Page 3 of 3 CREDIT BUBBLE BULLETIN In short, crisis reaches bedrock level
Commentary and market watch by Doug Noland
diminished, telling lawmakers that growth and inflation risks are increasing.
There are 'significant downside risks to the outlook for growth,' and 'upside
risks to the inflation outlook have intensified,' Bernanke said ... Bernanke's
shift reflects renewed turmoil in markets that forced the Treasury and Fed to
mount a rescue of Fannie Mae and Freddie Mac this week. He said that
stabilizing financial markets remains 'a top priority' ... "
July 17 - Washington Post (Neil Irwin): "The sprawling financial and economic
crisis is leading to expansion of the Federal Reserve's role, increasingly
turning the central bank into a sort of all-purpose guarantor of the financial
system. In the past few
months, Fed Chairman Ben S. Bernanke has burst through long-standing boundaries
on what the Fed does. Bernanke's actions ... have repeatedly pulled the world
from the brink of financial catastrophe and have won praise from Wall Street
and Capitol Hill ... 'The Federal Reserve has re-created itself,' said Vincent
Reignhart, a senior staffer at the Fed until last summer ... 'And if you do
more things, you set yourself up to have to choose among them and trade off.
What happens when concern for housing finance conflicts with the need to pursue
price stability?'"
July 18 - Bloomberg (Vivien Lou Chen): "The Federal Reserve shouldn't wait
until financial and housing markets stabilize to raise interest rates, central
bank policy maker Gary Stern said. 'We can't wait until we clearly observe the
financial markets at normal, the economy growing robustly, and so on and so
forth, before we reverse course,' Stern, president of the Federal Reserve Bank
of Minneapolis, said ... 'Our actions will affect the economy in the future,
not at the moment.' The comments by Stern ... reinforced traders' forecasts for
a rate increase by year-end."
July 17 - Bloomberg (Simone Meier): "The European Parliament may call on the
European Central Bank to revise its inflation goal as food and energy costs
soar, according to a draft report. The ECB's aim to keep inflation just below
2% 'should be examined in the context of a new age of globalization
characterized by rising energy and food prices,' said the non- binding report
... 'The ECB should move toward a full inflation target regime where a shift to
a range of targets might be more meaningful than a point target inflation
rate.'"
Burst Mortgage Finance Bubble Watch
July 14 - Bloomberg (Jody Shenn): "More than two of every five subprime
borrowers whose mortgages were reworked in the first half of 2007 are
defaulting anyway, Moody's ... said. Among subprime adjustable-rate mortgages
modified in the first half of last year, 42% were at least 90 days late on
March 31 ... Modifying loans granted to consumers with poor credit records has
gained favor as record numbers fail to keep up with payments and home prices
tumble ... Modification rates for subprime ARMs rose to 9.8% of all loans whose
initial 'teaser' rate periods have expired since the beginning of 2007, up from
the 3.5% recorded in a December survey ... "
July 18 - Bloomberg (Bill Rochelle): "Lake at Las Vegas Joint Venture LLC, the
master developer of the Lake Las Vegas Resort 17 miles from the Las Vegas
Strip, filed for Chapter 11 protection yesterday in Las Vegas with affiliates,
saying assets are more than $500 million and debt exceeds $1 billion."
Real Estate Bust Watch July 17 - Bloomberg (Daniel Taub): "Apartment rents in the Western US rose
2.5% in the second quarter from a year earlier, slower than the rate of
inflation, as unemployment increased and occupancies fell in most areas,
according to research company RealFacts. The average monthly rent in 15 US
states, most of which are in the West, climbed 0.6% from the first quarter to
$999 ... "
GSE Watch
July 16 - Washington Post (Anita Huslin): "In the four years since he stepped
down as Fannie Mae's chief executive under the shadow of a $6.3 billion
accounting scandal, Franklin D. Raines has been quietly constructing a new life
for himself. He has shaved eight points off his golf handicap, taken a corner
office in Steve Case's D.C. conglomeration of finance, entertainment and
health-care companies and more recently, taken calls from Barack Obama's
presidential campaign seeking his advice on mortgage and housing policy
matters. And he's privately smoldered over the events of the past week, when
Fannie Mae and Freddie Mac were portrayed as being on the brink of disaster ...
In his first interview in two years, Raines remained insistent that the
mortgage finance giant's problems are not rooted in the company but stem from a
time when the Bush administration and the Fed insisted the government-sponsored
enterprise carried no explicit federal backing."
July 16 - Wall Street Journal (John D. McKinnon and James R. Hagerty): "For
years, Washington officialdom enabled Fannie Mae and Freddie Mac, the
congressionally chartered mortgage companies, to grow until they dominated the
US market. Now lawmakers are confronting the result: a crisis of confidence in
the two companies that raises questions about whether they can make it through
the deep downturn that has struck the real-estate market. And nobody wants to
get stuck with the blame. If there's one decision that is being second-guessed,
it's the 1992 legislation that created the companies' regulator, the Office of
Federal Housing Enterprise Oversight, or Ofheo. In the 1992 debate, Ofheo came
away with fairly weak powers, and capital requirements for the companies were
set very low ... Lobbyists from the companies are said to have strongly
influenced the 1992 legislation ... "
July 18 - Wall Street Journal (Michael R. Crittenden and Sarah Lueck): "House
Democrats negotiating a rescue of Fannie Mae and Freddie Mac said they wouldn't
exempt the proposal from the annual debt limit, a move designed to quell
lawmakers' concerns that the Treasury's financial aid could be unlimited. Rep.
Barney Frank said any help for the two mortgage-finance giants would be counted
against the federal debt limit, which Congress must vote to increase. Congress
has voted five times during the Bush presidency to increase the limit ... which
currently stands at $9.815 trillion. Total public debt subject to the limit as
of July 15 is $9.440 trillion, within $375 billion of the limit. Some lawmakers
have worried the rescue plan would expose taxpayers to trillions of dollars in
losses."
Fiscal Watch
July 14 - Bloomberg (Carol Massar and Eric Martin): "The US Treasury
Department's plan to shore up Fannie Mae and Freddie Mac is an 'unmitigated
disaster' and the largest US mortgage lenders are 'basically insolvent,'
according to investor Jim Rogers. Taxpayers will be saddled with debt if
Congress approves US Treasury Secretary Henry Paulson's request for the
authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac,
Rogers said ... "
July 18 - Wall Street Journal (Deborah Solomon): "The government's rescue plan
for Fannie Mae and Freddie Mac is the latest move by the Bush administration
that transfers risk from the private sector to taxpayers, a phenomenon that
poses potentially enormous financial risks if the economy worsens. From the
bailout of Bear Stearns Cos. to a guarantee of student loans, the federal
government has either injected public money into the private sector or promised
to make capital available if needed. While taxpayers are not yet bearing the
brunt of these moves, they could still wind up on the hook ... 'The potential
for things to go wrong is big and so the potential to step in and take a lot of
the cost is really high,' said Deborah Lucas, a finance professor at ...
Kellogg School of Management and former chief economist for the Congressional
Budget Office."
California Watch
July 18 - Los Angeles Times (Marc Lifsher): "California's unemployment rate
crept up to 6.9% in June, a tenth of a percentage point higher than the month
before and the highest in nearly five years ... The latest figure ties
California with Mississippi for the third-highest jobless rate among the
states, the US Bureau of Labor Statistics said."
Muni Watch
July 14 - Bloomberg (Michael B. Marois): "US states, already reeling from the
slumping housing market and turbulent financial markets, will likely increase
borrowing to meet budget demands next year, S&P said. The ... company said
discretionary resources that states often rely upon to fund capital projects
have mostly evaporated, causing them to meet needs with bonds in fiscal 2009.
Many states have increased short-term borrowing for cash-flow purposes, S&P
said. States will have to fill gaps of more than $30 billion to balance budgets
for 2009 in response to reduced tax receipt expectations because of weak
economic growth ... Deficits are forecast in at least 23 states for the 2009
budget year. 'For the next year, state budgets are likely to be strained
because ... ' S&P credit analyst Robin Prunty said. 'This could ultimately
lead to significantly higher debt issuance to meet budget requirements, a trend
seen in prior downturns ... Connecticut pays 12.6% of its general fund to debt
service, the most of all US states. New York expends 6.5%, compared with New
Jersey's 7.4%."
July 17 - Bloomberg (Michael Quint): "New York state's tax revenue in the three
months ended June 30 was $195 million less than projected because of lower
business tax collections largely due to the New York City financial sector,
Comptroller Thomas DiNapoli said. Business taxes fell $273 million from last
year, mostly because of a 54% decline in taxes from banks."
July 18 - Bloomberg (Adam L. Cataldo): "New York Mayor Michael Bloomberg said
the city hasn't yet felt the full effects of the economic slowdown, a day after
the state reported a drop in projected tax revenue. 'We're doing better than
the rest of the country, but it is going to get to us, it is starting to get to
us ... Anybody that thinks it is not going to hit us is wrong.'"
California Watch
July 16 - Associated Press: "Housing data show the median price of a home in
California plummeted 31.5 percent in June compared with the same month last
year. DataQuick ... says ... the statewide median home price last month was
$328,000. The statewide median home price peaked in May 2007 at $484,000. The
decline is being driven by tightening mortgage markets and a growing
willingness by sellers to accept less for their homes ... About 41.9% of the
resold homes in June were foreclosed properties."
July 17 - Los Angeles Times (Peter Y. Hong): "Southern California's housing
market continues to be racked by falling prices and declining sales volume ...
The median home-sales price was $355,000 in June, down 29.3% from a year ago.
Home values are now on par with what they were in early 2004 ... Los Angeles
economist Christopher Thornberg, principal of Beacon Economics, said home
prices remain out of sync with what buyers can afford to pay. Thornberg said
prices must fall to 40% below the peak to match incomes."
July 16 - Bloomberg (Daniel Taub): "House and condominium sales in Southern
California fell 14% last month to the lowest level for a June in two decades as
buyers struggled to get loans and prices declined, DataQuick ... With little
capital available, 'even some of the well-qualified households aren't getting
home loans' in Southern California, said DataQuick analyst John Karevoll ...
'What I find remarkable here is that the numbers have stayed as low as they
have. When we're looking at numbers this low, we're looking at an awful lot of
activity that just isn't happening.'"
July 17 - San Francisco Chronicle (Carolyn Said): "Double-digit drops in median
home prices hit every Bay Area county in June, even the ones that had seemed
Teflon-coated. Across the nine counties, the median price paid for resale
homes, new homes and condos in June plunged 27.1% from a year ago to $485,000,
dipping below the half-million-dollar mark for the first time in four years,
DataQuick ... reported ... Among resold homes, bank-repossessed foreclosures
... accounted for 28.7% of all existing-home sales, up from just 3.5% in June
2007 ... 'This is pretty grim; double digits across the board,' said
Christopher Thornberg, principal ... Beacon Economics. 'It was eminently
predictable if you had a realistic view of the world. I heard a lot of people
say the Bay Area was never going to see prices fall, San Francisco was
untouchable; in San Mateo, it was impossible; San Jose, not with all the tech
money, blah, blah, blah. But prices at the peak relative to people's incomes
never made any sense.'"
Crude Liquidity Watch
July 14 - Bloomberg (Daniel Kruger): "Petroleum-exporting nations from Saudi
Arabia to Russia are not only charging Americans record high prices for fuel,
they are also poised to become the biggest creditor to the US government.
Holdings of Treasuries by oil producers and institutions such as UK banks that
are proxies for Middle East nations rose 44% this year to $510.8 billion
through April, four times faster than the rest of the world, according to the
Treasury Department ... At the current pace, they'll surpass Japan, which holds
$592.2 billion, as the largest owner this month. While the investment of
so-called petrodollars into government debt is helping to temper a rise in
borrowing costs as the US finances a record budget deficit, it highlights
America's dependence on foreign money."
July 18 - Bloomberg (Fergal O'Brien): "Europe's energy trade deficit soared 42%
in the four months through April as crude-oil prices jumped to a record. The
euro region's deficit on energy products widened to 99.7 billion euros ($158bn)
from 70.4 billion euros a year earlier, the European Union statistics office
... said ... Energy-product imports increased 41%."
July 17 - Washington Post (Faiza Saleh Ambah): "Clouds of yellow dust swirled
in the air as tractors moved back and forth, leveling a huge, barren piece of
land dotted with billboards announcing the city that will rise from the sand
here. Over the next few years, Saudi officials say this stretch of desert will
be transformed into a buzzing hub of scientific research and development, with
cutting-edge universities, hospitals and housing for more than 130,000 people
... The project, called Knowledge Economic City, represents a first serious
step by Saudi Arabia toward building a post-petroleum economy. It is one of six
major industrial centers planned to rise over the next 15 years. At a cost of
more than $100 billion, the sites are expected to provide housing and jobs for
the country's fast-growing population, half of which is younger than 21. These
cities-from-scratch are the most ambitious projects to date launched by a
kingdom enriched almost entirely by oil ... "
Doug Noland is a market strategist for the Prudent Bear Funds.
(Republished with permission from PrudentBear.com.
Copyright 2005-2008 David W Tice & Associates. All rights reserved.)
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