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The U.S. housing market will experience a second recession, forcing banks to post additional loan-loss reserves, said analyst Meredith Whitney, founder of New York-based Meredith Whitney Advisory Group, in an interview on CNBC Squawk Box, where she also talked about deflation in the economy, hinting that the housing crisis is far from over, due to strategic defaults, long term high unemployment, and increasing foreclosures.
“Most investors are not baking in a double-dip in housing,” Ms. Whitney said, “You’re going to see banks post additional reserves associated with this double-dip in housing, and that means weak performance going forward.”
U.S. home prices fell more than 30% from their peak in 2006 through the first quarter of 2009, prompting banks to take writedowns on mortgage loans. Housing starts have increased 24% since the low in April 2009 as mortgage rates remained near record lows and the U.S. government offered tax credits to home buyers.
Ms. Whitney said she didn’t foresee the trend of some homeowners paying off credit cards and other debt instead of making mortgage payments, as they await better terms on mortgage modification programs.
“Banks are actually accelerating their foreclosure programs, accelerating their short-sale programs. People who have been paying their mortgage now have to start paying rent. You’ll see a real leg down in supply displacement when you foreclose and you have to sell.”
Job cuts by state and local governments will also contribute to a “rough second half” for the U.S. economy, she said.
Financial reform will slow the velocity of money and cause “de-banking” as more Americans lose access to some banking services, making it “more expensive to be poor in this country,” Ms. Whitney said.
Meredith Whitney is a frequent contributor to CNBC, Fox Business, and Bloomberg News programs. Her extremely bearish view on banks landed her on the cover of the August 18, 2008 issue of Fortune Magazine. Even before the problems in September that befell Merrill Lynch and Lehman Brothers, she is quoted as saying, “It feels like I’m at the epicenter of the biggest financial crisis in history, however even a broken clock is right twice a day”.
In 2007, Whitney was listed as the second best stock picker in the capital markets industry on Forbes.com’s list of “The Best Analysts: Stock Pickers”, as well as being named “one of NY Post’s 50 Most Powerful Women in NYC.
Whitney, who was ranked as one of Fortune 500’s “50 Most Powerful Women in Business” in 2008, has also won CNBC’s “Power Player of the Year” over Jamie Dimon, Ben Bernanke, and Hank Paulson.
Implications of the Greek crisis
At this time it is important to put the Greek situation in perspective. Will we be talking about Greece 12 months from now? Clearly, no one can predict how the stock and bond markets will react in the coming weeks to developments in Europe. After all, as we all know, in this kind of situation the market is driven by emotions (panic?), not fundamentals.
It is not enough to say that the impact of the crisis will be limited due to the fact that Greece is an insignificant player in the global economic arena. After all, Thailand which originated the Asian debt crisis of 1997 is not exactly an economic giant. The more important focus should be on the shape of the global economy at the eve of the crisis. And in this context note that the crisis is occurring in an environment of a recovering global economy while the EU’s bailout of Greece implicitly guaranteeing the debt of larger economies such as Spain and Italy.
The drivers of global growth now include China and India, which are less vulnerable to Europe’s downturns. At the same time, Latin America and Southeast Asia enjoy much stronger government finances and more moderate exchange rate. These factors reduce their sensitivity to economic shocks. Furthermore, Greece, Portugal and Ireland don’t have the trade or capital market gravity of their larger European neighbors. The Greek crisis will end up being an important event in the history of sovereign debt, but its impact on the global economy will be minimal.
More important focus should be on the fact that the crisis is an exaggerated preview of what we should expect to see down the road from other countries. After all, Greece is not the only country that is facing a mountain of debt. Yes, the magnitude is different but the direction is the same. In Greece, they call it austerity measures, in North America it will be called reduced spending and higher taxes.
The point is that fiscal policy will work as a clear negative for overall economic growth. In Canada, for example, a government that was responsible for no less than 40% of overall economic growth during the past decade will start acting as a negative for economic growth in the second half of 2010 and beyond. The fiscal drag in the US will be much more significant. Accordingly, while the Bank of Canada will probably proceed with its plans to raise rates come June or July, the upcoming fiscal challenge suggests a very gradual approach. As for the stock market, any significant sell-off in the coming weeks should be seen as a buying opportunity.
Benjamin Tal
Senior Economist
Benjamin Tal
Senior Economist