Cracks in the foundation are starting to rear their ugly heads and investors need to wake up smell the risk. In my latest client newsletter, I wrote about the great disconnect that exists between Wall Street and Main Street. On the one hand, you have Wall Street who just assumes that this is a normal cycle and the worst is behind us. Then you have Main Street that is really suffering. We all know several people who are facing tough financial times or at least have heard the stories.
The Wall Street Journal reported last week that 1 out of 4 homes are underwater. That means these homeowners owe more than the worth of the home. If you look into the stats even more closely, you get a real disturbing picture. The numbers show that 65% of the homes in Nevada, 48% of the homes in Arizona, and 45% of the homes in Florida all have values of the home less than what is owed on the home.
This translates into a large number of potential foreclosures. The real estate markets cannot even get close to starting the recovery process until the foreclosure crisis starts a recovery. I think that we are a long way away from that starting. Overall, I don’t think that we can get a healthy recovery until you fix the real estate and foreclosure problem. All of these problems tie together spelling risk for the economy and risk for the markets.
There is no question that these risks are known by the market. However, the market expects that this recovery will take place much sooner. Therein lies the problem. I don’t think that Wall Street’s time table is even close to reality.
Wall Street also thinks that most of the debt crisis is behind us…well maybe until last week when Dubai revealed they are going to stop making the interest payments on 60 billion dollars worth of debt. Dubai is on the verge of defaulting on 60 billion dollars worth of debt. That would have some serious implications for a global economy that is already walking a tightrope.
Todd Harrison, president of Minyanville.com, described how the crisis would unfold.
It was announced on Sunday that their central bank would bail them out. Oh good, another bail-out. It might be a little early to see how this plays out.
How many more Dubai’s are out there that the market doesn’t know about? We are talking a debt crisis of epic proportion. I still don’t think that we have seen the end of the debt crisis.
We are also seeing the reality of the condition of the consumer. Consumer sales were not that great this Black Friday and don’t look to translate into a strong Christmas buying season. Be careful if you are drinking the kool-aid. These markets can go down as fast as they went up.
Dear Bob:
Good reasoning on the debt situation, seems that everyone has forgotten the original TARP strategy of swapping the banks illiquid MBS for Treasurys or better yet, Cash, instead the Treasury Dept gets into the Bank Equity business, I have never heard a single news article on the Fannie Mae Preferred fiasco that the big banks held as a Tier 1 Capital asset, Fannie Mae had 17 different levels of Preferred Stock, what person in their right mind would think any company would be viable with that many different levels of Preferred?
Anyway, have a Merry Christmas to you and your family.
Sincerely,
Steve Wisdom