgage Corporation are nationalized. Federal Reserve continues to hold/purchase bad ABS debt which causes massive cash infusions into the banking system at the expense of the future taxpayer. As the dollar continues to depreciate inflation continues at 15-20% per year or per month?7. Hyperinflation Tripwire Crossed (2010) – Systemic inflation becomes built into pricing and grows out-of-control. Or foreign investors fly-to-safety. 70% of Treasury notes are sold and investments move to other currencies and precious metals to preserve remaining wealth. A commodities asset bubble, ripple price shocks through the economy.8. World-Wide Second Great Depression (2011) – Lack of money stops inflation. All debts ($550 Trillion of paper wealth) evaporate. Official economy ceases to exist.
Greetings from Sao Paulo! We are slowly working our way up north.I guess Hummer lovers will find some really cheap deals.
\"Export orders, a source of strength for businesses in recent months, fell sharply\"Ah-ha!BRIC BRIC Export sensitives, metals, miner49ers, industrial commoditiesPatience patience You will see it come to it\’s fruition/depressionjingle jingle
Regarding exports and trade deficits, I noticed that the \"gap\" has shrunk. If, as is indicated here, exports really haven\’t been going up, then this is pretty telling- it means that imports have really dropped off. Yes, the consumer is on his/her back…Mark
@ Hubbs & ptmEvict the sparrows. The only martins you can hope to attract to a new colony are the 1st. year birds which don\’t come north until June. If they find sparrows they go on their way. http://www.purple-martin.org/apologies NR, for being so far off topic.
ptm on 2008-05-05 16:02:14“Based upon the wonderful news y\’all keep posting, here is my big picture view to date. I cannot see anything changing this scenario through 2008.” A plausible forecast, but what about the mitigating effects of the 3.25% cut in the Fed funds rate, trillions of dollars in liquidity still sloshing around the globe in SWFs, etc. looking for investment homes, $168 billion in fiscal stimulus, global growth / exports, and capital investment into alternative energy?Will these things do nothing to hinder such a worst case scenario?
The small drop in the equity indices today vis-vis a quick walk around CR and the headlines makes me wonder whether we are witnessing a tired bear market rally or a resilient bull. All I could think of doing was reading Hussman\’s Monday piece to get some perspective:http://www.hussman.net/wmc/wmc080505.htm
K J Foehr on 2008-05-05 17:36:53 – A plausible forecast, but what about the mitigating effects of the:A)3.25% cut in the Fed funds rate – As NR has said, it\’s a solvency problem, not a liquidly problem. These cuts have not passed through to consumer loans and are being absorbed into the banking system (I think). And as I understand it, LIBOR spreads looming large again indicating more credit squeezing. Sooner or later (within a year?) banks will have to pay the fed loans, go bankrupt, or get a free pass on a non-recourse loan pushing inflation up.B)trillions of dollars in liquidity still sloshing around the globe in SWFs, etc. looking for investment homes. This is a good question. If I were a SWF manager, what would I do with the all of those USDs? Previous posts suggest they are \"stuck/trapped\" into buying US Treasuries and agents. But what else can they do? Can\’t buy commodities for fear of further distorting that market. Then buy propriety, but US Gov will not let them buy US companies, so I guess build Dubai and hope the tourists will come?C)$168 billion in fiscal stimulus – Borrowed money directly adding to the national debt, devaluing the dollar, and putting more pressure on inflation. Total \"stimulus\" already consumed by increased gas prices.D)global growth / exports – Don\’t have enough details on the numbers, but my guess is that the $40-50 trillion world wide GDP is dwarfed by the order of magnitude larger $500 trillion credit bubble. So it may have some kind of effect now early on, but not much later on.E)capital investment into alternative energy – I see this more of a long-term economic policy issue rather than something that has a direct effect on the looming credit bubble.F)Will these things do nothing to hinder such a worst case scenario? – I don\’t know. Based upon past posts, you are much more sophisticated at these matters than I am. As I said before, I do this for my own understanding of how bad things can get and when it might happen. I am also discovering it upsets people and maybe I need to tone down the doom & gloom. Just keep the forecasts to the next six months or so…
Written by Free Tibet on 2008-05-05 17:18:02Re the Purple Martins, how far is north for you?
It\’s funny but I have a feeling that we become a sort of egg-or-chicken economy, with a loop effects. At least according to analysts:When commodities analysts are asked why Oil is surging they say it\’s (partly!)because of weakening dollar.And when FX analysts are asked why dollar is weakening they say it\’s (partly!) because of the boom in Oil.Does this mean that even if no new information (good or bad) are released, these two will just keep feeding on themselves?
camel camel, best buy,ES better selling camel than trading steelhttp://inhome.rediff.com/money/2008/may/03camel.htmCamel demand up as oil price soarsMay 03, 2008As the cost of running gas-guzzling tractors soars, even-toed ungulates are making a comeback, raising hopes that a fall in the population of the desert state\’s signature animal can be reversed.\"It\’s excellent for the camel population if the price of oil continues to go up because demand for camels will also go up,\" says Ilse Kohler-Rollefson of the League for Pastoral Peoples and Endogenous Livestock Development. \"Two years ago, a camel cost little more than a goat, which is nothing. The price has since trebled.\"The shift comes not a moment too soon for a national camel population that has fallen more than 50 per cent over the past decade, to about 450,000, according to government figures. Market prices for these \"ships of the desert\", which crashed with the growing affordability of motorised transport, are rising again as oil prices soar.A sturdy male with a life expectancy of 60-80 years now fetches up to Rs40,000 ($973), compared to Rs5,000-Rs10,000 three years ago, according to Hanuwant Singh of the Lokhit Pashu-Palak Sansthan, a non-profit welfare organisation for livestock keepers. Entry-level tractors cost around $4,000.
ptm on 2008-05-05 18:54:24“As I said before, I do this for my own understanding of how bad things can get and when it might happen. I am also discovering it upsets people and maybe I need to tone down the doom & gloom. Just keep the forecasts to the next six months or so…”I am not sophisticated on these matters. But the Prof is and he is not calling for a depression or hyperinflation.Also, I don’t think such views upset anybody here; we are used to it! And many, no doubt, more or less agree with you.My point is just that there are always opposing arguments to be made. The global economy has so many moving parts, and we are always dealing with incomplete information, some of which is not even accurate, e.g., CPI, GDP, NFP, etc., that it is impossible for anyone to predict with any significant degree of accuracy what will happen in the economy even one year into the future. Anyone who does is more lucky than prescient, and will certainly be humbled over the long term. We may be able to predict a slowdown or growth, but the extent of either cannot be consistently predicted accurately, IMO.Usually people, on both sides of an argument, have the view that they are right and the other side is wrong, even if the evidence begins to go against their case. This is human nature, but as investors we need to remain open to the possibility that we are wrong so we can adjust our investments accordingly before we are knocked out of the game.I am very bearish on our economy and the stock market, but I try to resist the temptation to extrapolate the current situation into nightmare scenarios that are, based on the lack of hard evidence, merely speculation. Of course, it is a good idea to be aware of the possibilities of what might happen, just don’t be the ranch on it.
Free Tibet on 2008-05-05 17:18:02 – Evict the sparrows.Yes, I have seen a sparrow from time-to-time checking out the condos. Luckily, the condos have the \"upside down smile\" entryway that martins will use, but sparrows will not pass through. From what I have seen so far, I have blue jays, mocking birds, morning doves, crows, sparrows, and hawks passing through my backyard view. Come to think of it, I was re-gluing a deck chair last Saturday when this huge shadow past by. Looking up I saw a hawk no more than 35 ft. off the ground. Usually they stay up 100-200 ft or so.At least birds let one take their minds off the economy for a bit…
hmmm…Would not surprise me if they were to start selling camels in U.S. soon. No credit? Bad credit? No problems! Anyone qualifies for a camel at Joe\’s Used Camels.Another option is that more people join these folks:Tired of paying through the nose, Americans try praying at the pumphttp://news.yahoo.com/s/afp/20080505/lf_afp/usreligionpovertyenergyoilWASHINGTON (AFP) – At a Shell gas station in Washington, Rocky Twyman and an unusual group of activists were mad as hell about soaring fuel prices.\"Last week, this station was 3.51 dollars. Now it\’s practically 3.60. So it\’s gone up nine cents in one week,\" Twyman said as he pumped five dollars\’ worth of gas into his thirsty American car.…\"Lord, come down in a mighty way and strengthen us so that we can bring down these high gas prices,\" Twyman said to a chorus of \"amens\".\"Prayer is the answer to every problem in life… We call on God to intervene in the lives of the selfish, greedy people who are keeping these prices high,\" Twyman said on the gas station forecourt in a neighborhood of Washington that, like many of its residents, has seen better days.…
(I take the motto is why pay more when you can pray more)
If religious Americans think that those causing high gas prices are evildoers, should not Mr Bush do something??
\"Does anyone have concrete evidence of government intervention in the gold market? There was quite a drop in the last couple weeks, but now it seems to be coming back. The Don Coxe webcast suggests that it moves counter to the financial stocks which are unnaturally inflated at the moment.\"See the following article for some interesting comments.Couldn\’t tell you in they\’re accurate or not.http://www.financialsense.com/editorials/kosares/2008/0505.htmlPeteCA
Apropos that list on \"The Top 100 Intellectuals list by Foreign Policy magazine\"…sadly the list omitted website programmers, because we would need at least one to fix this italics issue.
Iran rejects nuclear inspections unless Israel allows themhttp://wiredispatch.com/news/?id=155839An Iranian envoy said Monday his government will not submit to extensive nuclear inspections while Israel stays outside the global treaty to curb the spread of atomic weapons.\"The existing double standard shall not be tolerated anymore by non-nuclear-weapon states,\" Ambassador Ali Asghar Soltanieh told a meeting of the 190 countries that have signed the Nuclear Nonproliferation Treaty.(now that does sound reasonable)
@Written by ptm on 2008-05-05 16:02:14Sorry to say this but these type of step by step crystal ball gazing prognostications of oracle like discoveries, such as yours above are about as useful as hip pockets in a singlet. What a load of clap trap.Endowing us with evidence of your significant intellect and ego is not (repeat) NOT going to aid investment success one single iota. It is simply – crap.
WebMaster,Scrolling side to side…page is twice as wide as my screen.No other complaints? I must be the only one that didn\’t spend my \"stimulus package\" on a wide screen monitor to avoid having to scroll so far across the screen.Can you provide any help?
Barton Biggs thinks 1450 on the S&P is “easy” and new record highs are possible this year. I used to think he was a good contrary indicator, but he has been bullish and right recently so I’m not sure now.http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vP9wHuM8.Quk.asf
GSM on 2008-05-06 00:28:06: Endowing us with evidence of your significant intellect and ego is not (repeat) NOT going to aid investment success one single iota. It is simply – crap.Sorry, I had assumed it was a macro forum. Message received…
KJF, It seems like all the analysts are being forced to be positive right now. Look at David Rosenberg from Merrill Lynch. Have not heard from him in a little while. Samething with the other Morgan Stanely analyst (Stephen Roach)…they moved him to Asia.
Rosenberg put this out yesterday:1. The first quarter GDP report says no recession In our view, the folks that are relying on the \"plus\" sign in front of that first quarter 0.6% GDP number as a sign that we dodged the recession bullet, we believe, are not correctly interpreting the data. First, the really important attribute in the GDP data was the fact that for the first time in 17 years, real final domestic demand contracted (-0.4% at an annual rate). Such a decline happens basically 10% of the time – a 1-in-10 economic event that the markets are whistling by right now. Large swaths of GDP are contracting – consumer spending on durables and semi-durables, housing, nonresidential construction and capex. Not everything is going down – selected services such as health care and dollar-plays like exports are still hanging in. Past recessions have started even when GDP was positive But to suggest that the economy is not in recession because of a fractional GDP increase is an assertion that has little empirical support. In fact, recessions officially started in both 1980Q1 and 1990Q3 and guess what? Both quarters saw real GDP increase, not decline – the contraction came the following quarter (as we now expect to see happen). Not only that, but the initial GDP report in the first quarter of 2001 – the onset of the last recession – was estimated +2% at an annual rate (it has since been revised to -0.5% – which is why the NBER, unlike the media, don\’t place as much emphasis on GDP when it makes the recession call).All four factors to make the recession call have peaked To reiterate, what the National Bureau of Economic Research (NBER) monitors to date the recessions are (i) employment; (ii) real personal income less transfer receipts; (iii) industrial production; and (iv), real manufacturing and trade sales. Employment peaked in December/07. Real income peaked in September/07. Production peaked in January/08. Real sales peaked in October/07. So, it is still reasonable to believe that the recession started some time between September and January.
Re Rosenberg, there should be a period after recession in the first sentence.
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