CREDIT BUBBLE BULLETIN Look back and fear
Commentary and weekly watch by Doug Noland
"The job of an economist, among many other duties, is to put things into perspective. So, because I am an economist, among other duties, here is a little perspective on the recent turmoil in the stock and bond markets.
"First, when the story of this turbulence is reported, the usual explanation mainly has to do with some new loss in the subprime mortgage world ... Here is the first instance in which proportion tells us that something is out of whack: The total mortgage market in the United States is roughly US$10.4 trillion. Of that, a little over 13%, or about $1.35 trillion, is subprime - certainly a large sum. Of this, nearly 14% is delinquent, meaning late in
payment or in foreclosure. Of this amount, about 5% is actually in foreclosure, or about $67 billion. Of this amount, according to my friends in real estate, at least about half will be recovered in foreclosure.
"So now we are down to losses of about $33 billion to $34 billion ... The total wealth of the United States is about $70 trillion. The value of the stocks listed in the United States is very roughly $15 trillion to $20 trillion. The bond market is even larger ... This economy is extremely strong. Profits are superb. The world economy is exploding with growth. To be sure, terrible problems lurk in the future: a slow-motion dollar crisis, huge Medicare deficits and energy shortages. But for now, the sell-off seems extreme, not to say nutty.
"Some smart, brave people will make a fortune buying in these days, and then we'll all wonder what the scare was about." Ben Stein, "Chicken Little's Brethren, on the Trading Floor", New York Times, August 12, 2007.
I couldn't help but recall Ben Stein's summer 2007 article, as pundits were this week dismissing that tiny little Portugal could have any bearing on the juggernaut US economy and booming financial markets. And thinking back to August '07, Mr. Stein looked pretty smart for a while, with stocks rallying back from that month's selloff to post all-time highs in mid-October.
On the surface, things did look pretty good - "This economy is extremely strong. Profits are superb. The world economy is exploding with growth." Unappreciated back then was the acute fragility inherent to massive quantities of mispriced finance and speculative leverage. So flawed was market faith that Washington would never tolerate a general housing downturn.
From my perspective, 2014 and 2007 share troubling similarities. More ...
Doug Noland is a market strategist for the Prudent
(Republished with permission from PrudentBear.com.
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