Bill Fleckenstein mentioned some data points from Joel Locker of FBN Securities.

• As of the end of Q2, vacant rental units stood at 10% (about 3.94 million units), vs. the 43-year average of 7.16%. That 2.84% difference equates to about 1.12 million excess rental units above the historic mean.
• The overall housing vacancy rate was 14.36% in Q2, against a 43-year average high of 10.75%. (There are roughly 130 million total units, with 18.6 million vacant.)
• To get back to the 10.75% mean, the U.S. would have to create about 4.7 million households, or in other terms about 6.6 million jobs (assuming 1.4 jobs per household), without having built one additional housing unit.

And as I’ve commented previously, in a speculative market, like housing, fundamentals like this mean little, except in the very long term. And we all know what happens in the very long term. But they do give you an idea of where you are.

From Merrill Lynch’s press release:

On July 28, 2008, Merrill Lynch agreed to sell $30.6 billion gross notional amount of U.S. super senior ABS CDOs to an affiliate of Lone Star Funds for a purchase price of $6.7 billion. At the end of the second quarter of 2008, these CDOs were carried at $11.1 billion, and in connection with this sale Merrill Lynch will record a write-down of $4.4 billion pre-tax in the third quarter of 2008.

In other words, assets actually worth $6.7 billion were actually being carried at $11.1 billion. The sale represents 22 cents on the dollar for these “AAA” securities. And, even at that price, Merrill had to finance the sale on a non-recourse basis, so it is not exactly an arms-length fair market value.  Probably the Australian bank that recently announced that it had marked its CDO assets to 10 cents did so realistically. But let’s not single out Merrill Lynch. Bloomberg covers Fannie and Freddie’s balance sheet:

Without that $14.3 billion of tax adjustments, the fair value of Fannie’s net assets would have been negative $2.1 billion, by my math. Exclude deferred-tax assets entirely, and it would have been negative $19.9 billion as of March 31. (Fannie raised $7.4 billion of additional capital in May.)

As for Freddie, it showed $16.6 billion of net deferred-tax assets under GAAP as of March 31. Like Fannie, it put deferred taxes in “other assets” on its fair-value balance sheet.

Freddie said its other assets had a GAAP carrying value of $31.6 billion and a $42.5 billion fair value. By my calculations, using the methodology in Freddie’s footnotes, it looks like Freddie wrote up the deferred-tax assets on its fair-value balance sheet by about $10.1 billion.

So, take out the tax write-up, and Freddie’s net assets had a fair value of negative $15.3 billion. Exclude deferred-tax assets entirely, and that falls to negative $31.9 billion.

I think that you can take it for granted that most if not all financial institutions out there that have been involved with real estate finance are overstating their book values. Many of them have negative net worth if properly accounted for, marking their assets to their real market value. The FASB and the SEC have, deliberately, put so many loopholes into the accounting and pricing standards for financial assets that there is really no way to tell the true state of these companies. Sarbanes-Oxley is “just a piece of paper” as Mr Bush would say. The government agencies believe, as usual, that dishonesty is the best policy. If they can conceal the true state of the financial system for long enough, they think, they can buy time for it to recover and the fiction will magically become true. However, as Vytas’ comment points out, they’re just buying time for the looters to strip the valuable assets.

You can run, but you can’t hide. (Joe Louis). Everybody wants to know where they can hide their assets, their wealth, and come out of the economic turmoil and probable depression with them intact. The answer is, there is probably no such place. And if there is, it is probably knowable only in retrospect. Only economists, who know many things that aren’t so, have the gall to make long-term forecasts in this environment.

Any plan or strategy, or hiding place, can be thrown into confusion overnight. The biggest danger comes from powerful government actors, such as Mr Bernanke, who can wreak havoc with the stroke of a pen. They are dangerous because they don’t know what they are doing. They believe in an economic framework, a paradigm, that isn’t just broken, it is meaningless because it bears so little relationship to reality. They can shake markets and debauch money, although they can’t change the underlying problems. But they are not the only danger. Private players who have been concealing their troubles can, like LTCM, reveal losses, frauds or defaults that could impact any asset class. The economic future is basically unknown, in the sense that it is pretty clear where the destination is, but the path to get there could be long and torturous or short and catastrophic.

Like Joe’s opponent, Billy Conn, investors have to hit and run – we have to be speculators in speculative markets. The time to return to stability where investing makes sense will come, but not for some time. certainly not yet. We must watch for the punches, and react. We run, we duck – we move our assets out of harm’s way. We punch – we seize opportunities for profit when they are offered, without being lulled into believing that any asset class is safe. Each carries its own set of risks, some fewer then others but there is no risk-free asset.

Every day is a new attack on our wealth, but every day is a new opportunity.

In Zimbabwe, one of these won’t even buy a loaf of bread. This is what happens when monetary authorities start printing to support government spending that is more than the country can sustain. It means that any money people had becomes worthless. To those of us who are investors, this is the scary part of holding money. Its value is completely dependent on the restraint of government. And we all know how strong that is. Not. So we watch it like a hawk. Image from tomchao.com.

I see lots of projections roll by about the economy, house prices, and everything else. What essentially all the projectors seem to ignore is the effect of feedback. Feedback occurs when some portion of the output of a process is “fed back” to the input. Negative feedback, where the output reduces the input, serves to stabilize the output. Positive feedback, where the output augments the input, can cause the process to run wild. Momentum-driven markets are examples of positive feedback. Rising prices cause more mo-mo players to buy, which drive even higher prices and so on. Unfortunately, bear markets work the same way. Lower prices stimulate more selling, which in turn cause lower prices and so on.

Investment or value-oriented markets don’t work that way. Higher prices reduce yields, making investors less interested in buying. Lower prices increase them, encouraging buying. This is negative feedback, which stabilizes prices.

Investors have been driven from most asset classes because cheap money has encouraged momentum-oriented buying, making most asset classes unattractive to investors because high prices have rendered yields unattractive. Value investors have therefore sought shelter in low-risk assets, such as Treasuries, to wait out the inevitable storm. Julian Robertson’s closure of his Tiger fund in 2000, because he could no longer find any value, was probably the last trump.

“As you have heard me say on many occasions, the key to Tiger’s success over the years has been a steady commitment to buying the best stocks and shorting the worst,” he wrote. “In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much.”

The economy has been driven by the speculative fever. And the rising economy has fed back into the asset markets. But this feedback also works both ways. Falling asset markets, starting with real estate, are slowing the economy. The slowing economy reduces demand, and then drives asset prices lower, and so on. Value-oriented methods, which is virtually the only kind that economic forecasters have, don’t provide the tools to make forecasts in momentum markets. I don’t know how low we are going, but I sure don’t believe any of the forecasts and models that I see.

Edit: Just coincidentally, a more sophisticated analysis than usual from the IMF, hat tip to The Big Picture, no bottom in sight: