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223 comments on DrumBeat: February 29, 2008

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westexas on February 29, 2008 - 9:46am Permalink | Subthread | Comments top

“Mish” has a good essay today, “Keeping Down With the Joneses.” He has a quote from the recent USA Today article on reduced spending.

http://globaleconomicanalysis.blogspot.com/2008/02/keeping-down-with-jon...

"The new status isn't how much you've got, but your ability to show what you don't spend," says futurist Watts Wacker, who advises businesses on trends.

Or, as I have been putting it, “Cheap is the New Chic.”

Both the WSJ and NYT have articles on the “Walking Away” phenomenon, where homeowners, who owe more than the house is worth, are increasingly walking away and not even contesting foreclosures. As the NYT noted, in most cases former homeowners can dramatically cut their monthly housing costs by renting.

BTW, I didn’t attend the talk, but there was an oil industry luncheon meeting yesterday in Dallas at which a Yerginite Disciple delivered a talk on abundant oil---Saudi Arabia has millions of barrels per day of excess capacity, oil prices are going back down to the $40 to $50 range, etc.

As I have said before, perhaps it is poetic justice that Peak Oilers unload highly energy dependent assets on the true believers in the Yerginite community, i.e, get out of Suburban Dodge while you can pilgrim.

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River on February 29, 2008 - 10:21am Permalink | Subthread | Parent | Comments top

Some are getting out of 'Surburban Dodge' while some are doggedly trying to hold onto the 'ol homestead by tapping their retirement 401K accounts. It seems the nesting instinct is very strong among some, so strong that they are literally mortaging their future retirement to remain in a home where they are upside down on the mortgage. Leads me to believe that all humans are not smarter than yeast...

http://www.atimes.com/atimes/Global_Economy/JC01Dj01.html

"More People Tap 401(k) Accounts for Cash."

'It seems, according to his AP article, that an outfit called Great-West Retirement Services has noticed that more people are taking money prematurely out of their retirement accounts, and that, "hardship withdrawals jumped 14% last year, and the number of loans rose almost 13%, with a dramatic increase occurring in the fourth quarter." '

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Leanan on February 29, 2008 - 10:26am Permalink | Subthread | Parent | Comments top

Couple of economy-related links...

More Americans using credit cards to stay afloat

Seven years in the credit-counseling business didn't prepare Ann Estes for the alarming trend she began noticing last fall: As her clients' mortgage bills became unaffordable, a growing number of them began paying their credit card bills before — and sometimes instead of — their mortgages.

"We've never seen anything like this," says Estes, who counsels clients by phone from her office in Richmond, Va. "Their homes are at risk, and they know it. But people say, 'I don't want to let my credit cards go because that's my cash flow.' "

Why Surprises Still Lurk After Enron

Surprises multiplied as the subprime problem of 2007 grew into the credit disruption of 2008. It is one thing to have a bank report losses because some of the loans on its balance sheet went bad. That is part of the business of banking. It is something else, however, for a bank to report a multibillion-dollar loss from taking some risk that had never been mentioned in its financial statements.

Haven’t we seen this movie before, involving a company called Enron? Didn’t Congress pass a law requiring that the problem of off-balance-sheet mysteries be solved?

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mcgowanmc on February 29, 2008 - 11:27am Permalink | Subthread | Parent | Comments top

"Didn’t Congress pass a law requiring that the problem of off-balance-sheet mysteries be solved?"

No. They didn't.

There never was an investigation into the special purpose funds, now called VIE's.

And VIE's have been how Goldman and most likely JPM (They invented VIE's for Enron and have over twice the derivatives of Citi) have kept their books simmering on the oven.

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Leanan on February 29, 2008 - 11:41am Permalink | Subthread | Parent | Comments top

UBS sees writedowns hitting $600 billion

The toll of the mortgage mess keeps rising. Analysts at UBS (UBS) said Friday they expect financial firms worldwide to take writedowns totaling $600 billion in the wake of the breakdown of debt markets that started in June.

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Noizette on February 29, 2008 - 1:15pm Permalink | Subthread | Parent | Comments top

(from Switz.) The UBS shareholding meeting took place. 52 small shareholders slotted for speaking time. It was a huge jamboree, with special trains scheduled well before dawn from the big cities. People came armed with chocolate (a national symbol) and croissants, as the UBS is famed for its stingy sandwiches.

Shouting matches shrilled or boomed, invective flew. Finally, though, there was no way out and the UBS will be recapitalized by Singapore sovereign funds, an ‘arab state investor’ (no details from me, as the published facts are unclear and not important anyway.) In this way, it can avoid the ultimate bank review.

Ospel (google, his first name is Marcel) will remain the director for a year at least - experience and contacts over the new broom that sweeps clean!

I bank there. Heh. Saying more would be indelicate.

I post local stories because I appreciate them so much from others.

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Leanan on February 29, 2008 - 1:33pm Permalink | Subthread | Parent | Comments top

Faced with mortgage default, some U.S. homeowners walk out

Then in January he learned about a new company in San Diego called You Walk Away that does just what its name says. For $995, it helps people walk away from their homes, ceding them to the banks in foreclosure.

Last week he moved into a three-bedroom rental home for $1,200 a month, less than half the cost of his mortgage. The old house is now the lender's problem. "They took the negativity out of my life," Zulueta said of You Walk Away. "I was stressing over nothing."

You Walk Away is a small sign of broad changes in the way many Americans look at housing. In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of homeownership and foreclosure has changed, economists and housing experts say.

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davebygolly on February 29, 2008 - 1:43pm Permalink | Subthread | Parent | Comments top

Trouble is, depending on what the 401k is invested in, in some cases people may (unknowingly) be doing the right thing "walking away from their 401k"! One does not know what is going to be exempted from the tsunami of asset devaluations.

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solardoc on February 29, 2008 - 10:30am Permalink | Subthread | Parent | Comments top

"...get out of Suburban Dodge while you can pilgrim."

Exodus in progress.

From Bloomberg this moning:

'Vacant Homes in U.S. Climb to Most Since 1970s With Ghost Towns"
http://www.bloomberg.com/apps/news?pid=20601109&sid=au67GKPyS_Dg&refer=h...

Can you see this ever happening in North Dallas?
After all, "No one in Dallas ever lives below their means." (chuckle)

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westexas on February 29, 2008 - 11:09am Permalink | Subthread | Parent | Comments top

The Dallas Morning News had front page and business page stories on the rising foreclosure rates in the area this morning. Not surprisingly, outlying areas are getting hit hardest.

Conspicuous North Dallas consumption hasn't died yet, but I suspect that it is getting the flu.

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Sterling on February 29, 2008 - 11:37am Permalink | Subthread | Parent | Comments top

outlying areas are getting hit hardest

I would guess that it is the exurbs, where all the lifeboater are headed, taking the big hit and not the suburbs.

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wehappyfew on February 29, 2008 - 2:42pm Permalink | Subthread | Parent | Comments top

I see older neighborhoods in the Keller, Southlake, Grapevine area (midway between Dallas and Ft Worth) sprouting For Sale signs, and some look suspiciously empty and unkempt. At the same time, luxury subdivisions are still building new houses at approximately the same rate. Don't know how many new McMansions are actually being sold, though.

I have noticed morning traffic near DFW/Hwy121/114 is significantly lighter than when I first moved to this area two years ago. Higher prices or fewer jobs to commute to?

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westexas on February 29, 2008 - 2:52pm Permalink | Subthread | Parent | Comments top

Could be fewer construction and real estate related jobs resulting in less traffic.

Check out the article just below that davebygolly posted. Some amazing case histories. Kind of spooky how fast some of these subdivisions have crashed.

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davebygolly on February 29, 2008 - 1:50pm Permalink | Subthread | Parent | Comments top

Atlantic Monthly The Next Slum: http://www.theatlantic.com/doc/200803/subprime

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solardoc on February 29, 2008 - 5:00pm Permalink | Subthread | Parent | Comments top

The last line from "The Last Slum":

"About 25 years ago, Escape From New York perfectly captured the zeitgeist of its moment. Two or three decades from now, the next Kurt Russell may find his breakout role in Escape From the Suburban Fringe."

In recent years, more "escapees" have turned up in my neighborhood way out west on what used to be the last frontier in the lower 48. They bought their McMansionist ways with them in driving up land prices for second and third homes that were occupied for two months in the summer. Of late, for-sale signs have appeared on some of these trophy dwellings. The former occupants may be escaping back to the metro areas they came from in their fleets of Hummers, Escalades and Porsche Cayennes that contrasted with the muddy pick-up trucks of the locals.

In case any TODers are so fortunate as to "Get out of Dodge", ahead of the golden hordes there may be room for you out here if you will drive a muddy pick-up truck and don't mind living in an abandoned McMansion.

Thanks Atlantic Monthly and best hopes for the regentrifying of urban America.

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PaulusP on February 29, 2008 - 12:03pm Permalink | Subthread | Parent | Comments top

Cheap may be the new chic, but my investments in ELP do not come cheap at all!

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tstreet on February 29, 2008 - 12:35pm Permalink | Subthread | Parent | Comments top

As the article indicates, it is nuts to be paying $2400 per month for a mortgage when you can rent a similar house for $1200. Various politicians want to find a way to let those in trouble work out a way to stay in their houses with their lenders. Well, those defaulting have already found a way to work things out. Why work out a way to pay a loan which is worth more than your house?

Just let the whole thing come crashing down. Houses will be cheaper for those just wanting to buy and maybe lenders and borrowers will learn something from this fiasco.

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john15 on February 29, 2008 - 4:33pm Permalink | Subthread | Parent | Comments top

As the article indicates, it is nuts to be paying $2400 per month for a mortgage when you can rent a similar house for $1200.

this is why I don't take peak oil as serious as the mortgage mess.

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elwoodelmore on February 29, 2008 - 8:55pm Permalink | Subthread | Parent | Comments top

dont these landlords get a credit report on their potential renters ?

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ccpo on March 1, 2008 - 2:23am Permalink | Subthread | Parent | Comments top

How do you separate them? In the world I live in, the connectedness of all things is a given. Not so in yours? To wit:

Part of a home not being affordable is income being taken up by other costs... such as gas...

Cheers

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biologist on February 29, 2008 - 1:09pm Permalink | Subthread | Parent | Comments top

They had this in Germany a couple of years ago with quite dire consequences for the economy, the catch phrase was "Geiz ist geil" which translates to "miserliness is wicked" or "we lust for miserliness" (geil used to have some sexual undertones though the more modern use is like wicked or great).

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biologist on February 29, 2008 - 1:12pm Permalink | Subthread | Parent | Comments top

note: don't know how this post got placed here, it is a comment on
"“Mish” has a good essay today, “Keeping Down With the Joneses.” He has a quote from the recent USA Today article on reduced spending."

WAAYYYY up in this thread

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Leanan on February 29, 2008 - 1:17pm Permalink | Subthread | Parent | Comments top

Your comment is in the correct spot. Click on "parent," and you can see what any post is replying to.

It's down this far because others commented before you did.

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Jason Bradford on February 29, 2008 - 2:55pm Permalink | Subthread | Parent | Comments top

I oddly found myself on the phone with two guys who work with a major bank in the division that handles municipal bonds. Towards the end of the conversation I asked "how they are doing..." and got a 4 minute explanation of the situation. The troubles in the mortgage market are spilling over into short-term bond auctions (sort of ARM refinancing of infrastructure projects) worth 700 billion dollars.

Bottom line: the bankers are scrambling to contain the crisis, huge uncertainties lurk, difficult to close deals, unprecedented situation so a lot of creative thinking going on, what we hear about in the press is just an inkling of what is happening.

I don't think they have a clear idea of how it will all play out (who does!).

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Samsara on March 1, 2008 - 1:01am Permalink | Subthread | Parent | Comments top

Jason, Check out Mish the Great Graphs at the link by Mish.

Another major Symptom/Problem of the unfolding...XXXX Whatever it will be eventually be called.

Long Emergency, The Dim Ages, The Greater Depression....

Free Fall In Munis, Worst Month Since 2003

Bloomberg is reporting Munis Have Worst Month Since 2003.

U.S. municipal bonds are headed for their worst month in more than four years after collapsing demand for securities with rates set at periodic auctions sent debt costs for state taxpayers and hospitals as high as 20 percent.

The $330 billion auction-rate market froze after dealers stopped purchasing the bonds when buyers failed to bid. Their lack of support has spread to the broader tax-exempt market, sending yields soaring. Borrowers from California to New York City plan to convert the securities to longer-term debt, raising concern that a flood of bonds will overwhelm already sparse demand from banks and hedge funds.

"We're going to get smashed with new-issue volume from all these auction-rate bonds" that are being converted...

"Every alternative we turn to is worse than it was a year ago," said Roger Anderson, executive director of the New Jersey Educational Facilities Financing Authority, which sells bonds for colleges in the state.

Professor Bennet Sedacca on Minyanville had this to say about Munis today.


My firm has avoided municipal bonds for years now. The above Bloomberg article, an excellent piece by Jeremy Cooke shows why.

This is not a back slapping exercise, it is an exercise in just how bad a 'credit unwind' can get. I expect that many municipal bond portfolios will now get marked down in a big way. Net asset values of all sorts of municipal mutual funds, both closed end and open end will likely get smashed.

How badly? It depends on the quality but I am guessing anywhere from 5-20%.

http://globaleconomicanalysis.blogspot.com/2008/02/free-fall-in-munis-wo...

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