PIMCO's Bill Gross Commentary

[HenryTo]

April 2007 commentary from Bill Gross:

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+April+2007.htm

Along the lines of what I wrote in our weekend commentary. The danger is in overregulation and tighter lending standards for months/years to come, not the current/potential losses from higher resets, etc.

[HenryTo]

Bill Gross of PIMCO suggests that the Fed will need to cut to at least 3.75% in order to rejuvenate economic growth:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aCVrFHlD8_hg&refer=home

[HenryTo]

I absolutely agree with you on that.

Underpining both the California and Florida housing markets are Asian and the Middle Eastern buyer - and that is a big variable that not many forecasters have dealt with. We will see.

[nodoodahs]

I've no doubt we'll both be still hangin' around in another couple of years. We'll see.
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He was wearing my Harvard tie. Can you believe it? My Harvard tie. Like oh, sure, HE went to Harvard.

[HenryTo]

First of all, data from First American CoreLogic (and cited by Goldman) estimates that over 5% of all homes in the US have negative equity as of December 31, 2006. Over the last seven months, there is no doubt this ratio has increased. Given that the number of households in the US is about 110 million, that equates to about 5.5 million homes underwater. Also, approximately $400 billion of subprime resets will occur between now and the end of 2008 (about 1 million homes assuming a $400,000 average mortgage) - there is no doubt virtually all of these will be foreclosed on if the credit crunch does not abate (Fed Funds cuts will be of no help since these are not prime borrowers) since their houses are underwater and there are no refinancing options because no lending institution will touch these borrowers anymore.

Secondly, the resets are going to be much larger than 20% - the order of magnitude is at least 50% for prime borrowers and more than 75% for subprime borrowers with a shorter-than-five-year fixed period.

The article below summarizes it pretty well:

http://business.timesonline.co.uk/tol/business/money/property_and_mortgages/article2067174.ece

I had dinner with a PIMCO VP last night - and had listened in on several subprime conference calls from PIMCO, Blackrock, Goldman, and Lehman over the last couple of months - and from looking at the facts and evidence, there is no doubt things will get bad in the housing market even if interest rates, housing prices, and unemployment rates remain at current levels. The only thing (assuming no government intervention) that will bail them out is rising housing prices, but that isn't going to happen over the next 18 to 24 months. This took a while to sink in.

Finally, the foreclosure process is no laughing matter. It is not merely back to square one - once your credit is destroyed, you can literally go back to square zero and it will take years to rebuild your credit again.

[nodoodahs]

First, I don't buy the "2 million foreclosures" line.

Second, they wouldn't be thrown onto the streets, just out of the houses that they can't afford. So their ARM reset to $1100 instead of $900 a month? They get foreclosed on ...

and then ...

they move into a smaller rent house, a smaller house that they purchase, or into an apartment, for the $900 per month that they CAN afford. Which, incidentally, is where they were living BEFORE.

Big deal.

Needless to say, they don't stop spending for food, beer, liquor, movies, clothes, iPods, or anything else. They're Americans, for goodness sakes, they're not gonna stop spending!

I think the economic impact will be much more marginal than most seem to think, and I doubt at the end of the day that it will even be firmly quantifiable.
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He was wearing my Harvard tie. Can you believe it? My Harvard tie. Like oh, sure, HE went to Harvard.

[HenryTo]

The hedge funds, mortgage financiers, and other non-bank financial intermediaries are still deleveraging and being liquidated as we speak. These guys have no access to the discount window. Moreover, none of their paper have FDIC insurance - so chances are, once whatever fiscal bailout emerges, it will be too late for these folks.

During the 1920s and 1930s, guys like Andrew Mellon would have liked to throw this people onto the streets, but what would you get in return? Throwing 2 million people onto the streets does nothing for the confidence of the American population - and neither for the 65% or so that are still holding their homes. It only helps distressed buyers - which, keep in mind, PIMCO is a part of as well. At some point, none of this would be good for anyone - because the economy would have only dug itself into a deeper hole. The distressed buyers couldn't wait to buy Japanese real estate or stocks in the early 1990s - but how much of a return have they gotten since then? Not to mention huge societal disruptions - there are thousands of unintended consequences when you kick 2 million people out of their homes - such as higher crime rates, lower literacy rates, etc.

This is the world we live in today, and that's why Americans as a whole are more likely to take risks than either Europeans or Asians.

[nodoodahs]

Clint Eastwood said it best in "Outlaw Jose Wales" (the Spanish version was called "El Tejano" or something like that) -

"Buzzards gotta eat, same as worms."

Bailing out the speculative homeowner just hurts those good cash buyers of foreclosures, who could then turn those foreclosed HUDs and REOs into rental houses, helping them out on their way to early retirement.

Hooray for buzzards!
_________________
He was wearing my Harvard tie. Can you believe it? My Harvard tie. Like oh, sure, HE went to Harvard.

[anti]

The easy money mortgage is what drove Home prices up in the first place..

Rewarding those who spent too much money on a home, took too big a mortgage or who overleveraged their home seems compastionate...

but what about those who would like to buy a home now? Why should THEY be punished by artificially propped up home prices... which make they're american dream unattainable....

In essence it's a back door method of bailing out mortgage bankers, stupid bondholders and investment banks..

Bill Gross is just wrong.....................

[HenryTo]

September 2007 commentary from Bill Gross:

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+September+2007.htm

The argument for securitization among the bulls is that it spreaded out the risks - and thus when commercial banks pull back from lending, the bulls argue, the game can continue since the debt (instead of being held in banks) can be securitized and bought by the millions of retail investors, pension funds, bond bunds, and hedge funds. Today, that argument doesn't look so good anymore, as everyone is now "pulling back" at the same time. Many pension funds will no longer be allowed to purchase any CDOs, for example, going forward after this debacle (actually, it is still to come for pension funds since mark-to-market should not come until December 31st).

[HenryTo]

Bill Gross states that fiscal policy, rather than monetary policy, should be used to save homeowners:

http://www.bloomberg.com/apps/news?pid=20601087&sid=amVRExsd80cA&refer=home

[HenryTo]

Bill Gross still sees rate cuts in the next several months:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aY4FnmmKTXJs&refer=home

[anti]

Hey Mr Plosser,

Seems to be spreading now.......

[anti]

Today Fed's Plosser say's he sees no spread from subprime because banks have spread their risk...
Next story: Banks may hold more than half the loans needed to finance the Chrysler deal because of no interest in the market place.....

Hey Mr Plosser.. It's safer to drive when looking out the "Front window" rather than the rearview mirror....

[rffrydr]

I detect more than a note of consternation/relief at the end there--Bill's been holding his breath (and mouth) for quite some time--and just a little past his "capitulation." He should come hide in this message group with me.

The EEM currencies finally taking a hit today and it looks like he missed buying the the top:

http://stockcharts.com/h-sc/ui?s=TEI&p=DAILY&b=5&g=0&id=p28793474921
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Bill Gross on income redistribution and the high yield, leverage loan, etc., markets in his latest August 2007 commentary:

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+August+2007.htm