October 14, 2008
Posted by: Joe Morgan, CFA
With the bailout deliberations behind us and the plan moving
forward, the question for all of us is "what happens next?"
Unfortunately, one of the answers came in the form of the nonfarm
payroll release for September which showed a 159,000 person drop
from the nation's payrolls. Continued significant job losses going
forward could lead to another leg downward in the current
Though the second quarter grew at a pace of 2.8 percent, much of
that was due to the economic stimulus checks doled out by the
government - fleeting support at best. The fact remains that we are
in a long-term downtrend in reaction to an over-inflation of the
housing market, exacerbated by the destruction of the mortgage
Over the last 10 years or so, mortgages have been financed
primarily by off-balance sheet conduits that funded themselves by
issuing short-term debt. So, at the end of the day the entity had
30-year assets and 90-day liabilities. Beginning in late 2006,
investors became scared of a potential bubble burst in the housing
sector and began pulling their investments from the housing market.
These 90-day liabilities began to go away as investors shied away
from them at a reasonable rate. The conduits reacted by downsizing;
unfortunately, by that time the entire mortgage market had become
dominated by these same entities which found no buyers for their
A downward spiral of mortgage prices ensued and was aggravated by
the revelation that shifty lenders had made loans that should never
have been made; and shifty borrowers had taken the same.
Eventually, no one wanted to buy these assets and now the chaos
The pipeline that transports capital from those who have it to
those who can afford to pay for it is broken. In the mortgage
market, this is the off-balance sheet conduit which needs to be
reinvented, remarketed and redeployed. The nationalization of
Fannie and Freddie is one step of many in this process. The next
step is deciding what to do with them - a debate that was put on
hold last month when the credit markets began to seize up.
I believe it will take 18-24 months, at least, for any semblance of
a mortgage market to come about. First, Wall Street has to reinvent
the pipeline since one that funds itself with such short
liabilities is certainly a non-starter. Second, they will have to
sell this to the investors/lenders - not an easy task at all. And
finally - and most importantly - investors' fear must turn into
The first two of these steps are fairly straightforward, though a
solution is certainly not yet in hand. The third is much more
interesting. How long will it take for investment committees around
the country - and indeed around the world - to begin discussing
"return" once again instead of "risk" At a minimum it will take two
quarters with no serious negative events - credit or otherwise -
before this can happen. Only by the second quarterly meeting where
these boards review a paltry set of returns and cannot think of any
significant negative credit event since the last time they met will
they then become interested in "outperformance" once again.
The primary risk facing the economy and the markets today comes
from the jobs sector. Considering previous recessions, the economy
"should" be losing between 120,000 and 170,000 jobs, instead of the
84,000 average pace to date. Homeowners have been forced to sell
due to crummy mortgage contracts or the inability to refinance as
they'd originally planned. We have not seen a multitude of
homeowners forced to sell because they'd been let go of their jobs
- unfortunately that fate may be on the horizon.
Nonfarm payroll losses reached a cyclical high of 159,000 last
month. Should this trend continue, we could see another downturn in
the housing sector that will reverberate through the rest of the
Is the bailout bill too late or too weak? That remains to be seen,
but even if it does promote liquidity in the credit markets, we
still have Fannie and Freddie to fix. The time bought by earlier
measures is running out. If confident investors don't step forward
soon, we could be in for several years of recession.
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It's a Long Road BackOctober 22, 2012 Posted by: Joe Morgan, CFA
With the bailout deliberations behind us and the plan movingforward, the question for all of us is "what happens next?"Unfortunately, one of the answers came in the form of the nonfarmpayroll release for September which showed a 159,000 person dropfrom the nation's payrolls. Continued significant job losses goingforward could lead to another leg downward in the currenteconomy.
Though the second quarter grew at a pace of 2.8 percent, much ofthat was due to the economic stimulus checks doled out by thegovernment - fleeting support at best. The fact remains that we arein a long-term downtrend in reaction to an over-inflation of thehousing market, exacerbated by the destruction of the mortgagemarket.
Over the last 10 years or so, mortgages have been financedprimarily by off-balance sheet conduits that funded themselves byissuing short-term debt. So, at the end of the day the entity had30-year assets and 90-day liabilities. Beginning in late 2006,investors became scared of a potential bubble burst in the housingsector and began pulling their investments from the housing market.These 90-day liabilities began to go away as investors shied awayfrom them at a reasonable...Read More