Someone asked me the other day via Twitter if I'd seen Dick Hoey's comments on the Kudlow show where he asserted that bulls follow forward-looking indicators while (and I'm paraphrasing here) bears are looking in the rear-view mirror. PUHLEASE.
At this point, I'd say that it's the bears who have some sembelance of reality in their view points, and not just because I am one. But let's walk through some points one by one.
Yes, I'm worried about home prices. I'm a little concerned that they're 33% below the peak. But not so much because of the lost wealth (which is a tragedy) but because of how that will affect consumers, banks, builders, and a host of others. Let's see, consumers can't take money off their home equity loans to buy stuff in the future because many of them are underwater. Consumers also can't sell those homes because they won't come out whole, ruining the whole set of industries that really thrived on the idea that homes were meant as an investment instead of shelter.
Let's not forget that banks are stuck with ever-increasing amounts of Real Estate Owned on balance sheets because they can't sell them without tanking the housing market even further.
Builders, well there's a bit of insanity going on there, just because they still exist in the size they do. Prices start to stabilize (a false tell in my eyes because of the REO from the banks, not to mention the homes that were on the market, got pulled because they didn't sell for months on end and are now back on the market) and the builders start to build again. An article on Bloomberg this week said they're buying land again. The only analogy that I can come up that fits this lunacy is that it's like cooking Thanksgiving dinner 7 nights in a row, even though the refrigerator is so full that you don't know how you'll EVER get through all those leftovers.
Even after the 'Rally of the Century' that we've had since March, the S&P is down 40% from the October 2007 high. My client base is mostly individuals... individuals who came to my firm after seeing their retirement savings cut in half, in many cases within 10 years of when they had at least hoped to retire. Guess what kids - those folks aren't going to be spending the way they were in the past. They can't! They're saving every last penny they can at this point, hoping to build that nest egg back up so that they can at least retire within a few years of when they had originally hoped. And you know what... their money that we currently have in places other than the stock market? They're not so excited to put it back in. These folks have been burned a lot in the past few years. The stock market just doesn't have the allure it used to for them.
Consumer Debt Levels
Not only are consumers trying to save everything they can right now, but many of them are in debt up to their eyeballs. I know I've shown this chart before, but it's such a lovely picture, let's put it up again (Parental Warning: not suitable for small children):
Yeah. Pretty, eh? Household debt at the level of GDP. Think it's changed much in the past few months? Nah. Me neither. If it took years to get it to a sustainable/decent level back in the 30's why would we expect anything different now? Because it's different this time? Right. Tell it to someone else.
This debt is going to be a ball and chain around the ankle of the consumer for a long time to come. A LONG TIME. Those "coiled springs" that so many analysts keep talking about in reference to the retailers who have cut costs and just need the consumer back before earnings take off like rockets... BUNK. By the way, can I remind everyone that at least until recently the consumer drove 70% or so of the economy. Guess what is also probably going to change? Yeah. That.
Coming Mortgage Resets
I've shown this graph before too... but just in case anyone missed it...
Please notice all the resets of Alt-A and Option ARMS that are coming in the next 18 months or so. Any (honest) mortgage broker will tell you that both of those categories have the capability of being even worse than the Subprime mortgages. I've heard that up to 50% of the folks with those loans that haven't even reset yet can't make their payments. Guess what happens when they DO reset? Yep. Ugly. Really ugly.
But there's no housing problem.
And I haven't even gotten to the accounting changes coming for the banks that put all the toxic waste back on the balance sheets. But that's another post.