The Humpty Dumpty Economy

Nice mention in Barron’s this weekend, from our Thursday commentary, Household Equity at all time lows.  Its in Alan Abelson’s Up & Down Wall Street column.

Here is the excerpt via Barron’s:

"The wrenching changes being wrought by a falling Humpty Dumpty economy, largely created by credit, and a swooning stock market, kited by leverage, are everywhere evident. Housing foreclosures swirled up to an all-time high of 0.83% of all mortgages nationwide. Over 5.8% of homeowners were behind in their mortgage payments, the largest number in upwards of two decades. House prices lost a staggering 8.9% in 2007 as a whole (and they’re still tumbling).

Yet, despite the ubiquitous plunge in prices, the supply of unsold houses rose to four million, or to over 10 months’ worth. Homeowners’ equity fell below 50% for the first time since 1945, hitting a new low of 47.9%. As Barry Ritholtz nicely put it, never before have banks and the other various and sundry lenders owned more of the average American’s house than he or she does.

Speaking of lenders, thrifts and savings outfits lost a cool $5.24 billion in the final quarter of ’07, as they diligently wrote down tons of goodwill (perhaps it should more properly be called ill will).

In January, to continue this lugubrious litany of the damage done in the Humpty Dumpty economy and the ravages wrought by the bear market, the equity portfolios of the largest U.S pension plans, according to the calculations of Mercer, which keeps tabs on such things, shrunk by $110 billion. Not exactly chump change, even when it’s other peoples’ money.

We’ve long been a fan of Abelson’s unvarnished views and delightful prose. Its always a privilege when our thoughts find their way into his columns . . .

Previously:
Federal Reserve: Household Equity at all time lows    http://bigpicture.typepad.com/comments/2008/03/underwater.html

Source:
The Great Fall: Here Comes The Humpty Dumpty Economy
ALAN ABELSON
UP AND DOWN WALL STREET 
Barron’s MARCH 10, 2008   
http://online.barrons.com/article/SB120493420479720885.html

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  1. Winston Munn commented on Mar 8

    Although all manner of standard banking institutions have been impacted and will continue to be impacted, the real horrow show is waiting offstage in the “shadow banking system”.

    This is the heart of the beast known as the great debt explosion.

    “Satyajit Das, an author and derivatives industry expert, cites an example where just $10m of real, unlevered hedge fund money supports an $850m mortgage-backed deal. This means $1 of real money is being used to create $85 of mortgage lending – credit creation far beyond the wildest dreams of high-street bankers.”

    The shadow banking system – basically intermediaries who issue commercial paper to finance long-term debt – have their collective backs against the wall. Credit spreads are exploding as demand for short term money increases…there is a whiff of panic in the air….and who will be there to put a foot down to stop the forced liquidation of overleveraged assets?

    If the shadow banking system contracts significantly, what will happen to worldwide economies that depend on the 50:1, 80:1, 100:1 (who really knows?) reserve ratios of the shadow banking system when they are forced to deal with the 10:1 reserve ratio of standard banking?

    The competition for capital will be fierce.

  2. Lars commented on Mar 8

    Life as we know it is about to change.

  3. Reynold Weidenaar commented on Mar 8

    That Alan Abelson’s prose could be called “delightful” only underscores the atrocious stylistic state of financial journalism. Using a thesaurus as a crutch does not a writer make.

  4. TempusFugit commented on Mar 8

    If “Humpty Dumpty economy” means “it can’t be put back together again” then Mr. Abelson is guilty of the same kind of linear extrapolation that got us into this mess in the first place (e.g., house prices only go up). In his case, he seems to believe that nothing of value was created in the 2002-07 expansion; it was all “shadow banking” smoke and mirrors.

    A longer, historical perspective would indicate to the contrary: this too shall pass. It won’t be pretty or pleasant (the destructive part of creative destruction seldon is) but it will be over eventually. And when it is we will still have our more-or-less capitalist system still being stoked by the two mega-trends of our time: globaliztion lifting billions of people out of poverty and information technology innovations making them much more productive.

  5. cathompson commented on Mar 8

    barry – One good turn deserves another, but to complement Alan’s turn of the phrase is too much. I’m with Reynold. Abelson writes like a high school dropout in drag.

  6. Bob A commented on Mar 8

    It was interesting to hear Mr. Mozillo seem to deamonize people who made money by backing up their beliefs that lenders were out of control by shorting the lenders and their stocks and bonds.

    I have a very high regard for Mr. Mozillo and the company he built. But I do not find it believable these people simply had no idea what might be about to happen.

    Or that they had no responsibility to excercise more caution as the market took on an increasingly risky nature before catastrophe struck.

    These people justify their fantastical earnings based on their unique experience, skills, knowledge and accumen. Yet with virtually unlimited resources available to them, we are asked to believe they had no idea what was about to occur, and should not have been expected to exercise more caution as the circumstances and riskiness of their lending became greater and greater… indeed extending into realms never before seen in history.

  7. Graffiti Grammarian commented on Mar 8

    Oh dear. Remember that short-lived city weekly from several years back, called “Seven Days”? It was actually pretty good, they did pointed analysis and some decent news reporting.

    Every week they had a funny featre called “Log Rolling in Our Times.” It would give a quote from a critic — usually about a book — saying how good it was.

    Then right under it they would run a reciprocal quote from the author who had been flattered, usually returning the compliment by saying something flattering about the critic.

    Hence the humorous name “Log Rolling.”

    This sort of mutual back-scratching no doubt seems only polite to those who do it, but to third-party readers, it can seem gratuitous and perhaps even a tad bit self-serving. The printing press and its descendents are probably best devoted to some kind of higher use than this.

    ever a fan, Graffiti

  8. BDG123 commented on Mar 8

    How can anyone not love Alan Abelson? A little bit of George Carlin meets financial journalism. His witty prose and comical cynicism surrounding the brilliance of banking buffoons is relief in a very ‘uncomical’ world.

  9. AGG commented on Mar 8

    Barry,
    You’re all right. No matter how unpopular you may become because of your honesty, I would vote for you as Mayor of New York.
    That said, I wish to communicate to the cathompson person that, yes, this too will pass. However, returning to a statistical mean means ruin to many people who presently falsely believe they are wealthy. Our present situation is dire as compared to previous recessions because the confidence of the masses in the leaders hasn’t been simply undermined, it’s been inverted. It’s like finding out that your hero father was abusing your sister until she was nineteen. This is enough to make people think about the make believe aspect of our meritocracy, question education, not just in finance but in all fronts including sacred cows like medicine. Crirical mass in failed leadership leads to anarchy. Sure, it will pass, but will you ?

  10. Greg0658 commented on Mar 8

    “unsold houses rose to four million, or to over 10 months’ worth” ??

    10 month supply >> back in the days of 6% mortgage interest and second mortgage MEWs and Americans were the global leaders

    hey world >> 1/2 price McMansion anyone?

  11. john jansen commented on Mar 8

    In the battle over Mr Abelson’s prose I would suggest that his prose is excellent. What I find distasteful and errant is his analysis. I am far more often a stock bear than bull but Mr Abelson has not uttered a bullish breath in the last two decades. He is perpetually negative and the fact that he has it right this time is supportive of the old thesis that even broken clocks are right twice a day.

    That gentlemen is a skilled professional writer but lacks skill when analyzing finanial markets or macroeconomi events.

    JJJ

  12. lurker commented on Mar 8

    “a thesaurus does not a writer make”

    sums up Abelson perfectly. they should have retired that gaseous noisome windbag 10 years ago when he was still, as always, bearish???? my favorite columns, when I could still stand to read him, were the ones when he trotted out his anonymous hedge fund friends to talk their book. Yuck. He is a wordy hack.
    But I digress…

  13. Barry Ritholtz commented on Mar 8

    I’ve been reading — and quoting — Anelson for decades.

    I used to get 7 days — much better than New York Mag.

    But wasn’t logrolling in our time Spy Magazine?!?

  14. lurker commented on Mar 8

    I thought that was SPY too.
    best spy was Resume Mucho about all the Rhodes scholars.
    that was rich.
    miss it.

  15. Francois commented on Mar 8

    “longer, historical perspective would indicate to the contrary: this too shall pass.”

    The question is: who will survive the process and in what shape?

    It could be very ugly before it pass. And no one is guaranteed to escape unscathed. No one.

  16. Bob A commented on Mar 8

    So… let’s see where we’re at.

    All we need to solve this crisis is for four million people to save up a 20% down payment (roundabout $80k) so they can qualify to buy a home.

    No problem eh? We’ll have that for you any minute now.

  17. Bob_in_MA commented on Mar 8

    Hey, Reynold Weidenaar I just bought one of your mezzotints in an auction! A pseudonym, or a descendant?

    By the way, Barry, you said, “We’ve long been a fan of Abelson’s unvarnished views and delightful prose. Its always a privilege when our thoughts find their way into his columns…”

    Is that the royal we?

  18. Barry Ritholtz commented on Mar 8

    Yeah, I’m aware of it, Bob.

    It is an affectation — I do not always want to say “I said/read/did” — and the blog is a collective effort, so, the royal we gets used on occasion . . .

  19. Reynold Weidenaar commented on Mar 8

    Hey, Bob in MA, the mezzotint you bought was by my father (same name–1915-1985). Mezzotints were among his best work, mostly from the 1940’s. Unfortunately he also dabbled in journalism, a la Alan Abelson. In the late 1950’s he was engaged by The Grand Rapids Press to write a monthly column. Not having graduated from college, he felt compelled to display an impressive vocabulary–much like Alan Abelson seems to need to do today. Dad relentlessly mined his newly-purchased copy of Roget’s Thesaurus to lard up his writing with baroque and arch verbiage. It was tolerated by the Press for a couple of years because of what he had to say as an artist.

    In my ideal Barron’s Magazine, words would not be toys to play with or decorations to trot out for readers’ admiration. Unless they hire a pro like George Carlin. Wit and cynicism can be achieved without distracting and self-conscious wordplay. Good writing is a blend of directness, erudition, vivid idioms, and energy. The New Yorker is a good place to find it.

    Abelson may be the farthest thing from one, but he writes like a silly twit.

  20. Bob_in_MA commented on Mar 9

    Reynold,

    Thanks for the reply. It was the Bridge Builders, Makinac Straits at Swann. I’m excited to get it, because I had to buy it from home. Do you have a collection of your father’s work?

    I guess what people find refreshing with Abelson is that he is usually irreverent, and most business writing is either banal or hysterical.

    I never read business writing much until a few years ago when I sold my business and had a huge sum (to me) of money to invest. I’ve come to the conclusion that business writers aren’t much different from sports writers. You have the same fawning approach to the stars in the field, the same mindless boosterism, etc. I guess it’s served me well over the last couple years because I’ve done very well betting against lenders and builders all the way down, while these people kept calling bottoms and giving me new opportunities. One of the Alt-A lenders I’ve made a ton off was at an all-time high last February, as the sub-prime crap was exploding and the morons of the business talked about how the situation was contained.

    Now, I feel like I’ve learned as much as I can without devoting my life to it, so I’m trying to arrange my investments in a way I won’t have to pay so much attention to the business world. Frankly, I wish the market would just crash 25% more and I’d put everything in index funds.

    Then I could stick to reading the New Yorker, the Economist, etc.

    I’m glad you responded. When I saw your name, a couple days after buying the print, I felt I was in the Twilight Zone for a moment.

    Take care,

    Bob

  21. expat commented on Mar 9

    Hey, Reynold. Back in the day when I was a bit of a stoner, we used to say “Man, you’re totally harshing my mellow”. Now I will say, “Dude! You are totally mellowing my harsh!”

    Of course, while this too shall pass, let us ask first of all where we are and then think about where we are going. It was unchic to be Malthusian since it seemed so wrong; now it is politically incorrect to be Malthusian since it is, well, politically incorrect to suggest that we are too numerous since the “we” usually refers to poor third worlders.

    Our capitalistic system has indeed increased wealth for millions and the IT revolution has increased productivity. But, we perhaps need to really, really ask “So what?” A religious person (I am not) would certainly suggest that material wealth and an Ipod are not the purposes for our existence. Reducing lives to mere quests for plasma tvs or a car is frankly pathetic.

    So when we come out of this crisis (recession or depression), we will probably continue on the same path, building more homes, more suburbias, buying more cars, eating more Big Macs. China and India will also continue their booms, sucking in more and more commodities. Ultimately, oil will become extremely expensive. Food will become too expensive for much of the poor third world. Clean water, clean air, and arable land will be exhausted.

    This is not left-wing, tree-hugging bs. I work in the oil industry; I am to blame. We are running out of the basic necessities and if world population continues to grow and economies grow, then the demand on the earth’s LIMITED resources will exceed its ability to supply them.

    I don’t have any solutions other than limiting population and getting rid of things like Hummers and iphones. I don’t believe in the Technology Fairy who will invent desk top cold fusion next week or magical Star Trek food synthesizers which turn waste into tasty, nutricious snacks.

    So you might cheerfully speak of recovery from this crisis and return to our path of growth, growth, growth, but ask yourself what is the end game.

  22. wunsacon commented on Mar 9

    >> I work in the oil industry; I am to blame.

    I disagree with the implication that one statement entails the other. If you resign, someone else will take your place.

    It’s good (and good enough) that you share your warning with people. It does no good to humankind for “the observant” to “martyr themselves”. Some challenges require policy changes and mass action; not individual heroics.

  23. Reynold Weidenaar commented on Mar 9

    Bob,

    Yes, there is a collection of my father’s work. My sister handles this. I would be glad to give you the details off-blog. I don’t want to put my e-mail address up here, but it’s easy to contact me. Go to http://magneticmusic.ws and click on the button “E-mail Magnetic Music.” Your message will reach me.

    I don’t read much business writing, but I do plow through a fair amount of financial journalism. Like business writing, it suffers from fawning and boosterism—easy to see through—but more objectionable is the tendency to urge the reader to ACT!!! NOW!!! Human beings are hard-wired to react to new developments, which is a negative for good investing. It helps to read about behavioral finance. My approach is basic asset allocation, using low-cost index funds wherever possible. I follow the writings of William Bernstein, Jeremy Grantham, and David F. Swensen. But I allocate prospectively, not retrospectively. After establishing a balanced portfolio of index funds, success in investing can be enhanced by identifying large economic trends while they still have time to run. If you’re going to predict the future, predict it early. Four years ago, when I started managing my portfolio, I began tilting my investments towards such asset classes as emerging markets, commodities, energy, managed timber, euro-denominated bonds, renminbi and yen CDs. This was while still retaining a plain-vanilla allocation of U.S. stocks, bonds, etc. Tuning out the fluctuations and watching these trends unfold is like watching a flotilla of Queen Marys crossing the Atlantic: big, slow, and (absent the black-swan event we must always be wary of) they generally arrive somewhere advantageous.

    Last December and January the financial press (especially the side dealing with economics, and most particularly The Big Picture) was loaded with reports of untenable conditions that would lead to impending economic disasters—some 20 on a list I quickly compiled. I sold a majority of U.S. holdings, and took strong positions in gold and in ETFs that short the U.S. markets. This was more than just a tilt. I felt like a traitor for ACTING!!!, and for breaking my asset-allocation discipline. I could be walking the bridge to safety or I could be walking the plank. Here’s hoping the market gives you your 25% crash!

    Did you see the New York Times today? Two front-page mentions of Barry Ritholtz above the fold. Alan Abelson, eat your heart out!

    >> Reducing lives to mere quests for plasma tvs or a car is frankly pathetic.
    Right on, Expat. There are worthwhile things we can do with our money to improve the very hard lives of others. Like joining the American Institute of Philanthropy ($40/year) to learn which charities are most effective in using their funds, fulfilling their mission, and providing accountability.

  24. Reynold Weidenaar commented on Mar 9

    Bob,

    Yes, there is a collection of my father’s work. My sister handles this. I would be glad to give you the details off-blog. I don’t want to put my e-mail address up here, but it’s easy to contact me. Go to http://magneticmusic.ws and click on the button “E-mail Magnetic Music.” Your message will reach me.

    I don’t read much business writing, but I do plow through a fair amount of financial journalism. Like business writing, it suffers from fawning and boosterism—easy to see through—but more objectionable is the tendency to urge the reader to ACT!!! NOW!!! Human beings are hard-wired to react to new developments, which is a negative for good investing. It helps to read about behavioral finance. My approach is basic asset allocation, using low-cost index funds wherever possible. I follow the writings of William Bernstein, Jeremy Grantham, and David F. Swensen. But I allocate prospectively, not retrospectively. After establishing a balanced portfolio of index funds, success in investing can be enhanced by identifying large economic trends while they still have time to run. If you’re going to predict the future, predict it early. Four years ago, when I started managing my portfolio, I began tilting my investments towards such asset classes as emerging markets, commodities, energy, managed timber, euro-denominated bonds, renminbi and yen CDs. This was while still retaining a plain-vanilla allocation of U.S. stocks, bonds, etc. Tuning out the fluctuations and watching these trends unfold is like watching a flotilla of Queen Marys crossing the Atlantic: big, slow, and (absent the black-swan event we must always be wary of) they generally arrive somewhere advantageous.

    Last December and January the financial press (especially the side dealing with economics, and most particularly The Big Picture) was loaded with reports of untenable conditions that would lead to impending economic disasters—some 20 on a list I quickly compiled. I sold a majority of U.S. holdings, and took strong positions in gold and in ETFs that short the U.S. markets. This was more than just a tilt. I felt like a traitor for ACTING!!!, and for breaking my asset-allocation discipline. I could be walking the bridge to safety or I could be walking the plank. Here’s hoping the market gives you your 25% crash!

    Did you see the New York Times today? Two front-page mentions of Barry Ritholtz above the fold. Alan Abelson, eat your heart out!

    >> Reducing lives to mere quests for plasma tvs or a car is frankly pathetic.
    Right on, Expat. There are worthwhile things we can do with our money to improve the very hard lives of others. Like joining the American Institute of Philanthropy ($40/year) to learn which charities are most effective in using their funds, fulfilling their mission, and providing accountability.

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