Eye of the Storm
- Thread starter keithj
- Start date
Very presumptuous saying that we had survived the banking/financial crisis given the number of failed & problem banks were still increasing in the US when you wrote this post, now things are much much worse.
This is definitely the eye of the storm. This is a great depiction of the eye (though no guarantee this will definitely be the catalyst as there are other things that could set off a large negative chain of events):
http://www.economicpopulist.org/files/images/arm_reset_schedule.jpg
You will note that we are right in the middle of these resets...between subprime and options arms/alt-a.
How are these loans performing (those coming up for reset)?
Moody’s Links Option ARM, Subprime Performance
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How much of this do you feel is already priced in ? The effect of Subprime resets was unknown back in 2007. The imminent Option ARM resets over the next 2 years is a 'known known'. I'd expect that event to have been priced into expectations many months ago.Very presumptuous saying that we had survived the banking/financial crisis given the number of failed & problem banks were still increasing in the US when you wrote this post, now things are much much worse.
This is definitely the eye of the storm. This is a great depiction of the eye (though no guarantee this will definitely be the catalyst as there are other things that could set off a large negative chain of events):
Of course, there is a possibility that the upcoming resets will cause another crisis, but I feel since everyone knows the resets are going to happen, and we have a reference event (from Subprime) to show the possible effect, that the probability of it actually having the same effect is small.
US house prices have risen for the last few months, sales volume is increasing too. Most commentators expect the housing market to have already bottomed or to bottom by early 2010. The Option ARM reset event is a small (albeit negative) piece of the bigger picture.
hobo-jo.. what probability do you place on Option ARM resets causing another financial crisis ? 100% guaranteed ? or somewhat less ?
I agree; I think the option ARM resets is an entirely different kettle of fish and has largely already been factored in to forecasts.
1) The mortgagors are a different set of people - subprime is a market inherently more risky than regular full doc variable mortgages with a honeymoon rate.
2) As keithj has highlighted, the option ARM resets have been on the radar for at least a few years; the subprime resets wasn't widely acknowledged as a potential disaster.
3) The magnitude is smaller (ie volume of option ARMs vs subprime).
Hobo-Jo,
You're forgetting the most important variable with all these new resets, and that is the "price" they are resetting to.
I read recently, that the US zero cash rate policy means most of these new resets to come are actually resetting to much the same variable rate now that they were on as a teaser rate. i.e. No change. The issue with the sub-prime resets was that they were all resetting to higher rates which meant the borrowers couldn't service the loans which flooded the market with forced sales. The situation this time around is completely different. To start with, the loan quality of these Alt-A and Option ARM resets is much better and the reset rate is much more accommodating.
Don't get all carried away with the new age doom and gloom crowd. This time through won't be nearly so painful as the initial explosion of sub-prime due to its completely different loan profiles.
Cheers,
Michael
You're forgetting the most important variable with all these new resets, and that is the "price" they are resetting to.
I read recently, that the US zero cash rate policy means most of these new resets to come are actually resetting to much the same variable rate now that they were on as a teaser rate. i.e. No change. The issue with the sub-prime resets was that they were all resetting to higher rates which meant the borrowers couldn't service the loans which flooded the market with forced sales. The situation this time around is completely different. To start with, the loan quality of these Alt-A and Option ARM resets is much better and the reset rate is much more accommodating.
Don't get all carried away with the new age doom and gloom crowd. This time through won't be nearly so painful as the initial explosion of sub-prime due to its completely different loan profiles.
Cheers,
Michael
Thanks for the links,i'm not too sure about the eye of the storm, you have to see through the media spins as most of it is useless info,just investing journalists with their opinions,but one item is starting to stand out again the engine of growth in China is starting to pick up again so anything to do with miners will do well over the next 5 years..imho willair..
I'm with Keith, it's the unknown unknowns that will hurt us, or as Baz Luhrman puts it a bit better:
"Don't worry about the future, or worry, but know that worrying is as effective as trying to solve an algebra
equation by chewing bubblegum.
The real troubles in your life are apt to be things that never crossed your worried mind: the kind that blindsides you at 4pm on some idle Tuesday."
"Don't worry about the future, or worry, but know that worrying is as effective as trying to solve an algebra
equation by chewing bubblegum.
The real troubles in your life are apt to be things that never crossed your worried mind: the kind that blindsides you at 4pm on some idle Tuesday."
Great to see we're all open to mature adult discussion here
Priced into what keithj? I would say the general stock markets do not accurately reflect the danger that awaits, if you'd asked me at the March lows I might have agreed it was priced in, but not after a 50% rally. Has US housing priced it in? Possibly, but there is a lot of housing on the sidelines being kept off the market artificially by the US banks to avoid their assets being revalued and because more stock on the market will drive prices down further...
How much mainstream attention is there to the upcoming resets? Enough for the retail investor to be fully aware of the implications? Do a test yourself...ask around some friends whether they have heard of either subprime or option arms mortgages...do you think they will have heard of both?
Subprime more risky? With early indications of a 40% default rate how much riskier do you think subprime really was?
End of the day with or without a job if your house is worth half what it was when you bought it you are going to be tempted to hand in the keys if that option is available.
Alt-A as I understand it is actually larger than subprime, google "mr mortgage subprime vs. ALT-A" where the guy goes to the Fed website to bring up the actual data on size of the loans, etc. Interesting stuff.
This is a clip out of the article I linked above:
Can you provide a link re loans resetting to much the same as they are now?
The problem is that subprime, commercial and other issues are all still working their way through the system, Alt-A/Option Arms don't need to be as big as subprime to cause as much or larger damage to the system.
To dismiss these and other risks that are building on the sidelines would be foolish. Exactly how much effect these issues will cause on the Australian housing market is yet to be seen, but I think anyone expecting any real growth over the next few years is kidding themselves.
Sure!
But a quick Google would have given it to you. Google "Alt A Reset Rates" and its the first link. Its not exactly "hidden, secret squirrel stuff"...
The "Coming Alt-A Mortgage Reset Bomb" Is A Myth
Business Insider said:
Don't lose too much sleep over it mate. You're suffering from D&G Hysteri-opia. Nasty little disease, but nothing a good little lie down over a book of hard facts can't cure...
Cheers,
Michael
Thanks for the link, will have a closer look tonight, but have to wonder why you have the interest in Gold if everything is so rosy...Sure!
But a quick Google would have given it to you. Google "Alt A Reset Rates" and its the first link. Its not exactly "hidden, secret squirrel stuff"...
The "Coming Alt-A Mortgage Reset Bomb" Is A Myth
Don't lose too much sleep over it mate. You're suffering from D&G Hysteri-opia. Nasty little disease, but nothing a good little lie down over a book of hard facts can't cure...
Cheers,
Michael
I don't believe the D&G syndrome has me, I just think that in the face of reality and the largest crisis/credit bubble we've seen since the great depression that I don't expect it to be over in 18 months like everyone else seems to...
Quant easing and a devaluing USD. The US economy is still in dire straights, regardless of pending resets. They're going to be over-stimulatory for all of 2010 and maybe a touch more. Commodity bubbles will ensue...
Here's some more insight out today:
Bubble or Bull Run?
Business Spectator said:
They're pump priming and there will be bubbles forming in asset categories all over the world as a result. The only way a country can avoid having bubbles form domestically is to raise their interest rates to stave off speculation. The problem with that is it forces price appreciation in their domestic currency as the interest rate differential to the USD enables a carry trade. The RBA has started raising rates to stave off local bubbles, and can do so from a position of strength with relatively strong employment figures. Not all other countries can do so. If their currencies appreciate then the terms of trade diminish for them which they obviously don't want.
Interesting times ahead, but a hell of a lot of stimulation out there at the moment. You want to be invested in that sort of market. As the experts say: the cash rate setting will cause speculation. Derr, and it isn't going to change until the cost of speculation as represented in borrowing rates increase.
Cheers,
Michael
In my opinion Gold is moving more due to it's take up as a monetary/reserve role (by India, China, Sri Lanka, Russia), and as a safehaven from paper currencies, not because commodities will do well from stimulus $ (although it's probably a contributor), I think this will become more obvious as Gold rises a lot more strongly than other commodity based assets over the next couple of years.
IMO opinion if you are looking for commodity based assets then you would surely be better off looking at wheat, corn, surgar, etc as many businesses have been affected by the GFC unable to produce as much and reducing supply...
But then we both really know that the Gold you hold is not (only) because commodities will rise...there would be no need to hold it physically if that's the only scenario you see playing out
Stock market (US & here), house prices (US & here & elsewhere).
Why not ? The stock market looks ahead by 12 months or so... its' level today is closely based on what the market thinks will be justified in 12 months time.
OK, so if we accept that houses are being kept off the market to 'artificially' keep prices high, then that is the reality. So why put that fact in a different basket from other facts... like the fact that house prices have risen in the US for the last 5 months ? My mate is keeping one of his IPs off the market until prices get better - is that artificial or reality ? Who cares - the end result is what is important... and this is that US prices have been rising for 5 months, in sharp contrast to the previous 18 months.
I'd agree, v. few members of the public would be aware of Option ARMS resets, and v. few of them have any control over the level of house prices or stock markets. However, the people that matter (with the big $$$) will be v. aware of the implications & will have priced it in.
lol that's a pretty big generalisation. Where did you read that?
I guess they got it pretty wrong in March this year, as well as the peak in 2007, if that's the case...
The people with the big/smart $ are either selling (google "insider selling") or in the case of large investment banks they will ride the trend with their program/high frequency trading systems which give them the advantage which ever way the market is going. Otherwise what big $ are you talking about?
Yep, it's a generalisation, and it generally correct.
This is one of those comments that makes things seem either black or white..... You appear to be saying that the market was wrong in March, so it can never be trusted to be right. I'd be more inclined to generalise and say that historically the market has been more right than wrong, and that's likely in this case too.
'insider selling' found 40M+ results, was there one in particular that you though relevant to this debate on the expiry of Option ARMs ?
... and are therefore irrelevant to this debate.
Anyone with $100M+ to invest somewhere. Your average Ma & Pa commsec trader (who knows nothing about Option ARMs) doesn't move the market much. It's the smart guys (who are fully aware of Option ARMs reset dates) with the big $$$ that do... and they appear to be saying she'll be right regardless of some peoples single minded fear of a known known.
I'm still holding to this outlook, so far it has provided a successful investing strategy for 2009 and i think it will hold into 2010 as well.
and this. Again this has pretty much dictated the trading patterns of the market this year.
http://www.reuters.com/article/idUSTRE57D49S20090814
http://money.cnn.com/2009/09/10/news/economy/insider.sales/index.htm?postversion=2009091107
It has nothing to do with option arms really, it was simply a counter to the tangent you took us on when you said the coming issues are priced into the market at these levels.
Anyway enough of the games, it comes down to this: The crisis that lies ahead of us should be of far greater concern than those obstacles we've already passed. Not only because of the magnitude of these issues which in some cases are larger than those already faced, but because globally markets and our economic systems are already heavily weakened by the events of the last 18 months. A lot of the problems have been swept under the rug (e.g. change to accounting rules in the US) or simply had government intervention/money thrown at them. There is still no permanent fix in place to solve the underlying causes of this mess. Can anyone here give me an idea of how they expect the US to climb out of the pit that is their ever increasing debt?
Anyone that thinks that we are on the road to (global) recovery is clearly getting brain washed by MSM and are not carefully considering real data and the facts. The markets have been driven predominantly from liquidity added to the system through bailouts, cash injections, etc, when these artificial drivers are removed and further serious issues arise I believe we will test if not break through the March 2009 lows. There is potential for a drop like this to be prevented but in my opinion would take a considerable amount more stimulus/printing and this would simply cause other problems or draw out the length of time before a real recovery. Your initial question was "is this the eye of the storm"...I believe it is and within 12 months that will be blatantly obvious even to those that keep their head in the sand and don't look at the bigger picture.
Oh really?
What investors with $100m+ are sinking their dollars into the general market at these levels? Can you name one?
I can tell you where the leading hedge fund managers are placing their bets...
The next 12-24 months will be interesting. I will be sure to bump this thread as things progress...
hobo-jo;614392 Oh really? :rolleyes: What investors with $100m+ are sinking their dollars into the general market at these levels? Can you name one? ...[/QUOTE said:
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