We don’t generally comment on the day-to-day market action here; that’s what the Short Term Update is for; but the “subprime tsunami” bears comment. While we’re hearing more voices of concern about the mortgage industry and the potential of broadening ramifications within the larger debt markets and the economy, there’s still some very conspicuous signs of complacency. Exhibit A is the U.S. Secretary of the Treasury who is his clearly staking a claim to a lead role in a phenomenon that was known as the "revival chorus" in 1929. After the crash, the book Rainbow's End notes that administration officials, industrial leaders, bankers and utility leaders sang the praises of an imminent return to the prosperity. Here's a similar tune from the latest issue of The Wall Street Journal:
Paulson Downplays Subprime Fallout
Treasury Secretary Henry Paulson downplayed the potential broader economic fallout from the current subprime lending turmoil.
“You need to look at the underlying economy. We’ve got in my judgment a healthy economy,” Paulson said. “The fundamental question is, has that market bottomed out? I’m optimistic that it has, I don’t know for sure.”
According today’s Journal, bargain hunting Wall Street firms continue to act on the same hunch (see discussion of dip buying interest in subprime and other areas on Friday). Paulson’s old firm, Goldman Sachs, for instance, reportedly sees the “growing turmoil in the market for risky home loans as an opportunity. Goldman is looking at pushing deeper into the business, ramping up its own subprime-lending operation and pondering the purchase of another.”
We’ll stand by our statement at the top of this page and that of March 2005. Given that we were virtually alone in making these bearish pronouncements, it’s interesting that Paulson now says “the distress of the subprime mortgage market is something that should have been anticipated given the housing correction.” Actually it’s the other way around. The collapse of the housing market could have been anticipated with help of a decline in the subprime area. In fact, The Elliott Wave Financial Forecast did just that. In the first half of 2005, EWFF identified a clear five-wave descent in the EWI Suprime Lenders Index and stated, “The potential for a serious unraveling of the market is confirmed by the [this index], which combines the stocks of four major suprime lenders. These clean five wave patterns portend a fall to much lower levels.”
Since we also stated at the time that the subprime firms “are on the the front-edge of the credit and housing bubble,” we certainly agree that the crumbling subprime sector is an important element of the unfolding bear market and its accompanying deflation. But it is wrong to say it is the cause of the decline as so many headlines now assert. The sell-off and initial signs of a faltering economy are no more caused by the failure of subprime lenders and loans than winter results from the first snowfall. As The Elliott Wave Financial Forecast has been saying for the last two years, subprime’s demise simply signals the start of a new economic season. And as EWFF also noted in recent weeks, the slow but relentless onset is a sure sign that it will be a long, hard one. |
