Wednesday, July 11, 2007

Standard and Poor's Moment of Truth

The headline really says it all, no? And, dear reader, it's not from a lone blooger in his attic. It's from Dow Jones.

All of us who have wondered, for three years now, just how it is that credit can be freely given for crap furniture ("Buy now! No repayments until your 3-year-old kid graduates Medicine school!"), let alone actual Houses, are receiving an answer from the financial universe.

It's all Smoke and Mirrors. It is financial junk. And it is tanking. Sinking, Flushed, Round der Bend.

Already there is a domino effect in the US:

- Home Depot (fond memories: I bought two Bostitch nail guns there for amazing low prices, and despite some TSA headscratching, got them back to NZ in checked baggage) has announced an earnings downgrade

- Builder D R Horton has orders down 40% and inventory piling up. (Although just how new houses can 'pile up' does make one stop and think. Maybe they just stack them with big forklifts, like containers?)

- Re-rating of sub-prime debt instruments (the now infamous CDO's) is rampant, and guess what they will find - more junk and crap, everywhere they look. As Dr Housing Bubble notes, there's over a trillion US in mortgage re-sets a-comin round the bend.

So the question for NZ is - how soon before the US mortgage train wreck grows wings and flies the Pacific to land here? Oh wait, Bridgecorp was evidently into non-prime-mortgages too. As I seem to have voiced before, it would be schadenfreude if it weren't My country, too.

If I was working for one of the crop of recently opened appliance stores, I'd be polishing my CV. Because it's just amazing what you can do without when you put your mind to it. And vanity spending is the first to, er, vanish.

Boy, am I glad I downsized mid last year.

Update: 20 Jul 2007.

A good summary of the mechanisms behind CDO's and the other financial instruments which are presently in trouble. The obligatory quote:

'Bundling mortgages into asset-backed bonds and then agglutinating those bonds into collateralized debt obligations sliced into different flavors of risk always smacked of a sophisticated pyramid scheme.'

That's right folks - a pyramid scheme.....

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