a lot longer to sort out the mortgage problems(by John Mauldin)

Right now, the market is pricing in rate cuts of 75 basis points by the end of the year and another 25 basis points within 12 months. I think that is low. If the Fed is cutting, it is because they see the economy weakening. And I think that means they will cut more than anyone expects. What is the end number? I don't know. But I bet it is a lot lower than 4.5%.

Why? Because the credit markets are going to take a lot longer to sort out the mortgage problems than we might think. And that means that a lot of homes are not going to move for some time, which is not good for consumer sentiment or spending. And there will be substantially less mortgage equity withdrawal. As home prices drop 10% and then 15% and then 20%, boomers are going to realize that a large part of what they thought they had for retirement in the equity of their homes is not there. That means they need to spend less and save more. While that is good as an individual policy, it is rough on the economy at large. I still think this process ends in a recession.

But John, (I hear you ask) if the Fed cuts rates, won't that make mortgages cheaper? The answer is that for conforming loans it will. But right now, if you want a home with a loan larger than $417,000, you are looking at interest rates as high as 9%, even with excellent credit. And if you have poor credit? There are no subprime loans for you, without substantial down payments.

The problem, as I repeat, is not the availability of liquidity. It is the lack of credibility. No one is buying paper they are not absolutely 100% sure about. And until a new mechanism is developed that will allow for transparency in the mortgage markets which will then allow for the securitization process to being again, it is going to be tough to get a mortgage for someone who does not fall with the confines of conforming loans (for foreign readers, those are agency loans made by quasi government agencies like Fannie Mae which have the implicit backing of the US government.)

It will take some time, but the current disorder will again become order and the process will begin again, with a bubble happening in some other market which will eventually come undone and create a new black swan event.

(And yes, the implications of lower rates means a lower dollar and thus higher gold.)

And let's end with a great quote from Taleb, which is not exactly on point, but is a great quote nonetheless.

"We humans are the victims of an asymmetry in the perception of random events. We attribute our success to our skills, and our failures to external events outside our control, namely to randomness. We feel responsible for the good stuff, but not for the bad. This causes us to think that we are better than others at whatever we do for a living. Ninety-four percent of Swedes believe that their driving skills put them in the top 50 percent of Swedish drivers; 84 percent of Frenchmen feel that their lovemaking abilities put them in the top half of French lovers." (p. 152)