Monday, September 26, 2005

Greenspeak—Housing Bubble is a Concern

Don’t be fooled by the Fed Head’s sleight of hand (90% Cushion?)
A Reading Between the Lines tells the story

In an upcoming speech on "Mortgage Banking" to the American Bankers Association in Palm Desert, California Fed Head Alan Greenspan gave his strongest warning about the housing bubble.

Housing Market Driving the Economy–From Greenspan None the less: "In my remarks today, I plan, in addition, to focus on one of the key factors driving the U.S. economy in recent years: the sharp rise in housing valuations and the associated buildup in mortgage debt."

Rise in House Prices has tempted borrowers"[T]he associated run-up in housing values has left households with a substantial pool of available home equity."

Housing Bubble Driving Consumption: "[T]he implied increase over the past decade in consumption expenditures financed by home equity extraction, rather than by income and other assets, would account for much of the decline in the personal saving rate since 1995.."
"Nonetheless, it is difficult to dismiss the conclusion that a significant amount of consumption is driven by capital gains on some combination of both stocks and residences, with the latter being financed predominantly by home equity extraction."


Froth in housing spilling over into other markets: "The apparent froth in housing markets may have spilled over into mortgage markets."

Financial Derivatives in Housing Market Pose Risk: "[T]hese products could be cause for some concern both because they expose borrowers to more interest-rate and house-price risk than the standard thirty-year, fixed-rate mortgage and because they are seen as vehicles that enable marginally qualified, highly leveraged borrowers to purchase homes at inflated prices. In the event of widespread cooling in house prices, these borrowers, and the institutions that service them, could be exposed to significant losses.."

"Significant losses" take on added meaning for someone known for mincing their words.

The Numbers are not reassuring:"The results show that, as of mid-2005, less than 5 percent of borrowers had current LTVs (value of loan relative to the total value of the house) exceeding 90 percent"

The 90% figure is deceptive. Why? Because in a housing market that is experiencing rapidly rising prices the loan value to home value (LTV) ratio should be declining precipitously because of rising house prices making it a poor guage.

For example, consider that the median house price rose 15.8% for the twelve months ended in August.
Assume that a year ago you purchased a home for a price 100 with no down payment with an Interest Only loan. So your loan value to house value would be 100% (100/100) at the time of purchase. Now a year later housing prices have risen 15.8% and the value of your home would be 115.8 (100 X 115.8%) and your LTV would be 100/115.8, or 86.35%. So after one year of making no principal payments on your mortgage your LTV has declined to 86.35% simply because of rising housing prices. In fact your LTV would have been below 90% in about 9 months.

Basically anyone buying a house in the last 9 months should have an LTV less than 90%--even those taking our Interest Only loans with no down payments. In fact in some hot markets that have seen 20% or 40% price gains you would have a LTV less than 90% in a few months. These are the larger markets that represent a good chunk of the real estate market.

The fact is to have as many as 5% of borrowers with an LTV of 90% or more in a hot market of rapidly rising housing prices should be cause for concern, not consolation. It is a clear indication that turnover is high, as is leverage. High Turnover is a sign of speculation! That is what the LTV ratio is telling us.

The Fed Head’s conclusion is wrong:"In summary, it is encouraging to find that, despite the rapid growth of mortgage debt, only a small fraction of households across the country have loan-to-value ratios greater than 90 percent. Thus, the vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices."

There is very little cushion should housing prices fall. Don't be fooled by Greenspeak!!!

Greenspan Says USA has lost control of its Budget!

American fury over Greenspan leak
French claim Fed chairman admits US has lost control of budget

By Philip Thornton, Economics Correspondent in Washington
Published: 26 September 2005

From the Independent (UK)--
Bitter disagreements over global economic policy broke out into the open yesterday as the French Finance Minister claimed that Alan Greenspan had admitted America had "lost control" of its budget while China warned the US to drop demands for radical economic policy changes.

In an extraordinary revelation after a meeting between Thierry Breton and Mr Greenspan, M. Breton told reporters: "'We have lost control,' that was his [Mr Greenspan's] expression.
"The US has lost control of their budget at a time when racking up deficits has been authorised without any control [from Congress]," M. Breton said.
"We were both disappointed that the management of debt is not a political priority today. The situation that is creating tension today on the currency market ... is clearly the American deficit."

The public comments, which were made during meetings between the G8 nations and the International Monetary Fund, are certain to anger the Bush administration and widen divisions between the US and France over issues such as the Iraq war and global warming.

A clearly irritated senior US Treasury source said: "Things can get lost in translation."
A spokesman for the US Treasury said: "This administration is absolutely committed to the President's goal of halving the deficit as a percentage of GNP by 2009 and we have every expectation of meeting that goal."

Meanwhile, Zhou Xiaochuan, the governor of China's central bank, said it would not be pressured into suddenly abandoning its currency regime.

He challenged claims that the blame for the global imbalances could be laid at Beijing's door, hinting that it was driven by the strength of domestic demand in the US.

Speaking at a meeting of the International Institute of Finance, Mr Zhou said people were right to worry about imbalances. "The US has always run a fiscal imbalance and current account imbalance but in the recent two years we see the magnitude of the deficits is historically high. People start to worry," he said.

Mr Zhou added that China's currency regime, under which the yuan was pegged to the dollar for 10 years until two months ago, when it was allowed to float within a narrow band, was not the sole cause. "For China, actually our statistical data does not support significant elasticity of exports and imports on exchange rates," Mr Zhou said.

In an apparent reference to the US, he said: "When internal demand in a large economy becomes stronger it imports more and exports less."

The central bank chief likened China's foreign exchange regime to a "very big complicated machine", saying: "If you don't know how to fix it, you should not dismantle the whole machine. Chinese economic reform philosophy is gradualism."

But he played down fears that imbalances would inevitably lead to a crash, saying the US's deficit of GDP could be "tolerable". "Probably nobody knows whether it is really unsustainable," he said.

Rodrigo Rato, the head of the IMF, said US plans to cut government spending looked ambitious in the light of huge reconstruction costs as a result of Hurricane Katrina.

"The strategy to reduce expenditures is quite ambitious even before the new needs derived from the natural disasters that have affected the country," Mr Rato said. Finance ministers from the other G7 nations urged the US to pursue "fiscal consolidation".

In its communiqué, the G7 (which is the G8 nations excluding Russia) praised China for its decision in July to adopt a "dirty float" against a basket of currencies that allows the yuan to make limited daily moves.

"We expect the more market-oriented system to improve the functioning and stability of the global economy and the international monetary system," the G7 statement said.

In an apparent snub to Russia, the G7 said it would hold an extraordinary finance ministers' meeting in London in December rather than one in February, during the Russian chairmanship of the G8.

G7 sources said ministers were concerned over abuses of the rule of law that had seen leading businessmen imprisoned over the level of corruption with the former Soviet state.

Tuesday, September 20, 2005

The last Stand–Fed’s got it wrong, AGAIN !

Analyst says market and economy going down.
Points to change in 2 year yields for his rationale

By raising the Fed Funds Rate by 25 bp to 3.75% the Fed adds to the woes created by Katrina and higher oil prices.

To read the Fed’s statement:

This should be the last Fed rate rise as visible signs of a slowdown will soon become very evident.

As financial market analyst Michael Belkin notes in his recent commentary the Federal Reserve has gotten it wrong again by raising rates:

"Free market interest rates (the 2 year rates ) have led the Federal Reserve by months at the last three FOMC policy reversal points ( 1999, 2001, 2004). We dub this the 200 basis point rule (1 % (percentage) equals 100 basis points (bp)). It seems to take a 200 bp move in the 2 yr yield in the opposite direction of the Fed policy bias, for it to dawn on Greenspan and the FOMC that it is time to get off their rear end and reverse policy. This is a very different view of Fed monetary policy than that of Wall Street. They say that the Fed is the engine leading the train. We say the Fed is the caboose. Rather than second-guess every FOMC policy move, investors should watch the 2 Yr free market interest rate for a thumbs up or thumbs up on the US economy."

"Example #1 November 17, 1998, last rate cut. The previous month the 2 Year yield bottomed on October 15, 1998 at 3.83%. It rose to 5.73% an increase of 190 bp shortly before the 1999-2000 year tightening cycle. "

"Example #2 The last Fed tightening of that cycle was on May 16, 2000. The 2 Yr note peaked the next day 6.903% and fell to 4.858% the day before the Fed began tightening."

"Example #3 The last Fed cut in rates before this cycle was on June 25, 2003. The two year yield bottomed out 8 trading sessions later at 1.072%. The two year yield rose to a peak of 2.93% on June 14 2004 just before the Fed began this tightening cycle."

"If the FOMC follows its Keystone cops routine, there will be one more rate rise in the next few meetings while 2 Yr yields fall dramatically......"

"This scenario suggests that economic activity will soften....This will be a downer for stocks."

Thursday, September 15, 2005

Greenspan continues to attack Fannie Mae and Freddie Mac

The Wall Street Journal reported today (‘Greenspan Issues Another Warning on Fannie, Freddie’, by John D. Mckinnon and Dawn Kopecki; September 15, 2005)’ that Fed Head Alan Greenspan has issued another warning about the dangers of Fannie Mae and Freddie Mac’s portfolio’s in a letter addressed to Senator Robert Bennett (R., Utah).

To read the letter:

Clearly Greenspan is fretting;
" As Fannie and Freddie increase in size relative to the counterparties for
their hedging transactions, the ability of these [companies] to quickly
correct the inevitable misjudgments inherent in their complex hedging
strategies becomes more difficult."
"In the case of [Fannie Mae and Freddie Mac], excessive caution in reducing
their portfolios could prove to be destabilizing to our financial system as a
whole and in the end could seriously diminish the availability of home mortgage

Greenspan should stop pointing the finger and go to the public confessional. We have consistently pointed out the Housing Bubble and the accompanying financial risks, aka the mortgage backed market for repackaged mortgages, is due to the Fed Head’s bailout policy and low interest rate policy.

Greenspan senses the risks posed by his policy and continues to look to blame others for his own mistakes.

Time to own up AL!

Friday, September 09, 2005

FOMC Meeting Change

Looks like Fed Head Greenspan will be out on January 31, 2006. A just released statement from the FEd indicated that the two day FOMC meeting scheduled for Jan 31 and Feb 1 had been reduced to only Jan 31.

Pressure will be on the Bush administration to find a replacement. But as I indicated earlier in the year ( ) this will cause angst in the market. This was reiterated with our May 26th blog entry.

Add the anxiety of a new Fed Head to higher oil prices, increased deficit spending due to Katrina, growing trade/budget deficits, a housing bubble about to burst and rate rises by the Fed and the stock market is heading lower....much lower....

Good Riddance To Greenspan!

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