Tonight Bill Fleckenstein (via his contact inside the industry) updated his prescient forecast of the nation’s mortgage market:
“The Alt a space has deteriorated very quickly, but not yet public. $40 billion in subprime still waiting to find a home. No loans will be bought at attractive prices until May production as it will be underwritten to new guidelines. The triple bbb’s are a mess. The hedge funds that bought it are all in trouble. He [his source] says warehouse guys and Alt a guys are now next. Alt a guys may be worse as less insurance on those loans to protect them. The loan sizes are bigger as well. They may be worse than subprime when all said and done.”
Just as everyone thought that subprime would not see the problems it is seeing today, most everyone now thinks Alt A will be insulated from the troubles we are now seeing in Subprime. According to Fleck’s knowledgeable contact, this is just not the case.
Jim Rogers, co-founder of the Quantum Fund, seems to agree. From Reuters:
“‘You can’t believe how bad it’s going to get before it gets any better,’ the prominent U.S. fund manager told Reuters by telephone from New York. ‘It’s going to be a disaster for many people who don’t have a clue about what happens when a real estate bubble pops… Real estate prices will go down 40-50 percent in bubble areas. There will be massive defaults. This time it’ll be worse because we haven’t had this kind of speculative buying in U.S. history… When markets turn from bubble to reality, a lot of people get burned… This is the end of the liquidity party.'”
These are strong words from one of the most prominent and successful investors of his generation.
Fleck’s letter ends, “When I first entered this business over 25 years ago, those folks who were successful were the ones who understood what might occur two or three moves in advance. I believe the pendulum is beginning to swing back in that direction.”
Both Fleck and Rogers made their fortunes anticipating market events. Right now they’re anticipating major problems developing in the nation’s financial system. And they’re putting their money where their mouths are.
LIV