Chuck Ponzi January 5th, 2010

Chris Ripkey of the Bank of Tokyo-Mitsubishi says the Fed will be raising interest rates by June 2010.

I seriously doubt the FED funds rate will be raised anytime this year.  The Deflation boogeyman is out to get us, and deleveraging is a bitch.  I find it hard to believe, but I’m agreeing with Paul Krugman on many points… not the least of which in his landmark article That 1937 Feeling.

Which makes me wonder.  Krugman is hardly even close to a contrary indicator, but has nevertheless been a strong supporter of even more fiscal stimulus as the problem increased in intensity.  One cannot fault him for being a flip-flopper.  When he takes a point, he sticks with it.  Which is why it’s not surprising to see him write this:

As you read the economic news, it will be important to remember, first of all, that blips — occasional good numbers, signifying nothing — are common even when the economy is, in fact, mired in a prolonged slump. In early 2002, for example, initial reports showed the economy growing at a 5.8 percent annual rate. But the unemployment rate kept rising for another year.

And in early 1996 preliminary reports showed the Japanese economy growing at an annual rate of more than 12 percent, leading to triumphant proclamations that “the economy has finally entered a phase of self-propelled recovery.” In fact, Japan was only halfway through its lost decade.

Such blips are often, in part, statistical illusions. But even more important, they’re usually caused by an “inventory bounce.” When the economy slumps, companies typically find themselves with large stocks of unsold goods. To work off their excess inventories, they slash production; once the excess has been disposed of, they raise production again, which shows up as a burst of growth in G.D.P. Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.

Which brings us to the still grim fundamentals of the economic situation.

The bigger question is… is this just part of the schtick, or is it a really likely to be that bad.

My gut reaction after absorbing current economic news is that it is.  However, it is easy to make 2 types of mistakes in a deep recession:

The first one is that momentum has a lot to do with the physics of the downturn… it will go along until there is sufficient uplift from other economic factors which counteract the downward pressure caused by household deleveraging.  At this time, I cannot forsee what that is, but it’s normal to not be able to see the next growth area until it is upon us.  Personally, I wouldn’t be surprised to find it being related to energy, alternative or otherwise, since at current oil prices, many alternatives can still be profitable (just not ethanol or solar).

The second one is that growth does not normally come from the area of the last economic bubble… housing will not lead us out of the downturn, and this is where much of the economic commentary is now.  Think 2003 when journalists were still covering the tech stock market, while housing was going gangbusters.  It wasn’t until we were deeply entrenched in a bubble of absolutely massive proportions that the general focus changed.

At the same time, a grave risk has arisen with respect to another bubble, especially one in gold.  Unlike the 2 previous bubbles in stocks, which provided useful (albeit squandered) capital to very useful web-based technology and increased productivity and bubble in housing, which substantially increased and improved our housing stock, gold does little to provide anything of use to our country.  You can’t eat it, you can’t live in it, it doesn’t improve productivity, and it certainly doesn’t earn any income; which makes this the worst kind of bubble; an unproductive one.  At the end of it, we will only have great piles of shiny yellow metal.  Difficult to store, illiquid, and barely wanted.  But, that is looking past the peak.  In the meantime, we can all feel safe in saying that we will continue to delude ourselves that little blocks of shiny yellow metal makes us safer, or richer, or god forbid happier.  Personally, I’d be more interested in ensuring that we have adequate stocks of food, water, and financial reserves, both in households, and in government to prepare us for further downturns.  As sure as the famine of 7 years came after the 7 fat years, so too will recessions follow booms; it’s the natural order of things.

This natural order has not been able to take its natural course; the worst banks in lending are still wards of the state.  Instead of our chance to build a smart, efficient, and secure banking system, instead, we are perpetuating a bloated, mismanaged, stupid, and short-sighted banking cartel.  Eventually, nature will have to be satisfied.  As sure as the invisible hand balances the supply and demand, so too will the banking system that never cleansed itself of debt through bankruptcy stagger on, zombified with bad housing bets that the population can never and will never pay for.

Housing, on the other hand is woefully oversupplied, with shadow inventory reaching monumental proportions, with only more stacking up behind it faster than it is depleted.  We’ll drag this housing recovery out another 10 or 15 years at this rate.

• Dead Cat Bounce
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Brad_Davidson December 21st, 2009

DCB?

Whaddya think?

Hoocoodanode?

• Dead Cat Bounce
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Chuck Ponzi October 28th, 2009

Much of the last 4-5 months has seen a veritable frenzy of activity in the housing market throughout Southern California and throughout the rest of the US.  What does this mean?  Have we hit a bottom?  Is it a dead cat bounce?  Or, was the last year a bump across the bottom before an explosion upwards?

Well, if you’re looking for easy answers, I don’t have a crystal ball, any better than anyone else, so it’s nearly impossible to tell you where its going.  But, I can tell you the basics of the Long, Medium, and Short term.  Much of this is common sense, but must be repeated constantly to remain tethered.

Long Term Prediction

Eventually, though, it’s an argument about inflation or deflation.  Housing prices relative to incomes, rents, and inflation have moderated, but at a much higher level than historically, as pointed out by Dr. Shiller above.  If this is indeed a bottom, the ramifications of higher home prices are profound.  Consider for a moment, the beginning of this thought expounded in the WAPO yesterday regarding the housing stimulus:

Putting cash in pockets does have a stimulative effect because some of that cash will turn into consumption. But as far as stimulus measures go, it has a low multiplier (the ratio of new economic activity to stimulus spending). By contrast, we could take the same cash and hire more teachers, police officers or soldiers to fight in Afghanistan. We would get more economic activity, and the government would get something for its money.

But the tax credit stabilizes the housing market, people say. What does this mean? It means that the credit keeps housing prices artificially high. But housing is something that all people need. Why do we want it to be expensive? Would we want government policies that artificially push up the price of food?

To take it a step further, is there anything in this world that we consume that we would cheer when it goes up in price?  Nevertheless, even knowing how wasteful, inefficient, and stupid the measure is, our congress seems intent on passing an extension of the home buyer credit.  Even worse, it appears to be expanding to existing homeowners, completely negating the originally intended purpose of clearing inventory.  Of course that could be in large part because inventory in many areas has dramatically decreased, and it’s simply a matter of pork and pork products for the housing industry.

Currently, housing prices receive the largest subsidy of any asset class, and for what?  To make our neighborhoods better in some way?

But isn’t it just better for more people to own their homes? The conventional wisdom is that homeownership has positive externalities: Homeowners are more likely to invest in their communities, and it is the best way to build household wealth. But the evidence for this is mixed. In “Our Lot,” Alyssa Katz cites three academic studies and concludes: “Scholars found that once they set aside the various traits that tend to determine whether someone chooses to own or rent one’s home, homeowners and tenants really aren’t that different. . . . Often the new homebuyers were purchasing the worst housing in the worst neighborhoods with the worst schools — hardly a solid investment.”

So, to recap, we’re giving money to people to do what they were going to do anyway, and thereby increasing our own costs and driving malinvestment into residential housing instead of manufacturing capacity or research and development reducing our country’s competitiveness.  We’re taking money away from firefighters, teachers, and policemen so that your neighbor can afford a larger SUV or better furniture, and this entire premise is built on the disproved theory that won’t improve our neighborhoods in any way?

As I mentioned earlier, the real fight is about inflation or deflation.  There is no doubt that inflation is a monetary phenomenon.  At the present time, the deflationary forces of deleveraging are stronger than the inflationary forces of the stimulus packages and absurd monetary policy.

Make no mistake about it, in the long run, our currency will be devalued through inflation to nothing.  This is the fate of every fiat currency, and given the political stupidity that occurs when large numbers of people vote conmen and shamsters into political office.  This is the state of the US, and there is no indication that this will ever change.  Just look at the last 30 years.  In this environment, you will want to hold assets, not cash in the long run.

Medium Term Prediction

However, in the long run, we’re all dead, so we need to know what’s going to happen in the next 3-5 years.  What we can expect are the following in the medium term.

1.  Higher taxes.  This is true of both state and federal taxes.  We are on an unsustainable path.  While most Americans would rather make do with smaller government, the fox guarding the henhouses will never allow themselves to be kicked out.  This means less money to be spent on food, housing, healthcare, education, etc.

2.  Low interest rates.  Financing will stay very loose as long as interest rates are held down.  This is the latest salvo on the war against savers.  Banks, governments, and every company is doing everything it can to separate you from your money.  Most Americans will simply give up because they know nothing else.  Saving will come from outside the US, and not inside.  American’s balance sheets are beyond repair.  Nothing can save the average consumer now.

3.  Commodities Bubble.  Expect the next bubble to be in hard assets.  Perhaps this is oil, gold, natural gas, copper, lumber, corn, porkbellies, wheat, etc, etc, etc.  The government DOES want prices to go up, and will do anything to make it.  It would rather destroy Americans in its quest to save them than to admit that they don’t know and just let the world sort it out.  Most commonly, those who think they understand economics are far more dangerous than those who study it.

To be sure, there are no easy answers, even in the medium term.  And, beware that many of the above issues work against each other, so it will all be relative.  For example, low interest rates will drive a weaker dollar, rising prices on products which will improve export industries that may end up increasing jobs and demand and moderate the decline of the dollar.  Such paradoxes routinely exist, and help prevent the currency of a diversified economy such as the USD from declining too quickly too fast.  But make no mistake, the endgame of the fiat currency is to fall to zero value.  Eventually, houses will hold their value, even if prices are still too high.  This just means that they will endure long periods of poor returns relative to other assets.

If housing prices stabilize here, there will be no free lunch that returns us to high returns. That can only come if they fall below intrinsic value, something I feel supremely assured in saying has not happened in Coastal California (not true of deep inland Cali such as the Victor Valley or Palm Springs).  Orange County, San Diego Coastal, Los Angeles Coastal, and Ventura and Santa Barbara Counties are still painfully overvalued in relation to their alternatives.

The medium term case to own a home in Coastal California is uncertain.  I predict that we will have a clearer picture in the short-term predictions, but there are no certainties with this much malinvestment.

Short Term Prediction

There has been a significant shift from foreclosures.  Various reasons abound as to the cause, but there is no clear reason that the Notice of Defaults has continued to rise to record astronomical levels while foreclosures have remained relatively low.

The Big Picture takes up part of that story with “Strategic Non-Foreclosure” and the Piggington site details some of the statistics in the recent past for SoCal.

Do not be misled, there is a serious imbalance that has grown between defaults and foreclosures.  Foreclosures are dramatically lower than they should be given the incidence of defaults.  There are 2 possible reasons for this imbalance:

1.  Banks are having difficulty foreclosing.  Numerous possiblities exist for this reason such as poorly equipped staff, moratoriums, trepidation of foreclosure while on government dole, stated contradictory policies, and many more.  The general perception is that this will eventually result in higher foreclosures once the problems are dealt with.  Noone knows when that historical balance will return.

2.  Banks are actually working out modifications and they are sticking.  This could mean that a dramatically higher number of modifications are being approved and they are having the intended effect of reducing the market’s fall.  This would be difficult to explain.  Never in history has this happened, but never in history have we been this indebted before either.

While it’s entirely possible that #2 is happening, the risk is much higher that #1 is the actual case.  The table is clearly tilted on a risk/reward basis that #1 is happening. Smart money should hold out at this time until the trend is clear.  While the past 4 months is the first indication of stabilization, an unbroken 1 year trend will be the clear signal.  The soonest that could happen is next spring.  That is the earliest BUY signal that the housing bubble could  give us since Summer 2005.  We will simply have to see if that buy signal is confirmed for early entrants.  Purchasing now is highly speculative and likely to result in knife-catching.

According to Occam’s Razor, it is beter to attribute the latest moves to #1.  I cannot stress this enough that the risk/reward ratio still favors waiting for much of Southern California.  The exceptions to this are areas where buying is at a significant discount to renting (some exist).  It doesn’t preclude the possibility of failure, but it does give options for medium term and longer term trends to mitigate the risks of buying a home now.  For coastal california, any purchase now can only be seen as speculative and imprudent.

The Final Wrap

The basis of any bubble is a speculative frenzy.  Recognizing the attributes of a speculative frenzy and the stages bubbles go through is critical to timing any asset purchase.

Remember, there is nothing more fundamental to investing than timing.  Anyone who tells you otherwise is a fool.  Timing your purchases of stocks, bonds, commodities, housing, or any other asset is critical to success.

My hope was that this country and its leaders could see the value of letting housing prices fall to their intrinsic demand value, but leadership is nearly absent in US politics today.  There does not appear to be an opportunity for this to happen any time soon.

• Bottom Callers , Dead Cat Bounce , Deflation , Housing Crash
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Chuck Ponzi May 31st, 2009

Today I came across a detailed analysis of the mortgage meltdown in California along with detailed graphs, long-term analysis, and an indepth look at where we are in the overall housing bubble.

The T2 Partners paper provided by More Mortgage Meltdown can be downloaded here:

I recommend looking over the entire presentation, as it provides a play by play of where we have come in the last 3 years, and what to expect for the coming 3 years.  I agree with the general assessment that we are in the middle innings of the overall price declines (perhaps in Inning 5 of 9), but the real movement is yet to come in the middle and high-end price tiers.  Of course, there is no way of accounting for significant outside involvement that might change that outcome, however any change must be structural and permanent (such as offering citizenship to anyone purchasing real estate, offering 20% of the purchase price, no questions asked by the government, or total global thermonuclear war.  I doubt many can understand what those outcomes would look like, so we’ll focus on the most likely scenarios.

The key is really what is happening and will continue to happen California. Their assesment, given by Mark Hanson, is in my opinion spot on to how I expect the next 2 years to play out:

California housing — at the low end — is ‘bottoming’ mostly because: a) median prices are down 55% from their peak over the past two years, thereby making the low end affordable; b) foreclosures have temporarily been cut by 66% through moratoriums reducing supply; and c) demand is picking up going into the busy season.
But the moratoriums are ending and the number of foreclosures in the pipeline is massive — they will start showing themselves as REO over the near to mid-term. The Obama plan held the foreclosure wave back, creating a huge backlog and now the servicers are testing hundreds of thousands of defaults against the new loss mitigation initiatives. We presently see the Notice of Defaults at record highs and Notice of Trustee Sales back up to 9 month highs — there is no reason for a loan to go to the Notice of Trustee Sale stage if indeed it wasn’t a foreclosure. However, the new ‘batch’ are not only from the low end but a wide mix all the way up to several million dollars in present value.
Because the majority of buyers are in ultra low and low-mid prices ranges, the supply-demand imbalance from foreclosures and organic supply will crush the mid-to-upper priced properties in 2009. We already have early seasonal hard data proving this. As the mid-to-upper end go through their respective implosions this year and the volume of sales in these bands increase as prices tumble, the mix shift will raise median and average house prices creating the ultimate in false bottoms. We also have data proving this phenomenon.

You can find this narrative (and much more) on slide 62.

• Credit Bubble , Dead Cat Bounce , Foreclosures , Housing Crash , Investing
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Chuck Ponzi May 13th, 2009

CNN Money today gives us our money shot for the day while interviewing Realty Trac for insight into the April foreclosure numbers:

Foreclosures in April exceeded even March’s blistering pace with a record 342,000 homes receiving notices of default, auction notices or undergoing bank repossessions, according to a regular industry report.

One of every 374 U.S. homes received a filing during the month, the highest monthly rate that RealtyTrac, an online marketer of foreclosed properties, has recorded in four-plus years of record keeping.

“April was a shocker,” said Rick Sharga, a spokesman for RealtyTrac. “I would have bet on a dip because March foreclosures were so high.

Instead, filings inched up 1% from March and rose 32% compared with April 2008.

Indeed, for those who do not keep up with the lingo, you may want to google what a shocker is.

For those wondering, I’ll give a visual:

Shocker!

If this is in bad taste, let me know, but the foreclosure numbers are definitely a surprise.  Sometimes, I’m not sure if living in SoCal has warped my sense of humor.

And, for those seeing green shoots in the economy, I doubt you”ll be seeing a corresponding positive report out of housing.  We may very well be in a strong dead cat bounce this year (much like California experienced in 1993) as housing prices realign themselves.

There were 63,900 bank repossessions, the last stop in the foreclosure process. More than 1.3 million homes have now been lost to foreclosure since the market meltdown began in August 2007.

The increasing foreclosures will force RealtyTrac to rethink its forecasts, according to Sharga. “We had been predicting 3.4 million filings for the year,” he said, “but we’ll blow those numbers out of the water.”

With so much uncertainty, I can only stand by my predictions for 2009.  There will be some up and some down areas.  Overall, the direction is down.

• Dead Cat Bounce , Deflation , Foreclosures
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Chuck Ponzi November 19th, 2008

Housing? Maybe 2011.

Stocks? I’m buying at these levels.

Looking back? Peter Schiff got most things right. I don’t think we’ll see inflation for a little while more, that might come when people actually have money, but we’re in a deflationary recession right now. Everything is hit. Everything.

I think we’ve got more pain to come, but after a nearly 45% hit to the broad indexes, my opinion is that it’s got to get better sometime. This could be a replay of the late 1974 double-bottom. JMHO, this is not investment advice. If you get gains, take ‘em, you may not know when they’ll come again.

Don’t buy SoCal housing yet, you’ll be handsomely rewarded in the future for patience. There’s a lot of knife catching out there that might tempt some people, but the trend is in, and it’s down.

• Bottom Callers , Dead Cat Bounce
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Chuck Ponzi August 25th, 2008

If you want to see something really interesting, check out Lawrence Yun talking about something that bloggers caught onto long before the NAR did, shadow inventory… when sales come back, so do sellers.  whocoodanode?

In addition, the most startling revelation (which bypassed the host’s attention) was Larry the Liar’s admission that Realtors are bypassing entering direct sales into the MLS.

So, now that the MLS is no longer valid as a data collection tool, what is the next step?  Maybe the NAR will offer an open MLS?

Watch Here.

• Dead Cat Bounce
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Chuck Ponzi July 28th, 2008

For anyone interested in why interest rates on property are still going up, here’s a great chart courtesy of Paul Krugman’s Opinion column today:

I’m predicting whatever lift we saw this summer from decent rates (muting the crash underway), will disappear and the next leg down of prices will continue.  This dead cat bounce is dead!

I will be officially revising my 2008 Socal Real Estate estimates based on recent action.

• Credit Bubble , Dead Cat Bounce , Liquidity Trap
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Chuck Ponzi February 20th, 2007

With the mainstream media in a tizzy about whether housing has bottomed or not, the professional wishers and hopers are all too quick to tell us that everything will be fine, everything is ok.

Everything is not fine, everything will not be okay.

David Lereah, in fact was quoted:

Last year “was the year of contraction,” said David Lereah, the NAR’s chief economist. “When we get the figures for this spring, I expect to see a discernible improvement in both sales and prices.”

Uh… yeah. Call me in a few months and tell me how that’s working out for you.

The sad part (and the cause of so many dead cat bounces) is that the psychological environment changes enough for committed (and often overcommitted) interested parties to buy back in (Never Been A Better Time To Buy crowd). It is only when these parties become dissillusioned by repeated losses that the entire market capitulates and often sinks below fair value. In the heady times, leverage is power, in bad times, leverage is death.

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• Bubble , Dead Cat Bounce , Mean Reversion , Psychology
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