A couple of good pieces for Sunday evening reading or viewing. CBS’ 60 Minutes show offers a segment on the mortgage mess, featuring Jim Grant. It also includes the “just walk away” thought process that appears to be taking hold like a California wildfire.

They say they can afford the higher payments, but see no point in making them.”The house keeps going down, payments keep going up. Where’s the logic in that? And how can we fix it? I mean, that’s what this whole thing’s about for us is how can we fix this? And if we can’t fix it, then what do we do?” Matt Valdez asks.

“Why pay a $3,200 payment on a 1200-square-foot home? It makes no sense,” Stephanie Valdez adds.

“That’s what you agreed to do when you bought the house,” Kroft points out.

“Fine. If the value is going up. But we’re not going anywhere. The price or the value is going down. It makes no sense because we will never be able to refinance and get a lower payment. There’s no way,” Stephanie Valdez replies.

“You’re saying, essentially, that you’re going to stop making payments on it? You’re just gonna let it go into foreclosure?” Kroft asks.

“You know, that’s the only advice we’ve gotten so far is walk away from the home. We don’t want to do that to our credit. Why can’t our mortgage company work with us?” she says.

In other words, we only bought this puppy because we thought we could resell it for a profit. We now want to have our cake and eat it, essentially void the contract we signed and reprice the house at market without damaging our credit, or we’ll walk away. Sharp practice, indeed. They must be corporate employees, used to getting their stock options repriced down every time the corporation’s stock declined, to come up with this feeling of entitlement.

And another of John Hussman’s exceptionally thoughtful pieces. Certainly one of his top ten. It covers markets, the stimulus package, politicians and Keynesian economics with so much good stuff that I won’t excerpt from it.

John Hussman’s December 17 comment:

That said, there is one particular scenario that would be ominous in my view. That would be if we see a relatively uninterrupted series of declines that breaks cleanly through the August and November lows, followed by a one-day advance of 200-400 Dow points. That’s a script that markets tend to follow pre-crash. Though it’s not a strong expectation or forecast, it’s something worth monitoring, because we’ve started to see the pattern of abrupt jumps and declines at 10-minute intervals that is often a hallmark of nervous markets.

Foreign markets sold off rather briskly overnight and this morning. U.S. index futures were down pretty hard in sympathy. Doubtless the powers that be will be working hard to re-assemble Humpty Dumpty in time for tomorrow’s opening. The chances of an “emergency” rate cut in the morning are excellent, I would say, given the Fed’s predilection for attempting stock market manipulation. Pimco’s Paul McCulley speaks for the Keynesians when he says:

“In the fullness of time, there comes a time when time is full. Now is such a time: promises of “substantive” ease to come, on a ‘flexible’ basis, are no longer sufficient, they must be honored. The Reverse Minsky Journey has now gone into overdrive: systemic debt deflation, begetting rapid de-levering and asset price deflation, is upon us. The ‘neutral’ real Fed funds rate is plummeting. The Fed must catch it, not on the installment plan, but for cash delivery. The negative feedback loop that (Fed chairman) Ben Bernanke and (Fed governor) Ric Mishkin (recent speech HERE ) have spoken so eloquently about is no longer a risk, but a reality. Such a loop is self-feeding, not self-correcting. Only the Fed can interrupt it. Time is of the essence. What needs to be done needs to be done. Now.”

Of course, the assumption here is that easing rates is going to help. The problem is that lenders are worried about principal repayment, not about interest payments or rates. Their lending capability is impaired by loss of capital, the poster children being the bond insurers like Ambac which are being put out of business by the overwhelming losses. Easing rates did not work in Japan, the only similar situation in modern times. I do not expect it to work here.

Of course what happens on a short-term trading basis is virtually impossible to predict, unless you are one of the boyz with the muscle to move the markets and even then it could be tough if panic volume emerges. I intend to sit tight until I see clear signs of a substantial “clearing rally” as Hussman calls them. From my point of view, the risk is in not being short. If the market rallies, that’s fine with me, it’ll be coming back down and a chance to add to my shorts higher would be welcome. If it doesn’t, well, there’ll be a time to take profits regardless of technicals if there is a real crash. At some point, you have to say, “that’s enough” and then look to making sure your cash is safe. OptionsXpress, with whom I have an IRA account, has just announced an “FDIC sweep” feature which seems pretty good. They sweep your cash into up to ten different banks, staying under the $100,000 FDIC limit with each one. I can’t imagine any reason for holding more than $1 million in cash overnight when it is so easy to buy and sell Treasuries, and you have the proceeds the next day (IRAs are cash accounts, not margin, so you can’t have it the same day).

Hussman: “Generally speaking, when valuations are stretched (on normalized earnings) and both market action and economic measures have turned negative (as they have now), you can expect that “buying-the-dip” will result in a brief feeling of genius and success followed by profound regret.”

John Hussman: “I expect that a U.S. economic recession is immediately ahead.”

Even ECRI, for once, failed to deny that, with their Weekly Leading Index at a 59-week low, there was a risk of recession. “With WLI growth slightly negative, and remaining in a narrow band for the past two months, U.S. economic growth is set to slow through the New Year.” Given their perma-bullishness, that seals the deal as far as I am concerned. More from John Hussman:

But if a recession or a bear market would produce unacceptable losses or would force you to abandon your investment plan, it is best to begin altering your investment position immediately (even if not entirely at once) toward a position that you can maintain regardless of market outcomes. If your position is inappropriate, do not wait for an “ideal” opportunity to change it. Begin changing it immediately, and continue to change it in steps – larger steps when you can get favorable prices, smaller steps when you have to do it at adverse prices. The important thing is to start immediately and decide in advance to move step-by-step over a reasonably limited period of time, until your position is appropriate.

In English: Even if you believe intellectually in buy-and-hold, if you think you might even be tempted to sell your long positions during a 30% or more drawdown, get out now. Really Right Now.