Sunday, September 27, 2009

The Incredibly Stupid Hulce

OK, I'll make this a quickie...

I finally read the "editorial" piece by The Incredible Hulce. It's rolling along in acceptable fashion, cataloging past headlines from years gone by, until the final 2 paragraphs. Then she just completely blows up:

And here we are today, same issues, some different faces. But the economy still sucks and Bill Watkins, executive director of Center for Economic Research and Forecasting at Cal-Lutheran, says he doesn’t believe that sustained growth will occur any time soon. He said we may see small positive growth this quarter and the media will declare the recession over. However, the stimulus plan is not working. Government spending does not improve the productivity of private capital. Banks are still not lending. Houses, especially in Central Oregon, are selling for less than you can build them.

That said, we end this editorial with this: go ahead and declare the recession over. It’s not likely that there’s anything more that we can do to help the economy than to believe that it’s getting better and continue to operate our businesses lean and efficient and hold out for a recovery to eventually happen. If our community can lift itself up from the gloom and find some light even in the smallest of economic improvements, then that’s a very good thing. Let’s get this party started.

So everyone, including her hand-picked schmucks from some obscure-ass loser church-related global forecasting basement says that the shit is hitting the fan, and will continue to do so for the foreseeable future.

But Hulce, in her infinite wisdom, says "Let's get this party started"? Oh my God.

If our community can lift itself up from the gloom and find some light even in the smallest of economic improvements, then that’s a very good thing.

Really? So if we just click our heels together, we'll get back to Kansas... right?

This is Standard Issue Marketing Bullshit. That if you bullshit people enough, they'll start to believe anything.

But the real disturbing part of this, is the "Let's get this party started" bit. I mean, My God. Who talks like that? 85 year old white women trying to be "ghetto"?

And what's really wonderful, is that there is implied in statements like that, that The Bubble CAN, WILL, AND SHOULD get going again.

The PARTY was THE REAL ESTATE BUBBLE. And Hulce thinks the best medicine is to get it going again.

THIS is the reason Bend is doomed. There's a mentality there that isn't right. It's much like that of an alcoholic or chronic drug user: If I can just get the good feelings going again I had during the "high times", I'll be good, everything will be fine.

There are a lot of people in Cent OR who will be jonesing for a fix that never comes. "The party" is NEVER going to start again here. EVER. Well, not in my lifetime.

You've got to understand what is really happening to see why.

This is The Big Unwind.

We have made TRILLIONS in loans that will never be repaid. THAT was "The party". The seemingly unending river of credit which was used for almost everything from buying houses to paying off the old lines of credit so we could borrow anew, was "The party". The borrowing of a bit more to make payments on the old borrowings was when things started getting really dicey.

There was no more "party" at that point. Hulcey-mindset borrowers and others just started borrowing "to feel normal". This is where the drug & alcohol use is only hitting the "flatline" high... just feeling OK. Increased use, as always, is required to get "high" again.

And so you begin a spiralling vicious circle that can do nothing but end badly.

And so it has.

And Hulce wants us to ALL GET HIGH AGAIN... NOT finish rehab. The best way to handle what's happened, according to the Incredible Hulce, is we get a good shot of that what ails us, NOT quit cold turkey.

But what's just precious is THERE IS NO MORE, Hulce. That was it. We're in The Big Unwind. We're through.

So, I guess I will explain what is going to happen over the next several years, primarily for the benefit of dumbfucks like Hulce, in terms of what has already happened. And I'll try to make it painless & quick.

OK, our banking system is based on the Fractional Reserve System. If you ever had any sort of rudimentary finance classes, it's east to figure out: Let's say you deposit $100 in the local shithole collapsing bank, CACB. OK, they make money by loaning it out, but not all of it, more like $90. From wikipedia:

Central banks generally mandate reserve requirements that require banks to keep a minimum fraction of their demand deposits as cash reserves. This both limits the amount of money creation that occurs in the commercial banking system, and ensures that banks have enough ready cash to meet normal demand for withdrawals. Problems can arise, however, when a large number of depositors seek withdrawal of their deposits; this can cause a bank run or, when problems are extreme and widespread, a systemic crisis.

To mitigate these problems, central banks (or other government institutions) generally regulate and oversee commercial banks, act as lender of last resort to commercial banks, and also insure the deposits of the commercial banks' customers.

Really, those paragraphs embody a lot of info. There HAS TO BE reserve requirements, or else money creation is theoretically INFINITE (infinite inflation), and BANK RUNS can happen with ease. Imagine you have lent out all of that $100 deposit, if the person even writes a check for $1, you can't deliver.

Now, the "systemic crisis" part is what you should really be focusing on, because that is exactly what has happened.

If you read the wikipedia article in it's entirety (and you should), you'll see there is a very direct correlation between banking reserve requirements, and money creation. There is a very simple example with 20% reserve requirements which leads to a money creation multiplier of almost 5.

So the inverse of the reserve requirement is the money multiplier: 1 / .2 = 5.

You can see the actual reserve requirements for US banks here. It's a tiered system, but on all decent sized banks, it's about 10%. So the multiplier is about 10, but in actuality it is slightly lower due to other factors

Now, this system works great and can be actually used to spur spending by the Fed buying and selling a relatively small amount of bank-held securities, like government debt, some of which is always on the books of banks as "cash".

But there's something "Golden" about that 10% reserve number. It represents the amount beyond which losses become a vicious cycle of contraction vs it's usual virtuous circle of prosperity.

Once you loan losses go beyond 10%, you are pretty much fucked. Even if your losses approach 10% of your loan portfolio, you are in some deep shit. Because your depositors CANNOT get their DEMAND DEPOSITS. You are broke and cannot pay them.

You're in some Big Shit at that point.

Now, typically this sort of thing is a localized phenomenon. Big local business goes down, or some regional butter-fuck hits the local economy, like oil in the 80's or S&L commercial lending. And the shit goes down hard.

But this time it is WILDLY different.

The ENTIRE American housing base is down WAY over 10%. Commercial is down over 10%. THOSE 2 things represent TRILLIONS in loans.

The entire collateralized base of the American banking system is DOWN beyond the reserve point. This is the point where the "systemic crisis" begins.

The banks ARE NOT LOANING, not because they don't want to, but they can't. Even with the TRILLIONS flooding the system, the ENTIRE US BANKING SYSTEM IS STILL INSOLVENT. THAT is the problem. That is why we cannot "Get this party started".

We have gone WELL BEYOND the point of utter collapse. And the government response was really all it could be: FLOOD THE SYSTEM WITH TRILLIONS.

Because, you see, we have an entire banking system whose demand deposits are, say $10 trillion. But the loans and other securities that we have to pay each other off, are only $7 trillion. The gov't hawks were right: If we all tried to Get Our Money, the US banking system would have ceased to exist. Every single bank in the US would have to close.

So the governments only choice was to flood us with trillions.

But now the problem shifts from "I want my money" to "I want this economy to grow", and there my friends we are well & truly fucked. Because growth relies on money, and money comes and goes with the whim & weft of confidence in the fractional reserve banking system itself.

10% reserve requirements were NOT ENOUGH to avert one of the greatest crises in 100 years. So what do we do?

Lower it, as advocated by Hulce? THAT actually ENSURES it will happen again!

Or raise it? THAT actually ensures a TERRIBLE SLOWDOWN, by collapsing the lifeblood of our economy, money. A 20% reserve requirement would throw us right into a depression.

Even leaving it where it is portends that what we face today will happen again.

Fucking rock and a hard place, that is.

And so those are The Real Choices: Lower our reserve requirements to "Get the party started", but have an even more fragile banking system that will succumb to destruction almost instantly. Or raise reserve requirements, and face the prospect of a near-immediate and crushing depression, but a banking system that can in the far-future probably sustain almost any economic slowdown... once it stabilizes.

Or leave it as-is... and face a scenario that is a little of column A, and a little of column B.

Which is what we'll do.

So there will be no real growth in the next decade or so. And government will have to be on-call to forestall collapse for the foreseeable future. We will be in high-wire mode for at least 10 years, with even the slightest disturbance threatening our very existence.

Which is what will happen. We will be in low-or-no growth mode for 10 years, and banks will continue to fail. For years.

Look to Japan to see what happens. Moribund growth that never seems to take off.

When will it take off? When loan losses are so crushed that what actually remains is solid. And loan volume actually begins to exceed deposit growth, and money is created again. The Great Unwind ends when banks stop calling in loans (to pay depositors or "reserve" up), and actually start to lend again, which only happens AFTER we hit rock bottom, and they KNOW that their loans are solid, and repayment is assured. We aren't even close to that. AND THAT, my friends, is WHY banks are not loaning. They have raised their OWN implicit reserve requirements to SURVIVE.

It bears pointing out that I am not one of those psycho, Anarchy-types that believes the best thing is ZERO LOANS, and eating of home-grown beans & tomatoes. Well, I'm closer to that than many people I know, but I do believe there is a place for the modern banking system.

But I also acknowledge that this system can and will cause it's own implosions by it's very nature. And it's near collapse is what we are witnessing now. It makes the peaks and valley's higher & lower. But it does have it's merits.

But when it is systemically participates in a bubble, it literally ensures it's own destruction. There's really nothing else that can happen. And the bigger the bubble, the bigger the collapse IN PROPORTION to the leverage (financial crack-meth) used to create it.

And the leverage used to create our current debacle was almost infinite, because not only were banks going "off balance sheet" to create more money, the amount going into homes as downpayments was LESS THAN ZERO. People would actually get money at closing via all kinds of schemes, namely liar-loan fraud, appraisal fraud, and just about anything else they could get away with... ask Tammy Sawyer.

So our REAL reserve rate was far, FAR less than the OFFICIAL RATE of 10%. It was probably down around 0%, which means 2 things: Incredible fragility and the magnitude of the collapse will be unbelievable.

And THAT is where we are.
That there is GRILFY hotness, hbm.
Damn, I need to get laid.
Ahhhhh, the chubby quasi-pregger MILF. Is there anything better?

Sunday, September 20, 2009

What exactly will happen for the next 20 years in the housing market.

In trying to figure out what will happen in the future, I try to figure out if there is some sort of "model" that applies to the situation.

The housing bubble bursting is sort of hard to nail down, since it is pretty unprecedented. Housing prices as a whole have never really come down in this country. It's also hard to remember, but houses also used to not have such a "speculative" element to their pricing. House flipping was pretty marginal business, pretty much under the purview of sleazy infomercials until the late 90's.

But I think I have the housing market modeled pretty well, in a way that I think reflects the respective payoffs to the parties involved (and maybe I've talked about this before... I'm getting old).

It's our old friend, options.

See, when "we" build a house, we are "long" one house. Now, how it is financed is a secondary concern, but the asset, the house, exists, and we are "long" that house.

How it is financed does cleave the payoffs from this asset in a fairly interesting way.

When you buy a house, if you pay all cash, the payoff is simple: you gain and/or lose dollar for dollar whatever the house gains or loses. Pretty simple, the all-cash example is linear.

But when you buy a house, using one or more non-recourse mortgages (ie they can only take the house on default), you can't really lose monetarily anything once the house goes below the collective principle of the mortgage(s).

The "strike price" of the home is the sum of the mortgage principle. If you "cash out" (ie sell), you get the amount over and above the mortgage sum owed. If the sell price is below that, you simply get nothing.

Of course, it's more complicated than that, since there is also a cost borne of the hit to your credit record, and any sort of "psychic" or other costs, such as mental anguish, and such.

But this does model the purchase of a home using non-recourse debt.

So what is the payoff to the other side?

Well, if you study your options trading strategies, and I have, you know that to simulate a "long" payoff, you need to buy 1 call option (that's us, the home buyer), and sell 1 put option.

As an aside, a call option gives you the right (not the obligation) to buy a share of stock at a given price in a given period of time. A put option gives you the right (not obligation) to "put" a share of stock to someone at a given price within a given period of time.

So the "payoff" diagram of a call option looks like this (strike price = $30):

Call option payoff, $30 strike price.

So, say instead of $30 strike prices on shares of stock, think $300,000 mortgage on your home. Anything above that, you win, anything below... well, you just walk away.

So, we know we are "long" a house, financing ignored. And the home buyer is really long a call option, with a strike price of the mortgage amount. And for illustration purposes we'll ignore the fact that actually the home buyers "expiration date" and strike price change a bit everyday, since the mortgage is being paid off bit by bit thus lowering the strike price. We'll sort of look at it as a call option with a shorter expiration (like 1 year), with a sort of "blended" strike price of the average owed during the year.

So the other side of this transaction is the bank, and if you know anything about options, you know that they are essentially short a put option.

If they were long a put option, they could "put" the asset (ie house) to someone at a fixed price, something that's nice when prices are falling. But they aren't long, they are short, or the exact opposite. They can have the asset put to them at a fixed price, aka the mortgage principle.

So if the buyer owes $300K, and walks from the house worth $200K, the bank is out $100K. Simple.

So this is our housing market model: Buyers are long call options, banks are short puts the summation of these 2 positions equating to being long 1 house.

You might wonder, "Why in the hell would the banks ever go into a business with severely limited upside, and one hell of a lot of downside?"

Well, that's a good question. And the reason is simple, and was intimated to earlier: Banks receive "premium" (ie your mortgage interest payments) for bearing risk.

Think of an interest-only mortgage: The bank can receive (and invest) this amount every month for 30 years, and at the end they will either receive nothing (ie the house is worth more than the mortgage), or they will have to pay some amount that the house has fallen below the mortgage.

And before now, the idea that a house would be worth less in any decent period in the future was pretty absurd. In fact, this "bet" for banks was, and always has been, a pretty safe one.

But let's get back to our little housing model. To figure out the value of our home buyers "call option" we'd use Black-Scholes. I don't want to go into the mechanics of the formula, primarily because I don't fully understand them, but I do know a few things about option pricing.

When you are buying a call option, the price goes UP when:

  1. The volatility of returns goes up.
  2. The strike price goes down.
  3. The time to expiration is increased.
These are all pretty straightforward assumptions.

When the price of a stock is all over the place, the options for that stock, both puts and calls, go up in price.

When the "strike price" goes down, the value of a call goes up, since it's intrinsic value goes up.

When the time to expiration increases, you have more time for the stock to go above your strinke price, and so the value of a call goes up.

So, let's think about the historical aspects of this state of affairs, a bunch of Americo's long call options, and a bunch of banks short puts on the largest store of wealth on Earth, the US housing market.

Well, with respect to Black-Scholes, we can say that the call option buyer probably wants lower volatility, since that lowers the price of their option. The put seller actually can charge more at times of high volatility.

But US housing was never really volatile before 1997. Up a few percent here & there. Maybe once in awhile there would be a regional spike higher or lower, but on the whole home prices moved very steadily, if not slowly, higher. Home volatility has been historically low.

Lowering the "strike price" on a home, basically means increasing the down payment. This pushes up the value of a home owners "call option". It means they have more to lose if the price goes down.

The fundamental thing a large down payment does is it moves the strike price to the left, while the home value remains the same. The home buyer already has built-in "intrinsic value", and a pretty good cushion on which to make money. Similarly, the banks "loss point" moves way down (to the left, to the left), and given fairly stable returns over time, can pretty much count on a long, stable stream of interest payments from a call buyer who has got their financial ass on the line.

OK, so we've had this regime of stable returns, steadily incraesing prices, and fairly hefty down payments until about the past decade.

Then, what happens in any speculative bubble happened to buyers of home call options: They started buying more and more, and banks having lost their senses, also started participating, despite the fact that the increased volatility had actually imperiled the "value" of their vast holding of short puts (home mortgages).

The volatility pushed UP what people were willing to pay for call options, and increased the "premium" received for short puts. And slowly but surely, down payments shrunk, literally to nothing; ie the strike prices on homes equaled their value, and call buyers had almost nothing at risk except the transaction costs, which had actually grown considerably... but were still dwarfed by the potential gains.

And while prices were going up wildly, no really cared. Call prices, bought at little or nothing due to shriveling credit standards, leveraged returns to the sky. Instead of putting 20% down on a home & living in it, people put 3% down on 10 homes (that's 7, plus 3 more on credit cards, so I can retire in the Bahamas!).

And if your house went up 10% when you put 20% down, that was a nice 50% payoff.

But hell, if you put 3% down on 10 homes, and prices went up 10%, that was over 300% on the same money! Even with thick 1%+ transaction costs, it was still worth it.

And so our bubble was created. As usual, with high volatility and increasing strike prices (leverage), and the inherent risk associated with both.

So where are we now? Yes, yes.

Strangely, we have too many homes. That would be that pesky pursuit of 300% returns on 10 homes, not 1, kicking in.

Yeah, should have seen that coming.

Second, the banks hold short put options on assets (those 10 homes no one wants) that have plummeted in value. Yeah, this would be that pesky mortgage crisis I've been hearing about.

Yes, banks ALWAYS have a fairly limited upside on speculative bubbles, but typically (and theoretically) unlimited downside... well, at least to zero, or 100% losses on the assets.

Given that the cumulative sum of US homes was in the low to mid $20 trillion dollar range when this party got started, and prices have fallen off 40%, AND banks had the good sense to spike the party punchbowl with down payments of near 0%, well you've got yourself a recipe for a financial conflagration the likes of which cannot be imagined.

That tells us where we are. And might I add that this blog was around before this monster catastrophe even got started, way back in Dec 2006. And I'll try not to pull a muscle patting myself on the back here, but put all these option analogies together -- the increasing volatility, the shrinking "strike prices" (down payments), and you can see that while the individual call option owners (that's us) had quite a bit to lose (the collective "net worth" of homes in 2006 was many trillions), it was ALWAYS the banks that had the most to lose in a truly colossal meltdown of home prices.

You and me? We can just walk away. The banks just keep losing. And losing.

Or do they?

Our True and Goodly leaders have seen their way clear to taking our money, yes all that medicade and social security cash, and give it back to the fine local put sellers who are losing their shirts (ie Patty Moss et al).

So actually, our model is somewhat off. Because way down in the depths of the left hand side of our option payoff graph, the banks own a long put: They are putting their losses to the American people.

Way, way off to the left... something strange is happening. The banks have received something of almost mond-boggling value: A "free" put option.

Or is it 2 free puts options?

Because, if you look at the payoff diagram of a short put, you see it is the "horizontal" mirroring of a long put. A short put option has a flat payoff as prices increase (simple interest payment collection), but bends lower as prices fall (foreclosure).

Let's say banks on the whole have $15 trillion in mortgages outstanding. That "bend" lower is at $15 trillion and lower. But somehow, banks losses are being capped at an amount equal to what is probably their total capitalization, or about $1-2 trillion, I'd guess.

So somewhere around the $13 trillion mark, the linear negative payoff flattens. More absurdly, it actually seems to turn UP, and head back towards ZERO.

So the banks REAL PAYOFF seems to be a flat line, with a "V" in the middle. It pays banks to be nowhere near the bottom of this V. Be far above, or far below... but not in it's deadly center.

This raises all sorts of issues of fiduciary peril, the likes of which I hope you can clearly see.

But what I find far more interesting is the "offset".

We're STILL only long that one house (or one hundred millions houses... same diff). And Obama Jeebus W Bush has issued the banks somewhere between 1 and 2 FREE put options, meaning their losses are CAPPED below certain loss levels.

So WHO is paying for that put option... or options?

Ah yes... the answer is, of course, us! The American Taxpayer is paying for it.

So, to balance the equation of issuing banks a put option, we are going SHORT a put.

So now the tables are turned. What we thought was our collective "long call"on our homes, with unlimited upside and limited downside, has transformed. Our government has FORCED us to issue a SHORT PUT on the American housing stock, subjecting US to the full brunt of losses below a certain strike price.

But we don't receive interest. And with volatility at it's maximum, the value being lost is worth TRILLIONS.

THIS is the legacy we are leaving to posterity: The payoff of buying a home in this country has been fundamentally altered. Your call option is still in place. You can still win when/if prices go up.

But lurking on the dark side of the mortgage collective is the implicit short put option that will bail out the banks, AND STICK YOU WITH THE FULL BRUNT OF THE LOSSES.

The FLAT left-hand side of the payoff matrix is A LIE. YOU own the losses down there, NOT banks.

Maybe we should have known. How can banks, with their relatively thin capitalization, sustain losses FOREVER? Answer, they can't and they never could. There was always an implicit saving put option owned down there for them in the form of a government bailout.

So you are, as a home buyer, buying a huge call option when you buy a house, and now you KNOW that you are also PAYING for a put option as well. Never really "knew" it before... circumstances had always let it expire worthless, cuz prices inexoribly & continually went up. Not anymore. Prices CAN go down. A lot.

That fucking put option can take EVERYTHING.


This whole housing "investment" scheme seems a LOT less attractive. My upside is "unlimited" yes... but my fucking downside is also UNLIMITED. There's a "flat spot" there in the middle... but damn, we sliced through that like butter, and went straight to massive bank bailouts like flies go to shit.

Yes, yes... I will think twice about ever buying into this payoff matrix. It's not as good as it once was. Before now, it was all caviar and Lamborghini's. Now there's real pain if things don't work out.

No... I don't think I'll be doing that again.

So now... You Will See It Coming. Because THAT is what is going to happen. No more difficult to figure out than simply modeling the situation, and analyzing the payoffs.

It was this easy in 2006. But strangely, Patty Moss and the vast pool of experts the Bully and the rest of Bend media relied on had a curious dearth of insight into the problem.

This is a problem No One Saw Coming.

I did. You probably did.

Know thyself, motherfucker.

So when, in 5 or 10 years, when housing demand has simply Gone Away, and the Bully is interviewing Experts Who Cannot Explain What Is Going On, you'll know:

The payoffs have changed. "We" CAN LOSE. We are losing. But the debt? It's our kids problem, so who gives a shit.

Well, you should, cuz it's not really our kids... unless you're damn near dead already. It's us. The debt bomb is ticking, and we owe. Civilizations always die impaled on the pike of debt. Always.

The problem isn't going broke, it's worse than that. We'll lose this country.

To see our "bankers", look East.

Both the borrower & lender have nukes.

And a lender with nukes will always recover the vig.
Cowboy hats & bikini's... cures anythingDamn...
Thumbs up to NUKES!

Sunday, September 6, 2009

Goodbye Boys of Summer... that includes Patty Moss.

I'll make this a short one, since it's the last weekend of Summer...

I saw a pretty amazing home offers over at Forum Meadows. Not "amazing" because they are Good Deals, but amazing because they show how terrible things have gotten in Bend, and amazing in illustrating the after-effects of copious Kool-Aid consumption.


$129990 / 3br - Finished Newer Homes-Ready Now! (Bend) (map)
Date: 2009-08-08, 8:05AM PDT

Introducing Newer Homes from 1113 - 2100 sqft at Forum Meadows in East Bend Near St Charles Hospital. There are 3 floor plans to choose from and all homes are complete and ready for occupancy.

These are well appointed homes with tile counters, solid wood floor entries, appliances, finished garages, window blinds, fenced yards, accented exteriors, landscaping and underground sprinklers. They are 2 blocks from shopping, restaraunts and movie theater.

These homes are now for steal at $200,000 below 07' listing price.

They are in better shape than any bank owned home and you will receive an answer within 2 days of your offer.

If you're tired of making rejected, competing offers on homes that need repairs, then call Nancy @ 541-480-4599 or Matt @ 541-280-9576 today for information on these clean and ready to move in homes.

These Forum Meadows shitshacks are down 63% from their original ask prices of $349,500. Remember Pollocks infamous statement about STEALING?

Oregon subdivision a ghost town
Saturday, December 22, 2007 at 12:00 AM

Buena Vista Custom Homes unloaded 141 homes last weekend in what company says was the biggest residential home auction in state history. But none of the 29 in Bend sold.

Still, in every place except Bend, the auction achieved what Pollock set out to do — get rid of expensive-to-carry housing inventory. And it gave him some cash to use on his next moves.

"The sale of the homes from the auction put us in a great position as a buyer," Pollock said in a news release. "There are some great deals to be had out there right now on lots."

Some of the Bend houses attracted bids, Higgins said, but none of the bids came close enough to meeting the reserve prices to justify finalizing sales on any of the homes, Higgins said.

"They were trying to steal them," Higgins said.

The company retained the right to reject any final bids below its unpublished reserve prices, Higgins said. It was obligated to close on any final bids that rose above that level.

Buena Vista had hoped to see bidding start at $189,000 for its 1,133-square-foot models in Bend and $229,000 on its 2,116-square-foot homes.

Original asking prices had been $349,500 and $443,950, respectively.

Tamara Christensen and her family live nearby. She had hoped the auction would work at least well enough to fill the houses with people who would landscape the bare-dirt backyards she sees out of her back windows.

But another nearby resident said she was OK with the way it is.

"I kind of like having fewer neighbors," Charlene Gossling said.

"It's quiet."

I'm not sure how many times I ranted about Pollock taking the low bids for those cracker-ass shitshacks, and being happy to get them, but it was quite a few. He's still on the RIP Hall of Shame masthead.

I'm telling you folks... this thing isn't over by a long shot. THIS is where some Realtor would jump in and say something about "nowhere to go but up", or some shit. They've been saying that for 2 years. Is this UP?

It's stupid ideas like Pollocks STD-fest that'll be taking down this town for decades to come.

Speaking about Taking Down, someone (Ballzee) posted a link to the actual Cease & Desist order sent to Cracker Ass Motherfucking Butt-Fugly Patty Moss, and that shithole Fraud-U-Net Bank she whores over, Cascade Bank.

Funny, but this is yet another example of The Guy On The Street Saw It Coming YEARS Before The Lying Dumbfucks Who Are Actually Perpetrating The Fraud. This raises the question whether Moss KNEW she was blowing up CACB, or whether she is a fucking moron. I vote MORON.

So anyway, back to the order. Click the link, and read it, but I'd agree with Ballzee, it is damn "harsh":

the Bank...cease and desist from the following unsafe banking practices...
  1. operating with management whose policies and practices are determinetal to the Bank and jeopardize the safety of its deposits;
  2. operating with inadequate capital in relation to the kind and quality of assets held by the Bank;
  3. operating with a board of directors that which has failed to provide adequate supervision over and direction to the active management of the Bank;
  4. operating with inadequate loan valuation reserve;
  5. operating with a large volume of poor quality loans;
  6. operating in such a manner as to produce operating losses;
  7. operating with inadequate provisions for liquidity;

I mean Holy Shit! If that ain't a stinging rebuke for Moss, I don't know what is. The rest of the order is a bunch of micro-management directives about HIRING PEOPLE WHO KNOW HOW TO RUN A BANK, with the VERY OBVIOUS implication that those who are there now, DO NOT KNOW HOW TO.

One of the directives from Sheila BEAR HUG Bair, is that Mossco get Tier 1 capital up to 10%. It is not even close now:

Cascade Bancorp (Oregon) Announces Filing of Form 10-Q Quarterly Report and Financial Results for the Second Quarter of 2009
At June 30, 2009, the Company's leverage, tier 1 capital and total risked-based capital ratios were 5.19%, 6.03% and 8.87%, respectively...

FDIC also lays out how Mossy can and cannot raise money, one of which is the hilarious "raise it from the Board of Directors"! WTF! I also believe that "Begging for the money in the local lie-filled rag" is another legit money-raising avenue.

Mossy can also issue new stock... but hmmmm... that is NOT happening. I wonder why? Oh right... Wall Street would rather buy large, puss-ee (pussy?) maggots and eat them. Wall St would no more buy CACB stock than it'd rise & fly. Even CACB's largest shareholder KNOWS that this bank is DEAD & GONE, and will not give a nickel to save it.

OK, so I think Mossy & Pollock have finally earned their badge of shame on our RIP masthead.

OK, just some interesting pieces I read this week. First, I can't help but reprint the BBC piece, since it's hard with the character limits in the comments, and I think it's just a great balance to what you hear from Costa (ie 100% BULLSHIT):

Economic crash in Oregon boomtown

By Adam Brookes BBC News, Bend, Oregon

Bend, Oregon was a 21st century American boomtown. It is a beautiful place, in the high desert of central Oregon, amid mountains.

The sunshine is warm, the air crisp and filled with the scent of bitterbrush and pine.
Its people are gracious, their gorgeous surroundings imbuing them with a certain American languidness.

All these attributes were - in the minds of the city's ambitious planners and businessmen - what would bring the retirees and tourists flocking to Bend. To accommodate them, a boom in housing began.

Boom and bust

The population of Bend quadrupled in under 20 years - from 20,000 to 80,000.
Between 2001 and 2005, the median value of a home in Bend rose by 80%.

By 2005, work was getting underway on 700 new homes each month.

Some of the developments are stunning: houses filled with mountain light clinging to craggy hillsides.

More than 17% of the workforce was employed in construction - far higher than the national average.

In what had once been an isolated lumber and mill town, high-end restaurants and brewhouses opened. Shops selling expensive bric-a-brac bloomed. Massage therapists and hairdressers proliferated.

Downtown Bend looks like a shrine to post-millenial bijou: pricey shoes, scented candles, fancy coffee. There is even a shop specialising in beachwear - despite Bend's location in the high desert.

But when the US slumped, Bend crashed.

The value of a home fell 40% in under two years.
And unemployment nearly quadrupled from around 4% two years ago to 15% in the summer of 2009.

"Everything that Bend produced relied on the credit market", says Carolyn Eagan, an economist with the Oregon Department of Employment.

"Construction materials, doors and fittings, recreational vehicles: everything depended on people being able to consume more than they could use."

Now the credit has dried up, and the building of Bend has stopped.
The town is dotted with developments that got underway, and then ground to a halt.

They are desolate expanses of weeds, dust and discarded construction materials.

Homeless shelter

In downtown Bend, we met Dan Hardt. Mr Hardt used to employ 20 people hanging drywall in Bend's new homes.

He owned three houses of his own, and a boat.

He used to go on elk-hunting trips.
Now it is gone - all of it.

"When the building stopped, the lifestyle went very fast," he told us.

"It's a lifestyle I don't see coming back."

Dan now lives at the Bethlehem Inn
, a motel converted to an emergency homeless shelter.

"Those who were living at the at the top of the heap and who have fallen to the bottom, they don't know where to go for help, they don't know how to get that help.

There's anger and frustration and a sense of entitlement," says Corky Senecal, who heads emergency housing services for Neighbor Impact, and has 30 years experience of providing services for the poor.

"The middle class is where it's really been decimated," she says.
When you lose your job in America, you will receive financial aid from the government. But it is limited.

Typically, an unemployed worker in Bend will get state benefits for a period of six months to a year. After that, as many in Bend are discovering, you are on your own.

In addition, the loss of a job frequently means the loss of health insurance and payments into retirement funds.

This limited social safety net means unemployment in America can be devastating.
"It's not just the job that stops," says Dan Hardt. "Everything else stops with it."

Ms Senecal introduced us to to Randy Worrell and his 11-year-old daughter, Patty.
Mr Worrell, a burly 42-year-old former firefighter, was laid off from a variety of jobs.

He has not worked since the end of last year - and his unemployment benefits have run out.

"I don't know what I will do from one day to the next," he says.

Lesson learned
Neighbor Impact has put him and Patty in temporary accommodation. He will look for work, he says, for six hours a day.

And he is deeply sceptical of pronouncements emanating from Washington DC that the US economy is showing signs of recovery.

"Lately it's all, 'the economy is turning around'. No, it's not. At least it's not for us," he says. "I don't think we've even hit rock bottom yet. I think we have some way to go."

Bend, Oregon has a great deal going for it, and will, no doubt, experience some sort of recovery. The population of the city has not noticeably shrunk, which is a good sign.

But no-one expects the housing market ever to revert to its previous, ferocious levels of activity. And many will tell you they have no desire for it to do so, that Bend has learned a lesson about bubbles.

But in the US, joblessness can alter a life trajectory for ever. Seven and a half million Americans have lost their job since the start of the recession.

And unemployment's clawmarks will be visible on the face of Bend, and of the US, for a long while to come.

Some of this reporting is a little misguided (gracious?), but it is definitely not a piece you would EVER find in any Bend media outlet. It's basically an onthology and cataloging of greed and it's after-effects. Again, you will NEVER see this sort of thing from the Bully.

Another good piece I saw was from Mish:

Friday, September 04, 2009

How Overpriced Is The S&P 500?

Inquiring minds are wondering How Overpriced Is The S&P?

It's an excellent question given bulls feel the market is headed much higher while the bears feel the opposite after a remarkable 50% rally.

Let's start off with a look at the financial sector where Allowances for Loan and Lease Losses (ALLL) have plunged even though non-performing loans soar.

To understand the importance of ALLL, inquiring minds are reading a description of Allowances for Loan & Lease Losses.

Businesses try to predict, on an ongoing basis, the amount of loss in their accounts. They take periodic charges to earnings to better match losses to periods when they occurred. Banks do this as well.

They use current income, through the provision for loan and lease losses, to create and build a reserve to absorb losses.
The ALLL can be increased another way.

When the bank collects on previously charged-off loans, the amount recovered goes into the ALLL.
Charged-off loans decrease the ALLL.

If a bank decides it has overestimated its potential loss exposure, it can choose to reduce its ALLL and add the amount to its income. This is known as making “reverse provisions” for loan and lease losses, because the bank decreases the allowance, or reserve amount, rather than increasing the provision.

It is rare for a bank to make a reverse provision, however, because of the imprecise nature of determining an appropriate reserve.
One last point to remember with respect to the reserve is that the ALLL is a general reserve.

Therefore, even if a bank analyzes and estimates the loss on each loan, the allowance is there to absorb all losses in the loan portfolio and is not specific to a particular loan.
Remember that allowances for loan losses will decrease as charge offs increase. However, the above charts are in relation to non-performing loans.

Because allowances for loan losses are a direct hit to earnings, and because allowances are at ridiculously low levels, bank earnings have been wildly over-stated.
Bank Profits Too Good To Be True Flashback April 16, 2009:

Wells Fargo’s Profit Looks Too Good to Be True:

Jonathan Weil
What sent Wells shares soaring on April 9 was a three-page press release in which the San Francisco-based bank said it expected to report first-quarter net income of about $3 billion.

Wells disclosed few details of what was in that figure. And by pushing the stock up 32 percent that day to $19.61, investors sent a clear message: They didn’t care.

Dig below the surface of Wells’s numbers, though, and there are reasons to be wary. Here are four gimmicks to look out for when the company releases its first-quarter results on April 22:

Gimmick No. 1: Cookie-jar reserves.

Wells’s earnings may have gotten a boost from an accounting maneuver, since banned, that it used last year as part of its $12.5 billion purchase of Wachovia Corp. Specifically, Wells carried over a $7.5 billion loan-loss allowance from Wachovia’s balance sheet onto its own books -- the effect of which I’ll explain in a moment.

Once it took control of the reserve from Wachovia, Wells was free to start dipping into it to absorb new credit losses on all sorts of loans, including loans Wells had originated itself. (Think of a child raiding a cookie jar.)

The upshot is that Wells could get by with reduced provisions until the $7.5 billion is used up, boosting net income.

Another quirk: The reserve was related to $352.2 billion of Wachovia loans for which Wells was not forecasting any future credit losses, according to Wells’s annual report.
Weil goes on with three other highly suspicious (at best) practices by Wells Fargo, including a balance sheet holding of $109 billion of "other assets".

Weil writes:
"The footnote says the largest component was a $44.2 billion bucket that Wells labeled as “other.” Yes, that’s right: The biggest portion of “other assets” was “other.” And what did this include? The disclosure didn’t say. Neither would Bernard.

Talk about a black box. That $44.2 billion is more than Wells’s tangible common equity, even using the bank’s dodgy number. And we don’t have a clue what’s in there.

FDIC Problem Bank List Soars To 416

For a nice discussion of some of the problems facing the financial sector, please consider For FDIC, a long tunnel and little light by Rolfe Winkler at Option Armageddon.

FDIC’s problem bank list grew to 416 at the end of last quarter. These banks have $300 billion of assets.

In total, FDIC estimates the banking sector is wrestling with $332 billion worth of loans and leases on which borrowers have stopped making payments. That excludes hundreds of billions worth of underwater loans that may be current now but will ultimately default.

Many banks, including the largest ones, are likely to struggle for some time.

How Big is the B of A, and Citigroup Problem?

Citigroup and Bank of America have received hundreds of billions of dollars of government support, but, precisely because of that support, they’re not on the FDIC’s list.

Adding them to it would multiply total problem assets 10 times, to $3 trillion.
Asset prices aren’t going back to their highs of 2006-2007, so loans held against them will be generating losses for years.

The FDIC may raise enough cash from banks to fund depositor losses in small and medium-sized banks, but it is clear that the biggest banks are far too large for them to handle.

As a result, the government’s emergency rescue measures aren’t going away for a while. And taxpayers should expect to be writing fat bailout checks to the financial system for years to come.

America’s Japanese banks Inquiring minds are reading America’s Japanese banks also by Winkler.

A banking system loaded down with hundreds of billions of dollars worth of unrecognized bad debt — Japan in the 1990s? No, it’s the United States today.
And where are American banks hiding their losses?

Among other places, in their loan portfolios. Banks have written down billions in toxic securities, but many toxic loans are still carried at close to full value.
According to data published by the Federal Reserve late last year, banks are carrying $3 trillion of residential real estate loans and $1.7 trillion of commercial real estate loans on their books for a total of $4.7 trillion.

Dan Alpert at Westwood Capital thinks as much as a fifth of that total could be uncollectable.
Banks argue that loans should not be marked down if they’re still “performing.”

As long as borrowers are meeting their contractual obligations, there’s no reason to take a writedown. The problem is, this gives banks an excuse to extend, amend and pretend. They can make concessions on loan terms or delay foreclosure notices, if only to maintain the fiction that borrowers will make good.

With real estate prices likely to fall, and stay, 40 percent below the peak, borrowers have a big incentive to renege on their side of the bargain. This is how we become Japan.

Emergency bailout facilities allow banks that otherwise would have failed under the weight of bad loans to hold those loans to maturity — pretending the bad ones will be paid off in full over time.

In reality, many loans will default and banks will bleed capital for years. Take commercial real estate. As the Congressional Oversight Panel has reported, few CRE loans that were originated at the peak will qualify for refinancing when they mature.

Banks can pretend they will, carrying the loans at values far above what will ever be paid back.

So what do we do? We can start by eliminating government guarantees that allow banks to avoid dealing with the problem.

As things stand, the biggest banks have no incentive to write down loans because the Federal Reserve, Federal Deposit Insurance Corporation and Treasury Department have, in effect, promised them unlimited financing to hold loans to maturity.

As the Japanese can tell you, this is just a recipe for stagnation. Thanks to a debt bubble that authorities refused to deal with decisively, that country is now entering its third consecutive lost decade.

S&P 500 Earnings Given that loan loss provisions directly affect earnings. Let's take a look a PE chart of the S&P 500 from Chart of the Day.
PE Ratio, S&P 500

That chart was from earlier in the month. Nearly all companies have now reported and the PE is down to 127.43.

If that sounds preposterous you can check the S&P 500 Excel Spreadsheet right on Standards and Poors.
Real vs. Operating Earnings The chart above is based on actual reported earnings.

Unfortunately it's difficult to find anyone stating P/E ratios based on actual earnings. Instead, because the media and investor bias tends towards being 100% invested 100% of the time, nearly all estimates you see are based on "operating earnings".

Barron's had an excellent article on this subject in May of 2008. It is as relevant today as it was then. Please consider What's the Real P/E Ratio?
There are two main earnings numbers that Wall Street uses when discussing valuations -- "reported earnings" or "operating earnings."

Typically, the bulls use "operating earnings," and the bears use "reported earnings" because operating earnings are higher and reported earnings are lower.

Also, it makes sense for the bears to use the past 12 months of earnings because they are usually lower, and for the bulls to use forward operating earnings to help make their case.

Using the last 12 months is much more consistent, since it avoids dependence on estimates of earnings.
Operating earnings exclude write-offs, while reported earnings include write-offs.

That is the only difference, but it's a difference that is getting much more important.

As recently as the early 1990s, operating and reported earnings were virtually the same. But then we entered the greatest financial mania of all time, and the earnings numbers diverged.

There were so many write-offs by companies making unwise investments and then undoing them that operating earnings grew much faster than reported earnings.

The write-offs that had been sporadic and unusual became common for many companies.
Using operating earnings is now like playing in a golf tournament that doesn't count any penalty strokes for hitting the ball into a water hazard or out of bounds.

Over the past 75 years, most market peaks topped at around 20 times reported earnings, and the troughs occurred at around 10 times earnings. The financial mania of the late 1990s pushed P/Es to over 40 times reported earnings, and the following bust never brought P/Es below 18 times reported earnings.

There's more we can do to make sense of earnings: The best way to measure present earnings and future earnings is to smooth them out over long periods.

Earnings can grow at only approximately 6% a year over the long term. The trend is limited by the growth in real GDP plus inflation.

And long term, real GDP cannot grow faster than the increase in the labor force plus the increase in productivity.

If you don't accept this, look at a long-term chart and draw a 6% growth line through the earnings. It is clear that earnings sometimes rise above the line and sometimes fall below it, but earnings always revert to the 6% mean.

Going back to 1950, every instance where actual earnings rose above trend-line earnings was followed by a period where actual earnings went well below trend-line earnings.

Creative Destruction

Please bear in mind that historical long term trends are just that. Intermediate-term, it is imperative to factor in demographics, changing consumer attitudes towards debt, willingness and ability of banks to lend, overall debt levels, etc.

I have discussed consumer attitudes many time, most recently in Creative Destruction.
Factors Sealing The Deflationary Fate

The five month, 50% rebound in the S&P 500 was certainly spectacular.

However, the more important question is where to from here?
Take a look at Japan's "Two Lost Decades" for clues.

Creative destruction in conjunction with global wage arbitrage, changing demographics, downsizing boomers fearing retirement, changing social attitudes towards debt in every economic age group, and massive debt leverage is an extremely powerful set of forces.

Bear in mind, that set of forces will not play out over days, weeks, or months. A Schumpeterian Depression will take years, perhaps even decades to play out.
Thus, deflation is an ongoing process, not a point in time event that can be staved off by massive interventions and Orwellian Proclamations "We Saved The World".

Bernanke and the Fed do not understand these concepts, nor does anyone else chanting that pending hyperinflation or massive inflation is coming right around the corner, nor do those who think new stock market is off to new highs.

In other words, almost everyone is oblivious to the true state of affairs.

How Overpriced Is The S&P?

Take another look at those charts kicking off this article. Factor in the analysis of Winkler and Weil. Factor in demographics, consumer attitudes, etc.

Factor in global wage arbitrage. Factor in loan loss provisions that have only one way to go, up. Factor in consumer debt levels, realizing that consumer spending is 70% of the economy.
Do the forward earnings estimates you hear from bulls make any sense to you? They do not make sense to me.

While it's hard to put a price tag on any of those components, we can look at Japan as a model as I have suggested on many occasions and Winkler is suggesting now.
If you have not yet done so, please consider Effect of Household Deleveraging on Housing, Consumption and the Stock Market.

Here is a snip pertaining to Japan, but there is much more in the article to see.

Nikkei, 28 yrs

A look at the Nikkei shows that Japan has already lost two decades since the peak in 1990. It is likely the US follows the same general pattern.

Of course some huge innovation like the internet could come along that would create enormous profits and employ millions of highly paid workers.

However, the odds of that are extremely small.
Thus, the risk/reward scenarios of long term investing are awful based on fundamentals alone.

Traders however, will have many opportunities in both directions.
All things considered, I suggest the S&P 500 is easily 50% overvalued based on what we know now.

That is not a prediction the S&P will be cut in half, rather it is my belief that it should be cut in half. Given that I have seen estimates as low as 200, I am not "SuperBear".

However, the reality is no one really knows what innovation is (or is not) coming, nor can anyone say for certain what valuations investors are willing to place on earnings. There are also foreign Central Bank issues to fact in.

With that in mind, the S&P could easily meander around this level for a decade while earnings catch up to what are now very poor valuation metrics.

As always, traders need to keep an open mind and not get locked into any scenario. Long-term investors will have to take what they get.

Unfortunately, I suggest those results are not likely to be very pretty.

Mike "Mish" Shedlock

The title of the piece is sort of misleading because it is primarily about banking. What I think is amazing is the B of A and Citigroup chart.

These 2 banks on their own DWARF the size of the S&L problem several fold.

The number of failed institutions going down right now is quite low. But the size is incredible. And this graph doesn't even include AIG. Or Fannie. Or Freddie. Add those in, and you get a real sense that this current problem is something that will not fade away quietly.

Our government is trying to keep these companies off the FAILED board, because the incredible upset caused by just letting Lehman go (a piker in comparison) was not acceptable, and truly would have melted down the Worlds economies.

And it could still happen. I honestly do not think the US Government can recitify the situation. It's my strong belief that the bursting of the housing & credit bubble is the most important event of our lives (economically), and it's effects will be felt for decades.

And finally, I wanted to post this Oregonian piece.

Increase in Portland-area home foreclosures worries analysts
Posted by mgraves September 03, 2009 18:06PM

Portland-area foreclosure filings have begun ticking up again this summer, reversing a spring trend that showed mortgage defaults had leveled off.

County records show that the number of mortgage defaults -- the first step in a foreclosure -- rose less than 2 percent in Clackamas, Multnomah and Washington counties between the first and second quarters of 2009.

But this summer, new foreclosures are on pace to jump 9 percent in the third quarter to about 3,500 for the tri-county region, or 38 filings every day.

"We're not seeing any relief," said Sande Sivani, a consultant who researches property records and records documents for title companies. "It's going up and up and up."

The uptick comes as lenders, which months ago had put a moratorium on foreclosures, have grown more aggressive with struggling borrowers.

The housing market has seen a mild boost from bargain-hunting investors and first-time buyers chasing a federal tax credit. But the renewed interest isn't coming fast enough or broad enough for some home owners.

Double-digit unemployment and falling home values have pinched home owners between shrinking income and homes that are worth less than the mortgage debt. The position leaves them few options to avoid a default. "It's the high unemployment that's driving foreclosures," said Patrick Newport, U.S. economist with economics firm IHS Global Insight.

Banks, despite political pressure from the White House, remain reluctant to modify troubled mortgages to try to save homeowners from foreclosure. More frequently, borrowers whose mortgage fall into default are not escaping trouble.

Fitch Ratings Ltd., a credit-rating firm, examined mortgages that had been packaged into securities. The firm found that between 2000 and 2006, 45 percent of borrowers who fell behind on prime loans -- those with the best credit -- were able to "cure" their delinquency by catching up on their payments. But that cure rate has plunged to just 7 percent for prime loans.

For Alt-A loans, those with a slightly higher credit risk, the cure rate has fallen from 30 percent to 4 percent. For subprime loans, the riskiest type, the rate went from 19 percent to 5 percent.

In the three-county Portland area, Sivani said she found 800 loan modifications recorded in the first six months of the year. But, she said, her sampling found about only one in 10 were modifications tied to a delinquent mortgage.

Either way, those modifications were dwarfed by the more than 6,300 new mortgage defaults the lenders had recorded in those three counties in the same time period.

Despite Obama's calls for banks to lighten up on troubled borrowers, Newport said: "That isn't going to happen. Usually it's in the banks' interest to take the loan into foreclosure."

A July study by the Federal Reserve Bank of Boston found that lenders expect to make more money on foreclosures than from a modified loan. That's because a large percentage of borrowers historically either "cure" the delinquency on their own or they receive a loan modification, then default on the mortgage again.

By many measures, Oregon continues to fare better than the nation that's been dragged down by Arizona, California, Florida and Nevada. But in some cases, the state's woes are unmatched in its own record books.

The Mortgage Bankers Association reported recently that about 8.5 percent of Oregon mortgage holders were at least 30 days delinquent or in some stage of foreclosure during the second quarter.

For the first time in this downturn, that figure has surpassed the previous high water mark set during the 1980s recession. The second quarter figure was the state's worst since the association started keeping track in 1979.

Those looking for a brighter outlook in the next year may have a difficult time.

Barclays Capital forecasts the number of foreclosed homes for sale will peak in mid-2010 at 1.15 million, up from an estimated 688,000 as of July 1, the Wall Street Journal reported.

IHS Global Insight's this week ranked Portland as the country's sixth most overvalued housing market. The firm says the Pacific Northwest is the final region to watch the froth of the boom years burn off.

Of the 11 markets labeled overvalued, seven fall in Oregon or Washington.
Dunc, please help me do horny FRASH-DANCE in this metal crib!
I wish I had a pearl necklace instead...
Now that the Downtowners gone, where we get an hbm sandwich?