The Rude Awakening
Laguna Beach, California
Friday, March 23, 2007 ------------------------- - The housing tsunami hits the coasts,
- Can the bubble be re-inflated?
- Calling "Mish" and plenty more…
------------------------- Yesterday we called Mish. Michael Shedlock, or "Mish" for short, has just released a special research report on the housing bust and, like everyone else, we wanted the inside scoop. Eric Fry's interview with Mish elicited so much reader mail we could only deduce people are, well, wary of the impending catastrophe. Actually, there were so many concerned emails we thought we'd go ahead and publish Part II of the interview today. If you would like to send in any housing related thoughts of you own, please address them to aussiejoel@the-rude-awakening.com . If you would like to read the second part of the interview, scroll down… ------ Special Housing Report ------ Urgent Alert: Get Ready for the Worst Property-Led Recession of the Last 76 Years Nobody's money is safe. The "Second Wave" housing tsunami of 2007-2011 isabout to hit, and smart investors are already battening down the hatches. Protect your savings and investments - click here. ---------------------------- The Housing Tsunami, Part II
A Conversation with Mike "Mish" Shedlock Fry: Let's take the other side of [your] argument, just for sport. You've been worried about the housing market for a very long time. And, of course, you've been very right to be worried. But every bearish prognosticator runs the risk of remaining bearish for too long. What is the possible risk to your bearish scenario? In other words, what could go right…accidentally? Mish: What could go right? I don't think anything can go right here. I suppose it would take some sort of re-fueling of the bubble. But housing trends, unlike stock markets, are much more difficult to turn around. Housing is like a supertanker. A stock market is much more easily turned around, just because stocks are much more liquid than houses. We've got people right now that are still just trying to get out from under this. Dodd, the Senate Finance Chairman is talking about legislation to bail out some of the people at risk of losing their houses. Now actually, if you look at what he's saying, it's not really a bailout of people, per se, it's a bailout of mortgage lending. That's what he's angling at. But he can't really say that, of course. So is there some sort of scenario that bails out people and they stay in their houses? I don't know. We'd still have a big inventory problem. There's a lot of housing inventory out there. The builders have dramatically reduced their housing starts, but they're still adding inventory at a pace faster than sales. So that's adding inventory. Foreclosures are adding to inventory. So if the market's going to recover, you first have to start on a path that stops these foreclosures. But that's going to be very difficult to do. By the time Congress acts, it's likely to be too late…or at least too late in the process to help very many people. It's likely to be too little. The amount of money that Dodd was talking about did not seem all that substantial. And in the meantime, we had 131,000 foreclosures in January alone.
[Eric's note: For perspective, 131,000 foreclosures is 25% more than in January 2006 and 84% more than in January 2005.] The peak of mortgage resets is still about seven months away. There'll be more fallout after that. If more people were more concerned about it, then, from a sentiment standpoint, that might tell me that I was wrong. But the sentiment out there right now is that the mortgage crisis is going to be contained in the subprime area. That it's not going to spread etc. If that sentiment persists in a downturn, there's probably more downturn to come. Fry: It seems as though the only plausible rescue or lifeline would be like one that re-inflates the bubble. In other words, one that relaxes credit in some way - taking short rates down to emergency levels and relaxing lending standards. But obviously, neither one of those potential lifelines is on any policy-maker's radar. Mish: That's correct. That is absolutely correct. Fry: Of all the dire scenarios that you anticipate, which one do you think would surprise the most people? Mish: I think the surprising thing will be just the fact that it happens. I'm envisioning kind of like a slow sinking. I'm expecting home prices, on a national scale, to just sort of ratchet lower, like 2% at a time. That 2% would really be reflected in a bubble area as a decline of like 5%. Most people realize that home prices have stopped going up and are starting to fall. But I don't think we've seen that sentiment shift yet where people say, "Oh my gosh! Look at how bad it is!" But the bad housing market is going to really start hitting some people when they NEED to sell their house. Maybe they get a job offer, but they realize they can sell their house for more than they owe on it anymore. Which means they can't move to accept that new job. That's going to hit some people. So we're going to see a slowdown in jobs mobility. But I don't expect the housing selloff to be a Big Bang kind of thing. I think it's just going to be an "increasing funk" kind of thing. Fry: Over in the stock market, as this unfolds, which sector is the most at risk? The lenders, including the big money-center banks and the brokers? Or the homebuilders? Mish: Hmmm…Interesting question. There's still so much money out there chasing stocks that they might still levitate for a while. Just last week, Carl Icahn was proposing a buyout of WCI Communities (NYSE: WCI). I can't figure that out. I don't know why anybody would want to buy that company. On the surface, WCI is one of the worst builders in that it is extremely leveraged to Florida, which is one of the most overbuilt areas, and WCI is also in the worst segment of the market, which is condos. Yet, in the midst of a big stock market drop last week, WCI's stock actually went up, because there was this proposed buyout, while all the other homebuilders were plunging. [Eric's note: Shortly after the interview ended, SAC capital disclosed that it holds a 9.5% stake in WCI. SAC's intentions are not known, beyond the assumption that it hopes to make some money from the investment. SAC is one of the most successful hedge funds in the world]. But I would suggest that financial stocks themselves are the ones that are going to lead the next wave down. Right now, EVERYBODY knows about subprime. When everybody knows something, the bad news is pretty much already discounted. So many people know about it, it's front-page news worldwide. When New Century Finance collapses from $40 to $1.65, that's pretty fully discounted, one could say. So my question would be, "What's NOT discounted?" And there, there's only two scenarios to consider: The fact that the subprime contagion is going to spread and not be contained. That's the scenario you and I are talking about. And the other scenario is that the worst is behind us and the economy is going to pick up. But I don't buy that. The loan-loss provisions at U.S. banks are disastrously low, at a time when banks are more geared than ever to real estate. Those two things don't add up. If banks start having to increase their loan-loss provisions across the board, and I think they're going to have to, you are going to see losses, or at least larges earnings shortfalls, for all kinds of banks. So I would say, that's a scenario that people need to watch for. Fry: That's an excellent point. Just to wrap it up here…how does an ordinary investor prepare for the rugged housing market you anticipate? Do they sell their house and move into a bunker? Do they sell short housing stocks and mortgage lenders? Do they buy gold? What do they do? You still own a house, right? Mish: I own a house myself. It's fine to have a house. It's not fine to be overleveraged in a house. It's not fine to have a house that you can't afford, that you bought just because home prices were going up. People need to be prepared. Since I'm also talking about a loss of jobs in the economy, people need REAL savings. They need to have a year's worth of savings, at least, so that they can keep making their house payment, even if something happens to their job. Typically, right now, we're in a situation where even with TWO workers in the household, people are stretched to make their payments and aren't saving any money…People are buying more car than they need, for example. Do they really need that SUV? It all goes back to the hook of making things "affordable." You walk into a car dealer and they ask you, "What can you afford?" That's the first question out of their mouths. And if you can afford only X number of dollars per month, well, if that takes a 7-year stretch on a car payment, they'll come up with a program to make it "affordable." People need to be thinking of the consequences of that. That 7-year $32,000 car payment, when maybe they could have gone out an bought a $12,000 Hyundai Elantra, is an extra $20,000. Guess what? That's a 10% down payment on a $200,000 home. So people don't have their priorities right. People are gonna need to stop spending money on things that they can't afford, don't be overleveraged in houses…and start saving. But guess what happens if everybody decides to do that all at once? That slows the economy down. Fry: That's just what I was going to say. Your advice works at the individual level, but in aggregate, it would probably be a disaster for the economy. Mish: In aggregate, it's what the country needs. We need a recession…We need a cleansing of this bad debt. But look at what we've done. We're talking about bailing out some of these people now, actually the lenders. But by trying to avoid these things we're going down the same path that Japan did. This is the type of thing that caused Japan's deflationary scenario to drag on for 15 years. And we cannot discount the possibility that something similar will happen here. Especially if we start doing exactly the same thing that they did. That's where the risk is. The risk is in NOT taking the medicine. We need a recession and we need a lot of speculators to be wiped out. That doesn't mean one has to short the market, it just might mean doing something safe. If you can't afford to lose, then you can't afford to bet. And that means sticking your money into CDs and being happy with 5%, while the market's getting crucified. Fry: (laughing) Alright. That sounds like a plan. Thanks for your insights, Mish. Joel's Note: For those of you who requested Mish's special housing report, here it is… Surviving the Next Wave: Special Housing Report
-------- The Resource Reserve -------
Now Open - For a Limited Time… The Resource Reserve Get all of our commodity-related publications together in one easy packageso you can effortlessly take advantage of he next leg of the massive commodity super boom. Act fast - this offer is only available until April 1, 2007… Click Here Now:
---------------------------- | 
