Rolfe Winkler

Morgan Stanely sees 5.5% yield on 10-year (Biggadike/Kruger, Bloomberg) A continued flood of supply coupled with fewer buyers should drive rates higher. Mortgage rates vary closely with the 10-year. If the latter goes to 5.5%, MS notes that 30-year mortgages could get back to 7.5%-8.0%. House prices will suffer another steep decline if mortgage rates climb that much.

A master of disaster (Carter, Nation) You’ve probably not heard of John Dugan. As head of the OCC, he’s supposed to be regulating biggest banks. Instead, he’s been working hard as their advocate.

Adding fees and fences on media sites (Perez-Pena/Arango, NYT) Users want content to be free, but it can’t be produced for free.

VIDEO: Max Baucus, drunk on Senate floor? (Gavin, Politico)

Fargo reporter punk’d (TwitPic) Read the photo caption.

Worst driver on planet? (LiveLeak) This video actually captures a number of drivers on the same slippery street. But the first guy is a real doozy.

Paper plane enthusiast sets record (McCurry, Guardian)

How overhauling derivatives died (Smith/Lynch, WSJ)

Debt ceiling raised $290 billion (Rogers, Politico) Another Xmas Eve vote. Dems had wanted to raise the ceiling at least $1.8 trillion to avoid having to raise it again before midterm elections, but they didn’t have the votes. Congress has bought itself about 4-6 weeks of breathing room. Senate Repubs made a showing of not voting for the measure, but had they been in the majority, you can bet they’d have done the same to avert default.

At tiny rates, saving money costs investors (Strom, NYT) “Duh” is the obvious response to this piece. Savers have been getting hammered ever since the Fed started dropping rates two years ago. Yet it’s well written and important to see in the paper of record. It makes the point that low rates are forcing many folks to chase risk. Low nominal rates would be fine IF the Fed were allowing the economy to delever/deflate as it clearly needs to. If the cost of goods/services is falling, then rates can be zero and savers still come out ahead. But the CPI has stayed positive, so savers lose. Of course punishing savers is precisely what economists like Paul “paradox-of-thrift” Krugman and Greg “confiscate-cash” Mankiw say is needed for the economy to recover. Krugman wants to steal savings via shock-and-awe deficit spending, i.e. future taxation. Mankiw would literally confiscate a portion of unspent savings.

Good news alert: Hunting trash for cash (Hudak, Orlando Sentinel) The recession is causing us to produce less trash. This is problematic for Covanta, which burns trash to create energy. But it’s great for the environment.

Investors see farms as way to grow Detroit (Huffstutter, LA Times) Urban renewal…

VIDEO: Stopping purse snatchers (LiveLeak)

Alcohol substitute that avoids drunkeness in development (Rodgers/Alleyne, Telegraph)

Japan’s “grass eaters” turn their back on macho ways (McCurry, Guardian) Twenty years of economic stagnation appears to be neutering Japan.

Teflon Buffett (Felix)

Democratic Congresswoman Laura Richardson has even Hillary Clinton beat for selective memory problems. Remember how Hillary kept repeating the Bosnia story? That she dodged sniper fire, etc.? She always knew it was a lie, but she needed a concrete example of her foreign policy experience. It was telling that that was the only story she could come up with. I hope the Clintons (and the Bushes) disappear from American politics permanently.

But I digress. Here’s what Richardson said of her property in Sacramento in a statement this past Wednesday:

the residential property in Sacramento California is not in foreclosure and has NOT been seized by the bank.

Moreover:

I have worked with my lender to complete a loan modification and have renegotiated the terms of the agreement — with no special provisions. I fully intend to fulfill all financial obligations of this property.

These are bald-faced lies. According to the WSJ:

The Sacramento home of Rep. Laura Richardson was sold in a public auction two weeks ago for $388,000….James York, the Sacramento broker who bought the three-bedroom, 1.5-bathroom home, rejected the idea that the home hadn’t been seized. The sale of the home was announced in March. “She’s walked away from the property,” he said. “I would be happy to resell her the home for the $535,000.”

Recall from the original story:

The Southern California Democrat bought the house for $535,000 with no money down in January 2007 and owed nearly $575,000 to Washington Mutual when the mortgage was sold earlier this month at a significant loss to Red Rock Mortgage Inc.

And there is additional irony here:

Richardson didn’t vote on the housing rescue deal that passed the House of Representatives two weeks ago and in a statement attributed her absence to her father’s funeral. But Richardson did vote last fall in favor of the Mortgage Forgiveness Debt Relief Act, which passed and prevents the federal government from charging income tax on debt forgiven as a consequence of foreclosure.

The BBC reports on the latest subprime writedown at a major bank. The conventional wisdom is that most of the subprime related credit losses that have to be taken already have been. Going forward, a larger problem for bank net income will likely be increasing provisions for loan losses, as opposed to straight writedowns on holdings gone South. Here’s a list of writedowns to date for major banks worldwide:

MAIN CREDIT LOSSES SO FAR

• Citigroup: $40.7bn
• UBS: $38bn
• Merrill Lynch: $31.7bn
• HSBC: $15.6bn
• Bank of America: $14.9bn
• Morgan Stanley $12.6bn
• Royal Bank of Scotland: $12bn
• JP Morgan Chase: $9.7bn
• Washington Mutual: $8.3bn
• Deutsche Bank: $7.5bn
• Wachovia: $7.3bn
• Credit Agricole: $6.6bn
• Credit Suisse: $6.3bn
• Mizuho Financial $5.5bn
• Bear Stearns: $3.2bn
• Barclays: $3.2bn

Source: Bloomberg and company reports

The main impact of credit losses is that they reduce bank lending. A handy way to think about it, is that banks typically lend out $10 for every $1 in capital on the books. So credit losses of this magnitude can be incredibly DEflationary.

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Two weeks ago, I said it. Now commentators are saying the same thing on the WSJ op-ed page and on SmartMoney.com (snippets below): house PRICES may still be at historical highs, but house AFFORDABILITY is not, which may mean prices don’t have to fall any farther. The crucial forgotten variable is mortgage rates.

Here’s what I noted two weeks ago:

With a fixed rate 30-year mortgage of 18%, a $2000 monthly payment will buy $132,000 worth of home. Cut the interest rate to 6% and the same $2000 payment will buy $334,000 worth of home.

In terms of affordability, the two homes are totally equivalent. Remember, when you buy a house with a mortgage, your monthly payment has two components: a principal payment to pay down the debt on the total cost of the home AND interest on that debt.

While I agree overall that house prices have to fall, I’ve become skeptical about conclusions drawn from [analyses comparing house PRICES to median income]. The fundamental flaw I see is that it is based on a home’s price, not the total cost of home ownership. Maybe I’m missing something here, but it strikes me as obvious that house prices relative to income were lowest in 1982…interest rates were 18%!

If incomes are stagnating, and they are, then affordability is the key. What percentage of your income is actually being used on a monthly basis to pay for the roof over your head? The two authors I’ve cited use the house affordability argument to claim that the housing market has hit bottom.

But I’m not so sanguine. There are three problems with concluding that home affordability today means house prices have no farther to fall:

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This article isn’t long on details. Treasury feels “enhanced regulatory powers” would be a “better tool than interest rates” to “contain asset price bubbles.”

Hmmm. The Fed isn’t currently charged with the task of containing asset bubbles to begin with. Its job is to maintain low inflation consistent with full employment. The prevailing view of the Fed’s role vis-a-vis asset bubbles during the Greenspan years was summed up by the man himself in 2004:

“It is far from obvious that bubbles, even if identified early, can be pre-empted at a lower cost than a substantial economic contraction and possible financial destabilization,” Greenspan told the American Economic Association in 2004.

The Fed has been rethinking this view of late.

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With much thanks to Calculated Risk a compilation of early nominees for word/phrase of the year, 2008. This is NOT shameless plagiarism: I take NONE of the credit for these….I’m just not that witty. The best I’ve saved for last…

• Liquidity Cushion
• Hyperstagflation, or hyperstagdeflation
• “we’re all level 3 now”… with apologies to Tanta who coined “we’re all subprime now.”
• Ben Dover (as in Ben Bernake, I think)
• Bear-Stearned
• Systemic Risk
• Counterparty Risk
• Perfect Storm …. as in the problems facing the American economy
• walkaway
• wheelbarrow….as in the thing you use to carry bus fare after hyperinflation.
• Viagrate: “to artificially pump up.”
• lagflation
• subflation
• “underwater” and “upside down” as in the condition more homeowners find themselves in
• homeower
  
• Banana Republicans … for their subpar economic/fiscal mgmt.
• Hoocoodanode … as in the excuse you hear on earnings conference calls
• subprime food riots
• Mark to Myth
• jinglemail … what you send to you bank when you walkaway from your home.
• Mozilloed
• Bailout
• Paradise Foreclosed
• homedebtor
• short sale
• Alt triple A
• deleverage
• sustainabubble
• Debtrimental
• Housing Pustule … as opposed to housing bubble. Bubbles are cute. The implosion of the housing market isn’t.
• Depression-Lite
• Uncle Ben’s Rice … kind of like Jeopardy’s before/after category: popular foodstuff whose price is soaring after this central banker fans inflation fears with too many rate cuts….
• bank run
• “Japan 2.0″ or “Weimar Republic: American edition”
• meltdown
• residential copper mining
• Granite Countertop Quarries
• Decleverage … when they repo your boob job
• “Don’t Haircut me bro!“
• “I see debt people”

Late entrants (please, offer your own):

• agflation
• ZIRP or ZIRPification … as in “zero interest rate policy.” Closely related to “Japan 2.0″
• Dollar Carry Trade
• equity cushion

And my favorite:

The bad news on housing keeps coming:

WASHINGTON — U.S. new-home sales slid further in March to their lowest level since 1991 while the supply of homes for sale soared to nearly a three-decade high, suggesting little prospect of any near-term turnaround.

Sales of single-family homes slumped 8.5% last month to a seasonally adjusted annual rate of 526,000, the Commerce Department said Thursday. That’s the lowest level since October 1991. Economists had expected a much smaller drop of 1.9%, according to a Dow Jones Newswires survey.

February new-home sales fell 5.3% to an annual rate to 575,000. Originally, the government said February sales dropped by only 1.8% to 590,000. Year over year, new-home sales were down 36.6%.

Other recent data confirm the headwinds the housing sector faces. Earlier this week, the National Association of Realtors said sales of pre-owned homes fell 2% in March. Prospects for a recovery in the broader economy are closely tied to housing, given its effect on construction, employment and consumer spending. With housing still under pressure, Federal Reserve officials are likely to lower official interest rates again when they meet next week.

The median price of a new home decreased by 13.3% to $227,600 in March from the previous year, according to Thursday’s report. The average price tumbled by 11.3% to $292,200 from a year earlier.

Regionally last month, new-home sales decreased 12.5% in the Midwest and 19.4% in the Northeast. Sales fell 4.6% in the South and 12.9% in the West.

The month’s supply of homes for sale rose last month to 11 months, the highest since September 1981.

Inventories of various housing assets (single-family homes, condos, etc.) are the key to determining the path or prices. High inventories mean supply is outstripping demand, putting the onus on sellers to cut prices in order to bring buyers back to the market.

A few interesting items to pass along today.

The first is an interesting interview with an anonymous hedge fund manager (via JL). It’s a longish interview, but a good insider’s view on everything from the credit crunch to the downfall of Bear Stearns to the hedge fund business itself. A highlight:

Bear is not a commercial bank, it’s an investment bank: it doesn’t have these capital adequacy rules, it’s not regulated by the Fed, and Bear, if your average bank had a capital adequacy rate supporting 10:1 leverage, Bear is more like 30:1. And that is one of the reasons confidence evaporated so quickly: people looked at the balance sheet and realized that if assets have to be written down even a small amount, Bear can be insolvent. And that creates a panic.In reality I don’t think they had a solvency issue, but when the capital cushion is so small it creates instability.

The other investment banks are also levered in the 30:1 range, including Lehman/Merrill/Goldman. Bear was, in many ways, more vulnerable to a run on the bank, so to speak. But we’re not through the woods yet and bigger banks may fail.

That’s a good segue into two good articles on the cover of today’s WSJ. The first tells the story of Merrill’s misadventures in the CDO world. The second discusses LIBOR, the London Interbank Offered Rate, which is a benchmark rate banks charge each other for loans. The spread of LIBOR over U.S. Treasuries has been a remarkable barometer of market panic. That indicator, well, indicates that the worldwide financial system is still in trouble.

And as the WSJ article notes, there are those that think this rate (which is based on data self-reported by banks themselves) may be understated….

Didn’t think I’d see an op-ed like this in the Journal. The editors themselves hate Fed easing, and for good reason. Inflation hurts everyone in the economy except for those in debt; those who, financially-speaking, have behaved most irresponsibly. But this opinion piece says the Fed shouldn’t feel ashamed about printing money in order to get us through the housing crisis.

The author’s fundamental argument is that if the Fed just prints money, and lots of it, that the ensuing inflation will rescue the housing market and, thus, the economy. He says this would be preferable to nationalizing the housing market, which seems to be the only alternative in his mind.

Nationalizing the housing market may be a fait accompli…..but done correctly it probably doesn’t have to be a huge burden for taxpayers. Lenders who want to be bailed-out should be forced to take massive writedowns on the bad loans they want to pawn off on taxpayers. If the Treasury buys bad home loans at a really good price, taxpayers don’t have to lose that much in the long-run….

If the Fed “prints money”, the ensuing inflation would only serve the interests of those in debt by reducing the value of their debts in real terms.

Inflation happens when the supply of money increases relative to the supply of goods and services in the economy. More paper currency chasing the same amount of goods and services means each individual unit of currency has less purchasing power; it has less value. Savers lose because the dollars they’ve saved buy less after a period of inflation. Debtors win b/c the debts they owe are smaller in real terms after that same period of inflation.

Say I take out a $100,000 loan due next year. To make the math easy, let’s assume my lender isn’t going to charge interest….a rich uncle perhaps. If the value of the dollar declines 6% over the year, then $94,000 of today’s dollars will be sufficient to pay back the $100,000 loan next year.

Of course, most lenders do charge interest and if they EXPECT inflation will decrease the value of the dollars with which they’re paid back, they’ll simply charge HIGHER interest rates to offset the loss in value of those dollars.

Folks who have already taken out loans at fixed interest rates would benefit from higher inflation. New borrowers and those with adjustable rates would be forced to pay higher interest rates.

More inflation could also spark a run on dollar assets.

But perhaps the main reason this is foolish is that if the Fed lets inflation run wild now, it will just take more draconian monetary measures to get it back under control in the future. Take a look at the steps Paul Volcker was forced to resort to in order to tame inflation back in the early 80s. To beat inflation he had to increase the Fed Funds rate to 20%(!) by late 1980. It’s at 2.25% now. How many of my readers who bought a house in the early 80s recall what mortgage rates were back then? Would you believe they got as high as 18% for a 30 year fixed rate mortgage?

According to Wikipedia, raising rates that high to tame inflation “contributed to the significant recession the U.S. economy experienced in the early 1980s, which included the highest unemployment levels since the Great Depression.”

So far Bernanke has laid off the inflation lever. All of us who avoided overpaying for a house should pray that he continues to.

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From Bloomberg this morning:

April 11 — Confidence among U.S. consumers sank to a 26-year low in April as the labor market continued to deteriorate and gasoline prices rose.

The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 63.2 from 69.5 in March. The reading was below the lowest forecast in a Bloomberg News survey and the weakest since March 1982.

Not a good day today, what with GE’s earnings miss. I wonder why the market was so surprised by GE’s numbers. After all, most of GE’s profits now come from various financing businesses. Finance of any kind is not a good business to be in right about now.

Interesting, by the way, that the previous low for consumer confidence was hit in 1982, toward the END of the last great inflation in the U.S. Could this be a good contrary indicator that the market is headed back up? Plenty of “experts” argue that the bad news is “priced in.” Just watch CNBC any morning.

Personally, I don’t think so. There are plenty more shoes to drop as the credit crunch/consumer pullback is only in its early stages here. Also house prices have farther to fall and corporate earnings estimates are still too high for the second half of this year.

Still too early to buy this market. Though I love reading the new low lists every day in the Journal. There are plenty of decent stocks that are washed out. Here’s hoping Moody’s gets back to $20…