They come in legions, the analysts and the money managers. The CNBC anchors ask them what they think of the day’s 100-point drop in the Dow, and one by one they say that after the recent run-up a retrenchment is not only to be expected but healthy. They say that with so many new jobs being created the country can’t possibly slip into recession. They say you shouldn’t worry about the subprime mortgage problem, because that’s only a tiny sliver of the economy. They say that the stock-market correction is a buying opportunity, and then they tell you which stocks to buy.
Does anyone believe these guys? Does anyone wonder why, of all the guest experts paraded in front of the cameras, not a single one of them says, “Stay out of the stock market, put your money in the bank or in Treasuries or in your mattress, but don’t put it into stocks”? There are times, and this may be one of them, when this is the very best advice you can get, but CNBC is not in the business of scaring viewers out of the stock market, because for a business TV channel that would be suicidal. So today’s buying opportunity becomes tomorrow’s bigger buying opportunity.
Here are some inconvenient truths you will not hear out of the mouths of CNBC commentators:
New subprime loans reached more than $600 billion last year, almost 20% of the total mortgage market (vs 6% in 2000).
House prices would have to fall 22% to get back in sync with consumer price inflation.
85% of all subprime mortgages are of the adjustable-rate variety, and 60% of these have fixed teaser rates for two years and then float upward for 28 years.
The average teaser rate for subprime mortgages was 7.5% in 2005. On the average, that rate will reset to 10% this year.
In the category just above subprime (Alt-A), $400 billion in mortgages were written last year, up from $85 billion in 2003. The default rate on these mortgages has doubled in the last 14 months.
Last year, 47% of total mortgage loans featured buyer inducements (adjustable rate, interest-only, “no-documentation,” etc). That figure was 2% in 2000.
Loans as a percent of property value averaged 94% in 2006.
(I am indebted to economist and friend Gary Shilling for these statistics.)
Mortgage debt, credit card debt, margin debt (a record $321 billion), car loans, student loans – and that’s just the private debt. We will not mention the public debt, because this is a family blog.
Our economy in fact rests on a mountain of debt, or maybe a row of dominoes is the better metaphor. People squeezed by mortgage resets are likely to default on car loans and max out their credit card debt. Watching the dominoes are the politicians, who have already begun to display “righteous anger” at everyone – bankers, Wall Street, fund managers, brokers – everyone, that is, except the individuals who were gullible enough or greedy enough to grab the money and join the rush to the real-estate casino.
Underlying our economic system is the principle that a loan is a contract whose sanctity will be defended by the law. There are cracks in that foundation. Increasingly, borrowers who default are treated, not as deadbeats, but as victims. Ohio is planning to sell a $100 million bond issue to bail out troubled mortgagees, and several other states are drafting similar measures. Congress, with Senator Schumer leading the charge, is making similar noises. The next entitlement may be universal debt forgiveness.
Although our economy is obviously very vulnerable, most stock-market professionals remain complacent. In fact, the majority remains steadfastly bullish. There must be a code of honor here, sort of a “you tout my stocks, I’ll tout yours” understanding. Maybe I’m a cynic, but whenever I hear a stock-market guru telling me to buy a certain stock, something inside me says that if I do, I’ll be buying shares that he (or his wife or his brother-in-law) is selling.
