For the first 23 years of my working life I was an investment banker - I say this only to make the point that I was good at this and I was good because I developed a feel. Like a good sailor who can read the sky or a good soldier who can read the battlefield, I have a sense for both danger an opportunity.
I have to admit now to a sense of deep dread. John Robb posted this link today.
This graph shows the imbalance - all opportunity of risk is based on such imbalances when normal relationships get out of their "Norms". The 2 arrows prior show the times when house prices got out of norms with incomes. There has never been such an imbalance as now. I will repeat this point - There has NEVER been such an imbalance. There has to be a massive correction.
Dr Chris Martenson's overview is this:
So,onto the primary question, “what would be required to bring house prices and income gains back in line? The answer to that is either:
1) An income gain of 51%
2) Or a decline in house prices of 34%
Of the two, income gains or house price declines, which seems more likely? Before you answer that, you should know that the average income gain over the past 6 years has been 2.3% per year (not inflation adjusted). At that rate it would take 21 years, or until 2028, to close the gap. In the meantime, house prices would have to remain frozen at today’s prices. In a normal world, we would see a bit of both with house prices falling and incomes rising to meet somewhere down the road.
However, this is not a normal bubble and I expect house prices to do most of the work. Because of the correlated set of job losses that will result from the housing wipeout I am expecting a decline of even more than 34%, possibly as much as 50%. Remember, an outsized proportion of the meager job gains recorded since the recession of 2001 were in some way linked to housing. The ripple effect of job losses will extend far beyond realtors and mortgage brokers and into window manufacturing, lumber, plumbing fixtures, nail salons, BMW detailing services, and so forth.
The issue becomes solvency not just for the yous and the mes but for the banking system as a whole. Here is Dr Martenson again:
To put it in the simplest of terms, the total amount of bank capital in the entire country is a little over $1.1 trillion while more than $11 trillion in real estate loans exist meaning that a 10% to 15% loss on those loans would translate into the complete bankruptcy of the US banking system.
What this all means is that we have a crisis of solvency, not liquidity.
Currently the Federal Reserve has teamed up with a few European central banks to provide vast new sources (unlimited really) of liquidity to the banking system. The central banks will allow specific institutions (big banks) to trade in their piles of dodgy loans for electronic piles of cash for a specified period of time.
After a period of time the banks will have to buy those dodgy loans back, at par and with cash, at some point in the future. If those loans are bad (‘bad’ like a $500,000 mortgage on a $300,000 condo) then this maneuver by the Fed simply won’t work.
Instead, we need to quickly recognize that the loans are simply going to permanently underperform or enter default. This means we will probably lose a financial intuition or two (or thirty) along the way, but delaying the inevitable does not change the outcome, only the length of time you spend in pain.
There will be in the end no soft landing. Get ready for very tough times.
The US dollar will tank. The Chinese etc will have to diversify from the Dollar as their primary reserve currency. You also cannot run a war of a peacetime rate as we found out after the Vietnam war.
House prices and stock prices will tank. There will be an overshoot on property on the downside because of the standard for all financial panics - to pay the bills even good assets have to be sold at distress prices. Our pension funds etc have loaded up directly in shit assets or hold others that have. Good stocks are easier to sell than poor ones - so all stocks will be affected not matter what the fundamentals.
Expect people like the Chinese and Oil Kings to buy the crown jewels - cash will be King - we have seen the wedge with Morgan Stanley and Citicorp making fire sale deals with cash rich Arabs and Chinese.
Expect a real shift in power from the west. Expect a deep and long run recession in the west.
So what to do? Here is Dr Martenson's advice that I heartily agree with:
- Get out of debt.
- Be very careful about where you keep your money. Already several high profile money market funds have suffered losses and closed down returning less than the deposit amount to their clients. Expect this to get worse.
- The dollar is in a precarious situation especially now that the fed and the FHLB have begun exchanging paper money for bad debt. Gold. Silver. Top off your oil tank at home. Do whatever you can to reduce your exposure to the dollar
- Be aware that pensions, municipal investment accounts, and even your bank are all highly likely to be exposed to the leveraged losses that are now upon us. If you are exposed here, figure out how not to be. Should a major banking crisis erupt, please consider how you'll conduct your daily affairs if your bank 'goes on holiday'. Cash in a safe place is one form of insurance.
- If you are a citizen of a country whose central bank insists on bailing out the monied elite (big banks) with your current and/or future tax dollars, use every possible avenue available to legally apply pressure upon your political representatives to prevent this from happening.
Batten down the hatches mateys - it's going to be very rough
