The continuing housing correction, liquidity crunch, and squeezed consumer present an unusually challenging environment to navigate. Investment professionals have finally recognized that the underlying problems are systemic, changing their mantra from 2007 when this was seen as an isolated “sub-prime problem”.
We are particularly proud of our excellent and prescient intelligence in this arena, especially as it has evolved into the primary investor focus of the last 18 months. We developed our long term perspective back in 2004, as depicted most succinctly in the top chart to the right. Click it for an expanded view.
Going forward from then, not only did we warn our clients about both the risk of mortgage-backed securities and the peak of the housing market, both in mid-2005, but we laid out the vast ripple effects of that housing problem, as depicted in our tsunami chart (the second chart at the right). We have continued to keep our clients apprised of the situation, and will look for signs that the bottom has been reached.
Some of our visuals used with clients are to the right. Below is a sampling of written communications to clients over the period:
• June 17, 2005: Our Briefing warns of the bravado of some “quant jocks,” who displayed irrational fearlessness at the inability to accurately price CDOs and their derivatives.
Read the Briefing here
• October 24, 2005: Our Briefing notes that consumers are fueling spending with debt and home refinancing while also facing new cost-of-living pressures – an unsustainable practice we suggest will set up a consumer recession few see coming.
Read the Briefing here
• December 19, 2006: Our issue of eFocus waves a red flag, pointing out that a litany of risk premiums are at extreme record lows, suggesting a sharp change in risk profiles to follow.
Read the eFocus here.
• April 26, 2007: Our issue of eFocus notes a huge pipeline of mortgage resets that would hit later in the year, highlighting the fact that ratings agencies had barely yet downgraded any of the securities made from those mortgages, despite the failure of 60 mortgage businesses by that point.
Read the eFocus here.
• August 17, 2007: We published a Special Briefing comparing the current housing and credit problem to the Asian Flu crisis of 1997. In short, we laid out the case that the effects of the crisis would ripple far beyond the areas of investor focus as of mid-2007.
Read the Special Briefing
We have continued to keep clients updated over the past year in the following publications:
December 13, 2007 update on the consumer in this Briefing
March 11, 2008 warning on commercial real estate in this eFocus
March 18, 2008 warning on municipal budget squeezes in this eFocus
May 30, 2008 warning about the state of international developed economies in this Briefing
July 9, 2008 update that the credit crisis and fall of housing values is not yet over in this eFocus
In short, we feel that our intelligence on this major dynamic has been accurate and vastly important to our clients. The same can be said of many dynamics we have accurately uncovered in our 29 years of business.
