T2 Partners Presentation on the Mortgage Crisis – June 2009

Whitney Tilson and Glenn Tongue of T2 Partners have come out with a very well done presentation on the mortgage crisis. Link here (pdf file). This is a crash course outline of what is detailed in their book More Mortgage Meltdown: 6 Ways to Profit In These Bad Times. (Which I think is a very worthy read. Probably one of the best assessments on the mortgage crisis I have read so far. )

The presentation puts the crisis into perspective through many data points and charts showing, where we have been, where we are currently, and what is to be expected down the road, which isn’t pretty…

Some of the things that stood out to me are:

1. They mention that wave 1 of the mortgage crisis began with speculators who jumped ship quickly and defaulted on loans. This is largely behind us.

2. Wave 2 came from borrowers who defaulted when their mortgages reset due to payment shock. These were mostly the “subprime loans” that you heard so much of in the news. As the teaser rates reset, the payments increased dramatically, thus leading to defaults.

3. There are still 3 “waves” of defaults that have yet to hit. These will come from defaults on Prime Loans (the cream of the crop) that are A.) under water because of home price declines and/or B.) cannot be paid because of job losses. Jumbo prime loans, seconds and HELOCs have yet to see a major set of defaults, which are inevitable…..

But most importantly, the $3.5 Trillion commercial real estate market has yet to go through a serious round of price write-downs and defaults. It’s coming… and it won’t be pretty.

4.) $2.4 Trillion in Alt-A mortgage resets still lie ahead of us. And this peak in resets goes out to January of 2013 !!!

All of this leads any rational speculator to scoff at the idea of “green shoots” or whatever other stupid name the spin-doctors have come up with. This debacle is going to carry on for a long time because the political goons refuse to let the market self-correct. We may be following the Japanese lost decade (actually two-decades) template.

I have no doubts that we will see a reflation in asset prices, because of the stupendous amount of money printing that is going on across the globe.. but the timing of it all, I’m not so certain. There are still massive debts that will simply disappear due to bankruptcies and defaults, which is all counter-productive to the Fed’s inflationary policies. So this tug-o-war going on is jerking the markets back and forth.

At the end of the day, however, I’m of the opinion that the inflationary pressures will come sooner than later and all these deflationary scares will be a non-event. If only, because the Fed’s ability to print is infinite and at this point I really think they have commited themselves to that necessity if pushed into the corner. And let’s not forget a politician will never just sit on his hands !!

The key to navigating through all of this unscathed and richer, is to anticipate where the money will flow. My bet is out of bonds, out of the dollar, out of Euros, out of housing, and into foreign equities (in particular BRIC nations, minus Russia. So BIC), into commodities, into gold and silver, into farmland, into agriculture, into well run companies with the pricing power…. and … and….. many other places.

We are seeing a massive paradigm shift occurring. Study history and you will see how fortunes are lost and fortunes are made during these times.

Good luck!


— Pip Tradewell
Editor for Gold-Speculator.com