Sub-Prime Crisis Might End Up Costing Half A Trillion Dollars
Bill Bonner - Wed 14 Nov, 2007
Corrections, corrections, corrections... The slide in stocks is correcting...the aforementioned 319-point rise in the Dow is probably a correction in what will eventually be seen as a bear market. Gold is correcting too. It fell more than $8 to under $800. Oil is correcting...down to $91. Commodities - notably copper - are correcting too. The only thing that is not correcting, yet, is the dollar. The dollar index fell again yesterday, with the yen up against the greenback. But the euro did not rise against the buck yesterday, so that was at least a bit of a correction. Corrections, corrections, corrections or does this mark a new phase? Has the generalised deflation we've been warning about arrived already?
The stock market came back so strongly yesterday it sent us into depression.
We had it all figured out. Finally, we said just 24 hours ago, ‘the tide has turned.’
We liked the sound of it. A nice Shakespearean ring to it: “There are tides in the affairs of men…” And it has a no-nonsense certainty about it too. Once the tide has turned, there is no point in arguing with it…or even analysing it. The liquidity is going the other direction; that’s all there is to it.
So what happened? The Dow rose 319 points….
Either we are wrong; or ten million investors have no idea which way the tide is running.
Here at the Daily Reckoning, we are rarely wrong…but often incorrect. Something that ought to happen usually does happen, but not necessarily when we expect it. The dollar ought to go down. Stocks ought to go down. Savings ought to go up. The average house ought to go down. The average householder ought to stop spending so much money. Our latest book ought to win a literary prize. These are things you can count on, dear reader. But don’t hold us to a schedule.
There is, of course, more under Heaven and more on Earth than is contained in our philosophy – but not much! So, if we thing stocks ought to go down…they darned well ought to go down…if not sooner, then later.
According to our view of things, the great credit bubble is losing air. We reported an estimate that the sub-prime crisis might end up costing as much as half a trillion dollars. Yesterday brought more estimates – one at $200 billion. The other at $400 billion. Whatever the final tab, a hundred billion here…a hundred billion there… Pretty soon, you’re talking real money. And when this money disappears, you have to expect that people will have less money to throw around.
"The bloodbath in credit and financial markets will continue and sharply worsen," writes Nouriel Roubini.
Roubini says that banks have only ’fessed up to their losses through the third quarter of 2007. But, remember, the problem with these sub-prime loans is that the collateral – housing – is losing value. The more value it loses, the worse the crisis gets. We won’t know the scope of losses for 2007 until the annual statements come out in the spring of 2008. And then, losses for 2008 could be even worse.
Roubini says that banks have only ’fessed up to their losses through the third quarter of 2007. But, remember, the problem with these sub-prime loans is that the collateral – housing – is losing value. The more value it loses, the worse the crisis gets. We won’t know the scope of losses for 2007 until the annual statements come out in the spring of 2008. And then, losses for 2008 could be even worse.
Here’s a headline from Reuters:
"Home prices to keep sliding with no bottom in sight"
“The U.S. housing market's skid is nowhere near over,” continues the article, “and could extend for another five or even 10 years, according to one of the most-watched housing economists.
“Robert Shiller, a Yale University economist and co-developer of Standard and Poor's S&P/Case-Shiller Home Price Indices, told Reuters that declines in home values in the most vulnerable markets could well double the losses recorded thus far.
“What's more, Shiller, who is also co-founder and chief economist of the financial firm MacroMarkets LLC, said predictions for a bottom within the next year or so are probably wrong, with price declines in 2008 possibly worse than those seen this year.
"There is a probability of a continuing decline for a period of years, bringing prices in many cities down in the 10s of percent," Shiller said in an exclusive interview.
"The bottom is hard to predict," he said. "I do not see it imminent and it could be five or ten years too."
“Areas most vulnerable to home depreciation are those that rose the most during the market's heyday, plus those at the centre of the crisis in the subprime mortgage market, Shiller said. California and Florida are high on this list.”
Meanwhile, a report on CFO.com cautions investors:
“Don't expect fallout from the subprime credit crisis to ease anytime soon…”
But, yesterday, Wall Street acted as though it were already over.
"Home prices to keep sliding with no bottom in sight"
“The U.S. housing market's skid is nowhere near over,” continues the article, “and could extend for another five or even 10 years, according to one of the most-watched housing economists.
“Robert Shiller, a Yale University economist and co-developer of Standard and Poor's S&P/Case-Shiller Home Price Indices, told Reuters that declines in home values in the most vulnerable markets could well double the losses recorded thus far.
“What's more, Shiller, who is also co-founder and chief economist of the financial firm MacroMarkets LLC, said predictions for a bottom within the next year or so are probably wrong, with price declines in 2008 possibly worse than those seen this year.
"There is a probability of a continuing decline for a period of years, bringing prices in many cities down in the 10s of percent," Shiller said in an exclusive interview.
"The bottom is hard to predict," he said. "I do not see it imminent and it could be five or ten years too."
“Areas most vulnerable to home depreciation are those that rose the most during the market's heyday, plus those at the centre of the crisis in the subprime mortgage market, Shiller said. California and Florida are high on this list.”
Meanwhile, a report on CFO.com cautions investors:
“Don't expect fallout from the subprime credit crisis to ease anytime soon…”
But, yesterday, Wall Street acted as though it were already over.
*** Corrections, corrections, corrections…
The slide in stocks is correcting…the aforementioned 319-point rise in the Dow is probably a correction in what will eventually be seen as a bear market. Gold is correcting too. It fell more than $8 to under $800. Oil is correcting…down to $91. Commodities – notably copper – are correcting too.
The only thing that is not correcting, yet, is the dollar. The dollar index fell again yesterday, with the yen up against the greenback. But the euro did not rise against the buck yesterday, so that was at least a bit of a correction.
Corrections, corrections, corrections…or does this mark a new phase? Has the generalised deflation we’ve been warning about arrived already?
Probably not. So far, these are small corrections…mostly overdue. Remember the basics…
…housing is going down because it is not affordable…
…the financial industry is going down because everyone already has more than enough debt….
….stocks are going down because earnings – mostly from finance and debt – have peaked out…
…the dollar is going down because there are too many dollars and not enough real goods and services to buy with them…
…gold is going up because it is the natural, traditional refuge in times of monetary crisis…
So, let’s stick to the formula, at least for now – sell dollar assets on bounces…buy gold on dips. It looks as though an opportunity is coming our way…
*** The Shanghai stock market is off about 15% from its peak. Another correction? Or has the tide turned in the East as well as the West?
Colleague Porter Stansberry sends this note:
“I think China is going to be the largest economic pile-up ever witnessed by mankind.
“Reason: they have no legal foundation of common law. They have no experience with capitalism. No accounting standards. Mal-investment all over the place. Their castle is based in one part on pieces of paper issued by the most heavily indebted, bloated, derailed government ever conceived and another part on inflation-induced consumption by Americans. Then there's the demographics idea and a country full of angry young men who can't [find wives…China lacks women]. They will agitate.“
“All the ingredients are in place for a monumental stock bubble followed by a monumental collapse...”
*** Yesterday, we recalled a conversation from the weekend; the subject was rabbits.
We were sitting in a café in London, watching a group of old men walk by. It was Remembrance Day, the 11 day of the 11th month...the day the WWI stopped. The men were wearing their service medals; some had so many they practically stooped from the weight of them.
“Of course, they should be proud of the time they spent in the army,” we were telling Elizabeth. “But there’s more to it. I watched a bit of the ceremony – commemorating those who died in WWI. They wheeled out one of the last veterans – Harry Patch, who served in the trenches. He’s 109 years old.”
“Yes, even I feel proud of them…and I’m not even British,” said Elizabeth. “It’s part of what holds a group of people together…it’s what gives them a sense of identity and what makes a nation work…a shared history…a shared sense of commitment and sacrifice…”
“Yes, but it is also stupid…and often fatal. Remember, that rabbit?”
We had a particular rabbit in mind. The one your editor ran over when he was driving on the rural roads of France. The rabbit feinted and dodged. The tactic might have worked against a wolf. But our Renault mini-van was indifferent to feints and dodges. It simply crushed the poor animal.
“Not all our instincts are suitable to modern life,” we observed. “We tend to eat too much…because some instinct tells us to load on calories when we have the chance…probably an instinct developed over 1,000s of years of living on the edge of starvation.”
“And instinct to fight wars too…that is even more dangerous than hamburgers. When WWI began, millions of young men answered the call. They stood up…got their guns…and went over to defend the Empire. It was not a logical, well-considered response. It was an instinct…a deep instinct that made men who didn’t sign up feel like cowards. “
“The instinct was a good one – thousands of years ago. Then, men needed to defend their villages and tribes. If they didn’t, their genes probably wouldn’t have survived into modern populations. But now, they rush into the trenches of WWI…or into Iraq today…and what’s the point? In WWI, the Europeans spent four years killing each other – for no apparent purpose. Germany never had any intention of invading England. The soldiers’ wives and children were never in danger. Even as a territorial dispute, the issues were trivial…and usually fraudulent. Nobody knew or really cared whether the Alsatians wanted to speak French or German. Then, at the end of the war along came the Americans with the doctrine of “self-determination,” the idea being that people should be free to decide for themselves which government ruled them. The Europeans practically laughed at Wilson when he came up with that one. Even the Americans themselves had already decided against it. The “War Between the States” settled the matter; despite the declared intentions of the southern states, Lincoln’s army forced them back into the union.”
“The wars usually don’t make any sense…but the instinct is still there. So when the cannons warm up, men still grab their shields and their spears. The result: many of them get killed. The instinct proves fatal…just as it was for the rabbit. And then, both the dead and the living are hailed as heroes… That’s an instinct too…as if they really had defended their homes and families.”
“That’s true in Iraq today too…we praise the soldiers as heroes…even if we think the war is a humbug. And if you dare to point out that the war is a fraud…or even that it is probably a mistake, you’re called a coward. Of course, it’s preposterous. Logically, it takes no courage to send someone else out to fight a war than it does to oppose it.”
“Yes…but you wouldn’t want to deny all instincts,” said Elizabeth.
“Love…faith…hope…charity…those are instincts too.”
Regards,
Bill Bonner
The Daily Reckoning
This article is from The Daily Reckoning. With over 500,000 readers every day The Daily Reckoning has become essential reading for anyone who’s interested in their money. If you think you'd enjoy witty, irreverent and often hilarious commentary on economics and investment - for FREE - then sign up today.
Interested in discovering the next sector set to blast off? How about learning the specific shares the experts see as the most profitable in 2008? Attend The World Money Show London and hear from 50+ investment experts as they reveal their profitable strategies and provide their specific stock picks. The World Money Show London is being held 30 November - 1 December at The Queen Elizabeth II Conference Centre and will feature 14 panel presentations and leading investment product and service providers. Call today to register for The World Money Show London at 00 800 1414 8888 (international free phone) between 10.30 am -10.30 pm EXCEPT from 28 October to 4 November when hours will be 9.30 am to 9.30 pm because of the daylight saving time difference. Don’t forget to mention priority code #009376. Or visit: http://www.worldmoneyshowlondon.co.uk/main.asp?scode=009376
Regards,
Bill Bonner
The Daily Reckoning
This article is from The Daily Reckoning. With over 500,000 readers every day The Daily Reckoning has become essential reading for anyone who’s interested in their money. If you think you'd enjoy witty, irreverent and often hilarious commentary on economics and investment - for FREE - then sign up today.
Interested in discovering the next sector set to blast off? How about learning the specific shares the experts see as the most profitable in 2008? Attend The World Money Show London and hear from 50+ investment experts as they reveal their profitable strategies and provide their specific stock picks. The World Money Show London is being held 30 November - 1 December at The Queen Elizabeth II Conference Centre and will feature 14 panel presentations and leading investment product and service providers. Call today to register for The World Money Show London at 00 800 1414 8888 (international free phone) between 10.30 am -10.30 pm EXCEPT from 28 October to 4 November when hours will be 9.30 am to 9.30 pm because of the daylight saving time difference. Don’t forget to mention priority code #009376. Or visit: http://www.worldmoneyshowlondon.co.uk/main.asp?scode=009376
post a comment
Back to top comments
No comments added
Related Economic Forecasts Articles
15 Sep, 2008A "Once in a Century" Event?
11 Sep, 2008The Feds are Running Scared
04 Sep, 2008Bonds, Stocks and Cash Offer No Margin Of Safety
Most Popular Articles
03 Oct, 2008 An irony-induced Coma: Bailout Bill Historic Vote06 Oct, 2008 Inflation is going away. Prosperity is just around the corner.09 Aug, 2006 Reasons for an impending US economic recession14 Oct, 2004 The current US economy status09 Oct, 2006 What should you do if the real estate bubble bursts?
Recieve Articles like this by email
