Crucible

…so the air conditioner failed on Saturday, and Sylvia and I had an absolutely horrific weekend — so hot, and so humid.

I’ve never seen the cats flatter — stretched out for maximum surface area. Our fluffy cat, “Bitey” (possibly the smartest of the lot, and certainly the fluffiest) quickly learned to hang out in the bathroom exclusively…all that cooling tile. It was kind of funny, every time we wanted to use the bathroom, to find her there, stretched out on the tile.

Still, she was perhaps the only thing in the house that was more miserable than her owners. We tried opening a few windows at night, but couldn’t leave the doors open because our front screen door is down, awaiting delivery of its replacement, and the house has so much thermal mass that it doesn’t end up cooling off until about 5:00am. Bitey, at least, had the advantage of literally being able to sleep in the window.

I had left a message with the folks who had serviced our A/C a year ago, but when I called them back at opening time, 08:00am this morning, they told me that they still had jobs left over from Friday, and they couldn’t promise me anyone before tomorrow morning at 08:00am. So I had them pencil me in, and set about looking for another outfit to call.

Several of the places that I called just answered the phone with “Hello?” You’d think that beggars wouldn’t be choosers, but I want just a little more professionalism than that.

I ended up calling Mountain Electric, who wanted a $75 diagnostic fee for coming out, which they would refund if the work was ordered. This actually sounded reasonable to me, and the flip side of that policy was that they could be here today! All righty, then. Cancel the first guys. The mountain men showed up at 4:30pm, went up on the roof, and came back down directly, having diagnosed a failed motor of some description — $575 to replace.

We gave them the go-ahead, and after about 2 hours total, they were done. Call it four man-hours, plus the cost of the part. I’m satisfied with the price.

One interesting thing was that they brought a large patio umbrella up on the roof with them, so that they wouldn’t have to be working in the blazing sun all day — brilliant.

And the house is cooling down! Sweet, merciful Jesus.

It Ain’t Over

There is a Barron’s columnist, Alan Abelson, whom I absolutely adore.

He’s ironic — sarcastic, even — and is properly wary when Bear Markets are stalking around. Back when the dot.bomb bubble was rising, and then falling, he couldn’t have been more (rightly) sardonic about the Glory of the New Economy.

And he’s often been heard to say that bottoms don’t come when everybody is sniffing around, waiting to buy, looking for which stock is undervalued — they come when everyone has given up, and all have sworn off stocks forever.

Which brings us to last week’s column:

AS STEPHANIE POMBOY reminds us in her most recent MacroMavens commentary, this isn’t by any means the first time that the prayer parading as forecast — “the worst is over” — has been heard in Wall Street. In March 2001, the Nasdaq was off by more than 70% from its peak set only a scant year earlier. Investors became increasingly convinced that lightning had already struck, the landscape was littered with shattered stocks and a turn had to be in the offing. Were they ever wrong! Instead, recession reared its ugly head, profits posted their biggest declines since the 1920s and Nasdaq fell another 50% before hitting bottom deep into 2002. […and that’s not even counting the companies that had failed and been delisted –Tom]

Stephanie, who has a thing for scary comparisons (the scarier the better, of course) notes some unsettling resemblances between then and now. The most conspicuous of which is that, just as in March 2001 when the Nasdaq was off 72% from its top, so the home builders today are down eerily the same percentage from their all-time high. And there has been, at least until the shock of AIG perhaps nicked it a trifle, a revived appetite among investors for risk.

The biggest flaw in the notion that the worst is over, in her view, is that the source of the problem — home-price deflation — is not only continuing but intensifying. “According to the latest Case-Shiller Index,” she notes, “home prices are now deflating at a 32% annual rate, versus 8% six months ago. And the deflation is sure to intensify as the 4.6 million new and existing homes still sitting on the market find a clearing price.”

She exhorts us to “Think of it…that 4.6 million inventory is nearly double the 2.6 million average inventory in the 20 years leading up to the bubble. More disturbing still, a record 2.27 million of those homes are sitting empty!” Well, leery of getting her mad, we followed instructions and thought of it, and, we’re sure she’ll be pleased to learn, we felt an appropriate shiver go up our spine.

For good measure, Stephanie adds that those melancholy figures fail to include all the homes “stuck in purgatory at banks, which are now collecting keys faster than they can list the properties.” The Federal Deposit Insurance Corp., she relates, reckons that “other real estate owned” by banks is up more than double the year-ago total.

And, she concludes, “As long as the largest asset on household — and bank — balance sheets continues to deflate, the credit and consumption hits will keep coming.” In short, the worst sure ain’t over.

IF, WE’RE DEAD WRONG (which, hard as it may be to believe, would not be a first for us) and the worst really is over, we wish that some illustrious personage — say [Treasury Secretary] Mr. Paulson or [JP Morgan Chase Chairman and CEO] Mr. Dimon — would take a few minutes out of his busy, busy schedule to pass the good news along to [Federal Reserve Chairman] Ben Bernanke. For if the credit crisis truly is winding down, why in the world is Mr. Bernanke’s Fed running around like a proverbial chicken without its head and still working feverishly to prop up the banks?…

Read the Full Column at Barron’s
“It Ain’t Over”
May 12, 2008

‘This American Life’ on the Global Credit Crisis

From This American Life, the first explanation of the sub-prime mortgage meltdown that finally made me understand why it happened. The short answer: too much money chasing too few good investments (operating, I can’t help but add, in a lax regulatory environment).

It’s a gripping story, filled with debauchery, jargon, and really, really bad math:

A mortgage-backed security… is a pool of thousands of different mortgages. These are all put together, and divided into different slices — Jimmy’s word, tranche: “tranche” is just French for slice.

Some of these slices are risky, and some are not.

OK. A CDO is a pool…of these tranches…a pool of pools.

And Jim, and most companies like his, weren’t buying the top-rated tranches, the safest ones, the AAA’s, they were buying the lower-rated stuff, the high-risk stuff. Jim’s company bought tranches that came from [Glen’s] company, the guy who hung out at nightclubs, with B-list celebrities, the guy who said he was selling mortgages to people who didn’t have a pot to piss in.

There’s another term the industry uses — this is not a joke — they call these lower-rated tranches “toxic waste.” They’re so high-risk, they’re toxic.

And so basically a CDO is sort of a financial alchemy: Jim takes this toxic stuff, these low-rated, high-risk tranches, puts them all together, re-tranches them, and…Presto! He has a CDO whose top tranche is rated AAA: rock-solid, Good as Money.

If this seems too good to be true to you, you’re in good company. Guys like billionaire investor Warren Buffet said the very logic was ridiculous.

But back in 2005, 2006, the Global Pool of Money? They couldn’t get enough of these things. And the CDO industry was facing the same pressures everyone else was, at every other step of this chain: to loosen their standards, to make CDO’s out of lower and lower-rated tranches.

This is Jim’s partner…

“Actually, in 2005, already, we had an internal debate, here, because there were two banks coming to us, saying, ‘Why don’t you do a deal with us? — BBB securities — and, uh, you get paid a million bucks in management fees per year.’ Very clear, just like that, in 2005. And…we declined those deals, we said, ‘We just don’t believe that those BBB assets are Money Good. We don’t think they’re well-underwritten, and we think that if we do a CDO of those, that’s going to blow up completely. We were a little early in ’05, by not wanting to do those deals, and people were laughing at us, to be honest, to say, ‘Well, you’re crazy. You’re hurting your business. Why don’t you want to make…per-deal, you could make a million dollars a year.'”

“And did somebody do that deal?”

“Absolutely! Everybody!”


…by late 2006, the average home cost nearly four times what the average family made. Historically, it was between two and three times. And mortgage lenders started to notice something they’d almost never seen before: people would close on a house, sign all the papers, and then default on their very first payment. No loss of a job, no medical emergency: they were under water before they even started.

And although no one could really hear it, that was probably the moment when one of the biggest speculative bubbles in American history…popped.

Listen to the entire show at This American Life:
“The Giant Pool of Money”
May 9, 2008

Housing Price Bust Still Has a Long Way To Go

From The Economist:

By most measures, prices are still above the levels implied by the fundamentals. Using a model that ties house prices to disposable incomes and long-term interest rates, analysts at Goldman Sachs reckon that the correction in national house prices is only halfway through. They expect an 18-20% correction overall, or another 11-13% decline from now. But their models suggest that six states—Arizona, Florida, Virginia, Maryland, California and New Jersey, could see further price declines of 25% or more.

Ooh…further price declines of 25% (or more!)

Read the Full Story in The Economist
“Map of misery”
May 8th, 2008

An interesting point is that such a fall in Southern California (on top of the 20% fall we’ve already had) would be equivalent to a 40% drop from peak prices:

(1 – .20) x (1 – .25) = (1 – .40)

…which is the same most-pessimistic drop predicted by the most pessimistic of the industry analysts quoted in the Los Angeles Times article that I wrote about here a few months ago. It would mean that median prices here would fall from a peak of $505K to about $303K, which again, I have to say, sounds like the likely bottom to me.

Oh, man, watch out, the sky is falling.” –me, August, 2005.

Robert Reich on the Summer Gax Tax Holiday

Former Clinton Secretary of Labor Robert Reich weighs in on the odious Summer Gas Tax Holiday proposal supported by Hillary Clinton and John McCain:

The gas tax holiday is small potatoes relative to everything else. But it’s so economically stupid (it would increase demand for gas and cause prices to rise, eliminating any benefit to consumers while costing the Treasury more than $9 billion, and generate more pollution) and silly (even if she won, HRC [Hillary Clinton] won’t be president this summer) as to be worrisome. That HRC now says she doesn’t care that what economists think is even more troubling.

In case you’ve missed it, we now have a president who doesn’t care what most economists think. George W. Bush doesn’t even care what scientists think. He rejects all experts who disagree with his politics. This has led to some extraordinarily stupid policies.

…Even though the summer gas tax holiday is pure hokum, it polls well, which is why HRC and John McCain are pushing it. That Barack Obama is not in favor of it despite its positive polling numbers speaks volumes about the kind of president he’ll be – and the kind of president we’d otherwise get from McCain and HRC.

Haven’t we had enough of politicians who reject facts in favor of short-term poll-driven politics?

Read the full post on Robert Reich’s blog:
“Hillary Clinton Doesn’t Listen to Economists”
May 4, 2008