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Five Things You Need to Know: Treating the Symptoms, Ignoring the Disease


Fannie Mae, Freddie Mac merely symptoms of a larger disease.


Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:

Treating the Symptoms, Ignoring the Disease... Towing the Party Line... 9% and Rising... Death of the American Saver?... Nothing Wrong With Living Within Your Means, Is There?

1. Treating the Symptoms, Ignoring the Disease

While the full impact of the nationalization of Fannie Mae (FNM) and Freddie Mac (FRE) is still being sorted out - conservatorship, nationalization, in time it will come to be seen as the same thing - there is only one thing equities traders and investors need to understand: just as subprime mortgages were not the problem, and just as Bear Stearns was not the problem, so too, Fannie Mae and Freddie Mac were not the problem.

Each of these separate crises were merely symptoms of a larger virus, a larger disease; too much debt built on too much leverage with too little economic growth to support it. Regardless of what stocks are doing today, this is all that matters.

It is clear from the market's behavior this morning, especially the U.S. dollar up on this news, that the probabilities of success of the Federal Reserve and the government being able to force an end-run around debt deflation by instigating inflation is being called into question.

There is still some non-trivial probability that the Federal Reserve (especially if the government assists by enacting complicit fiscal policies) can kick start inflation, most likely by embarking on a Japan-style quantitative easing program, but every day that goes by without initiating this plan makes this path increasingly less likely.

Instead, what becomes more likely as the debt deflation accelerates, is that monetary and fiscal policy will try and cross the line into hyperinflation as a last resort to avoid (or, at a point, halt) deflation.

2. Towing the Party Line: "This Will Make Mortgages More Affordable."

Shortly after Treasury Secretary Hank Paulson's Sunday morning press conference, the major news networks trotted out "experts" to explain what the impact of the nationalization would be for the mortgage market. The party line, repeated by talking heads on all major news outlets, was that this action would "stabilize" the housing market by "making mortgages more affordable."

I suppose that's one way to look at it. But that's like tossing a couple of oars to a man in a sinking boat and encouraging him to row away. The problem isn't being oar-less. The problem is the boat is sinking.

The problem in housing isn't mortgage affordability, it's oversupply and too much leverage.

3. 9% of Homeowners Late or in Foreclosure

The Mortgage Banker's Association says a record 9.2% of homeowners with mortgages are either behind on their payments or in foreclosure through the second quarter. The percent of loans at least 30 days past due or in foreclosure rose further, from 8.8% in the first quarter, and up from 6.5% year-over-year.

In reporting this news USA Today did their best to put on a brave face: "In one bit of positive news, delinquencies on subprime adjustable-rate loans dipped 1 percentage point from the first quarter to 21%."

4. Death of the American Saver?

As social mood continues to transition to negative, there will be an increasingly darker view of monetary and fiscal policy consistent with the mindset accompanying a deflationary debt unwind. For example, consider the tone of this recent article by BusinessWeek's Roben Farzad: "Why American Savers Have Drawn the Short Straw."

"American savers, take a bow. This is your moment of vindication. Your hour of glory. And you earned it (in a manner of speaking).

You resisted the siren call of plastic teaser APRs, dutifully living within your means to store money for a rainy day. You never took out an interest-only mortgage. Never had to pawn the copper pipes from your exurban McMansion to pay the reset on your liar loan. Your credit score would have gotten you into Harvard at age 12.

Good for you! Your reward: injurious savings yields, inflationary rot, and election-season neglect, all served up with a dollop of institutional insecurity."

Farzad sums up the piece with this apt characterization:

"Maybe savers' ultimate vindication will arrive when and if every asset is so deflated, credit is so choked off, and misery is so prevalent that only those with cold hard cash can lob in lowball offers for homes, cars, and everything else."


5. Living Within Our Means

Minyan EK over the weekend forwarded me an interesting story from the Aspen Daily News, "Mortgage Market Tightens Further," important because it showcases what will be an increasingly familiar refrain over the next few years.

While cataloging the familiar woes facing even qualified borrowers, ("While money for real estate is still available to borrow, lenders are looking for more documentation about income, assets and credit history than they were two or three years ago."), what stood out in the piece was this nugget:

"Reflecting on the now bygone era of money being loaned with virtually no real proof that it could be paid back, Adam at Community Banks noted: "There is nothing wrong with people living within their means."

The Federal Reserve, based on their actions, might disagree.

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