Day: April 19, 2008

Angry Freeholders?

Angry Freeholders?

After seeing the website Angry Renter, I considered my own position in the matter, because I’m not in favor of bailouts either.? I own my home free and clear, and I paid off my mortgage well in advance of when I had to.? I own a house smaller than I could afford, and with eight kids, sometimes I wish I had chosen otherwise.

But I love our little hovel, and wouldn’t have it any other way.? That said, there would be reason for people like me to be annoyed at any bailout.? I stayed within my means; I sacrificed other goals to own my home free and clear of any encumbrances.

Angry Freeholder Graph
Here is my version of the Angry Renter graph, with one major modification.? Using data from First American (LoanPerformance), I estimated what percentage of homeowners will be vulnerable if home prices fall another 10% or so.? They fall into my “under stress” bucket.? My view of the situation is this — over the next two years, with a fall in housing prices of 10%, roughly 12% of the housing stock of the US will be in a negative equity position, and more so, if one considers closing costs.

Remember, default in housing means negative equity in a sale, plus a negative life event: unemployment, death, disability, disaster, or divorce.

The problem is bigger than Anger Renter represents, which is why the politicians will do something (though it will likely be ineffective).? Politicians care about the banks, also… bank failures are not conducive to a happy economy.? Renters tend to not have much political clout, because they aren’t usually well-off.? My view is that Angry Renter as a movement goes nowhere.? Now, if you could get the relatively well-off freeholders involved, that could be another thing, but, I still think opposing a bailout would fail politically — politicians care about the banks.

The US Dollar and the Limits of Irresponsibility

The US Dollar and the Limits of Irresponsibility

Promises, promises.? How many ways can the politicians dream up to spend money that they don’t have?? Perhaps it’s easy when you are the world’s reserve currency, and few argue with taking down IOUs denominated in US Dollars, at least for now.

But there are limits.? When looking at the US Dollar today the markets have kind of a benchmark that they use as their default scenario:

  • Fed funds will not drop below 1.5% at the bottom of this cycle.
  • CPI inflation will not rise above 5% for this cycle.
  • Nominal GDP growth will not drop below 4% for this cycle.
  • The US current account deficit will improve, albeit fitfully.
  • ?Total Federal Debt will not grow faster than $600 billion per year.? (you didn’t know it was growing that fast, now did you? 😉 )

Of course, this is just my view, and I could be wrong.? But the US Dollar has gotten trashed, and in order for it to get hit further, the powers that be will have to exceed the current “Limits of Irresponsibility.”? As for the default scenario that I have laid out above, those are key parameters that I think are baked into the current low level of the US Dollar.? Violate those levels, get a lower Dollar.?? Get further away from those levels, and dollar could rally.

When I gave my talk to the Society of Actuaries, one of my recurring themes was, “It is wonderful to be the world’s reserve currency.”? Consider especially slide 32, where the weak dollar combined with strong overseas equity markets flattens out the net foreign assets to GDP ratio at near -20%.? We ship our losses overseas, and that isn’t counting all of the subordinated structured product that they bought… yet.

I am not a doom-and-gloomer by nature.? I try to recognize what is wrong, analyze what could be done to ameliorate the situation, and consider what could go right.? I am not an optimist on the US Dollar, though I don’t see how it falls much further from here.? There is room for the US Dollar to rally, if only a few things go less wrong.

In the long run, though, there are imbalances that the US needs to change, and the long run path of the Dollar will rely on those changes.? I believe that the markets embed an improvement in US policies long run; if that fails, we will continue to see the Dollar deteriorate.

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