Sometimes the complexity of the world is a ruse, and seeing the overwhelming future of our fortunes is strangely simple. Our past and future credit crisis is but one case in point. Remember when fear and failure wrecked markets wising up to the fallout of debt given to anybody for anything, but especially for buying houses?
Naturally our financial leaders around the world took the radical steps required to reduce the debt created in a massive credit bubble. Oh, sorry, that was my fantasy world I was talking about. What our leaders are doing is correcting a severe cyclical recession. What our reporters are doing is covering a severe cyclical recession. What sublime kabuki theatre.
Back in the real world, the destruction of debt required to cure a credit bubble hasn’t been done. That means the reason for the new credit crisis is no different than during that past time of fear and failure – except that now we have new magnificent malignant clusters of sovereign debt serving as a sort of hand-held fan covering the unclothed emperor. Does that count as cover?
There is a prism I use to see the world. It is in houses. Look immediately above to see housing prices (the global housing bubble chart). Let me tell what I see when I look at this: We had one wicked housing bubble in the United States, but apparently we were the conservative party poopers. It looks like the funner countries are Ireland, Britain, Spain, Sweden, France, Norway, Denmark and Italy.
I know mortgages are used to buy houses. Yet they also represent not just the largest financial asset category, but the use of debt to buy anything including companies and commercial real estate and credit-card receivables. What are the futures of these debt assets? If we know the fate of mortgages do we know the fate of them all?
Oh and I also wonder about the sovereign kind? Luckily those debts are backed by the likes of honest hard-working Greeks who live to protect their impeccable reputation for being always good-and-true to their word (“Pass the Ouzo Aristotle. Do you have a cigarette? Did you have to pay any taxes this year?”).
The strange case (Or is it the normal case?) is the residential mortgage market in the United States. Look immediately above. Values of the equity asset have fallen more than 30 per cent, but the values of the debt asset (mortgages) used to buy the equity asset (homes) have fallen two per cent. Both of these investments have a right to title to the same asset, but one has fallen FIFTEEN TIMES further than the other. Is this the real world or is it make believe?
While it’s possible that this anomaly may hold, the 14 per cent of residential mortgage borrowers who are now behind points toward the debt mortgage balances and the equity home values moving closer to each other.
That’s a complicated way of saying that mortgage balances logically should fall in value in a ratio very much like the fall in value of the house asset itself. Has not happened yet, but isn’t it true that the world is logical?
We know that the fall in property values is real and we know that the United States bubble in values was far greater than any bubble of the last 120 years (See chart above and pay close attention to the amazing “X” bubble. That’s historical Jack.). Thus now do you see the pattern of Armageddon gathering force and deciding when and where to explode and paint a picture of gore all across the world.
The American market in housing went totally off the deep end. A flood of negative equity now invades our land. Yet look yonder to strange and distant shores. Look at Italy and Denmark and Norway and France and Sweden and Spain and Great Britain and Ireland.
Their real estate market got bubbled worse than ours, but surely their central bank and treasury are more honest, courageous, and knowledgeable than ours?
Oh, I’m sorry. That’s another scary discovery. Admit the ruthless incompetence of the Fed and the Treasury in the management of our massive credit bubble, but give them credit for being rather like the publishers of Consumer Reports where their evasions and deceptions are surely trivial when compared to old world freaks like Italy and Spain who publish Penthouse and unending internet offshoots. Did you read the prospectus or just look at the pictures?
Just when you think it’s impossible for dishonesty to be taken to the next level in the American housing market, you see a chart like this one, which, if true, means that bank-owned properties are being held like abandoned castles (The chart above shows huge numbers of bank-owned properties lying hidden in your local bank’s burka. The banks own the properties, but they don’t sell the properties.). I had always assumed that the shadow inventory was just bungling bankers failing to stay on top of their foreclosure cases. I didn’t think of the sale of a foreclosure as a banker chugging boiling poison and certain death. Then I saw this chart and interpreted it as an executioner’s song titled “My Bank Sold My Home and Went Belly Up Big Time. Ain’t Pay Back a Bitch”.
One on top of the other, I saw then this stupendous headline in Forbes: “Six Giant Banks Made $51 Billion Last Year; The Other 980 Lost Money.”
And then I said to myself: “Well, if I owned a bank and my bank would go out of business if I sold my foreclosure collateral, would I just hold it then to live for another day?” The answer was obvious: Yes, I would just hold it like an old abandoned castle.
It takes me aback. It staggers me. Our housing market is a true obstacle course for an honest thinker. The federal government is making every mortgage loan to forestall radical crashing, and our local banks are pretending to solvency by going into the castle and museum business (Holding foreclosures as investments or as tchotchkes.).
My suggestion therefore is that you look in to the John Paulson subprime-mortgage trade. Read up on what that was all about. See if there is some form of echo housing-bust credit-crisis high-multiple sovereign-credit-default derivative which you can use to really get the chance to do it big this time. This is the best trade ever. It’s easy. It’s obvious. It’s real.
The centre cannot hold. America is a bubble, and no plan has been suggested to kill the bubble debt. The world is a bigger bubble, but nobody has a plan for a global debt-destruction project. It’s like the whole world has turned Japanese (Yes, I really think so.).
We and the world and debt behind mania will break. Hell will rule then, but remember, we will only have to live with it for an extended period.