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A READ OF THE TEA LEAVES
By Stanley C. Clayton
December 8, 2009
Economic Tea Leaves
It was mentioned in an earlier Tea Leaves that starting in 2010 there will be a very large rise {again} in mortgage foreclosures. The chart above, courtesy of Credit Suisse, lays it out in graphic detail from most of 2007 through 2016. The top three (Option adjustable rate, Subprime, and Alt-A) are of interest as these are the ones that have very large interest rate resets – to a much higher interest rate after the first few years. We can see the nation was nailed with a huge volume of Subprime loan resets beginning in 2007 and through much of 2008. 2009 was a relative lull. Now 2010 and 2011 get hit with a huge volume of Option variable rate and Alt-A loan resets. The peak is about August 2011 and tapers down through the first quarter of 2012 when it finally hits manageable levels by mid-year. Without timely and effective massive government intervention, there will be another meltdown like 2008. Banks know this is coming, which may help explain why there is so little bank lending.
Lull Before The Storm
Retailers and manufacturers have been gearing up for Christmas giving a boost to employment and production (GDP). T''is the season to be jolly, and there are enough actual positives that people can breath a sigh of relief. We should unabashedly enjoy it for all it's worth and for however long it lasts.
For all the reasons discussed so far in Tea Leaves, tough economic times may lie ahead. Depending on how it unfolds, it could become the makings of a perfect storm, or if it unfolds differently, the “Great Recession” may transition into the “great doldrums” of stubbornly low prosperity well into the future. This grist can be for mill next year.
Stock market Tea Leaves
Current market action makes me think of an analogy to Alfred E. Newman (Mad Magazine's “Who me worry?” icon) as the prevailing approach to investing. But if Alfred starts to worry, even the Fed easing is likely to be insufficient to keep Al in the game. From this vantage point, it seems likely Alfred will seek a bridge to safety by mid year. Think he'll make it?
