Wall Street's financial institutions and pension funds are thought to be heavily exposed to possible losses in collateralised debt obligations (CDOs) - packages of debt including mortgages owed by American households that are bought and sold in the financial markets.
When the Canadian dollar is trading nearly one-for-one with the U.S. dollar (the “loonie” at nearly 96 cents earlier this week) how can you not worry about our economy?
And, the mere fact that this story is gaining more traction in the international press indicates its seriousness.
Meanwhile, the “holdout effect” may keep the spiral going downward as well according to one economist. The details:
Sal Guatieri, economist at BMO Capital Markets, said the troubles in housing will continue to drag on the overall economy.
“The US housing correction shows no sign of stabilizing,” Guatieri said.
“Foreclosure rates are at all-time highs, with many subprime borrowers throwing in the towel. Continued moderate home price deflation, though helping affordability, is also discouraging buyers from taking the plunge.”
Market Watch, meanwhile uses “Moby-Dick” language to describe its concern:
Standard & Poor’s just drove a huge harpoon into the heart of the mortgage credit bubble, and it's going to take a long time to clean up the mess once the beast finally dies. …
But the bigger news is that S&P isn't going along with the charade anymore. S&P said it would change its methodology for rating hundreds of billions of dollars in residential-mortgage-backed securities. And it would review its ratings on hundreds of billions of dollars in the more complex collateralized debt obligations based on those subprime loans.
A lot of debt will be downgraded to junk status. A lot of that debt will have to be sold at fire-sale prices. A lot of pension funds and hedge funds that once thrived on the high returns they could get from investing in subprime junk will now lose a lot of money.
S&P’s announcement is a death warrant for the subprime industry. No longer will mortgage brokers be able to help buyers lie their way into a home. Fewer stressed homeowners will be able to refinance their mortgage, thus extending and exacerbating the housing bust.
“We do not foresee the poor performance abating,” S&P said.
And, I’m far from the only blogger to wonder, “Where was S&P two or three years ago?” as Business Week reports.
Homebuiders’ stocks reflect the ongoing concern, continuing to stumble and continuing to get stronger “sell” recommendations.
So, is it time to wonder about a possible recession? I say, “yes.” I’ll give you 1-in-3 odds we are in a recession within 12 months, and 1-in-2 odds we are by Jan. 1, 2009.