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8:30 AM EST Monday, January 14, 2008: Forecast of the year, made by Ben Bernanke, Fed Chairman, before the Joint Economic Committee of the U.S. Congress on March 28, 2007. Note the date.

"At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."

And pigs will fly. I've been aching to run this wonderful image. It's a perfect illustration for the Bernanke quote.

My second illustration is the Tech Wreck of 2000-2002. It shows big drops in stockmarket prices, especially among tech stocks (the bottom blue line in the chart).

Illustration Three: Cisco, despite its higher profits, has still not reached the lofty heights of 2000, nor even the $36 price I sold my Cisco holdings at on its way down.

Item four: Some excerpts from a piece by Gretchen Morgenson in yesterday's New York Times:

Fair Game, Cruel Jokes, and No One Is Laughing

WHAT do banks call it when a troubled borrower abandons her home, sending them the keys?

“Jingle mail.”

And what do they call it when an irate borrower abandons his home, yanking electrical outlets from walls, leaving faucets running and otherwise trashing it on the way out?

“Taking the inside of the house with you.”

There’s nothing like black humor to define — however sadly and starkly — the blows that keep on coming in this mortgage debacle. But make no mistake, lenders are only beginning to learn how to manage the onslaught of jingle mail and houses turned inside out.

Investors, homeowners and regulators have greeted the new year hoping that the worst of this financial nightmare is over. Some investors may even view Bank of America’s planned bailout of Countrywide Financial last week as a sign that it is safe to wade back into financial services stocks.

But while other economic crises over the last decade were resolved relatively quickly and cleanly — the Mexican peso mess, the Russian debt debacle and the dotcom implosion — the unraveling of the great home mortgage boom is significantly more complex. There are infinitely more moving parts to this problem, and it will take far longer to right.

For example, while it is widely known that a wave of subprime adjustable-rate mortgages, or A.R.M.’s, will reset this summer — raising the specter of further foreclosures — an even more troublesome mess involving pay-option adjustable-rate loans lies well beyond that. These are the kooky loans that allowed borrowers to make payments that were a fraction of the interest owed, without paying back any principal.

Only when the loan balloons to 15 percent larger than its original size — a nifty development that results from a multisyllabic quagmire known as “negative amortization” — do lenders demand that borrowers pay down principal. In many cases, this will cause borrowers’ monthly payments to double, according to analysts.

When do analysts say borrowers will have to start coughing up this extra cash? In 2009, or later.

“As difficult as the rescue prospects are for subprime borrowers, they are even worse for most pay-option A.R.M. borrowers,” said Michael D. Calhoun, president of the Center for Responsible Lending, a consumer advocacy group. “Three-quarters of pay-option borrowers are making the minimum payment based on 2 to 3 percent interest typically. The payment shock is so huge that a refinance is virtually impossible.”

Consider this as more evidence that we are moving into financial waters that we haven’t had to navigate in quite some time — if ever. Because other housing downturns were not national in scope and did not involve mortgages that had been pooled, sliced up and sold to investors around the globe, it is almost impossible to predict how long the turmoil will last or how financiers, regulators, municipalities and homeowners will manage its fallout.

BUT it is possible to get a feel for what is happening on the ground from a new survey of 2,400 real estate agents sponsored by Inside Mortgage Finance Publications. The survey taps into the outlook of people who see troubled borrowers firsthand, when they try to sell their homes before foreclosure occurs.

For example, agents participating in the survey confirmed what many borrowers say: that loan servicers are downright unresponsive. This is especially true when distressed owners try to sell their homes before being put through the trials of foreclosure. When they sell at a price that is lower than the outstanding mortgage debt, that is known as a short sale.

Asked how servicers could streamline such sales, one said: “Allow you to go directly to the loss mitigation department without having to speak or argue with eight people before they finally give in and transfer you.” Another said: “Respond to offers within five business days — they are killing the market by taking upwards of three months to respond to an offer.”

A third participant said: “Answer their phone, make it easier to talk with the appropriate people, instead of playing Mickey Mouse games. I have never understood why these companies who are owners of a defaulted loan do not make it easier to communicate with agents who are trying to sell these homes.”

Thomas Popick, principal at Geosegment Systems, the designer of the survey and a supplier of data to financial services firms, said its findings show that loan servicers are averse to short sales, even though they may be the best solution for many borrowers, lenders and the overall real estate market....

For the full Morgenson piece, click here.

Item five: An excerpt from the weekend's Economist:

America's economy; A long slog

The severity of America's downturn may matter less than its length

AMERICA'S monthly employment numbers are perhaps the most glamorous economic statistics. Though fickle and much revised, they have an outsized effect on the financial markets and policymakers. On January 4th dismal jobs figures seemed to confirm what many feared: a downturn is at hand

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Stockmarkets shuddered on news that the jobless rate had jumped to 5% in December, and that the private sector had shed workers for the first time since 2003. Talk of recession has soared (see Warning Lights). Even George Bush has admitted the economy faces “challenges”. If not actually shrinking, America's economy is weak. The real question is not the technical issue of whether the downturn will qualify as a recession, but how long it will last.

Many Wall Street seers expect any downturn to be mild and short-lived, thanks to the adrenaline shot of lower interest rates (financial markets expect the federal-funds rate to fall by more than a percentage point this year, to below 3%) and the cushion of export growth. The housing malaise, they think, will linger, but less maliciously. And the panic in credit markets will ease, as losses are tallied and banks recapitalised.

Even the Fed's most hawkish governors are now hinting at more cuts in interest rates. The weak dollar and strength in emerging economies will indeed boost exports, although — if a recent slowing of foreign manufacturing orders is a guide — by less than in 2007. Buoyed by central-bank liquidity and sovereign-wealth funds' readiness to pour capital into American banks, some tensions are easing. The spreads between interbank rates and safe government bonds have fallen, though they remain above historical norms.

That is all good news. Even so, powerful signals point to a long period of sub-par growth. The huge backlog of unsold homes suggests house prices have further to fall — by around 20% going by housing futures. Lower house prices will force Americans to spend less and save more — a process that has hardly started. They will also spread the mortgage mess well beyond subprime borrowers, which would lead to greater financial losses. Hank Paulson, Mr. Bush's treasury secretary, this week suggested his scheme for assisting troubled homeowners should extend beyond subprime borrowers.

The grim arithmetic

In addition, the weak economy will raise credit concerns well beyond residential mortgages (see Stepping beyond subprime). Commercial property looks ever more vulnerable. Corporate default rates, stunningly low in recent years, are sure to rise. One recent estimate expects default rates on high-yield debt to quintuple from 0.9% in 2007 to 4.8% this year. If the downturn endures, even that could prove optimistic. Rapidly rising defaults and losses could yet trigger another financial-market panic.

Even if the economy is spared that fate, many effects of the credit mess have yet to materialise. Lending standards have tightened, but surely have further to go. America's banks are in worse shape than anyone predicted in August. The business of extracting fat fees from creating complex debt structures is in tatters. Banks' balance sheets are at once weakened by large losses on subprime-related products and swollen with unwanted assets from defunct structured-investment vehicles. For all the ease with which banks have tapped new capital in the past few weeks, they will be more cautious lenders now.

Put together falling asset prices, rising defaults and tighter credit and it is hard to see how the economy will bounce back quickly. History, too, suggests the hangover will last. A new study finds that, on measures from capital inflows to asset-price rises, the buildup to America's mortgage crisis looks eerily like earlier financial crises in rich countries. In the average rich-country banking crisis, it took two years for growth to return to trend; at worst it took more than three (see Same as it ever was).

The parallels are not perfect, but their message is that whether or not the economy falls into an official recession, it will probably stay weak for longer than many now expect. Prudently looser monetary policy will help, but cannot reverse the credit cycle or the bursting of the housing bubble. Nor will modest fiscal stimulus of the sort Congress is talking about. As Mr. Paulson admitted this week “there is not a single or simple solution that will undo the excesses of the last few years.” America faces a long, hard slog.

All this is my unsubtle way of saying "I know you can't time stockmarkets. But it's a mess out there. I'm in doubt and I'm largely staying out. Except for some obvious shorts, which I'll talk about (I hope) in the next few days."

Idiot sightings.
You do not have to pass an IQ test to be in the banking, broking or financial services industry.
You do not have to pass an IQ test to buy a suit or rent a corner office.
With these profound thoughts in mind.....

+ A new neighbor called the local township administrative office to request the removal of the DEER CROSSING sign on our road. The reason: 'Too many deer are being hit by cars. I don't think this is a good place for them to be crossing anymore.' -- from Kingman, KS

+ I was at the airport, checking in at the gate when an airport employee asked, 'Has anyone put anything in your baggage without your knowledge?' To which I replied, 'If it was without my knowledge, how would I know?' He smiled knowingly and nodded, 'That's why we ask.' -- Birmingham , AL

+ The stoplight on the corner buzzes when it's safe to cross the street. I was crossing with a coworker. She asked if I knew what the buzzer was for. I explained that it signals blind people when the light is red. Appalled, she responded, 'What on earth are blind people doing driving?' -- She was a probation officer in Wichita , KS

+ I work with an individual who plugged her power strip back into itself and couldn't understand why her system would not turn on. And a deputy with the Dallas County Sheriff's office.

+ When my husband and I arrived at an automobile dealership to pick up our car, we were told the keys had been locked in it. We went to the service department and found a mechanic working feverishly to unlock the driver's side door. As I watched from the passenger side, I tried the door handle and found it was unlocked. 'It's open," I said to the technician. His reply, 'I know. I already got that side.' -- Ford dealership in Canton , Mississippi

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.
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