Wednesday, May 27, 2009

Yelling "FIRE!" In A Crowded Bond Market


What happens when you are holding a trainload of ALT-A mortgage paper, and 40% (+/-) of the mortgages in those securities are 60 days delinquent? (Think every Money Market fund in the USA)

You sell.

What happens when you are holding 10year US Treasury notes and the government keeps "stimulating" itself at a $trillion per pop, and tax revenues are only 50% of total expenditures? (Think every business in America that holds US Treasury notes as a store of cash)

You sell.

What happens when you are holding massive amounts of debt in a insanely foolish "vendor financing" scheme and your customer just lost his job? (Think China buying US debt to keep interest rates low to spur further buying of Chinese dreck)

You sell.

What happens when your income stream gets clipped and you have a bunch of bonds that can sell to raise cash? (Think export nations that sell to the US)

You sell.

What happens when you are running an insane amount of spending, but you can't tax enough to make ends meet? (Think US government)
You sell.

What happens when you foolishly chased the latest bubble in bonds, and now see that it has clearly topped and is heading down? (Think Money Market/Retirement funds)

You sell.

What happens when some fool from Princeton offers to buy mortgage dreck and US Treasury notes at above market rates? (Think....well, you know who I am talking about)

You sell as much as you can.

What happens when you have spent three straight months convincing people that the bottom is in, houses are cheap, inflation is coming, and the government saved the day, but you know the opposite is true and have a bunch of massively overpriced bonds? (Think large New York investment banks and hedge funds)

You sell.

What happens when the selling pressure overwhelms the bid in the bond pits?

Prices drop.

What happens when bond prices drop?

Interest rates rise.

What happens when mortgage rates jump by 30% in a half-day's worth of trading?

Pending contracts, lots and lots of pending contracts (appx. 50% by one estimate), blow high and wide.

What happens when a house sale "falls through?"

It goes back on the market.

What is the mindset of the owner in a depressed market that just lost a sale?

Panic.

If the next few weeks see followthrough on this trend, the amount of selling in real estate will simply overwhelm the bids and the entire real estate market will be frozen, until the owners capitulate and lose their homes to auction. The bond market is the "end game" and is why The FED has been buying bonds.

Just as you can't get out of debt by paying your VISA with your MasterCard, we can't keep our asset values high by borrowing money to pay off debt.

It's a global dash for cash. Everything is being sold to raise cash, and that includes trendy real estate.

8 comments:

bi renter said...

yeah, but BI is special.

Anonymous said...

I've been looking for some vulture opportunities and I still don't see any. Even today, people have an inflated idea of what properties are worth; and that latest silly report that "Silverdale/Bremerton is the hottest housing market in the country" isn't helping.

Eleua said...

Where is that "silly report" that showed Silverdale/Bremerton as the hottest market in the USA? I missed that one. (shame on me)

I've been busy watching the MBS and 10yr US Treasury sell off on an almost daily basis during this entire stupid stock market rally. Interest rates tell the tale, and it isn't good.

I do expect that rates will get another reprieve, but the Ben and Tim Dynamic Duo are going to have to trash the stock market to do it. I look for some fear to hit the market fairly soon that will scare everyone into the 10year and shorter duration, which will drag down interest rates.

Meanwhile, stocks and retirement portfolios will get trashed, but at least Congress and the banks will get a few more months to convince everyone that "this is the bottom."

Thanks in advance for forwarding the link to that silly report. I'd love to see what is the justification and who wrote it.

My guess is that it will be along the lines of "healthiest man in Hiroshima" during mid-August of 1945.

Anonymous said...

http://www.usnews.com/articles/business/real-estate/2009/06/04/the-top-10-housing-markets-for-the-next-10-years.html

Anonymous said...

Say, Eleua, have you seen that the average home price in Detroit is $11,533, and that a couple recently picked up a foreclosure for $100?

Anonymous said...

Okay Eleua, time to consider coming back from vacation, we need you back at Seattle Bubble:

We need to find Eleua and bring him back for a few more guest posts. On the subject of sarcasm, I say keep it up. If we can’t laugh at the absurdity of the last four years, we will cry thinking about the permanent damage this bubble has done to our country.

TJ_98370

TJ_98370 said...

Eleua, Seattle Bubble readers would very much like to hear from you, again:

We need to find Eleua and bring him back for a few more guest posts. On the subject of sarcasm, I say keep it up. If we can’t laugh at the absurdity of the last four years, we will cry thinking about the permanent damage this bubble has done to our country.

QUALITY STOCKS UNDER FOUR DOLLARS said...

Can anybody tell who in the world is buying all the treasury securities on the order of one to one and a hlf trillion dollars a year.