Monday, September 25, 2006

Voodoo debt and the coming recession

kann sein das die häufungen der berichte über explodierende und kaum kontrolierende kreditmärkte zufall sind. evtl. auch ein versuch der bären zu erklären wie sich die märkte trotz der sich abzeichnenden rezession in den usa noch immer nahe ihrer hochs halten.,

denke aber in der tat das sich hinter der kredit/schuldenfrage der schlüssel für die weitere entwicklung der märkte verbirgt.

With debt piled high in a variety of voodoo mortgages, the declining economy will soon turn into a bobsled ride to tears. bill fleckenstein

But while CDOs and CDSs are hard to fathom, a disruption in these risk-filled markets would become all too comprehensible to average folks -- as the aftermath would bring serious turmoil in real estate and the economy. In the spirit of "forewarned is forearmed," I will now attempt to explain a bit of this mortgage exotica, and then show what risky behavior it has financed in neighborhoods across America

In the marketplace, there are indices known as ABX.HE. They are a synthetic version of assets backed by U.S. home loans. They are subdivided into "tranches," or sections, that are grouped by their relative risk. Two weeks ago, a friend alerted me to the rather large trade that went through in a particular tranche of one of these indices. (It happened to be the BBB- tranche, which is the riskiest.) When the trade took place, it knocked the bid price a bit lower. It has continued to drift and now is off about 1.5%.

One tranche now bears a stench

What makes that interesting? In the nine months since the ABX.HE began trading, every time one of these indices has sold off, some CDO manager (with a natural appetite for asset-backed home-equity-loan securities) has stepped into the market and driven these slightly fallen angels right back up. But now those buyers seem to have disappeared.

I believe that the CDO and CDS markets (the lower-grade tranches in particular) will be ground zero in any financial dislocation. As my friend says: "A slowdown in the housing market is a growth event. Something going wrong in subprime is a volatility event" (i.e., a market dislocation). Granted, it's too isolated thus far to draw any big conclusions from, but then again, all trends must begin somewhere.

A bubble's date with a wrecking ball

Proceeding to the front of the housing ATM food chain, I'd like to spend a moment on how folks' appetite for risk has been enabled by all of this mortgage exotica. There are several worthwhile quotes that I'll now share from The Campbell Real Estate Timing Letter, which has a good track record regarding that market. Some of these comments won't be news to readers, but it's nice to find other people who agree with me (as long as it isn't Time magazine), especially if they come at it from a slightly different vantage point.

Author Robert Campbell writes: "I always figured the deflation of the housing bubble would resemble a slow train wreck, but there is new evidence that makes me think the correction may occur more rapidly. This is because there is compelling evidence that a recession is dead ahead. … Now that housing prices are going sideways to down -- and incomes and jobs are still sagging -- this 'debt-fueled' artificial-life-support system for continued consumer spending (and an expanding U.S. economy) is running out of gas.

"In the long run, housing prices cannot continue compounding faster than incomes. We are now facing this economic reality. People cannot continue buying homes with creative, voodoo mortgage-loan financing -- that, in the end -- they can't afford. I don't know who has been more irresponsible, real estate agents, mortgage lenders, borrowers, or banking regulators -- but I do know that the lending standards for mortgage borrowing have dropped to a zero setting for the past five years. If people weren't in prison or earned more than the minimum wage, money essentially was free to all -- whether they could ever hope to pay it back or not."

No happy ending for housing

Continuing on, he says: "The United States has experienced the greatest real estate boom in history, but the boom is now turning into a bust, and the aftermath is not going to be pretty. Present American folklore has it that a real estate decline does not have to affect the economy. That's like saying that it will rain, but you're not going to get wet.

"The coming recession is not only going to dispel that hope, but it's going to speed up the fall. … The sad fact is that we're living in a debt-fueled economy, as opposed to an income-fueled economy. Housing prices cannot continue to compound faster than incomes forever. This incredible rise in prices has been driven by artificial demand (ultra-low interest rates and ultra-loose credit), as opposed to real demand (rising incomes and rents)."

He concludes: "Loose mortgage loans that prolonged the boom will worsen the bust. Homebuyers are now going to pay the price for their 'buy now, worry later' spending spree. … With market manias, self-feeding greed on the way up turns into self-feeding fear on the way down. That time is near."

My comment: Yes, it is.

entscheidend wird wirklich sein ob die käufer dieser mbs wirklich langsam ausreichende risikoprämien verlangen. evtl. ist das o.g. beispiel ja der anfang.



Anonymous John Fleming said...

I like Fleckenstein's articles too.
Will be be a tough week for Wallstreet and dollar I think, with upcoming figures on housing.

Found an article about Kehl in Elzas(Alsace) Germany. Seems like the French will start a mini-bubble there. Germany side 30% 'billiger' and lower property taxes and houses in better condition. Estate Agent in Kehl has
2 to 8 potential clients everyday escaping from Straatsburg.

2:59 AM  
Blogger jmf said...


i think we really can call this a rolling bubble.

5:21 AM  
Anonymous Anonymous said...

This comment has been removed by a blog administrator.

4:52 PM  
Blogger jmf said...

hallo anonym?,

habe dein posting aufgrund deiner nicht immer ganz "stubenreinen" ausdrucksweise gelöscht.

bin immer an meinungen und dikussionen interessiert.

sie sollten nur sachlich und niemals beleidigend sein.

9:53 PM  

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