Are we through the worst? There’s decidedly mixed messages coming out of Wall Street this week on whether or not the fallout from the housing depression will continue. Banks are approaching the $250 billion mark in writeoffs so far, and the question is “How much more is coming?”
That depends of course on who you ask.
If it’s Bubblemeister Greenspan, the answer is soon, as I pointed out yesterday. But if you ask the International Monetary Fund, they’ll tell you an alarmingly different story.
The International Monetary Fund said financial losses stemming from the U.S. mortgage crisis may approach $1 trillion, citing a “collective failure” to predict the breadth of the crisis.
Losses approaching the Roubini Line: $1 trillion. Economist Dr. Nouriel Roubini was talking about losses in this range well before anyone else was, his Global EconoMonitor site continues to have some of the best analysis of the situation in general, but the bottom line is if the IMF believes the losses are approaching the Roubini Line, we’re in bad trouble.
Falling U.S. house prices and rising delinquencies may lead to $565 billion in mortgage-market losses, the IMF said in its annual Global Financial Stability report, released today in Washington. Total losses, including the securities tied to commercial real estate and loans to consumers and companies, may reach $945 billion, the fund said.
The forecast signals the worst of the credit crunch may be yet to come, because banks and securities firms so far have posted $232 billion in asset writedowns and credit losses. Policy makers, concerned that lenders’ deteriorating balance sheets will hobble economic growth, are pushing companies to raise capital.
“The current turmoil is more than simply a liquidity event, reflecting deep-seated balance-sheet fragilities and weak capital bases, which means its effects are likely to be broader, deeper and more protracted,” the report said. The fund warned of the risk of “a serious funding and confidence crisis that threatens to continue for a significant period.”
Morgan Stanley Chief Executive Officer John Mack told shareholders at the company’s annual meeting in Purchase, New York, today that the credit crisis will last “a couple of quarters” longer.
That’s being optimistic, frankly. Roubini has openly said that a trillion in losses would be a best-case scenario and that the actual losses may in fact be far worse.
Keep in mind the same IMF was saying this 12 months ago:
In April 2007, the fund said there was little risk of a “serious systemic threat.” It also said that “stress-tests conducted by investment banks show that, even under scenarios of nationwide house price declines that are historically unprecedented, most investors with exposure to subprime mortgages through securitization will not face losses.”
Quite a different story now, eh? Things will get worse before they get better. The President has always trumpeted how small businesses have been the cornerstone of the “job growth” in this country. And if this is any indication, those same small businesses expect real trouble ahead.
A gauge of small business optimism in the United States sunk in March to a 22-year low, as small business owners clamped down on plans to create new jobs and expand business operations, a survey released Tuesday showed.
The index of small business optimism fell 3.3 points in March to 89.6, the lowest monthly reading since the surveys began in 1986, the National Federation of Independent Business said.
“We are seeing recession readings,” said NFIB Chief Economist William Dunkelberg in a statement.
The decline was driven by a sour outlook for business conditions and real sales growth, accounting for half the decline in the index, the group said. Weaker plans to create new jobs accounted for 21 percent of the decline.
During the next three months, 3 percent of the owners surveyed plan to create new jobs, down 8 points from February and the lowest reading since March 2003, NFIB said.
“Reductions in employment from layoffs and terminations eased from February, but the sharp decline in job creation plans does not bode well for economic growth in the near term,” Dunkelberg said.
Most of the jobs created in this country, upwards of 90% of them, are created by small businesses. If they are cutting staff and not hiring, unable to expand due to the credit crisis, then America’s in a world of hurt.
Meanwhile home sales have hit a record low.
The number of Americans signing contracts to buy previously owned homes declined more than forecast in February, indicating no sign of a bottom in the U.S. real-estate recession that is entering its third year.
The National Association of Realtors’ index of signed purchase agreements decreased 1.9 percent to 84.6, the lowest reading since records began in 2001, the group said today. The drop follows a revised 0.3 percent increase in January.
The continued slump in sales may spur further declines in property values, worsening the slide in mortgage securities that has already caused $232 billion of asset writedowns and credit losses. Traders anticipate the Federal Reserve will have to lower interest rates by at least a quarter point this month to cushion the economy’s downturn.
“Looking for a bottom in housing is a little premature,” Drew Matus, senior economist at Lehman Brothers Holdings Inc. in New York, said in a Bloomberg Television interview. “Prices are likely to come down and we expect that to continue for some time.”
Economists had forecast the index would fall 1 percent from an unchanged reading previously reported for January, according to the median of 29 estimates in a Bloomberg News survey. Projections ranged from a decline of 1.5 percent to a 1.5 percent gain. Compared with a year earlier, the measure was down 21 percent.
The numbers keep telling the story, and the story is that things are going to continue to get worse, until something finally breaks. The Fed is rapidly running out of money to throw at the problem and rate to cut. The worst losses are still yet to come and only have been dammed up by the Fed’s flow of money. When that dam breaks, it’s going to take out trillions in wealth.
The Monoline Nuke still looms. The credit crisis is still throttling the economy, and the downward spiral in housing shows no sign of bottoming out.
Be prepared.
