Financial topics

Investments, gold, currencies, surviving after a financial meltdown
Gordo
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Re: Financial topics

Post by Gordo »

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I think we all already know this, but...

U.S. Housing Slump Has ‘Just Begun,’ Says Forecaster Talbott

Feb. 5 (Bloomberg) -- Let’s say you own a $1 million home in Santa Barbara, California.

The house seemed like a steal when you bought it with that adjustable-rate mortgage in 2005. You still love the white beaches and those yachts bobbing up and down in the harbor.

Then you awaken early one morning, troubled that your monthly payments will soon double. You go out to pick up your newspaper and see for-sale signs on five houses on the street. One identical to yours just sold for $500,000.

Are you going to pay the bank $1 million plus interest for your place? John R. Talbott, a former investment banker for Goldman Sachs, poses that hypothetical question in his latest book of financial prophesy, “Contagion.”

His answer: “I don’t think so,” he says. “If I’m right, then this housing decline has only just begun.”

Talbott is an oracle with a track record: His previous books predicted the collapse of both the housing bubble and the tech-stock binge before it. A friend who runs a New York steak house introduces him as Johnny Nostradamus, he says.

What sets him apart from other doomsayers is his relentless emphasis on simple arithmetic. He walks you through the numbers to show how U.S. house prices got so out of kilter with wages, rental prices and replacement values -- the cost of buying a property and building a home. (“Homes in California by 2006 were selling at three to five times what it would cost to build a similar home from scratch,” he writes.)

Five More Years

Talbott’s latest predictions are sobering. The U.S. is only halfway through the total potential decline in housing prices, he says. Home values will continue to deteriorate for four to five years, he forecasts. Adjustable-rate mortgages issued in 2004 and 2005, for example, are only now resetting for the first time, he notes.

Bankers may “try to blame the crisis on poor Americans with bad credit histories, but that is not the real cause of the housing crisis,” he says. “The greatest home-price appreciations and the homes most subject to price readjustment are in America’s wealthiest cities and its glitziest neighborhoods.”

At the end of 2008, a record 19 million U.S. homes stood empty and homeownership sank to an eight-year low as banks seized homes faster than they could sell them, the U.S. Census Bureau said this week. Almost one in six owners with mortgages owed more than their homes were worth, Zillow.com said the same day.

By the time the crash ends, Talbott predicts, homeowners will have lost as much as $10 trillion, with investors and banks worldwide losing almost $2 trillion. And just as the U.S. starts getting over a prolonged recession, the first big wave of baby boomers will retire, depriving the economy of their productivity (and high consumption), he says.

Back to 1997

So how far will the price of your home on the range fall? Citing historical data and trends, Talbott concludes that real prices should return to their average 1997 levels, adjusted for inflation. Why 1997? A 120-year historical graph shows that real home prices in the U.S. stayed relatively flat for 100 years, then began rising in 1981 and surged from 1997 to 2006.

A return to 1997 prices “would get us out of the heady, crazy days from 1997 to 2006 in which banks were lending large amounts of money under poor supervision and aggressive terms.”

How did we get into this mess? Talbott blames everyone from average Americans who caught “the greed bug” to hedge funds and credit-default swaps. The single biggest error, he says, was for U.S. citizens to allow their national politicians to take large campaign contributions from big business and Wall Street -- a theme Kevin Phillips developed in “Bad Money.”

‘No Accident’

“This crisis was no accident,” he says. It began, in Talbot’s view, because the U.S. government was “co-opted” into deregulating the financial industry. Politicians were “paid to deregulate industry,” taking billions of dollars each year in campaign contributions.

His investment advice for this prolonged recession: Hang on to cash and invest in gold or Treasury Inflation-Protected Securities, or TIPS. If he had to invest in stocks, he would put his money in China.

Living in smaller houses with their savings gutted, U.S. baby boomers will face yet another big challenge, Talbott says:

“The toughest job to get in the future will be the elderly person greeting you as you enter the local Wal-Mart.”

“Contagion: The Financial Epidemic That Is Sweeping the Global Economy . . . and How to Protect Yourself From It” is from Wiley (256 pages, $24.95, 15.99 pounds, 19.20 euros).
John
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Re: Financial topics

Post by John »

There's real panic developing in Washington, because of the accelerating downward
economic figures.

Image

Washington is SO panicked, it now appears they'll pass the stimulus bill.

Sincerely,

John
mark
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Joined: Tue Oct 28, 2008 6:48 pm

Re: Financial topics

Post by mark »

There is an exchange traded fund symbol FAZ that tracks 3X the inverse of a banking index. FAZ declined about 20% today.

This indicates someone thinks the banks are going to come out well in the short term.

Am I missing something, or is this a case of buy the rumor, (bailout) and later, sell the news (bailout)....
mannfm11
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Re: Financial topics

Post by mannfm11 »

I am wondering if you should take the public advice of anyone from Goldman Sachs? Abby Jo had the SPX at 1800 by the end of 2001. They had oil to $200 by the end of last summer. It appears they are top callers more often than target callers. The gold game is an interesting one in that higher or lower is a coin flip short term, but collapse is in our future. It is clear that misguided economics, taught in every college in the country is for nothing more than serving the banker class and the result of this is we are going to spend trillions bailing out bankers, their shareholders and bondholders rather than let them take the bath that everyone from Nortel and Lucent shareholders to Worldcom and Enron shareholders and bond holders. Why do the bondholders and shareholders of Citi, JPM and Bank of America and others get a free ride out of this. The government should put together a bad bank and give it to these entities and put together a good bank and give it to the depositors.

The housing game has a long way to go. I like the fact this guy sets it at 1997, because I do also. I saw a houing crash here in DFW back in the 1980's and we barely got out of it by the time this one was going good. There have been 3 million people move into DFW since 1970 and 2 million since the crunch hit, so the economy and growth here has absorbed a lot of the excess. But, the figure I watch are the preowned housing sales reported by the NAR. These figures were kept by someone, but for some reason, the only figures ever kept by the NAR were bubble figures, like they need to keep it a secret that we aren't selling homes at a bust pace, but at a boom pace when you take the 1997 to 2006 period out of the mix. The current sales level of 4.6 million they reported last week would have been a record high in 1997. The level of new home sales shows a bust, but the preowned sales are going like we are at an economic peak. This tells me there is even greater speculation going on now than at the peak and we are just in the beginning of this process. I am in the business of renting homes, a family business composed of roughly 20 free and clear suburban Dallas homes and have spent most of my post college time in real estate of some sort. The speculaion is greater today than it was at any time I have seen and there are a lot of foreclosures going on in rental property.

The big deal that was mentioned was the cost of building a home. I have drawn a conclusion that there was such a huge profit margin in building homes in a lot of the US that the housing industry has remained intact despite losing billions. In the 1980's, a couple of bad years busted US home and General Home, 2 companies that had been the largest builders in the US for the bulk of the 1970''s. This bust is a national crisis and not a single major home builder, much less the 2 largest have gone bust. They may be right around the corner, but support is coming from somewhere. I recall the new home market here could undersell the preowned market of recently completed homes by 10% to 20% once it went bust here. My brother in law builds from time to time and $500K was a pretty substantial home here around 2000, well done 5000 feet on a nice lot and he could gross around $100K out of a home like that. I would venture there were spec areas of the US where $1 million might have cost $300K to build plus the lot max and having the lot was the gig.

I read data this week that there were something like 19 million vacant homes in the US right now. That is a 10 year supply. We are going down a lot more than 1997 levels, plus inflation. I saw $100K homes sell for $35K down in Houston and it happened damn quickly. And Congress didn't seem to give a damn either. It appears that NY, Florida, Nevada and California carry more weight than Texas. It has been that way for years, which may be why we have a state government that might have a chance to finance itself.
Higgenbotham
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Re: Financial topics

Post by Higgenbotham »

mannfm11 wrote:The housing game has a long way to go.

...The speculaion is greater today than it was at any time I have seen and there are a lot of foreclosures going on in rental property.

...I read data this week that there were something like 19 million vacant homes in the US right now. That is a 10 year supply. We are going down a lot more than 1997 levels, plus inflation. I saw $100K homes sell for $35K down in Houston and it happened damn quickly.
This company is auctioning 550 homes off in Texas later this month. The auction will take place in Dallas.

http://www.ushomeauction.com/

I scanned the list and noticed financing is available on nearly every unit. That's all I need to know in order to know that I am not interested. A similar process played out in the 1980s in the Midwest rust belt on a regional basis. The economy bottomed somewhere around late 1982. Finally, in November of 1986, Joe Maas International Auctioneers went through the midwest and sold 100s of houses for no minimum bid, cash only. Hardly anybody showed up because they had to pay cash. One auction I went to was attended by only one other person. He was a dairy farmer who had just received 20K from the USDA. We inspected the house and the auctioneer asked if I would start the bidding at 10K. I said no. He asked if I would start it at 5K and I said yes. The other guy bid $6500 and I let him have it. If this plays out again on a nationwide basis, and there's no reason why it won't, there probably won't be anybody at these auctions with any government money to spend when it finally gets to the point where they throw in the towel and the financing dries up.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.
John
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Texas real estate

Post by John »

I have heard it said that because Texas had such a severe real bubble and
crash in the 1980s, they've learned their lesson, and the current crisis
won't hurt them nearly as much as other states.

Is there any truth to that?

John
mosullivan
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Joined: Sat Oct 25, 2008 6:55 pm

Re: Financial topics

Post by mosullivan »

I think it has a long way to go as well...This economic contraction
globally is already bigger than the 1890's or 1930's as measured by
asset losses as a percentage of GDP. This is the biggest economic
event in human history; and just beginning. Of course, the last part my opinion
mosullivan
Posts: 27
Joined: Sat Oct 25, 2008 6:55 pm

Re: Financial topics

Post by mosullivan »

People criticize me for saying that these "experts" are morons, but I
just can't think of a better description.

Sincerely,

John
Now that was funny! I mean I have to agree....I remember the calls for trillion dollar market caps...The same experts now call a 40% erosion of the world's assets inflation...no hyperinflation :roll:
Higgenbotham
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Joined: Wed Sep 24, 2008 11:28 pm

Re: Texas real estate

Post by Higgenbotham »

John wrote:I have heard it said that because Texas had such a severe real bubble and
crash in the 1980s, they've learned their lesson, and the current crisis
won't hurt them nearly as much as other states.

Is there any truth to that?

John
http://www.realtytrac.com/MapSearch/FreeSearch.aspx

The realtytrac heat map gives the frequency of foreclosure activity for each state. Activity ranges from about 1 per 70 units in Nevada to 1 per 19,000 in Vermont. Texas comes in at 1 per 1,000 which looks to be be around the median. The map could be tracking foreclosure "actions" so it's possible that the rate shown on the map is higher than the true rate because there can be multiple actions per property as the foreclosure process completes. Also, the number of actions required to complete the process could vary according to state law.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.
njarboe
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Joined: Thu Feb 05, 2009 4:32 pm

When the Dollar Will Crash?

Post by njarboe »

I have just discovered this site a few weeks ago. Lots of good information and ideas on this site.

I think that the value dollar could quickly collapse at some point. Most people who I think have insight into the current state of the economy believe either hyperinflation or deflation will occur. I'm not sure which or if both will happen. The tricky part is that until people give up on the dollar, deflation will be occurring as trillions of dollars(debt obligations) are liquidated. What could be trigger for dollar collapse?

Right now, I would guess, that the people in hedge funds that have large positive positions with public institutions, (investment banks and AIG) that have not been paid are doing their best to get money transferred from the treasury to those institutions so that they can get access to the cash. Hedge funds with bad bets are going through bankruptcy. Savvy hedge fund investors would have positions in both types of hedge funds. If the treasury covers all the bad bets, then the hedge fund owners will be spending time deciding what to transfer those dollars into for the long term. Land, gold, yen, stocks? Probably all of them. One might think that with all of the quick computers and instant trading methods, this crisis might unwind quicker than previous ones. But the court system is the limiting factor. The courts have become slower and slower over time and thus this collapse may be even more drawn out than the last one. I would love to see a full length research article in the press about the limited liability hedge funds and how people explicitly bet both ways with the intention of having big losses dissolved by bankruptcy and big gains retained.

How much more TARP funds would be needed to fully unwind all of the positions is a huge guess. $150 trillion? The question is what fraction of the $1 quadrillion in paper gets sucked out as it moves from entity to entity. I'm not sure of the Freddy May/Fanny Mac obligation the US took on: $5 trillion? There is a lot of stealth bailout occurring. The treasury guaranteeing hundreds of billions of dollars of bad loans of many banks. For example $306 billion for Citi in November. Bloomberg

If congress continues to fund the failed banks as they unwind their obligations over the next 2-5 (10-20?) years, the dollar's value may hold fairly steady as deflationary debt elimination balances the inflationary desire exchange dollars for physical assets. On the other hand, if TARP does not continue to get funded, the dollar with collapse quickly.

Here are a few events I think could be the trigger to the market that the TARP money will dry up.

The Senate Republicans filibuster a TARP increase and the Democrats fail to use the nuclear option to over-ride. Expect huge swings in the dollar when this starts being discussed. If the TARP increase goes through, then the dollar will probably continue to strengthen, while if the TARP expansion fails, the dollar will quickly collapse.

If a TARP extension passes, the the next trigger event will be when the next one is needed. Not the whole $150 trillion will be passed in one TARP extension. That would just be too much for people to accept. Maybe a trillion or two each year.

The next trigger would be the mid-term elections. If fiscally conservative Republicans get control of the House or Senate in 2010 then, the market will know the jig is up and the dollar will crash. I can see no way to know what will happen.
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