The Economy's House of Cards

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Foreclosure stats for February indicate that 308,000 U.S. households received some type of foreclosure related notice during the month. Of all U.S. residential mortgage holders, 15% have either missed some payments or are in foreclosure. Mainstream news outlets reported these depression level numbers as 'good news' because the rate of foreclosure activity was only 6% higher in February than the huge level that had been reached a year earlier.

Housing is at the epicenter of the economy's problems and the situation has consistently gotten worse since the market peak in September 2005. The decline has continued even though there are numerous federal and state programs aimed at shoring up the housing market. Government policy seems to have been highly effective at creating the housing bubble, but impotent in cleaning up the mess. President Obama stated in a speech in Mesa, Arizona in February 2009 that his administration's housing programs would help three to four million homeowners avoid foreclosure through loan modification programs.  More than a year after that speech, the latest figures indicate that 116,300 home mortgages have been modified through federal programs. At that rate, it will take as long as 34.4 years to fulfill Obama's promise.

The abysmal failure of its loan modification efforts seems to have led the administration into new directions. As part of last November's "Home Affordable Modification Program", the federal government will now pay to get people out of their homes by encouraging short sales. A short sale in real estate is when a bank agrees to accept less than the outstanding mortgage owed as payment for a house. The government's plan pays the owner $1500 and the bank $1000 to agree. Real estate agents get much more however. They have to appraise the house (a major arena for corrupt practices during the housing bubble) and get a commission for arranging the sale. Neither homeowners, nor banks are likely to be pleased with this gift to the real estate industry - an industry known for its generous political contributions.

It was noted in news reports by early 2006 that U.S. foreclosure rates were starting to climb and a possible crisis was imminent. After four years, government programs haven't 'fixed' the problem, nor are they likely to in the foreseeable future. Mainstream news outlets are now reporting that U.S. foreclosures this February experienced their lowest rate of increase in four years. Foreclosures are continuing to go up, but at a slower rate. The numbers are not getting better. A casual reader of the news might miss that important point.

The ultimate nightmare ending of a housing collapse in a bad economy can be seen in Detroit today. The mayor of Detroit has just suggested bulldozing up to a quarter of the city. In some areas only one or two buildings are occupied per block. Faced with a $300 million budget shortfall, the cost of maintaining city services for these areas is prohibitive. Youngstown, Ohio and Flint, Michigan already have programs to demolish empty neighborhoods. Kansas City just voted to close down half of its schools and along with a number of Midwestern industrial cities might be implementing such programs in the future. Federal assistance will be needed to help Detroit implement its program. Perhaps this new housing aid program will be called the "Home Bulldozing Modification Program".

Disclosure: None

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Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The House of Cards Economy

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Housing continues to deteriorate. There are now 12 million homes in the U.S. with mortgages that exceed their value. This pool of houses which is particularly vulnerable to abandonment and foreclosure represents almost a quarter of all mortgaged residential properties . By the end of 2008, it is estimated that there will be a million bank owned properties for sale, which would represent a third of homes on the market. The situation is already much worse in trend leader California, where over 50% of existing home sales were foreclosed properties last month. Median prices there have dropped 34% from the high so far. The rest of the U.S. could follow California, although increased government efforts to prop up the housing market are trying to prevent further erosion.

Last quarter 766,000 U.S. home owners received at least one foreclosure notice. Only six states accounted for a majority of foreclosure activity - Arizona, California, Florida, Michigan, Nevada, and Ohio. The last four of these states are battlegrounds in the presidential election and Arizona would be too if McCain didn't represent it in the senate (nevertheless McCain's lead in the polls there is surprisingly small even though Arizona is one of the states most likely to support a Republican candidate for president). Foreclosures were worse in the beginning of the quarter and the rate even declined by 12% in September. While it looks like the number of foreclosure notices will be lower in the future, this won't be taking place because of improvements in the housing market.

The rate is being lowered by new laws have been enacted in a number of states to delay the repossession process and the FHA is attempting to renegotiate loan terms for a number of mortgage holders at risk. Foreclosure statistics are indeed very much affected by the ease of foreclosure which varies by state and should not be considered as an absolute indication of the strength of a state's housing market. New York for instance currently has a low foreclosure rate because it is necessary to go to court first and this means a foreclosure can take well over a year, longer if the judge doesn't wish to be cooperative. The FDIC is also trying to delay or prevent foreclosures. The first thing they did when they took over IndyMac was to stop all foreclosures and they are continuing to do so.

Delay does not mean preventing the inevitable however, it usually only means it only takes more time to get there. U.S. housing was in a bubble and prices became way extended on the upside. They are going to have to come down at least to the long-term mean - and we still have a long way to go to get there - before a sustainable recovery in real estate is possible. This will be an important precondition to a healthy economy as well. A look at the past suggests this linkage. Housing prices fell approximately 50% nationally in the U.S. between 1930 and 1940. The economy wasn't in such great shape then either.

NEXT: Black Friday Panic Grips World Markets

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

From Bailout to Bailout - The Prelude to Bear Stearns Collapse

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our video on the material in this post is 'The Bear Stearns Bailout'. It can be found at: http://www.youtube.com/watch?v=G8Mn67rNCFQ

The New York Investing meetup first mentioned in August 2007 that Bear Stearns was likely to fail. Two of Bear's hedge funds had gone under in late July and this helped t0 precipitate a sell off in the U.S. stock market by bringing media attention to the subprime crisis. Even though the subprime crisis had begun by at least December 2006 with the sudden failure of mid-sized mortgage lending company, the financial media failed to recognize its importance until the forced closure of the Bear Stearns funds. The precarious state of Bear Stearns finances that this failure indicated was in turn also missed by the U.S media. As usual, the media took its cues from Wall Street, which remained bullish on Bear Stearns right up to the very end (as was the case for Enron and a number of other major corporate failures).

Furthermore, the September 20, 2007 earnings report indicated everything was fine. Despite the failure of the two hedge funds, Bear Stearns claimed to have earned $1.16 a share. A write off of only $200 million (an insignificant amount for a Wall Street firm) was taken as a charge for closing the funds. Another $700 million of mortgage assets were also written down, also not that great an amount. In the earnings conference call, the CFO stated that he “expect[ed] a return to more favorable conditions next year”, stressed the underlying business was sound, and market dislocations tended to run a quarter or two. The only thing he was correct about was that the market dislocations would only last two more quarters - although he certainly didn't imply that this would be because Bear Stearns would no longer exist after that time.

While the September earnings report was reassuring, Bear Stearns December 20th earnings report was an indication of serious and possibly fatal problems. Suddenly, the company lost $6.90 a share, the first loss in its history (Bear was even profitable in every quarter during the Great Depression). Wall Street analysts were expecting a loss of only $1.79 a share, missing the actual loss by over $5.00 a share. The loss included only $1.9 billion of write downs in subprime mortgage exposure. Despite the indication that analysts had completely missed the extent of Bear Stearns problems, the stock actually went up after the earnings report, instead of sharply falling as it should have. The CEO subsequently 'resigned' - something that usually only takes place when a company is in trouble.

By December 2007, Bear Stearns was hardly unique in suffering losses because of the ever expanding credit crisis. The Federal Reserve attempted to address these system wide problems by creating its first new lending facility, the TAF (term auction facility), which gave it an additional conduit for its money pumping operations. In January 2008, reacting to the further deterioration in the financial system, the Fed cut its funds rate by an additional 1.25%. Bear Stearns, however, could not benefit directly from any of these moves since it was not a commercial bank and was therefore not allowed to borrow money from the Fed, so its situation continued to deteriorate.

Nevertheless, even as late as early March 2008, neither Wall Street, nor the media were ringing any alarm bells that Bear Stearns was about to implode. No Wall Street analyst had a sell recommendation on Bear Stearns stock even though it was about to lose almost all of its value. It apparently didn't bother them that the balance sheet indicated 33 times leverage, an amount that can only be described as enormous and which was greater than any other broker dealer or commercial bank. While the public facade that everything was fine was being maintained by Wall Street, rumors were circulating behind the scenes that Bear Stearns might go under. The big players were quietly getting their money out in what was basically a secret run on the bank.

NEXT: Bailout to Bailout - The Collapse and Rescue of Bear Stearns

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

The New York Investing meetup predicts the current bear market in Aug 2007

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

After having warned its members that the subprime crisis would soon start impacting the stock market in July 2007 (days before it actually happened), the New York Investing meetup followed this up in the August 8, 2007 meeting with a prediction of a crash or Bear Market. By January 23, 2008 both the Nasdaq and the Russell 2000 had fallen over 20% and were officially in Bear markets.

The August meeting emphasized that the Bull Market was over, that earnings wouldn't save the Market (a common claim by the financial media pundits at the time), the hardest hit sectors would be the bubble sectors of the Bull Market, real estate and financials, and short-covering rallies would be the key to profits on the long side in the future. It was even predicted that one or more broker-dealers would fail, with Bear Stearns name mentioned. The most important point made in the talk "Crash or Bear Market" (http://investing.meetup.com/21/files/) was that the Federal Reserve would not be able to save the stock market with its usual liquidity injections into the financial system. It was emphasized quite strongly that the U.S. dollar was in precarious shape and that any attempt to save the U.S. stock market with rate cuts would ultimately fail because of the damage it caused to the dollar. Future events would more than bear out this prediction.

Next: Bernanke Get in His Helicopter and Does His First Money Drop on Wall Street

Daryl Montgomery

For more information about the New York Investing meetup, please see: http://investing.meetup.com/21

The New York Investing meetup predicts the subprime disaster in July 2007

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.


While Federal Reserve chairman Ben Bernanke was making repeated announcements that the subprime problem was contained and wouldn't have far reaching effects, the New York Investing meetup had other thoughts.

In his now famous June 5, 2007 speech to the International Monetary Conference, Bernanke stated, "... at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or financial system." The New York Investing meetup, which doesn't automatically accept any pronouncements from Washington or Wall Street, quickly came to
the opposite conclusion. Cyberspace was filling up with stories of rapidly rising foreclosures, dropping housing prices, faltering hedge funds, and problems in the debt market. In the July 11, 2007 meeting, the New York Investing meetup warned its membership that the subprime crisis was about to explode and would cause serious damage to the stock market. In less than two weeks, the accuracy of the New York Investing meetup's take on the subprime crises was vindicated. The stock market would fall until mid-August.

Daryl Montgomery

Next: The New York Investing meetup predicts a crash of bear market in August 2007

For more information about the New York Investing meetup, please go to:
http://investing.meetup.com/21