Those most pessimistic on the economy and stock market have been proven right over and over again over the last year and a half, with those who listened to their calls for caution preserving their wealth instead of watching it evaporate, which has been the fate of those following the permabulls. Wall St. economists, financial pundits, and government talking heads have been dead wrong and led many astray, though what has been most surprising is that investors continue to follow the advice of those who didn’t even see this train wreck coming, with examples provided below.
Bernanke: There's No Housing Bubble to Go Bust
Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.
U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.
Nell Henderson
Washington Post, October 27, 2005Greenspan sounds optimistic note on housing
Former Federal Reserve Chairman Alan Greenspan said that last week's rise in weekly mortgage applications could signal that the ``worst may well be over'' for the U.S. housing industry, according to a report of a speech Greenspan gave in Canada on Friday.
John Shinal
MarketWatch, October 7, 2006
Compare those comments to those who were laughed at with their dire projections last year who have been proven right, such as NYU’s Professor Nouriel Roubini, who argued early last year for credit losses north of $1 trillion.
As I argued in writings last February such credit losses would be at least $1 trillion and could be as high as $2 trillion, well above the $300 billion of subprime writedowns that have been recognized so far. At that time the $1 trillion estimate was considered as lunatic but by now the IMF estimates these losses at $945 billion, George Magnus of UBS estimated them at $1 trillion; Goldman Sachs put them at $1.1 trillion, the legendary hedge fund manager John Paulson (who made last year $3.5 billion of income on shorting subprime) put them at $1.3 trillion; and a couple of days ago Bridgewater Associates estimated such losses at $1.6 trillion. Thus, as I argued then $1 trillion would be floor, not a ceiling, to such credit losses.…
So brace yourself for a severe recession in the US and other advanced economies, a serious global growth slowdown and a systemic financial crisis. The worst is ahead of us rather than behind us and the financial and equity markets complacency and sucker’s rally that – in April and May - followed the Bears Stearns creditors rescue and the Fed bailout of non-bank broker dealers (the PDCF lender of last resort support extended to primary dealers) was gone by June with stock markets now back to bearish 20% plus downward adjustment.
Nouriel Roubini,
Nouriel Roubini's Global EconoMonitor, Jul 9, 2008
Frank Barbera, who writes the Tuesday Observation, has long warned FSO readers of the impending trouble facing the economy and financial markets as a few of his archived examples illustrate:
- 01/30/2007 The Great Credit Bubble: What Could Go Wrong?
- 02/27/2007 Tracking the Perfect Storm
- 05/22/2007 Tales of a Rolling Boulder
- 05/29/2007 Tempting Fate: The Return of the Bear — Part II
- 06/19/2007 The Top Ten Signals That Global Stock Markets Have Topped
- 06/26/2007 Signs of a Gathering Storm
- 07/24/2007 Bearish Divergences Abound
- 11/06/2007 Banking Crisis — What Banking Crisis?
- 11/27/2007 Financial Upheaval: Building Downside Momentum
- 01/15/2008 Bear Market In Force — C-YA!
- 05/20/2008 Battlestations! S&P in Topping Mode
- 07/01/2008 Danger: Open Trench
One of the main points that the pessimists seem to grasp is that the debt binge of this decade got way, way out of hand and would have major repercussions for both the economy and stock market. For example, bank credit as a percent of GDP rose to more than 60%, nearly three and a half standard deviations from the long-term average of 44% as lending standards fell by the wayside.
Source: Federal Reserve/BEA
Though default rates are still low relative to the last two recessions, the key point is that these defaults rates apply to loan levels that are three to five times the size of previous recessions and are still accelerating. What has many of the pessimists concerned is what the fallout would be if default rates reach the levels seen during the last consumer-led recession in 1991 as overall bank credit has significantly expanded.
For example, FDIC commercial bank residential and commercial real estate noncurrent loan rates are well below levels seen in the 1991 recession, though the value of loans outstanding has expanded significantly over the last two decades. The result, even though noncurrent loan rates are still low, the value of real estate loans in noncurrent status is approaching levels seen back in 1991. If noncurrent loan rates reach 1991 levels or higher, the financial fallout will be devastating and we will continue to see more financial writedowns ahead.
Source: FDIC Quarterly Statistics on Banking
Source: FDIC Quarterly Statistics on Banking
Source: FDIC Quarterly Statistics on Banking
The current stress in the financial markets is unparalleled to previous financial crises. Commercial and investment bank stress can be seen when looking at depository institutional borrowing from the Federal Reserve, which is off the charts. What’s more, the Federal Reserve has swapped its balance sheet with Wall St. by exchanging its U.S. Treasury Securities for mortgage-backed securities that can’t find a bid. Unprecedented credit lending has led to unprecedented losses.
Source: FRB
Source: Federal Reserve: H.4.1 Factors Affecting Reserve Balances
Outside of the financial economy, things aren’t looking much better either as both personal and business bankruptcy filings have roughly tripled over the last two years and show no sign of slowing.
Source: Administrative Office of U.S. District Courts
Source: Administrative Office of U.S. District Courts
As both the economy and the financial markets have deteriorated over the last year, the Federal Reserve and government have stepped in to bring stabilization; the Fed by lowering interest rates and the government through its stimulus package. However, their collective efforts have actually brought a destabilization to the markets as the U.S. dollar has deteriorated significantly as is shown below with the U.S. dollar falling relative to a basket of currencies, even the Mexican Peso despite the so-called “STRONG DOLLAR POLICY.”
Source: U.S. Board of Governors of the Federal Reserve System
The credit excesses built up over the past three decades cannot be simply swept under the rug and will continue to plague both the stock market and economy as the financial excesses are wrung out of the system. Signs of stabilization remain absent with the path of least resistance still pointing south. As such, the drumbeat continues to remain capital preservation, not capital appreciation.
