commercial credit risk going parabolic

[solarbird]

This is a little less coherent than I'd hoped, sorry; I wanted to make sure it got posted tonight instead of delayed yet again!

Commercial real-estate credit risks - which is "up" in these graphs - appears to be going parabolic. This implies that something's exploding, possibly two government-sponsoured GSEs with initials FM. The residential real-estate CDO/ABX markets have lost their small recovery almost entirely. The Alt-A implosion is starting to hit as some of the worst of that sector is already exploding badly and wrecking attempts to 'salvage' what's left of subprime value. C.f. the start of the downgrades avalanche on alt-A securities. (Regular readers will recognise a familiar - and previously-credited - chart.)

In similar and related "wuh oh" moments, agency bond spreads are also jumping. That's important because it raises concerns that the Fannie May/Freddie Mac bailout plan - not yet triggered, but give it time, it will be - was forced by overseas governments. Not helping: 2007-originated prime, as in prime, as in best grade mortgages are starting to fail at disturbing rates. This is no doubt related to how nearly one-third of all homeowners who bought a house in the last five years owes more on their loan than the value of the house. Fun!

Oh, housing inventory reports often don't include bankruptcy bank possessions, particularly in places like California. This makes the real number worse than reported, and again implies a longer time to recovery.

Dr. Roubini posted a column a week(ish) ago about why the recession will be global, and the worst since the Great Depression, but not as bad as said depression. However, it has a lot of data on credit, the banks and banking system, and is worth reading. He's still strongly in stagflation camp, but contraction in the M3 ("broad money") supply is starting to kick in pretty fiercely, adding credibility to the deflationista case. "Doctor Doom" is starting to sound like the optimist.

Kevin Depew writes again that the word of the moment is frugality, which is bad news for a discretionary-spending economy. Mish had similar commentary but I dropped the link - sorry. And Paul Farrell writes a rather angry column about how much Americans love their war economy and is going to keep liking it right up until it can't.

Comments

[mejeep.livejournal.com]

I'm just a simple ferret but my observation re: commercial real estate:

I see many banks opening large branches all over NY & NJ. I suspect it's just to fill otherwise vacant stores lest they have to admit that they're losing money on bad speculation and store vacancies are at an all time high as independent businesses are all pushed out by high expenses and "big box" stores.

[solarbird]

Interesting anecdotal note. What kind of scale is "all over" and what banks are involved?

I am an econ noob

[blues-kun.livejournal.com]

What possessed these people to jump on these crap loans in the first place? The lemming effect?

Re: I am an econ noob

[solarbird]

70-odd years of real estate never losing value combined with a concerted effort to make the mortgage/refi cycle a throughout-the-lifetime process for a lot of people - kind of the same way that "payday loans" become such a nasty cycle of deprivation.

Re: I am an econ noob

[silussa.livejournal.com]

Was just reading a book by one financial advisor, written a few years ago, which advocated minimizing the equity in one's home for a variety of reasons. Of course, if you have minimal equity, you also have minimal reason to fight through mortgage problems.

[hubbit.livejournal.com]

From a Financial Times quote in Kevin Depew's article:

"Executives at Procter & Gamble (PG), the world’s largest consumer company, argue that austerity-minded US supermarket customers will still opt for proven brands of items such as toilet paper and nappies against cheaper alternatives," the FT noted.

I want some of whatever the P&G execs are drinking; to this day my household buys cheap recycled-paper TP, because for wiping our posteriors we need fancy? Same thing with diapers; all three of my children wore cheap store brand diapers. We had a limited budget back then (still do, actually) and just could not see spending twice as much for something to catch and hold excreta. It isn't as though a baby really notices or cares.

One thing that is difficult to remember, it seems, is that we've really only had this "must-spend-discretionary-income" concept on the popular level for a century or so. The rich were few and could get whatever they wanted, but common folk by and large had to live by the old New England Yankee dictum of make it do or do without. With the advent of the mail order catalog in the late 19th century, the average family began to be sold on the idea that they, too, could buy all sorts of things they really didn't need but looked pretty. Once the idea of down payments and credit took hold, that was it. What was once a chop-your-own-damn-tree, plane-your-own-damn-boards, make-your-own-damn-furniture economy became an "that piece of crap? that's LAST year's; I want THIS year's crap!" economy. Aside from a Depression and a World War (during which consumer goods were restricted or unavailable - try that in today's "entitlement" culture), it's only gotten bigger every decade.

[silussa.livejournal.com]

As a convenience store manager, I can attest to the fact that, though we sell a fair amount of "store brand/generic", a lot of folks will still spring the extra money for "name brand".

Myself...I buy the cheapest stuff I can find. Currently still working my way through a "closing/bankruptcy" sale from a few years back. :)