The Perfect Storm

[Guest Winnie]

There are so many things which we have hoped for on this site for years converging all at the same time, and possibly in the same week:

- SM Crash (next week after more banks fess up?)

- Yen Carry Trade unwinds (ditto)

- Hurricane in Gulf of Mexico - Dean causes oil to surge in price.....

- Curtains to bonuses, City job cuts - the rumours and emails will start rippling through the City offices on Monday

- Private Equity activities slashed and soon to be taxed (limply but symbolic of growing anti fat cat sentiment)

- Mortgage Fraud rearing its head again in UK

- Commercial property market openly crunching

BoE cannot cut IRs because of inflation all around us (even the supermarket price war has been called to a halt by an investigation, and then there is Oil, China...) and the threat to sterling (looking very fragile as the YCT unwinds and the HP focus shifts to our economy as being NEXT

I have no money in the markets except shorts on US real estate and financials. I cashed in my pension two months ago, and already saved myself £60k haircut on the lump sum.

It has to be cash......for a little while yet, and the only money to be made is in currencies or shorting IMHO....

Also...over time as the sheeple start getting burned...if I were a banker (heaven forfend) I would not be leaving my Aston Martin out on the streets overnight...the mob can be vengeful, and those guys will get the full force of resentment and blame.

[?...!]

When the credit market finally woke up to the reality of risk in the 21st Century, and credit spreads began to widen and widen, I said the banks could accommodate these elevated spreads for six to eight weeks before they would begin to incur very heavy losses.

I think the FOMC thought something similar if not exactly the same (they ought to be better informed than I), and that last weeks actions were a dirrect attempt to carry Countrywide for a further 30-60 days, after which I see restructuring and a dissolvement.

Unfortunately for the FOMC their action did not really bring the spreads down far enough to avert any real losses. The Fed may well begin an inflationary cycle September 18th (which I think is an invitation to terrorism).

If you didn't go to Yen 6 weeks ago there may still be time to save a few pennies on the pound, but you really need to act sooner in future. Your pension could have made 10% gains rather than 10% losses.

In Summary.

The worst is still ahead. Monetary policy is being draw up to make the correction a long and slow one rather than a rapid adjustment. Although I think it will cut just as deep.

There will be some very substantial losses announced at some point. These will be very bad days on the markets, and since they will likely come as out of the blue, shock announcements I would sit out for a while.

The biggest question of all remains unanswered... Who are the underwriters? As they are surely dead.

[refusnik]

There are so many things which we have hoped for on this site for years....

...if I were a banker (heaven forfend) I would not be leaving my Aston Martin out on the streets overnight...the mob can be vengeful, and those guys will get the full force of resentment and blame.

Kirsty was quoted as saying somethng to the effect of "These types from housepricecrash website are trying to crash the market" so I am not sure if the blame won't be thrown around here too! or - I am not sure! Even if she's dumb, she was very serious.

[grasshopper]

Nouriel Roubini argges that likely Fed Funds may not prevent a US recession.

http://www.rgemonitor.com/

Nouriel Roubini's Blog

The Forthcoming Fed Rate Cuts May Not Prevent a US Hard Landing

Nouriel Roubini | Aug 17, 2007

The Fed finally acknowledged today the risk of a serious US economic slowdown given the current financial and credit markets turmoil. More important than the symbolic 50bps cut in the discount rate was the move – in today’s FOMC statement – from the semi-neutral bias of the last few months ("semi" as inflation was still their predominant concern until recently) to a clear easing bias today. Essentially today the Fed telegraphed a certain Fed Funds rate cut at the September meeting and possibly more cuts in the months ahead.

The statement was very clear in signaling an easing bias and a policy cut ahead: “Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth forward." The statement also pointed that "the downside risks to growth have increased appreciably". And it clearly signaled that the FOMC is "prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."

The stress on the downside risks to growth and the failure of the statement to even mention the “I” word (Inflation) suggests that, in about a week since the previous FOMC meeting, concerns about inflations as the predominant risk have faded and concerns about growth have sharply increased. For a Fed that – until recently – was in the soft landing camp (slowdown of growth but still moderate pace of growth) today’s statement is a signal that they are starting to worry about a hard landing of the economy. For the first time in over a year the Fed is now implicitly admitting that they underestimated the downside growth risk: until now the official Fed view was that the housing recession was contained and bottoming out and not spilling over to other sectors of the economy; and that the sub-prime problems were also a niche and contained problem. The sudden shift to a strong easing bias suggests that the Fed miscalculated until now the damage to the economy and to financial markets of the housing recession and its real and financial spillovers.

Even before this tightening in financial conditions following the recent market turmoil economic growth was weakening: a deepening housing recession; a saving-less and debt-burdened US consumer buffeted by many shocks (high oil and gasoline prices, falling home values, falling home equity withdrawal, slackening labor markets, tightening mortgage markets) and slowing down its consumption to 1.3% in Q2 (and further down in August based on the most recent data); a corporate sector on a real investment strike (with capex spending on software and equipment growing a dismal 2.3% in Q2).

Now with financial conditions significantly tightening in credit and financial markets the shock to private consumption, real capex investment of the corporate sector, and residential investment will be even more severe, thus increasing the risks of a US hard landing (either a growth recession with growth below 1% or an outright recession). You have the beginning of a severe credit crunch in mortgage markets (not just sub-prime but also near prime and prime mortgages) and in consumer credit (especially non-credit card consumer debt); a severe tightening of credit conditions for anything related to real estate (housing, non residential real estate) and mortgages; and a sharp increase in credit spreads for the corporate sector that will push down corporate capex spending. Add to all this rising risk aversion, panic, fall in consumers, corporate, investors’ confidence that are important drivers of durable and capital spending decisions and you have all the conditions for a US hard landing.

Will the Fed be able to rescue the economy and avoid the hard landing? This is quite unlikely in my view.

First, as argued here before we are facing an insolvency crisis for many agents in the economy, not just a liquidity crunch. Given the serious insolvency - rather than just illiquidity- among many economic agents (many mortgage-burdened households, dozens of mortgage lenders, many homebuilders, some hedge funds and financial institutions, some distressed corporates) a modest Fed easing in the fall – even a likely 75bps cumulative cut by December - will not make much of the difference as you cannot solve an insolvency problem by throwing liquidity at it. The de-leveraging of a massive Minskian credit bubble has barely started and easy money will not be able to reverse this credit downturn. This is a much more serious credit crisis and crunch than the liquidity crunch around the LTCM near collapse in 1998.

Second, even the currently prices Fed rate cuts will not be able to restore normal conditions in credit and financial markets given the widespread uncertainty about the losses from subprime and other mortgages and given the uncertainty about which institutions are at risk. Equity markets have moderately rallied today but the credit crunch in highly illiquid instruments will remain and keep markets and investors on the hedge. And news of further downgrades, delinquencies, insolvencies and stresses in pockets of markets and in financial institutions will keep investors highly nervous and risk averse.

Third, the economic slowdown is already underway and given the glut of housing, autos and durable goods in the economy the demand for these goods will be relatively insensitive to interest rates. In 2001 and on the Fed aggressively cut the Fed Funds rate, from 6.5% to 1% by 2004; and long rates fell by 200bps in that period; still the 2001 recession was not avoided given the then glut of tech capital goods and real investment fell by 4% of GDP between 2000 and 2004. Once there is a glut of capital goods – then tech good, today housing, autos and consumer durables – Fed easing is like pushing on a string and becomes less effective as it takes time to work out such a glut.

Thus, at this point what the Fed will do in the next few weeks and months may be too little too late to prevent a US hard landing.

[mikefluk]

The biggest question of all remains unanswered... Who are the underwriters? As they are surely dead.

That's easy to answer; anyone who :

Has a mortgage

Has a pension

Invests in the stock market

Has cash in a bank

[PropertyGuru]

That's easy to answer; anyone who :

Has a mortgage

Has a pension

Invests in the stock market

Has cash in a bank

is breathing???