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    Mar 2006
    Boston, Mass.

    Default Greenspan warns subprime woes could spread

    Greenspan warns subprime woes could spread
    March 15, 2007 (Reuters)

    Speaking to the Futures Industry Association, Greenspan conceded it was "hard to find any such evidence" about spillover from housing yet, but added: "You can't take 10 percent out of mortgage originations without some impact."

    Greenspan said the downturn in U.S. housing markets appeared to stem more from high housing prices than from a decline in mortgage quality but said he was not downplaying problems in so-called subprime loans.

    He said that subprime woes were "not a small issue" and seemed to result primarily from buyers coming into lofty housing markets late after big price run-ups that had left them vulnerable to hikes in adjustable mortgage rates.

    AntiSpin: You got to hand it to Big Al. He's got a great sense of humor. Either that or he's becoming forgetful. It was he, after all, who recommended ARMs to home buyers back in February 2004, a year from the peak of housing prices when mortgage rates were still at 40 year lows. At the time Al must have been thinking that a sensible person can safely expect prices at 40 year lows to last another 15 or 30 years, so a fixed rate 15 or 30 year mortgage may not stack up to an ARM. Right.

    Specifically Big Al said back in 2004, "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."

    That they did. Liar loans, suicide loans, deathbed loans, and so on, especially heavy in 2005 and 2006. It's the "loan production" from that period that our CDO expert Jim Finkel explains (Part I - free, Part II iTulip Select) are seeing as the most problematic for lenders and firms in the securitized debt business. Now we're all starting to pay the price:
    A town right on the default line
    March 16, 2007 (David Streitfeld, LA Times)

    Foreclosure notices are painfully common in Perris, where sub-prime loans built a suburb

    Oscar De Leon was washing his car a few weeks ago when he noticed a piece of paper stuck to the front door of the house across the street. He strolled over to check it out.

    "You are in default," the paper proclaimed. "Unless you take action to protect your property, it may be sold at a public sale."

    De Leon, who lives in the Riverside County town of Perris, knew this official notice of foreclosure was bad news. Not just for the home's owners, who tried to sell for months, failed and quit town for parts unknown.

    It was bad for De Leon too, a 28-year-old employee of a food service distribution company. He and his wife, Sandra, pay their mortgage every month, happy they can raise their three children far from the urban problems of Los Angeles.

    It's the age-old dream of the suburbs. Now, it's at risk in communities throughout the country, thanks to lenders too eager to lend and borrowers who thought houses would dispense money forever, like magical ATMs.
    Once frothy housing markets, such as LA, are already entering Step D on schedule per our January 2005 housing correction prediction, although most U.S. housing markets nationally appear to be at Step C.
    Step D: Three years into the decline, marginal home buyers will learn what owning a home really costs, versus renting when housing prices are declining and jobs are more scarce. Rent is a fixed cost, whereas home ownership presents many variable costs, including increased interest payments on ARMs, and rising tax, insurance, and energy costs. Also, upkeep for the average home typically costs five to ten percent of the price of the home, annually. As prices fall, homeowners will have less access to home equity loans. Many will not be able to afford repair and maintenance expenses. Homes in some neighborhoods—and in some cases, entire neighborhoods—will begin to look neglected, further depressing prices.
    We have many readers who caught our January 2005 prediction and the June housing market top call that followed and sold. They write in to say they're glad they did. If you are reading this and are in the home construction business, it may be too early to put your shingle up to declare yourself a specialist in the soon to be booming McMansion conversion business, but not too early to think about the kinds of changes you want to make to your business to take advantage of the new home construction trend we expect to see in Step E, the conversion of over-sized single family homes into multi-family rental properties. Still a few years away, but stake your claim to the best areas, new developments of McMansions near major highways close to job centers.

    Today's Credit Where Credit's Due acknowledgment goes out to Bill Fleckenstein who invented the concept of Home as ATM, now frequently mentioned in the press.

    In other news, after months of relative quiet, Staglfation Godzilla turned up at–of all places–a de Angelos sub shop in Burlington, MA. Wife and I broke with our tradition of chicken and fish and went there for a steak and mushroom sub to satisfy a craving for bad food. We were surprised to shell out nearly $9 for a greasy meat filled grinder. A steak sub is the perfect inflation measure meal. It can only be eaten once a year–takes that long to forget how bad you felt after you ate the last one. A year later, all you remember is how good it smelled and how tasty it was going down. This may also be the logic behind four year political terms–it takes that long for voters to get their hopes up enough to go to the polls again. Last year's sub cost us around $8 bucks. The year before that, around $7, as we recall. Meanwhile, business is slowing down, even with all of the government contract business–e.g., Ratheon–in the area.

    Stagflation isn't only showing up at the local sub shop. Friends in the restaurant business tell us that food supply costs have been steadily rising for months, while business away from government jobs is falling off. They don't want to raise prices, but soon won't have any choice. The Wall Street Journal today reports:
    As Costs Climb In Food Chain, Consumers Pay (subscription)
    March 16, 2007 (JUSTIN LAHART - WSJ)

    Yesterday, the Labor Department reported February prices for "crude foodstuffs and feedstuffs" were 18.8% above year-ago levels. Food companies are starting to pass those higher costs on -- wholesale consumer food prices were 6.8% above year-ago levels. Today's report on consumer inflation will probably show higher prices at the checkout line, too.

    Economists surveyed by Dow Jones Newswires on Monday estimated the consumer-price index was 0.3% higher in February than it was in January. Given the jump in food and energy prices in yesterday's wholesale inflation report, the risks seem to be on the upside.
    The inflation phenomenon is global, with countries from China to the Czech Republic feeling the pinch.
    China Inflation Picks Up
    March 14, 2007 (WSJ)

    The pace of inflation in China picked up in February, figures issued yesterday show, and economists said it could gather steam later in the year as the economy continues to power ahead.

    The consumer-price index rose 2.7% in February from a year earlier, the National Bureau of Statistics said, faster than the 2.2% rise in January but below market expectations. Economists polled by Dow Jones Newswires had forecast, on average, a 2.9% gain in the CPI.
    No surprise that after years of supporting the dollar through coordinated liquidity injections worldwide, inflation is popping up everywhere. Of course, the gold price told us that starting in 2001, rising first against the dollar as the U.S. depreciated and then against all currencies as global central banks followed suit.

    All of which leads us to next week's iTulip ShadowFed on Monday to vote. This will be our first real debate for a while. We have not bothered to meet to predict the past few Fed votes due to excessive predictability. Now Goldman says three rate cuts in their January letter to clients, and today Merrill Lynch joined the investment banker's chorus.
    Housing mess risks recession unless Fed cuts: Merrill
    March 15, 2007 (Reuters)

    House prices could tumble 10 percent this year and raise the chances the United States may slip into recession unless the Federal Reserve cuts interest rates to cushion the fall in economic growth, Merrill Lynch said in research notes this week.
    Meanwhile, our CDO guy and other contacts in the debt markets expect rate hikes. The news is of global inflation, with central banks overseas confounding the consensus of economists by raising rates unexpectedly. At the same time, the housing market is giving the markets a whiff of recession.
    "The US is likely to be in recession in the next 12 months, says Rudi van der Merwe from Standard Financial Markets, as more mortgage lenders and banks come under pressure in the States."
    An interesting ShadowFed discussion, no doubt. We will publish the results for everyone to see before the official FOMC rate decision results appear on Wednesday, March 21. The poll and discussion are available to iTulip Select subscribers.

    Top investor warns of Russia stock bubble
    March 14, 2007 (Reuters)

    Prominent emerging markets investor Jim Rogers said Russian equity markets were overvalued and could burst "sooner rather than later," revealing the skeletons in the cupboard of its "outlaw capitalism."

    "I wouldn't put a nickel of my own money in Russia, and I wouldn't put a nickel of your money there either," Rogers, a long-time commodities bull, told Reuters by telephone from New York on Wednesday.

    "Everything about Russia is one big bubble, and it's going to pop. It's going to happen sooner rather than later," said Rogers, who co-founded the Quantum Fund with George Soros in the 1970s and has focused on commodities since 1998.

    "When that happens, people will look around and say, how did that happen? That's when we'll find out about all the skeletons in the cupboard."

    The fund manager said the Russian state was confiscating assets and company owners were cashing out via a series of initial public offerings in London.
    "Russia is a disaster," Rogers said. "Everybody in Russia is busy stripping assets. If you ride across Russia, you are not going to see a lot of money being spent on railroads, pipelines or roads."

    "It's outlaw capitalism."

    Russian stock prices surged 80 percent last year, driven by an economic boom now into its eighth year on the back of high oil prices and soaring consumer demand. But the RTS stock market is down about 7 percent in the year to date amid a global sell-off triggered by concerns over U.S. growth and inflation.

    Rogers predicted Russian stocks would suffer huge losses when the bubble pops. Some stocks could go down by as much as 90 percent, others 40 percent, while some could disappear, he said.

    Referring to a rash of Russian companies that have listed shares in London, Rogers said: "People don't have a clue. They're buying blind pools, and companies are saying 'Just give us your money, we're not going to tell you what we'll do with it'."

    Investors last got their fingers burned in Russia after the August 1998 domestic debt default and rouble devaluation sent volatility through world markets, losing major banks billions of dollars.

    But Rogers warned: "Things will be worse this time. 1998 was a stock market bubble; this time we have a huge housing and commodities market bubble."
    We interviewed Rogers last year. We'll see if we can't get him back on the horn to see what he has to tell us about Russia.
    Last edited by EJ; 03-16-07 at 06:20 PM.



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