Predictions for 2008
Once more into the breach dear friends, once more!
If at first you barely succeed, take a risk again? Undaunted by my mediocre 2007 prediction results, I’m back with more.
Or else close up the wall with our English dead!
1. 2008 will show that we have not a housing crisis but a global credit crunch. This is almost a layup, for all the indicators are present, it’s just a matter of reorienting public thinking.
One recession, coming up!
Certainly housing – most particularly homeowners who took out subprime loans – was the first crack in the dike, triggering a slowdown in capital velocity and a credit tightening that now reveals far too many people were doing it, doing it, doing it. When the music stopped, far too many people are holding assets they didn’t understand. For most of them, the exit strategy of selling will give way to the maintenance strategy of farming what you have.
This isn’t as much fun as buying and selling
2. The
- Construction as a source of business spending and jobs.
- Refinancing as a source of liquidity and consumer spending.
- Professional services and repackaging of assets lead to financial velocity.
These are big drivers, but by themselves they’re not the reason. Rather, the repricing of risk – the vast widening of an overly compressed risk curve – affects the cost of capital everywhere in the economy, and the skittishness over asset devaluations pulls risk capital out of the marketplace. Less velocity, higher capital cost – it equals recession, as Nouriel Roubini primus inter pares has been saying relentlessly.
Stepping out with thought leadership
The global economy will be recessionary too. When we sneeze, everybody catches a cold.
Are you exposed to the American economy? You know you are!
3. Risk curve spreads will stabilize but be high. It’s not a cycle, it’s a sea change. Sea changes do cycle, but the recovery interval is ten to a hundred times longer than the collapse interval.
Markets work in a reverse cliff: when catastrophes strike, the first thing that happens is the commodity disappears. Then when it reappears, pricing is sky-high at first. Gradually, slowly, pricing declines or spreads compress, and after a period of years, the market is back in the vicinity of where it was before the financial catastrophe.
We saw this most recently with hazard insurance. 2004 was the catastrophe year, as four hurricanes hit
Twice — as — high! Twice — as — high!
Something similar has to work its way through the risk curve. It’ll take months to stabilize, and years to recompress.
This, as everyone has told you, is big.
4. Congress won’t pass any meaningful legislation in the housing arena. Nothing for GSE reform. Nothing for tax reform (except another one-year AMT patch). Nothing for public housing reform. Nothing for Section 8 or HUD reform.
I’m just in a reform-enactment slump
Too many people are running for too many offices, and the atmosphere in
The stasis is really depressing.
Just not motivated to tackle housing problems
5. A rating agency will go bust. Actually, I made this prediction in August, 2007:
He’s fully independent … aren’t you, poopsie?
If the large capital markets come down with a severe case of food poisoning, they’re going violently to expel their symbiotes that persuaded them to consume the food that made them so sick.
Arthur Andersen disappeared, not because it was convicted of anything but rather because its brand was sullied and there was a surplus of big accounting firms. The market decided that N – 1 global accounting firms was enough.
What is the intrinsic reason for three rating agencies? Might not two be good enough?
I’ll reiterate it here.
I only say things twice
No, I don’t have any insider knowledge, nor have I drawn a bulls-eye on any particular agency’s chest.
The reasoning is simple: there’s no intrinsic need for three agencies rather than two, and the agencies’ role in the subprime and CDO meltdown is large, visible, and a ready target for litigation. Arthur Andersen disappeared through litigation-induced dissolution.
6. A reinsurer will go bust. Even before recent events, MBIA and AMBAC were taking a pummeling in the credit markets. Now, with Berkshire Hathaway (Warren Buffett) announcing the formation of a new reinsurer, it should create what Ross Perot would have called a giant sucking sound of new business flowing to the new entity and away from the existing ones.
Naw, here’s the deal … y’all need a new reinsurer
Bad news for the big monolines.
7. For sponsors, risk re-pricing will expose fissures in sponsor capacity. Everybody looks like a world-class athlete when bicycling downhill,
We all look good now
, but the Tour de France is won in the mountains.
Are you strong enough to stay with me in the tough times?
In the same way, fifteen years’ of credit complaisance has led lucky sponsors to think themselves shrewd, thinly capitalized sponsors to think themselves lean and mean. When a credit crunch hits, and financing or occupancy go backwards, suddenly muscle can pedal where flab cannot.
We’re about to discover who’s got capacity, who’s been coasting, and who’s suddenly going to grow new muscles the hard way.
8. It’s workout time. Even if they can’t make ends meet, affordable housing properties are assets. While a very few need to go somewhere to die, for most, saving them is better than letting them die. Which means that there’s a stakeholder – lender, equity investor, regulatory agency, subsidy provider – who has both a self-interest in protecting the property and the capital to do so if sufficiently motivated. That lucky winner will find itself in workout time.
And remember, kids — you should always have an adult around when you do workouts!
(Full disclosure: my for-profit company recently formed a workout group, precisely to help such folks tackle their problems.)
Just push here
9. The crunch will accelerate sector consolidation of the survivors. Much of our space is overpopulated, with many too-small and too-thin entities. Some whose fissures are too wide, whose balance sheets are too thin, will cease as active players. They will be bought, or merged, or their assets sold off.
Not many properties will fail. Many properties will change changes, or change financing, or change their controlling party.
As they say on Wall Street, this is gonna break some glass. Or, as my dad used to say, “it’ll get the kids off the street.”
Don’t get run over in the financial traffic
10. 2008 will be a watershed for AHI. Over the last twelve months, we at AHI have figured out several things about where AHI’s value proposition is, and how we can be most useful to the overall cause of improving affordable housing financial ecosystems globally – which means, one country and one metropolitan area at a time. We’ll be putting those things into practice during 2008. Once such I’ve already described on this blog: I think Slum Dwellers International is on the verge of great things ($10,000,000 from the Gates Foundation will do that to you J ). It will be an enormous satisfaction to help them put that money to work.
And to all of you readers, Happy New Year, and may all your posts be merry.
Where the future begins tomorrow!
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