Is there a light at the end of the tunnel?

[7:57] ..." into this -- a question number 2 well the story begins and housing market. And you could see the boom the bachelor and the bust in the housing market here. This is a very good measure national house prices this is the national. Five -- case Shiller index. Encompasses. About 70%"...

[13:01] ..." 228 loans two year fixed. Than. Turning into six month -- were adjustable rate mortgages. So all the loans originally notified had to reset their first reset in -- seven that's when interest rates were still hot with the merger lower rates. To the increase in monthly payments was recent stint about 350 bucks a months"...

[19:59] ..." said oh my goodness this this is -- release quite serious in stock market Kate and keep skating. The panic. And what has agreed to some degree we're pass through the worst of it -- say"...

[27:46] ..." that. Person she does every morning is read the Op Ed page New York Times which is okay. Because she cuts -- one of the now -- environment that's being an actor read them for a go to sleep which is you know quite painful. But in the last three to four weeks she's now turned her attention to the business page into three New York Times business page first as opposed to -- she read the Boston Globe first but. She's in your country here. Which. It's a"...

[29:35] ..." lead retailing by six months of what was going on in the housing market. Six months ago saying something about retailing today in what's going on housing market today is giving you forecasts for retailing the next six months. You can see the implicit forecast is. A bit disturbing one"...

[1:47]" You asked about my book. To find out. But I'll tell you what year but August 15 just keep that in mind okay how bad is it. Well it's bad we're in net in recession deep recessions concede yet. Clearly in the job market we've been losing jobs since the beginning of the year the shows the monthly change in payroll employment from January -- seven through October of 8. We've lost one point two million jobs since the beginning of the year in my judgment we've been recession since late 7. Think when the -- the recession you'll probably be October November of -- 2007 so. Rarity a year into this economic downturn which. Just as point interest that's the average length of the post World War II recessions -- we're already there. The job losses are very broad based across lots of different industries it's now easier to list industries that are still hiring. And that would include health care. Broadly defined. Most of educational services job growth is slowing but still positive and educational services but K through twelve a lot of that of course is demographically driven. A little bit of defense. Some technology. -- energy. Which reflects the previously high commodity prices. But that's it. Every every other industry now is playing off and increasingly more aggressively into the last two months. Job losses have been well over 200000 and initial claims for unemployment insurance. At least through early November suggest. That we will see another couple 300000 jobs lost in November. Maybe even may even be higher than that so the losses are intensifying. One of the hallmarks of this recession. Is how broad based it is not only across industries and it also occupations. But across country this is our assessment of which states are in recession. That are red. Thirty states in all -- recession. It's is. Our judgment based on looking at a plethora of economic data jobs in. Measure industrial production and income retail sales various measures -- activity. Series veteran orange they're at risk of recession not quite there yet some moral. And in recession the skirted. It's not states North Dakota Wyoming maybe Texas that would be that's the strongest economy in the country what state is still expanding. Alaska. An axis of course the effect. Lingering effect of the previously I. Energy purchased -- that. You concede to very broad based on Internet. Post news I think one of the reasons why consumer confidence is so low in previous recessions the the recession through very regionally concentrated. And people could move by the you go from. Where they were losing jobs to where there were job opportunities. So for example in the last recession earlier in this decade. California was a mess that people could moved to Phoenix or Tucson or Portland organ. But there -- those options today it really is no place -- and I think people understand that and that's. Psychologically very very disconcerting very good the rotating. But the other hallmarks of this recession is. That. Itself being led by over leveraged consumers. Past recessions. Have been precipitated. By over leveraged businesses businesses took on too much debt in the good times. When conditions turned. That he had to lay off workers and cut investment that. Led to the bombs self reinforcing negative cycle characterized as a downturn. That's not the case this -- around most non financial businesses -- Had had pretty good balance sheets. Coming into all of us. The problem is really consumers. And you can see that consumers are also are under significant amount of financial stress this is. Data based on credit files but take a randomized sample -- files in the country has maintained by bureau Equifax at the end of every month. The lasted -- couple years were the last week of October sues the very timely data very accurate data. It shows that 860. Billion dollars worth of household liabilities were in delinquency or default as of the last week of October. In this data set that's approximately seven and half percent of all liabilities and loses. This is everything's his first mortgages second liens. Credit cards vehicle loans student loans consumer finance -- it's a very broad based. It's it's it's though is that well like -- liability side of that of the household balance sheet. You'll know then everything is jumping. No sign of any stabilization. Thirty day delinquency 169120. -- rising. Very rapidly. In its -- all product lines credit cards. You clones of course first mortgages and secondly it's nothing is they're partners no sign of any stability here. -- losing to that is. Credit quality or is eroding. Again everywhere across the country either the in all the MSAs. That we look at. 380 -- cross country not a single one is experiencing better credit conditions. There if you were stable. Is mark in North Dakota San Antonio Texas -- But that's every every NSA is experiencing big increases in on delinquency. How bad is it it's. It's it's very difficult situation that the economy's. Deeply in recession. How we get into this -- a question number 2 well the story begins and housing market. And you could see the boom the bachelor and the bust in the housing market here. This is a very good measure national house prices this is the national. Five -- case Shiller index. Encompasses. About 70% of the nation's housing stock. You can see it is an index so it's equal to 100 at the start of the decade. House prices stood doubled essentially the first half of the decade peaking in the first quarter 2006. There are many reasons for the the boom in the bubble so many that one could write a book and as I said I did. And that's last time -- the book a promise. -- I tend the last word in in July it was immediately out of date so that new material. At a couple chapters. -- still -- the reasons and just down to three. Just for brevity sake. Reason number Ryan the process of mortgage securitization. Is fundamentally flawed broken. That's the process of taking global investor dollars turning them into mortgages for US homeowners. But no one in the process was responsible for making sure that. Loans that were being made good loans. And that includes everyone in the process -- the lenders mortgage lenders. The investment banks the package the loans the rating agencies that rated the securities. The regulators. And the investors themselves who didn't do either due due diligence Nolan nature. Was was it empowered with the responsibility of making sure that the long -- good ones and so millions of bad loans from eight. Second reason lack of regulatory oversight. This was that that the -- part of this decade. This is the apex of deregulation. Which began in the Reagan administration. Which at that time probably was a very good thing and -- system is arguably over regulated. The stifling -- litigation is leading to higher cost for financial products. Minority groups and -- inch groups couldn't get access to credit. And whose whose could that the system is being deregulated. But by the -- part of this decade at the bubble the pendulum had swung too far in there was very little if any regulatory oversight. In lenders for setting up corporate structures so that they could avoid any kind of regulation and as a result. The engaged in very gracious kind of lending activities and of course resulting in the mortgage problems are experts right now. Through reason. I Hoover's you know out of -- without ever confidence. Prices house price is rising strongly. Beginning early in the decade. To get to three years of very strong house price growth people start forecasting with the ruler. Expecting strong price gains ad infinitum into the future. Which you buy into that kind of forecast and you do silly things you flip homes you don't. Great properly you don't regulate you know you to do things. So Hoover certainly as part of this that's how we got the bubble. We're now the best at prices are down there over 20% from their peak and you can see that they're back to where they were. In 2000 force and anybody who bought a home and didn't put any money down. Or put very little down is now under water meaning that the a value of their home is less than the mortgage debt they -- on their home. Which is a necessary condition Ford default notice fishing conditioning needs some kind of pursuit pertaining event lost job on it and it increased unexpected increase. Expenses. But it it's a necessary condition and we now have. Millions of homeowners out there that. Our underwater. Are the best and housing values has precipitated -- hate -- mortgage crisis. Which you can see here of first mortgage loan defaults have gone skyward. This again is based on credit file data. I don't think they got yet to regaining -- know. As of October there were two point nine million loans. In default which is the first step in the foreclosure process. 30609120. -- notice of default. That's what this data showing in the foreclosure process starts which varies quite a bit across country. Outrage when a foreclosure was only six that was early payment to -- those are the folks that we're flipping. When the market turned in a six they realize it could make note a block the that is literally turned to keep back to land without making -- a mortgage payment so the defaults. Came on unexpectedly quickly very surprising. 7 was the second wave that was the sub prime reset. Who five sub prime loans. These are 228 loans two year fixed. Than. Turning into six month -- were adjustable rate mortgages. So all the loans originally notified had to reset their first reset in -- seven that's when interest rates were still hot with the merger lower rates. To the increase in monthly payments was recent stint about 350 bucks a months that they -- 1200 bucks months and 1550. Bucks a month. That was too much financially untenable. Resulted in in default. Course Rachel and now people are hitting resets that that really isn't as big an issue the real issue now. Is wait three which began at the start this year and that is the negative equity all the homeowners that are the millions of homeowners that are under water. Combined with rising unemployment. Which is precipitating -- the necessary condition in underwater homeowners and eight a series of fishing conditions for default and rising unemployment. And you can see it's the very significant foreclosure problem. This is. Undermine the financial system. The losses. On these mortgage loans. It's undermining the system's capital base. You see here my expectations for losses as he needs some is going to have to digest. On NASA's that it originated from 2004. Q one through 2007 Q forms in billions of dollars. A broken down DO Los estimates in two banks. That's the first bar. It's everyone from JPMorgan to. Two it suntrust -- financial would be hedge funds pension funds insurance companies government that would be female a Freddie Mac in the FHA he took the bars -- believed to about one point three trillion dollars. This feels low. There are few other folks that do these estimates the IMF World Bank. Couple recommendations. And their -- now higher than my estimates that but some burnout ranging up to two trillion dollars -- losses. I just you context there's 27 trillion dollars in credit market entrants outstanding so. I get a sense of the magnitude of some of the losses. -- the -- probably represents losses on residential mortgage assets its loans and securities. You can see I like it there in the back of the envelope calculation in the chart. Estimating that there were roughly fifteen million sketchy loans made. A during the boom and bubble d.s are loans that are high risk of default 3% those who go through the entire foreclosure process. -- defaulting goes through to foreclosure sale so that six million moms. That the foreclosure sale of the mortgage owner will lose roughly half the mortgage balance so. Most the the average mortgage balance origination was say 200000 dollars. We'll get back -- K in the foreclosure sale. After -- all the expenses involved in recorder. You can see the total losses. Are roughly 600 billion. The good news is that the right doesn't financial system. Are just about 600 doing a little overs of the system has done a pretty good job marking its residential assets in my view to. A reasonable estimate of expected loss. Unfortunately. Other Rosser -- in the system has yet to fully write down. Of those assets. And you can see. The include consumer loans that's vehicle loans and credit -- primarily. Commercial mortgage loans which now is causing all kinds of -- system. Some -- some commercial mortgages are already defaulting very rapidly. That's on everything from apartment buildings to retail space to hotels. Office space corporate debt that would be junk bonds and corporate bonds yellows. Seen island so treatment. But it's hard to pinpoint exactly when the financial crisis which began really in the -- said in. Turned into a financial crisis a financial panic. I think. Panic describes. What we've been in since early September there's an element of the fear panic irrationality to a if I had to identify the event he would be the day that the Treasury Department nationalize Fannie Mae and Freddie Mac. -- now arguably that was a reasonable thing to do. There. Sure which treasury in effect got into the balance of these institutions to look they thought they were barreling towards insolvency. So but when that when they when they did it I think -- crystallize in the minds of all investors that no financial institution was state. That every institution was in play in in in in fact the very next day after the nationalization nationalization occurred. Over weekend on that Monday Lehman Brothers was implied that the broker dealer. In Lehman's problem really wasn't liquidity the could avail themselves of facilities credit facilities -- established after the collapse of Bear Stearns. Really lose. They're probably was that there -- there counter parties didn't want to do business with them and if if they did business with them they wanted significant more significantly more collateral. So for example JPMorgan Chase required Lehman put up another five billion collateral to sperling indeed traipse through. Through JPMorgan. Course that was too much that. Push them towards bankruptcy. By the treasury decided this point 92. Save Lehman from bankruptcies that this was there -- line in the proverbial that the proverbial line in the sand they. You figured they couldn't be -- everybody in this would be pleased to. Make that point. Which at the time again might have been reasonable thing to do. But unfortunately there's collateral damage in most significant damage was to a mighty big money market fund that held Lehman paper. A ready market and the value that paper when they did they broke the buck that means that the value their assets the problem with the of their investors. And that I think it was psychologically too much for mom and pop investor who thought. Who think that it and I think that money market funds are one step removed from the mattress and you're telling them they're not. Induces. Focuses on it now and saw tremendous redemptions from money market funds almost immediately. And this is where the financial crisis and it. Jumped to the real economy. Because money market funds are key buyers commercial paper they own about 40% of all. A CP outstanding and commercial papers. A short term I use that big companies issued to finance themselves short run they needed to. And its inventory net exporters some music to make payroll. If they can't issue CP then -- can quickly. Bond and operational difficulties -- have to shut plants shut facilities. Those operations. Equity investors said oh my goodness this this is -- release quite serious in stock market Kate and keep skating. The panic. And what has agreed to some degree we're pass through the worst of it -- say that. With a great deal interpretation given what had in the history in the equity market. But it it feels like we're past the worst of the best measure of that. The -- in the system. Is that the so called Ted spread this is the difference between three month Libor instrument eagle. Libor is the interest rate that banks charge each other to borrow and -- for me lend to each other. Treasury bills obviously there are the risk free rate so the difference represents. In this sense the -- in the banking system you know what premium risk premium banks are asking of each other to lend to each other. He and you can see that the Ted spread has gone skyward in this crisis. Actually. The peak in the Ted spread back in early October it was foreigner and 64 under 65 basis points. -- point 65 percentage points. I cut that off because fight if I hadn't been -- of these other crises would have look like crises. Nature they were crises. We're now down to as of yesterday 211. Basis points two point 11 percentage points. Which is. Obviously better. But it certainly not good. Normal would be well below 100 basis points one percentage point. And we're far from that so this this crisis this panic. Continues on its not over. And as long as it continues. The economy's prospects grow darker now. I've now completed the answer to question number two billion in this mess. I'm going to now enter into question number three what's the economic fallout in the working assumption. Here with respect to the fallout is that the financial panic. Will fade in fade relatively soon over the next. Couple three months not that the crisis way and but that justice served raw panic out there will will be in debate people just won't be selling just get out there. -- that is that the key working assumption obviously key risk. So what is the economic fallout is very serious I think -- recession which began a year ago continue for another year at least. -- he got here this is real GDP growth quarter inquiry annualized Q when you eat through fourth quarter of 2010. You can see that GDP real GDP fell a bit in Q 3 wait that's history. I'll probably be revised to lower. You can see -- for a away now expected to be almost down 4%. In the current quarter. In paddy fields have been optimistic at this point down 4%. The other 2% decline roughly Q 19 and another small declining cute -- on -- nine. Then we get that growth by the into the nineties two thousand ten. This for context. Trend growth is somewhere between two and half in 3% so. We may need that kind of growth to just to maintain the the unemployment rate. He needed consisting growth above that to bring unemployment rate down to this this which suggested unemployment is going to rise. -- well into 2010. In Calgary today it's six point 5%. I expected to peak. Somewhere north of 8%. Sometime in early 2010. It won't decrease your -- fall until we get into 31. And twenty well. And I you see that with trepidation he too feels optimistic that at this point -- time. Our earth both murky links between what's going on in this the next system in the economy link relatives. It's shutting down on the availability of credit the credit markets there's too broad sources of credit. The credit markets the bond market in the banking system. The credit markets. Are completely shut down you can see that with resident residential mortgage securities here. -- is issuance of private label mortgage securities a sub prime alt A Jumbo loans. You can see that it's come to a complete standstill zero issuance of the last 34 months. Commercial mortgage securities issue it's zero last couple 34 months. Junk bond issuance junk corporate bonds are below investment grade corporate bonds zero issuance. Asset backed securities Beazer securities issued to finance and credit card loans vehicle loans. Basically zero talking in the -- CEO. -- before yesterday said. Did find 1500. Million dollar deal that was done in the last three weeks satcher who did the deal -- At least that's the rumor. The context last year in October 50 billion dollars worth they PS was zero or 500 million dollars worth mr. Emerging market debt. And -- investment grade debt. You municipal bonds all severely disrupted. Banking system isn't survival. Bank lending continues. A lot of that however I think is a banks are are. Businesses and households drawing down existing credit lines. Because banks are tightening up -- you credit. -- see that here from a survey conducted by the Fed. -- asked senior loan officers at major commercial banks every quarter are they. But tightening are using their underwriting standards relative to the standards that replace the quarter before. This shows the net percent of lenders that are tightening their standards on scene islands as commercial and industrial loans that's loans to business. Mostly small and insight is business commercial mortgage loans us the red lining credit cards -- conceit. The net percent that are tightening is up as -- as it's been since the savings and loan crisis of the early 1990s. Partners' -- question the Fed's been asking since the sixties that is are you willing to make consumer loan. -- as low as it's been. Ever been except for one quarter. The second quarter of 1980. In Jimmy Carter imposed credit controls. So by law lenders -- I just it's so. Like one is credit for the elderly credit has been. Curtail this isn't going to be fixed easily credits not going to flow easily. For quite some time in that suggests that the economy's. Prospects. Be prepared for -- Second fact a second leg is confident it's been completely shattered. Consumer confidence that I. Almost any surveys as long as it's ever been business confidence also completely eviscerate it. The national federation of Independent business survey small businesses is at a record low but it's pretty close. Zero and survey from the dismal scientist website I asked nine different questions of the participants. Everything from rethink the world's going to look like in six months to are you hiring people -- the net percent of positive responses to all nine questions. We we have several hundred participants every week he concedes it is completely collapsed. Last week it today in the time all time low. Previous lowest. But within that we you're invading Iraq in March -- April 2003 so -- And good barometer for me accomplices. Is is my wife she's a lunatic liberal that. Person she does every morning is read the Op Ed page New York Times which is okay. Because she cuts -- one of the now -- environment that's being an actor read them for a go to sleep which is you know quite painful. But in the last three to four weeks she's now turned her attention to the business page into three New York Times business page first as opposed to -- she read the Boston Globe first but. She's in your country here. Which. It's a bad sign if she's -- business page. She's panicked. Pass a second away it is competence and again I don't I think this is scoring event I don't think we get by this very quickly I think this is a going to dampen. People's moods for. For a long time to come and therefore there ability and willingness to spend. Third third like as well we're and that class wealthier. Then we will. And we will be a lot less wealthy for a long time to come a long time to come household net worth as of yesterday was down thirteen trillion dollars from its peak. -- being just about a year ago. A four trillion that thirteen trillion dollars housing wealth the -- stock wealth. I can see the relationship between. Well and spending. -- here. I think ocean is due before. Keep showing it to you -- breaks down. But it it's not -- and very firmly. The Blue Line right -- was the growth in retail sales core retail sales excluding vehicles in gasoline so this is. This is good proxy for Christmas sales I've taken three month moving average of the did to -- that the volatility bit. I asked price growth is the Red Line left hand scale -- cheers and house price. Prices lead retailing by six months of what was going on in the housing market. Six months ago saying something about retailing today in what's going on housing market today is giving you forecasts for retailing the next six months. You can see the implicit forecast is. A bit disturbing one and 2%. A nominal retail sales growth. Given that. Who were by retail sales price inflation is about 2% at the moment. That means that real retail sales will be negative and -- will be the first time that's happened. Since Christmas 1992 when you can see a second get any better in early 2009. Obviously very simplistic kind of analysis but I -- the point. That the wealth effect he's going to be very significant. We were -- the next well for foreseeable future in another reason to suspect that. That economy's not going to Fortis -- And -- skip."