USA securitized assets – beware Option ARM’s!

Read today that there are heaps of Option Adjustable Rate Mortgages due for reset starting next year.

These are pretty cool but were abused.  They allow people to pay nothing for a period of time – just keep adding the interest to the principal until 5 years passes or the loan reaches 110% loan to value ratio.

Trouble is once it resets, the loan starts the principal & interest payments.  Today, with US house prices in the toilet in many parts of the country, most of these mortgages will be way underwater.  Add in rising unemployment and you have a recipe for another big mortgage problem caused by rediculous lending practices, naive or wishful borrowers and predatory lenders.

Its unbelievable what people will do.

6 true & faithful friends have I

What, who, where, when, how, why

Pass the Sangria Please!

Saw some stats today on Spain.  Don’t be fooled into thinking things are rosy there.  They have a million unsold houses available.  Unemployment will be heading to 25%.  Banks are in for some big strife there.

More sangria please!

RBA hitting the brakes?

Expect a tightening bias from the RBA and a rate rise in November and/or December.   Pulling back the stimulus is dangerous business.

Watch out.

Economic predictions – next 5 years

For Australia, I see the following:

1. ‘permanently’ higher unemployment of between 6% and 7% rather than the lows of around 5% recently experienced.  My forecast range is still a little lower than Australia’s long run average rate of unemployment

2. Real GDP growth of about 1% to 2%, driven by exports to Asia

3. Moderate inflation in the 2% to 3% range unless we get big spikes in oil prices; I am also watching the impact of carbon reduction efforts on end consumer prices as this could lift inflation a bit too

4. Savings rates will be higher, keeping a lid on discretionary consumer spending; hey, we boomers need to save and invest a bit more to ensure there is a decent pot available for retirement

5. Given item 4, I see consumer spending steady but not spectularly low or high.

6.  Asia is a big boost for Australia as the Asian domestic ecomonies grow over the next 20 years and they rely less on exports to the US, Europe & Japan.  This will take quite a while – remember that China still has about 1 billion people with a living standard about that of Nigeria.   China has a long way to go but wow, its going to be a real boost to Australia for a very long time.

7.  I can’t predict sharemarkets but today the US and emerging markets look like they could be a little ahead of themselves for this stage of the recovery.

Undercover Economist

Just finished the Undercover Economist by Tim Harford.

Its a very interesting read and will give you insights into scarcity power, tax and markets & auctions.

I recommend this book for anyone interested in everyday economics.

Green shoots!

Back in June I did a presentation on the economy.  Many factors I looked at were ‘less bad’, some even good.  The weight of evidence definitely suggested the wind was starting to turn, albeit plenty could still go wrong.

I still think we are heading in a generally positive direction.  I will post a link to the presentation shortly.

What’s your view?

Deflation or inflation?

Each time I lean towards the higher inflation, I read some very convincing piece about negative inflation.  This time a good paper by Dr Lacy Hunt & Van Hoisington.  Their arguments are quite convincing leaving me in two minds about how to allocate investments for what looks like another 6 or 12 months of very slow or even contracting economic activity.

Also interesting to note in their work was the Tax Multiplier – research has shown that each $1 increase in taxes reduces private sector spending by $3.  That sounds very bad given increased taxes are in the cards to help governments cope with their big deficits.

If I can’t decide which way this thing is going, I might try some strangle option positions…..

Recession – time to start a business!

Charles Revson started Revlon in 1932, the height of the Great Depression.  Who would have thought he’d be so successful?

Any one know other businesses started during the Great Depression or other periods of financial crisis?

More US Problems Coming

About US$1 trillion of what are called Alt A mortgages are outstanding.  These are what are often called Low Doc loans as the income of the borrower is not verified.  The lender relies on largely on the word of the borrower.

I have seen various surveys that suggest 70% of Alt A borrowers lied about their income, and they probably didn’t understate it.  Another suggested 25% of these borrowers overstated their income by 50% or more.

Watch out as the slowing economy starts to impair the ability of these people to pay and the housing slump reduces the value of the collateral further.  Its the next mortgage credit problem that will hit the US.  Hopefully the banks are making loan loss provisions and keeping capital in reserve to deal with this forth coming problem.

Sorry to be so negative but its going to be ugly for some time yet but we should see improvement, possibly starting in 2009.  In the mean time, cautiously look for opportunities!

Cheers

Tom the money man