On Wednesday, with the market recently completing a 500 point dow rally from Friday, I received a call from a friend who asked if the coast was clear to get back into the market. I explained to him that it was absolutely not a time to buy in, and interestingly enough we had a 450 point decline in the following 2 days. As I continue to repeat time and time again, the macroeconomic risks are absolutely incredible in our current environment. I simply cannot see how we're going to get through this mess without a HUGE government bailout, and even then, I still don't see how catastrophe won't ensue when the dollar gets tossed out with the trash.
Ambak, MBIA are only a sideshow here. The government states that they want to help facilitate housing price stability, by raising GSE caps and dropping interest rates. I'm going to say this now - they CANNOT and will not be able to achieve that goal. Monthly housing costs even at today's reduced prices are simply not affordable to 85% of Americans who work 40 hours a week and make between $15 to $30 per hour. And even in cases where it may be affordable, it simply doesn't make sense to devote such a large percentage of monthly income to housing payments. Even rental costs are pushing the average individual to the limit. No matter how we slice and dice the numbers, they just don't add up. Over the last 7 years, housing prices have more than tripled, or gone up 200%+, in overheated areas. Monthly mortgage payments have therefore risen over 250%. To put this into perspective - my monthly salary has risen only about 25% in the last 5 years. Never in history has housing required such a large chunk of our monthly income.
The fallout from this situation? Foreclosures and defaults will continue to roll in. Therefore rescuing ABK and MBIA by providing a few billion dollars of liquidity is not going to work. Warren Buffett himself is unwilling to touch mortgage related issues. He recently referred to mortgage assets as "toxic paper". Quite frankly, it's only a matter of time before Moody's or S+P cuts ABK and MBI's ratings. But to be honest, their demise may only be foreshadowings of even greater disasters to come. Hundreds of billions in writedowns are looming. If even high-grade AAA rated TAX FREE MUNICIPAL BONDS (close to the best of the best) have not been able to find a market in this environment (as in the Auction Rate Securities Failures), what are we to make of the trillions held in mortgage backed assets?
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