Hello, Goodbye

We finally closed on the sale of our old home, and concurrently closed on the purchase of our new one. It took 8 weeks and 11 weeks, respectively, after approval. This was one of those Scenes from the Recession moments. Well, not moments- more like months. And we were the lucky ones.

Our old home was beautiful, less than 5 years old, and sitting on a half-acre, less than 15 minutes from downtown Austin, one of the hottest metros in the country. We listed it on the MLS through one of those DIY, flat-fee listing services, and it took four months to get an offer, more than double the "average" time on market (at least in days past; the average is skewing longer now). Our home was custom-built, weird configuration, so there were not any real comps, which contributed to the longer time on market. But, after the offer, it still took TWO MONTHS to close, and that despite the fact that our buyers had 10% down, strong credit, and affluent co-signers (their parents, who run successful businesses).

The closing kept getting pushed back due to piddly demands from lenders to produce this documentation or that documentation, then rejecting the loan at the last minute, forcing the lenders to shop at multiple lenders for the loan, after having been pre-approved.

"This is normal," their agent explained to us, wearily. "The housing market is fine here in Austin," he said. "But nobody can get loans." So supply is high, and demand is high, but the loans are scarce. Houses are sitting longer on the market, simply because lenders are too nervous to turn loose of the money to anyone but the highest-quality buyers, on the best-quality homes.

After breathing a sigh of relief when our deal finally closed, we then faced the exact same problem for the house we were buying: we had been pre-approved long ago, had 20% cash down payment, no debt (literally), good savings, and plenty of income. What's more, our house was a steal, a foreclosure flip that we had been pursuing for months. Because ours had liens against it, we had to wait to close, but even then, the date kept getting pushed back due to underwriting nit-picking.

It's good that lenders are being more careful, and it's good that loan money is flowing, even if it takes a lot longer to turn on the spigot. But had we not been in such a good financial position, carrying two mortgages for a few months could have been financial death. For sellers who are relocating for their job, carrying two mortgages is common.

So what has been the real-world effect of bank bailouts? Maybe I should have applied for my loan at Bank of Curtis.

New year, new hope... uh, right?

I took a hiatus from all the depressing financial news that I was hearing and promulgating on this blog, hoping that the Christmas spirit, Obama's inauguration, and a little time would help us crawl out of our economic hole.

Not so much.

I mean, the weird thing is that some economic indicators, like the TED spread, and commercial paper (very, very short-term loans to businesses) are starting to look more favorable lately. In Austin, even the housing market is fairly strong, at least for used houses. But other events point in the opposite direction:

• foreclosures in the prime California market are up 81% from last year, 225% from 2006;
• major employers are shedding jobs (this is an international phenomenon);
• shipping rates are zero!

I am not exactly sure what to make of this, but I continue to be amazed by the number of people who claim each week that we have "officially hit bottom". I think we're a long way from bottom.

But that does not mean that I am hopeless or depressed. Just realistic. And despite everything, cautiously optimistic.

No soup for you

Still nothing.

No loans, no commercial paper.  The credit markets are still frozen.  

I am really shocked and amazed that there has not been more coverage of this story by the New York Times.  After a $700 billion, er, make that $1.5 trillion bailout, and massive capital injection into our banks, the loan money still is not trickling down to businesses and home buyers. 

In it, the reporter is surreptitiously on a conference call with JP Morgan Chase executives.  Chase took $25 billion dollars of the bailout money, at Treasury Secreatary Paulson's behest, after initially declining it.  Paulson insisted, saying that it would be bad for consumer confidence if the public saw that some banks were more in trouble than others.  Go figure.

After being asked by a lower-ranking executive about when Chase would start making more loans, the high-ranking executive running the meeting explained: 

[T]he same executive (who I’m not naming because he didn’t know I would be listening in) explained that “loan dollars are down significantly.” He added, “We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side.” In other words JPMorgan has no intention of turning on the lending spigot.

Translation:  NO SOUP FOR  YOU.

Apparently, even the world's largest banks are not immune to the credit crisis of their own making.  Too bad the CEOs of those companies don't suffer the same consequences.

Meet the new boss

America elected it's first black president this year, and did so emphatically.

Not sure either party candidate has a good answer to the current fiscal crisis, but this is hopefully a major step forward in breaking down racial barriers, and incentives for young black Americans.

Congratulations, President Obama.

Do I hear ONE DOLLAR, anyone?

Now, this can't be good.

The UK Telegraph and The Economist both reported that Greek shipping ports are filled with huge container ships, all going nowhere. Two months ago, the ships rented for $234,000 per day; now, they are renting for just $7,500 per day.

UPDATE: Now zero dollars.

And they are still in port.

Why? Because major banks are not lending money, especially for the short-term lines of credit that keep the majority of companies in business, all over the world. But wasn't this huge government bailout supposed to capitalize the banks to do just that?

Yeah, it was. Looks like we were sold a bill of goods. Why this story isn't getting more play in the national media, I do not know.

The Greek shipping crisis is a symptom of the interrelated credit mess that is currently unraveling. Businesses that need short-term cash (i.e., most all of them) are in trouble. This commercial paper, as these short-term lines of credit are called, is still largely locked up, though it has begun loosening a little bit recently.

Recent national TV news stories about car dealers whose sales are thriving, but still have to close their doors because they can't get short-term cash to buy inventory, are still more signs. Businesses that need large amounts of cash will feel the pinch first. But the trickle-down effect is what I fear most.

As I write this on election night, it becomes more apparent than ever that a new U.S. president is not the most powerful man in the world.

Safe to come out yet?

A glimmer of hope on close of business Friday, October 17: the TED spread dropped below 4 pts, and global markets closed significantly up, including the FTSE, Dow Jones, Hang Seng, and the Nikkei.

Free and clear

The solution is now painfully obvious:  free and clear is the only way to be.  Especially in an economic free-fall.

Normally, reading economic reports is something I enjoy about as much as, oh, say, a prostate exam.  Particularly economic reports from conspiracy-theory sounding names like Shadow Government Statistics.

But my colleague Mike (aka "Dr. Nacho") gave me a copy of The Hyperinflation Special Report, compiled by John Williams.  It is a little smug, and certainly dire-sounding, but I have to agree with the paper.

Williams spends 23 pages building his arguments and positing his conclusions, but it's really common sense:  the government has run up it's "credit card" (the national debt), and there is no money to pay it back.  It can keep printing the money, but increased supply of money means the value of it (demand) falls.  This is inflation.  But when it happens on a very large scale, as it has in countries around the world, as recently as two years ago, you get hyperinflation. 

Williams bolsters his arguments with bolstered by some historical research.   It goes back to the definition of "money". Money (actually "wealth") used to be something of intrinsic value, like gold, diamonds, or even animals, food, or spices and incents.  As those things became to bulky to carry around, symbols of that wealth were created: gold or silver coins, usually.  Paper money was introduced as a symbol of a government's wealth, measured in gold (this was the gold standard).  In 1933, President Roosevelt abandoned the gold standard, in an attempt to shake the country out of the Great Depression.  In 1971, Nixon effectively admitted the government was bankrupt, and disallowed the redemption of dollars for gold.  The dollar has been floating on, well, confidence for the last 40 years.  Confidence that the U.S. government would make good on any debts, such as Treasury Bonds purchased by Americans, foreign investors, or other countries.

That confidence is quickly eroding.

The result could well be that, like a professional check kiter, everyone- citizens, foreign investors, banks- stops lending to the government.  Unable to get more loans, the Fed prints money to pay it's debt, but that money is devaluing rapidly.  The chaos and confusion of such rapid devaluation spurs more panic (as with the 11% market drop last week) and soon, you have hyperinflation.

Williams says it might take longer, maybe 2010.  But as government officials try to unravel the subprime/CDO/CDS mess, the scope of the problem may only grow larger.  A similar event occurred when a few minor accounting irregularities triggered an audit which led to the collapse of Enron and Arthur Andersen, and millions of dollars in pension funds and stock options disappeared in just a few short months.

To keep my money in the market, even in U.S. Treasury Bills is gambling.  Period.  The safest bet is to own real assets- house, cars, furniture- free and clear.  No debt.  Then a job is merely used for those monthly variable expenses- food, fuel, insurance, utilities, clothing, entertainment. 

Unfortunately, that's easier said than done.  But it's definitely the direction I'm heading.