'because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability'
It appears that Hoenig is the only one who sees the potential for another 'bubble' formation ? ? ?
taken from the FOMC meeting press release:
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman;
William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh.
Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee's flexibility to begin raising rates modestly
Wednesday, April 28, 2010
Monday, April 26, 2010
BBW Market Monitor Week of April 26, 2010
The effects of what happened in the residential mortgage market seem to cascade on forever. I believe that it has been directly influenced by the 'entitlement' mindset and has taken that mindset a step further. As we reach a position in our
country where more and more people rely on some form of government 'entitlement' program it does not bode well for our future as a free nation. The tide must be changed, individual freedom and liberty must be brought to the forefront, growing government bondage has to end (the bigger you build it the more that will come appears to be the current mantra yet who is going to be able to pay for it!) - responsibility must be restored in and to our economic lives (personal, federal, state, local - at all levels!).
prb
BBW MARKET MONITOR WEEK OF APRIL 26, 2010
Are we out of the woods yet? It sure seems like it if you look at what the stock market is telling us. Stocks are up 8+% YTD and 79% since the lows in March 2009. But what is it exactly that is keeping consumer spending and the stock market charging forward? Unfortunately, the answer lies mainly in the largess of the federal government and mortgage defaults. Over the past year we have seen:
Government income assistance: $243 billion
Tax reductions: $63 billion
Government wages: $27 billion
Decline in savings rate: $22 billion
Strategic mortgage defaults: $120 billion
This totals a cash flow boost of $475 billion which equates to 5% of consumer spending. Unfortunately, we question its sustainability, especially considering the increasing discontent with Washington’s historic deficit spending and the inevitable increase in taxes to follow, coupled with the fact that eventually “strategic” defaulters are going to have to start paying for their shelter.
For a typical example of a “strategic” mortgage defaulter, take the case of Cheryl Trella, who was profiled in a Financial Times article this week. She’s a 56-year old grandmother living in the Phoenix suburb of Chandler who has not made a payment on her $300,000 home in more than a year. Yet, her lender, Bank of America, has not contacted her since August. Basically, she has been living rent free for that entire time. She is not alone.
According to Moody’s Economy.com, six million people continue to live in their homes free of charge even though they are significantly delinquent or in some stage of foreclosure. Lender Processing Services estimates that 1.4 million borrowers have not made a single payment in the past year. Of course, these days banks have good reason for moving slowly. Once they take possession of a property, they must write down its value to reflect market prices, taking millions of dollars in losses in the process.
Assuming that you have decided to “strategically” default on your mortgage and you no longer have to pay the $1,000-$5,000+ per month for your mortgage payment, what would you do with your new found windfall? Well it seems many are spending it like a drunken sailor on vacations and toys – one last splurge before bankruptcy must be declared. The blog Calculated Risk recently detailed a case study of an actual HAMPlicant at one of the nation’s largest servicing shops. HAMP applicants much submit a “hardship affidavit” to show they can no longer “maintain payment on the mortgage and cover basic living expenses at the same time.” In conjunction, they must also submit recent paystubs and bank statements to verify this affidavit. One couple had a $1,880 monthly mortgage payment on which they had defaulted, yet their bank statements for the past 30 days included the following expenses:
Visits to the tanning salon
Visits to the nail salon
Shopping at a gourmet produce market
Visits to various liquor stores
A DirecTV bill that involved many premium programming and pay-per-view events
Over $1,700 in retail purchases including: Best Buy, Baby Gap, Brookstone, Old Navy, Bed, Bath & Beyond, Home Depot, Macy’s, Pac Sun, Urban Behavior, Sears, Staples and Footlocker.
This case study probably should be taken with a grain of salt, but there is no question that a new population within our society has emerged. Studies like this suggest that there are a rising number of people that appear to have no qualms about defaulting on their debt, while using the windfall of the default to have one last spending spree.
To make matters worse, web sites such as http://www.youwalkaway.com/ make the process seems as easy as 1-2-3, showing a happy couple with their small child laughing and playing in the front yard without a care in the world. Of course, we are all going to pay for this in the long term. In the short term, we at BBW Capital Advisors, feel this demonstrates 1) the
Federal Reserve will keep short-term rates near zero in order to give banks a license to print money to recover from all these “strategic” defaults and 2) that the recovery is hardly sustainable. Remember that 70% of GDP comes from consumer spending. It will be interesting to see what happens to that statistic once these millions of “strategic” defaulters actually have to start paying for their shelter.
country where more and more people rely on some form of government 'entitlement' program it does not bode well for our future as a free nation. The tide must be changed, individual freedom and liberty must be brought to the forefront, growing government bondage has to end (the bigger you build it the more that will come appears to be the current mantra yet who is going to be able to pay for it!) - responsibility must be restored in and to our economic lives (personal, federal, state, local - at all levels!).
prb
BBW MARKET MONITOR WEEK OF APRIL 26, 2010
Are we out of the woods yet? It sure seems like it if you look at what the stock market is telling us. Stocks are up 8+% YTD and 79% since the lows in March 2009. But what is it exactly that is keeping consumer spending and the stock market charging forward? Unfortunately, the answer lies mainly in the largess of the federal government and mortgage defaults. Over the past year we have seen:
Government income assistance: $243 billion
Tax reductions: $63 billion
Government wages: $27 billion
Decline in savings rate: $22 billion
Strategic mortgage defaults: $120 billion
This totals a cash flow boost of $475 billion which equates to 5% of consumer spending. Unfortunately, we question its sustainability, especially considering the increasing discontent with Washington’s historic deficit spending and the inevitable increase in taxes to follow, coupled with the fact that eventually “strategic” defaulters are going to have to start paying for their shelter.
For a typical example of a “strategic” mortgage defaulter, take the case of Cheryl Trella, who was profiled in a Financial Times article this week. She’s a 56-year old grandmother living in the Phoenix suburb of Chandler who has not made a payment on her $300,000 home in more than a year. Yet, her lender, Bank of America, has not contacted her since August. Basically, she has been living rent free for that entire time. She is not alone.
According to Moody’s Economy.com, six million people continue to live in their homes free of charge even though they are significantly delinquent or in some stage of foreclosure. Lender Processing Services estimates that 1.4 million borrowers have not made a single payment in the past year. Of course, these days banks have good reason for moving slowly. Once they take possession of a property, they must write down its value to reflect market prices, taking millions of dollars in losses in the process.
Assuming that you have decided to “strategically” default on your mortgage and you no longer have to pay the $1,000-$5,000+ per month for your mortgage payment, what would you do with your new found windfall? Well it seems many are spending it like a drunken sailor on vacations and toys – one last splurge before bankruptcy must be declared. The blog Calculated Risk recently detailed a case study of an actual HAMPlicant at one of the nation’s largest servicing shops. HAMP applicants much submit a “hardship affidavit” to show they can no longer “maintain payment on the mortgage and cover basic living expenses at the same time.” In conjunction, they must also submit recent paystubs and bank statements to verify this affidavit. One couple had a $1,880 monthly mortgage payment on which they had defaulted, yet their bank statements for the past 30 days included the following expenses:
Visits to the tanning salon
Visits to the nail salon
Shopping at a gourmet produce market
Visits to various liquor stores
A DirecTV bill that involved many premium programming and pay-per-view events
Over $1,700 in retail purchases including: Best Buy, Baby Gap, Brookstone, Old Navy, Bed, Bath & Beyond, Home Depot, Macy’s, Pac Sun, Urban Behavior, Sears, Staples and Footlocker.
This case study probably should be taken with a grain of salt, but there is no question that a new population within our society has emerged. Studies like this suggest that there are a rising number of people that appear to have no qualms about defaulting on their debt, while using the windfall of the default to have one last spending spree.
To make matters worse, web sites such as http://www.youwalkaway.com/ make the process seems as easy as 1-2-3, showing a happy couple with their small child laughing and playing in the front yard without a care in the world. Of course, we are all going to pay for this in the long term. In the short term, we at BBW Capital Advisors, feel this demonstrates 1) the
Federal Reserve will keep short-term rates near zero in order to give banks a license to print money to recover from all these “strategic” defaults and 2) that the recovery is hardly sustainable. Remember that 70% of GDP comes from consumer spending. It will be interesting to see what happens to that statistic once these millions of “strategic” defaulters actually have to start paying for their shelter.
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