The forecasts in Bob Prechter’s best-selling book, Conquer the Crash, are coming true like falling dominoes. The truly remarkable part of the story is how early he saw them. Bob described the ways that many dominos would fall before some of them were even set up. His earlier book, At the Crest of the Tidal Wave was published in 1995, while Conquer the Crash was in 2002. This was years before the gathering storm became obvious to “Dr. Doom,” (the New York Times’ name for economist Nouriel Roubini) who described parts of the bursting bubble in 2006.
The following is a sampler of quotes from Conquer the Crash and At the Crest of the Tidal Wave, followed by some recent news quotes.
Credit
2002 Conquer the Crash Chapter 11:
Chapter 4 of this book makes the case that after nearly seven decades of a positive trend, confidence has probably reached its limit. Chapter 1 demonstrates a multi-decade deceleration in the U.S. economy that will soon stress debtors’ ability to pay. These dual forces should serve to usher in a credit contraction very soon.
Chapter 13: A defensive credit market can scuttle the Fed’s efforts to get lenders and borrowers to agree to transact at all, much less at some desired target rate. If people and corporations are unwilling to borrow or unable to finance debt, and if banks and investors are disinclined to lend, central banks cannot force them to do so.
Another example of defensive psychology is the increasing conservatism of bankers during a credit contraction. When lending officers become afraid, they call in loans and slow or stop their lending no matter how good their clients’ credit may be in actuality. Instead of seeing opportunity, they see only danger.
August 11, 2008 Wall Street Journal
Fed Study: Banks Tighten Credit on Households, Businesses
“U.S. banks continued to tighten their standards on loans to households and businesses in the second quarter, said a Federal Reserve study that also … shows that demand for bank loans over the past three months continued to fall off.”
August 13, 2008 International Herald Tribune
U.S. credit system remains crippled a year after crisis erupted
“A year after the credit crisis erupted on Wall Street, one of the most important arteries of modern U.S. finance remains broken. The problem - the drying up of financing for a vast swath of the economy - has intensified … The inability to revive credit markets has served as a drag on both the U.S. and the global economies.”
“Bond investors first stopped buying private home mortgage deals, then shunned commercial mortgages. Now, they are becoming wary of credit card debts and auto loans. In the first half of 2008, private securitizations reached $131 billion, tumbling from $1 trillion a year earlier….
Analysts say housing prices are the most important numbers to watch for the economy and markets. Investors will be able to estimate the size of their losses once it becomes clear how far prices will fall and when they will bottom.”
That last sentence clearly says… nothing. There are times when the media is useful. This is not one of them.
Real Estate
1995 At the Crest of the Tidal Wave Chapter 20
The fall in real estate, in turn, will affect financial institutions such as banks and insurance companies. Some states, such as California, have laws that restrict banks from collecting any more than a debtor’s house and land on an unpaid mortgage. Many people will simply walk away from their homes and turn their keys in to the banks, which will consequently be vulnerable to going under in large numbers.
July 29, 2008 BBC
“Faced with seemingly never-ending falls in the value of their properties, some American home-owners are taking radical action; they are choosing to walk away from homes and their mortgages. Consequently, [she] has also walked away from the $200,000 loss on her property. Her bank gets stuck with that. Traditionally in America there is a social stigma attached to those who default on their debts… but, in the depth of this crisis the social attitudes to such actions are changing.” “The dangers are extraordinary," Professor Wachter says. “If all that is needed is that the house value is less than the mortgage value, there is a large number of homeowners in the United States who are in that situation.”
2002 Conquer the Crash Chapter 16:
The overwhelming evidence for a major stock market decline presented in Chapters 4 through 7 is enough by itself to portend a tumble in real estate prices. Usually the culprit behind these joint declines is a credit deflation. If there were ever a time we were poised for such a decline, it is now.
August 2008, The American Bankers Association Quarterly Bank Stock Review:
“In Seattle, Spokane, Denver, Salt Lake City and Boise, things are basically grinding to a halt. Demand for projects is very weak. Property valuations have essentially gone back to the original dirt value that might have been six or seven years ago. We are talking about 10 cents on the original appraised value. That is a massive reduction in value. And you can apply similar discounts to lots and land…. We have a mass of non-performing or net charge-offs coming over the next four to six quarters.”
“During the second quarter, Southeast banks and thrifts fell 36 percent…. Over the last year, the Southeast banks are down 40 percent…. Southeast thrifts are off more, 61 percent…. What I am seeing across many of the Southeast markets are more and more auctions…. small builders have gone into bankruptcy or just sold some developments outright to vulture-type investors who have already, in some instances, sold full developments close to… 50 percent off, net-net, placing those prices, just for context, back to the 2003 to 2004 price levels. Obviously, the Freddie Mac statement that they believe we are only 50 percent through some of this housing price decline, is definitely humbling. Roughly 85 percent of the mortgage market was funded through the securitization market. The absence of that vehicle, as well as the severe capital constraints throughout the entire financial system, will make the funding of almost anything, but especially homes, increasingly more expensive and, for some buyers, just simply not an option. Compound the funding problem with the consumer confidence issue and the demand is very, very soft for real estate purchases because there is just so much uncertainty and caution about the future economics…. On the commercial side, large box retailers continue to close locations.”
August 13, 2008 Detroit News
A Detroit home recently went on the market for $1 and still required 19 days to sell. The home sold for $65,000 in November 2006 and according to neighbors was the nicest house on the block at the time. So desperate was the bank owner … to unload the property that it agreed to pay sales commission, closing bonus, part of the buyer's closing costs, back taxes and a water bill, which cost the bank about $10,000.
2002 Conquer the Crash Chapter 16:
Another remarkable trend of recent years adds to the precarious nature of mortgage debt. Many people have been rushing to borrow the last pennies possible on their homes. They have been taking out home equity loans so they can buy stocks and TVs and cars and whatever else their hearts desire at the moment. This widespread practice is brewing a terrible disaster.
July 2008 Study, Center for Economic and Policy Research
“The projections show that the crash of the housing bubble is likely to eliminate most, if not all, of the gains that families had made in accumulating wealth over the last two decades…. As these projections should demonstrate, homeownership is not everywhere and always an effective way to accumulate wealth. For those who owned a home in the last few years, the collapse of the housing bubble led to the destruction of much or all of their wealth."
Many of the important dominoes described in Conquer the Crash have yet to fall. There is still time to benefit greatly from this book. EWI remains hard at work, looking ahead and applying the broad perspective that allowed these predictions. I cannot recommend strongly enough that you read this book.