CHESSNOID

I think I have kept with this recession theme for awhile, since the signs started affecting our economy due to our subprime mortgage debacle. I was no where near the first person to blog about this. I remember reading a few blogs and even posted a chart (*Click here for the Chart*) that showed all the resets that these loans were about to hit. You can compare it to a ticking bomb with the clock starting at the height of the housing boom and mortgage originations occurring in 2006 and scheduled to re-set in 2008. We are in the part of the cycle where foreclosures are shooting through the roof and every industry is feeling the domino effect of tight credit and defaulting borrowers curbing there spending. People forget that this housing bubble took about 6 years to inflate and that the housing bust will need time to deflate. This is a very big balloon.

For the last year or two, economists denied we were even in a downtrend and the government claimed we were still in a strong growth phase. Of course the real estate brokers and agents were continuing with nonsense that the time to buy is now and that house values never fall. Jump on the train to wealth before you miss the final ride. Yes, they are all coming to their senses now and many of the real estate agents and brokers are back to their real day jobs.

Everyone is aware of all this information now about the housing bust we are currently experiencing and working to get through. I never really understood how deep the other countries were involved in our finances. Of course, once I started reading everything out there on the internet, I realized many countries invested in our real estate market indirectly through bonds and super investment funds with mortgages used as assets. Since there are trillions of dollars of mortgages loaned out, the US could not have sold it only to its domestic investors. We seemed to have pushed these high risk investments to many companies. I have blogged about them in the past as well. Here is a list of the major financial institutions affected around the world announcing major losses in the last 12 months according to Reuters:

2007

Feb. 8 - HSBC (HSBA.L: Quote, Profile, Research) - Europe’s biggest bank HSBC Holdings blames soured U.S. subprime loans for its first-ever profit warning.

April 2 - NEW CENTURY (NEWCQ.PK: Quote, Profile, Research) - The U.S. subprime lender files for Chapter 11 bankruptcy protection in the biggest collapse of a mortgage lender in the U.S. housing downturn.

July - IKB & SACHSENLB - Two banks in Germany, IKB (IKBG.DE: Quote, Profile, Research) and state bank SachsenLB suffer exposure to the U.S. subprime market. The German banking industry bails out IKB but SachsenLB almost goes under and is quickly sold to state-backed Landesbank Baden-Wuerttemberg (LBBW).

Aug. 9 - BNP PARIBAS (BNPP.PA: Quote, Profile, Research) - The French bank bars investors from redeeming cash in $2.2 billion worth of funds, telling the markets it is unable to calculate the value of the three funds due to turmoil in the subprime market.

Aug. 9 - NIBC - The Dutch merchant bank discloses 137 million euros ($189 million) of losses on U.S. asset-backed securities in the first half, and shelves plans indefinitely for an initial public offering.

Sept. 13 - NORTHERN ROCK (NRK.L: Quote, Profile, Research) - The British mortgage lender has a run on the bank after the government reveals it has stepped in to rescue the firm.

Oct. 1 - CREDIT SUISSE (CSGN.VX: Quote, Profile, Research) says its results will be “adversely impacted” by the market turmoil but it will remain profitable in the third quarter of 2007.

Oct. 15 - CITIGROUP (C.N: Quote, Profile, Research), the largest U.S. bank by market value, says third-quarter profit fell 57 percent due to sub prime losses.

Oct. 19 - WACHOVIA CORP (WB.N: Quote, Profile, Research) - The fourth-largest U.S. bank posts a 10 percent decline in third-quarter profit, having suffered $1.3 billion of write-downs resulting from credit market turmoil.

Oct. 24 - MERRILL LYNCH (MER.N: Quote, Profile, Research) stuns Wall Street after writing down $8.4 billion, mostly from bad investments related to risky subprime mortgages.

Oct. 26 - COUNTRYWIDE - U.S. mortgage lender Countrywide Financial Corp (CFC.N: Quote, Profile, Research) posts a $1.2 billion third-quarter loss after writing down $1 billion in subprime lending losses.

Oct. 29 - MITSUBISHI UFJ FINANCIAL GROUP INC (8306.T: Quote, Profile, Research), Japan’s largest bank, says it will write down subprime-related investments by as much as 30 billion yen ($260 million) — six times more than previously announced.

Oct. 30 - UBS - Swiss bank UBS (UBSN.VX: Quote, Profile, Research) reports a third-quarter pre-tax loss of 726 million Swiss francs ($624.8 million) after a 4.2 billion franc charge on subprime-related losses.

Nov. 4 - CITIGROUP says it may write off $8 billion to $11 billion of subprime mortgage losses, on top of a $6.5 billion write-down in its third quarter.

Dec. 19 - MORGAN STANLEY (MS.N: Quote, Profile, Research) posts a $3.59 billion fourth quarter loss and $9.4 billion of mortgage-related writedowns.

2008

Jan 17. MERRILL LYNCH reports its worst ever quarter, revealing around $16 billion in mortgage-related write-downs and adjustments.

Jan. 24 - French bank SOCIETE GENERALE (SOGN.PA: Quote, Profile, Research) says fraud by a single trader has cost it over $7 billion.

Feb. 13 - Germany agrees a 1.5 billion euro rescue package for IKB, the third bailout for the stricken lender, saying a collapse of the bank would have “incalculable” consequences.

Feb. 14 - UBS (UBSN.VX: Quote, Profile, Research) says it will have to write down $18 billion in bad loans. Analysts warn its writedowns could yet double.

Feb. 17 - The British government says it will nationalise NORTHERN ROCK for a temporary period, abandoning efforts to find a private sector buyer for the ailing lender.

Now, all these losses have definitely affected many markets worldwide but I think the actions we are taking here may make the consequences worse. The federal reserve has been lowering interest rates dramatically. On the day after worldwide stock markets had experienced 5-8% plunges in 1 day on Jan 21, which in turn forced the federal reserve to act and make an emergency rate cut of 3/4 % before a regular scheduled 1/2 % rate cut a week later. It definitely helped our stock market and helped foreign stock markets bounce up from that day. These low artificial rates from 6 years ago was a major contributor the financial housing crises we are experiencing now. It definitely won’t be the solution to the problem.

What these rate cuts are doing now and future planned rate cuts will do is encourage other countries to protect their economies and currencies. I know we don’t generally read any news beyond our borders, but I feel it will come back to hurt us. Recent news show many countries taking the necessary action to make sure inflation doesn’t get out of hand in their respective countries as the value of their currency skyrocket in value. According to Bloomberg:

India is building stockpiles of food staples to ease supply constraints and curb inflation. The government buys food grains at guaranteed prices from farmers for distribution to the poor at subsidized rates through state-run shops.

Philippines President Gloria Arroyo last month proposed giving National Power Corp., the state-owned electricity generator, a subsidy to help cap prices.

Among Asia’s wealthier countries, Singapore last week announced plans to give cash and rebates to needy citizens to offset the highest inflation since 1982. Taiwan imposed a ceiling on gasoline and diesel prices after inflation quickened in November to a 13-year high. And South Korea is studying ways to limit increases in school tuition and heating bills.

“They’re distorting their economies, and these policies can’t last forever,” says Jan Lambregts, head of Asia research at Rabobank International in Hong Kong.

Asia’s rapid growth also means price controls can’t keep inflation bottled up for long, says HSBC’s Prior-Wandesforde.

“Rate increases are required now, and they’re falling behind the curve,” he says. “Ultimately, policy tightening will need to be bigger than it would otherwise have been.”

While a few of the region’s central banks, including Vietnam’s and Australia’s, have chosen to raise rates, “the others are just delaying the inevitable, and it’s a matter of time before they reach their `inflation pain’ threshold,” Prior-Wandesforde says.

I think the currency market is actually a bit more complicated than our housing bust situation. We actually have gone through housing booms and busts before and just going through the business cycle. This time around it was aggravated by artificial rates, record number of loan originations and house purchases, and an accumulating war debt building towards incomprehensible gross numbers. We are a free market economy and the government is taking action that stifles the market forces. For some political reasons, the government doesn’t want the housing bubble to correct itself and thus making a problem even worse. The federal reserve has lowered the interest rates down to 3% and already has plans to lower it more. The government is trying to stimulate buying and it just won’t work this time since they are just ignoring the problem. Houses are still overpriced and people just don’t want to buy something when they can rent it for substantially less with the possibility of the house going down in value in the near term.

As for the currency markets, I really can’t make a good guess of what will happen as we continue to lower our rates. But whatever it is, I don’t think it will be a positive outcome for us.