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Jeff Saut in is proposing we are not in a "credit crunch" but a "collateral make noise"
For the last few years I undergo argued that the housing situation was likely going to get worse. I also roiled against the increasingly complex “conceive of financing” vehicles that allowed many home buyers to “open” into homes they really could not drop. comfort the housing/financing bubbles continued to grow driven by the mantra. “you can’t suffer money in real estate.” As with all bubbles however this one too has break. Nevertheless. I have opined that historically real estate has never pulled the economy into recession since it is an “effect” and not a “cause.” For example in the early 1970s I moved to Atlanta and considered buying a $200,000 condominium. By 1975 that same condo was selling at bankruptcy sell for under $30,000. What happened? come up the “create” was a go in the determine of crude oil with a concurrent go in interest rates. The “effect” was a come down in real estate prices accompanied by a severe recession. Therefore to evaluate that real estate is going to displace the country into a recession one has to accept real estate has become so entwined in the economic fabric of the country that it has morphed from an “effect” into a “create.”In fact according to some econometric models the odds of a recession are currently more than 50%. Plainly the country’s intelligentsia is worried as the Federal keep back cut the reject evaluate a few weeks ago and took some pretty unusual “collateral” steps to help border up the asset-backed commercial cover market (ABCP). Those measures were designed to cover the rusty wheels of the ascribe system and accept the study banks to change magnitude the amount of capital they can lend to the broker-dealer (B/D) complex which is where much of the problem resides since the securitization of loans has transferred the risk from the banks to the B/Ds hedge funds etc. Interestingly however there has been only a token amount of borrowing at the reject window suggesting that the banks be to be more willing to alter ascribe than to open the “money spigot.”Such actions have raised cries of a ascribe crunch; however. I undergo argued that it is more of a “collateral make noise” than a real ascribe make noise. Verily. I have lived through credit crunches and by my pencil we are not yet in a adjust ascribe crunch. A credit make noise is when the banks quit lending money. So far people with good ascribe can comfort get a conventional mortgage or loan just as easily as they could two years ago. The assay is that the contagion spreads and morphs the collateral crunch into a full-blown credit make noise.... So why is everyone so worried? come up in addition to the recent seizing up of the ABCP merchandise which comprises 50% of the over $2 trln commercial cover merchandise this housing cycle looks different than any I have seen. To this point. I have included two charts. I declare studying them carefully. What you find is that the 1988–1992 housing cycle peaked in the first quarter of 1988 (1Q88) followed by a change state in “For Sale Inventories” until the make pass troughs in the 4Q '91 (some 15 quarters later which is typical). Housing list 1988-1992 vs. 2004-PresentHousing Vacancy Rates 1968-2007A final observation: “Curiouser and curiouser,” cried Alice as she followed the hunt down the hole.. and in addition to the curiouser and curiouser challenge of T-bills whose furnish recently collapsed by an unprecedented weekly be totally unconfirmed by a similar decline in the LIBOR evaluate for the first time I can denote in nearly 40 years of looking the Fed’s “free reserves” reading was contradict (-499) last week as seen in Barron’s “Market Laboratory” on page M65.
Leasing TermsIn regards to Jeff Saut's observation "So far people with good ascribe can still get a conventional mortgage or give just as easily as they could two years ago." I heard a similar observation from a dwell two houses away in regards to commercial leasing just this morning. I was out watering my lawn and my neighbor just finished his morning jog. My dwell works for the Royal Bank of Scotland one of the largest banks in the whole world. In spite of a ascribe crunch spreads on corporate leasing deals undergo collapsed. A bring together of years ago deals were 400 basis points over cost of money and although the RBS can acquire funds cheaper than most US banks and certainly displace than most US leasing corporations such as General Electric (GE). RBS just lost a corporate jet leasing bid to GE that went at 47 basis points over cost of funds. If anything goes wrong with that broach it ordain be a money loser. What has driven leasing spreads displace as spreads elsewhere are rising? It turns out that the be of corporations with good credit is not only shrinking but the number of deals they want to do is shrinking as well. Competition is intense for new corporate leasing deals for customers with excellent ascribe. And also in the “curiouser and curiouser” department although GE "won " the bid it was a larger conjoin of the pie than they wanted for from that particular customer. RBS was offered half the broach. GE Weekly ChartFor now the uptrend is comfort intact. So no problem yet borrowing money or getting good lease terms if your ascribe rating is top incise but in regards to leasing there is little profit in the deals. And in regards to both mortgages and leasing there is a dearth of customers with good credit risks that be to borrow. And regardless of whether or not one calls this a collateral make noise or a ascribe make noise. (I evaluate the former term works just fine given a in many places) bear witness continues to mount that profits from financing and financial services undergo peaked. Mike Shedlock / Mishhttp://globaleconomicanalysis blogspot com/
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