Ok, let's go after this in no particular order:
So let's lay this all out in a way that is simple and easy to understand.
Now what is the definition of "Recession"?
A recession is two or more consecutive quarters of negative GDP growth.
Hmmmm..... only in a government school can you subtract 5 from 3.3 and not get a negative number.
Now this may be too pessimistic for housing. So let's say that it is. What else looks bad?
Well, you could go back to my posting on this just a little while ago, for example. There you would find four out of four leading indicators all pointing downward.
Fact is, ALT-A paper is dead weight. Lenders are going to have to go back to traditional underwriting values. This, unfortunately, means that those who are in non-traditional mortgages and can't pay won't be able to refinance out (since payments will actually go UP under a conventional mortgage) and those who can't qualify won't be able to buy. This is going to result in a huge number of short sales and defaults - but there really is no other way out of the box. Asset prices - in this case - house prices - must come down on average of 30% over the next five years.
This will create a recession as it will remove half - or more - of the buyers for new construction from the market immediately and essentially halt many resales until prices adjust. In fact, we are likely about to enter a recession right now, if we haven't already entered one. (a recession can only be called in retrospect, as the definition above should make clear.)
By the way, banks who are currently holding the bag have yet to catch on. 85% of foreclosure sales - which one can assume are being put on the market for their outstanding mortgage value - are receiving no bids. Gee, do you think that means the mortgage is for more than the market believes the property is worth?
Can we avoid an economic (and market) crunch? Sure. Santa Claus could appear tomorrow, wave his magic wand, and instantly inflate everyone's salary by 40% without creating more money or disturbing anything else in the economy. Or he could appear and pay off 30% of everyone's mortgage - with magic cash. I suppose that if I want to engage in magical thinking, I can come up with all sorts of ways in which this bubble does not explode and screw millions of people.
But - I live in the real world. I invest in the real world. And I am forced to use basic mathematics that I was taught in that real world, not "new math" where 2+2 = 5. No, I am not Arthur Anderson.
Now here's two other things to consider, before I leave you to ponder all this:
Show me the way around what's coming, and I'm all ears. But show me with math - not fanciful thinking that violates even the basic premise embodied in 4th grade mathematics.
Oh, and while you're at it?
Explain this - the same toxic loans that caused this mess are being offered - right now.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions.
NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES.
The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.
Looking for "The Best of Market Ticker"? Check out Ticker Classics.
Market charts, when present, used with permission of TD Ameritrade/ThinkOrSwim Inc. Neither TD Ameritrade or ThinkOrSwim have reviewed, approved or disapproved any content herein.
The Market Ticker content may be reproduced or excerpted online for non-commercial purposes provided full attribution is given and the original article source is linked to. Please contact Karl Denninger for reprint permission in other media or for commercial use.
Submissions may be sent "over the transom" to The Editor at any time. To be considered for publication your submission must include full and correct contact information and be related to an economic or political matter of the day. All submissions become the property of The Market Ticker.
Leads on stories of current economic and political interest are always welcome. Our fax tip line is 850-897-9364; please include contact information with your transmission.