Thursday, December 11, 2008

All Your Bailouts Are Belong To Us

Past bailouts notwithstanding, this article describes why the housing market is due for further destruction beginning in 2009:

Now, as the housing recession deepens, a coming wave of payment shocks threatens to bring another surge in defaults and foreclosures as these mortgages “recast” to higher monthly payments over the next two years.

Heavy losses from investments backed by pay option ARMs were a major cause of the demise of Wachovia and Washington Mutual, one of the largest originators of option ARMs during the height of the lending bubble.

These pay-option mortgages represent a huge portion of the illiquid bank assets that the bailout was supposed to support. They have only just begun to decline in value. When defaults on option ARMs force further bank writedowns, banks will once again face insolvency; they will cease lending and the credit markets will freeze up again in 2009.

Does that mean there will be a TARP II in 2Q09? Anything is possible in this climate. With China getting skeptical of any further U.S. bailout investments, only the Fed's quantitative easing will keep bailout money flowing. Instead of buying a wheelbarrow to carry stacks of worthless dollars around to buy groceries, I'll just hang onto my gold ETFs until a new U.S. currency is issued.

Brace yourself for the second phase of a multi-year credit crunch starting after 1Q09. Any analyst who claims that a federal spending stimulus or automaker bailout will bring GDP growth back in 2009 is unbelievably stupid. No way am I going long any homebuilder, bank, or REIT for the foreseeable future. NBER dated the beginning of this recession to December 2007, but I expect future economists to label it the beginning of a Depression.

The stock market is nowhere near a bottom. Fair value of the S&P 500 is nowhere near 1000. THIS IS GOING TO GET WORSE!!