Guest Post: Will John Paulson Be Wrong This Time?

Tyler Durden's picture

Submitted by The Burning Platform

John Paulson Will Be Wrong This Time

We have arrived at critical juncture in the ongoing financial
crisis. Have the government actions of the last year successfully
spurred the animal spirits of Americans, resulting in a self-sustaining

The Obama administration and most of the mainstream media would
answer yes. GDP has been positive for the last four quarters. Consumer
spending has increased in five consecutive months. Corporate profits
have been relatively strong. The country has stopped losing jobs. The
missing piece has been a housing recovery.

No need to worry. Famous or infamous (depending on your point of
view) $15 billion man John Paulson has assured the world that house
prices will rise 8% to 10% in 2011. His basis for this forecast is that
California prices have rebounded 8% to 10% in the last year, and this
recovery will spread to the rest of the nation.

Maybe Paulson has teamed up with his buddies at Goldman Sachs to
develop a product that guarantees a housing recovery. I tend to not
believe anything that comes out of the mouth of anyone associated with
Wall Street, but let’s assess the facts and see if they point to an
impressive housing recovery in 2011.

The man who has been right on housing for the last ten years has
been Yale Professor Robert Shiller. His analysis of U.S. housing prices
from 1890 until present, which he first published in 2005,
unequivocally proved that we were in the midst of the greatest housing
bubble in history. At the same time, David Lereah, the chief economist
(shill) for the National Association of Realtors, was pronouncing it
was the best time to buy. He published his masterpiece of market tops, Are You Missing the Real Estate Boom? at
the 2005 housing peak. He called a bottom in January 2007, and the NAR
has continued to tell Americans it is the best time to buy for the last
five years as prices have dropped 36% nationally.


Dr. Shiller continues to be the voice of reason when it comes to the
housing market. He is doubtful that the recent “recovery” will continue:

    “Recent polls show that economic forecasters are largely
    bullish about the housing market for the next year or two. But one
    wonders about the basis for such a positive forecast. Momentum may be
    on the forecasts’ side. But until there is evidence that the
    fundamental thinking about housing has shifted in an optimistic
    direction, we cannot trust that momentum to continue.”

Whom do you believe? The paid mouthpiece for the National
Association of Realtors, the Wall Street shill, or an impartial
economics professor who has done rigorous analysis using 120 years of
housing data?

Government Manipulation and Failure

The Obama administration has taken unprecedented actions using
taxpayer money to keep housing from reaching its natural equilibrium
level. The Keynesians who inhabit the White House decided that a
first-time home buyer credit of $8,000 would boost home sales and have
a multiplier effect by spurring home furnishing sales. It is obvious
these people have not spent much time in the real world. No one decides
to purchase a home because of a tax credit. They may accelerate a home
purchase in order to take advantage of free money, but an incremental
purchase will not be generated.

The tax credit was set to expire in November 2009, and the bean
counters at CBO projected it would cost taxpayers $8 billion. The NAR
estimated that 1.9 million first-time home buyers took advantage of the
government handout, resulting in 350,000 additional sales over that
time frame. Therefore, the total cost to the taxpayer was $15 billion,
and each additional home sale cost you $43,000. Dean Baker of the
Center for Economic and Policy Research called the credit “a
questionable redistributive policy” from renters to home buyers, but
said that he used it himself when he bought a house. He wrote on his
blog: “Thank you very much, suckers!”

Congress deemed a 100% over-budget program that dispensed $8,000 to
people for doing something they were going to do anyway such a raging
success, they extended it and expanded it to all home sales. The new
and improved program extended the $8,000 credit for first-time home
buyers and added a $6,500 credit for any home purchase. It was
restricted to “poor” folks who made less than $225,000. The credits run
out on April 30, 2010. The mainstream media was positively ecstatic
over the home sales “surge” in March. They will be astonished again
next month as these handouts have pushed forward demand from later in
the year.

Economists have estimated phase two of this program will cost
taxpayers $100,000 for each additional home sold. The following chart
unmistakably shows a surge in home sales from the government giveaways
and then a plunge immediately thereafter.     

The Home Affordable Modification Program (HAMP) makes the home tax
credit program look like an astonishing success. The Obamanistas took
$75 billion of taxpayer funds and have been distributing it to millions
of reckless homeowners in order to keep them in homes they can’t
afford. The administration sold this plan as keeping 4 million people
in their homes. A veteran in the mortgage industry recently noted that
a HAMP application he reviewed showed that these poor people needed a
reduction in their $1,880 mortgage payment while incurring the
following expenses in the prior month:

  • Visits to the tanning salon
  • Visits to the nail spa
  • Purchases at a gourmet produce market
  • Various liquor store purchases
  • A DirecTV bill that must involve some serious premium programming or pay-per-view events
  • And over $1,700 in retail purchases, including: Best Buy, Baby Gap,
    Brookstone, Old Navy, Bed, Bath & Beyond, Home Depot, Macy’s, Pac
    Sun, Urban Behavior, Sears, Staples, and Footlocker.

The conception behind this plan was that these homeowners were just
down on their luck and needed a little help. The facts have proven
otherwise. Despite threats and tremendous pressure from the
administration on the banks, the program has been a miserable failure.
After one year, only 228,000 permanent loan modifications have been
completed. Modifications made by banks in 2008 have re-defaulted at a
rate of 60%. If this program results in 500,000 modifications, the cost
to taxpayers per modification will be $150,000.   

The truth is that millions of irrationally exuberant people bought
houses they couldn’t afford, using “creative” mortgage products, and
then borrowed against the inflated value of these houses so they could
live the good life. They rolled craps and now need to accept the
consequences. These worthless government programs have cost taxpayers
$100 billion and just postponed the ultimate bottom for housing.  

Law of Supply and Demand

The Federal Reserve also did their part in the last year. They
printed enough dollars to load their balance sheet with $1.25 trillion
of mortgage-backed securities of highly questionable value. These
purchases, which artificially reduced mortgage rates by at least 0.5%,
concluded on March 31, 2010. Mortgage rates have already risen 0.25% in
three weeks.       

Considering the pile of tax dollars thrown at the housing market in
the last year by our leaders, you would think new home sales would be
above the level sold in 1963. New home sales in 1963 reached 600,000
when the U.S. population was 189 million. Today, new home sales are
trending at 400,000 and the population is 310 million. At the peak in
2005, the total of existing and new home sales reached 9.2 million,
with inventory for sale of 2.8 million homes. Total home sales are now
trending at 5.4 million, a 40% decrease, while inventory for sale is
3.7 million, a 30% increase.

According to the Census Bureau, the real median price of homes in
the U.S. peaked at $261,000 in the first quarter of 2006. The median
price bottomed at $168,000 in the first quarter of 2009, a 36% drop.
After throwing $100 billion at the problem and artificially depressing
mortgage rates, the government has achieved an increase in prices to
$173,000, a 3% surge. Based on this data, the market appears to have
stabilized. An eight-month supply of inventory with prices up slightly
sounds like a fledgling recovery. Nothing could be farther from the

Foreclose This House

Believers in the fledgling recovery are ignoring some key facts.
There are already 11 million homeowners underwater on their mortgages.
As of March, banks had an inventory of about 1.1 million foreclosed
homes, up 20% from a year earlier. Another 4.8 million mortgage holders
were at least 60 days behind on their payments or in the foreclosure
process. This “shadow inventory” was up 30% from a year earlier.

At the current rate of sales, it would take banks nine years to
clear this inventory. They are likely to increase the rate of sales as
inventory continues to pile up. This will compel prices to go lower.
Prices would fall even if a tsunami of Option ARM and Alt-A resets
weren’t hurtling down the track – but they are. Beginning in June, a
surge in resets will begin and not subside until late 2012. These liar
loans were riddled with fraud, and the vast majority of these
mortgagees will default after the reset. A surge in foreclosures is
just over the horizon.

 Reversion to the mean cannot be circumvented. It
can be delayed, but it will not be denied. The combination of expiring
tax credits, the failure of HAMP, the conclusion of the Fed buying
dodgy MBS, the growing shadow inventory of foreclosures, Option ARM and
Alt-A resets, and rising interest rates will result in a further fall
in home prices of at least 20% in the next two years. Mr. John Paulson
will be wrong this time. Maybe we could even arrange a bet. If I’m
right, I get to take my clan to one of his 19 mansions for a weekend of
fun among the ruling elite. If he is right, he gets to spend a weekend
at my underwater condo in Wildwood among the real people.

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Goldenballs's picture

Lets face it if you,ve got 15 billion you can buy cheap and forget about 100 Million for a few years...............

whatsinaname's picture

The bond market certainly is co-operating with BB and banks letting people refi their expring Option ARMS at never before rates !!

Misean's picture

"Reversion to the mean cannot be circumvented."

THe hope has been to ramp 70's style inflation to pump real wages into line with bubble prices, thus making the loans "appear" whole, and get the market moving without a subsequent severe price drop. 

In the 30's the goal was to hold wages high.

I anticipate similar success.


drwells's picture

Yep. Somebody please point me to an occasion when real wages/rents/incomes EVER caught up to bubble valuations, rather than the bubble imploding.


TheGoodDoctor's picture

+7,000,000 homes not paying their mortgage. Yeah no doubt ever since Nixon took us off the gold standard officially wages, inflation, and housing have not followed the same chart pattern. I'd like to see that really. All on one chart. I bet that would be interesting with John Williams type numbers instead of the Fed's BS numbers.

TheGoodDoctor's picture

Very intersesting. So, I take it there is the stated worth, the CPI worth, and then the adjusted worth via shadowstats. I'll have to take a closer look. Thanks.

optimator's picture

And, the government and the banksters will be able to pay off their debt with inflated dollars.

seventree's picture

THe hope has been to ramp 70's style inflation to pump real wages into line with bubble prices

This is the part I don't understand. Not in your comment, which is on target, but as part of "the plan." Even if all these planners managed to get price inflation going to the point where nobody could even afford to eat on their salary (let alone buy a house) this puts no pressure on employers to raise wages to match. What would be their motivation? Businesses will continue to squeeze costs, including payrolls, for the same reasons they are now. Even if all those mysterious economic manipulators could arrange such a thing, it would only produce a lowered qualtiy of life but not any house sales.

Rainman's picture

Those option ARM and Alt-A resets are off most people's radar. I assume many have pre-entered the retail inventory or shadow pipeline already before resetting by 2012, but nobody really knows.

Since most of the exotics are California grown and the CA RE market is the nation's biggest by far, you can safely bet the banks ( plus F&F and FHA ,etc.) will eat a lot more bad paper going way into 2013 at least.

Luckily, Fannie and Fred have that unlimited line with the UST. They'll need it. 

LeBalance's picture

That might be the MOST compelling argument for the False Flag nukes being set off in California.  Just think of all the issues that would sweep under the carpet.

That thought is mighty interesting.

Dr. Sandi's picture

Let's assume Mr. Paulson is right again this time. Except, also consider that he is lying again.

Since Mr. Paulson has made most of his money by betting against the people he has sucked into doing business with him, it is very logical to assume that he will make a few billion more from the Long Shot Louies who put down bets for U.S. housing to win, place or show in the coming year.

If I were placing bets, I'd put my simoleons on Mr. Paulson creating an oily synthetic product that makes billions when key companies in the housing industry die at the starting gate and have to be put out of their misery with the starter's pistol.

As with Goldman Sachs, listen carefully to Mr. Paulson's words, then bet the opposite way, just as he's going to do.



Orly's picture

Excellent analysis, Doc.

Spitzer's picture

I am no expert on Paulson but is his US bank holdings the reason why people think he is bullish on housing ?

My guess is the reason he is holding bank stock is because he has some inside information on how the world will look in the next few years. Maybe the bankers have a deal done with the dollar already. They are just waiting for Obama to destroy it first. Then when the dollar is gone, the gold in fort Knox will be divided among the banks in Paulson's portfolio  to recapitalise them.

Howard_Beale's picture

Paulson is betting on TBTF. Period. He has no inside info. He's just a another chump thinking the bailouts of the future will protect him.

He may well be wrong.

4shzl's picture

As long as he gets to stack the deck, Paulson will win again.  Paulson: crooked as a dog's hind leg.

drwells's picture

"As with Goldman Sachs, listen carefully to Mr. Paulson's words, then bet the opposite way, just as he's going to do."

Agreed. When you get to be Paulson's size, I suspect somebody from Washington unofficially swings by to explain the deal: you talk the party line even as you continue whatever looting and stealing you were doing, with appropriate kickbacks to the System, of course. Otherwise, you're suddenly "revealed" to be breaking the law, fooling around with the 16-year-old pool boy, or whatever amuses them.

Racer's picture

The chart shows the real cost of the property boom and why the real winners from high house prices are  banks.


The average household bill in Britain is now higher than the typical salary,

David449420's picture

I'll reiterate once again.

  One lamppost, One Bankster.

  One lamppost, One Politician.

It's coming.

MeTarzanUjane's picture

Oh yes but first they will proceed to their lamppost walking down skinners row where their prized hides will be liberated from their carcasses.

trav7777's picture

Sounds like DEFLATION to me, just like Douchinger said!

The price of everything is dropping.  Oh, no wait, it's not.

Gold at 1180 oil at 82.  Deflationary as hell, right?

DavidRicardo's picture

His bet relies on the Fed purchasing $6.4 trillion in securities around December.


And that's exactly what will happen.

Illya Kuryakin's picture

Yeah betting is easy when the game is rigged in your favor.

bob_dabolina's picture

" Prices would fall even if a tsunami of Option ARM and Alt-A resets weren’t hurtling down the track – but they are. Beginning in June, a surge in resets will begin and not subside until late 2012."

I believe the majority are recasting mortgages, which is why I suspect the Fed is on an all out frenzy to keep yields low.

*recasting mortgages can reset lower (or higher) as the yield is influenced by the market*

This my friends, can be very helpful for the housing industry.

4shzl's picture

I believe the majority are recasting mortgages, which is why I suspect the Fed is on an all out frenzy to keep yields low.

*recasting mortgages can reset lower (or higher) as the yield is influenced by the market*

Bingo -- we have a winner.

Pamela Anderson's picture

Of course he is going to be wrong this time... there is no Pellegrini to tell him what to do...

Blano's picture

I'm surprised no one has tried to interview Pellegrini about all this.

bob_dabolina's picture

Pellegrini got lucky.

He was standing on his last leg before Paulson.

Paulson also had the aid of Greenspan.

It doesn't take a genius to make $15 billion in a few months when you have the guy who created the fucking problem working on your team.

kalasend's picture

I don't quite understand the thinking behind the deflationary camp(if that's how you call those who don't buy the housing recovery). We all pretty much agree that the Fed is determined to print. But somehow there's a group who think that the Fed is determined to print but not to print enough for the job.


Mercury's picture

Well inflation (via printing) doesn't necessarily "recover" anything. For one thing rates will rise as inflation accelerates which will counteract rising home prices.  For another inflation doesn't make people richer, especially when their living expenses are going up faster than their incomes.  If home prices do keep pace somewhat with inflation it may actually prompt some homeowners to take advantage of this and sell because they need the money. Plus, property taxes are only going higher.

Dburn's picture

Well inflation (via printing) doesn't necessarily "recover" anything...

Excellent point and if wages are pushed down in response to rising prices, people selling houses will become endemic. More lay-offs and increased productivity expectations with lower wages will ultimately lead to more foreclosures as people realize they don’t have the extra money to make home repairs and do maintenance along with paying the increased property taxes, homeowners insurance and the infamous misc category.

That will take whatever recovery people are predicting and jam an ice pick in it as large inventories of homes are again dumped into the market.

At some point , the idea will finally be driven home that a home is no longer an investment. It’s a forced savings plan with negative interest.You pay to save. As interest costs rise along with rising payments on adjustable and contractors who try to make a year’s income on your house for repairs since they have no idea when the next job will come, the idea that wages will rise is falling down funny.

The pride of home ownership will turn into a large kick me sign as people get stuck further and further into the ground. It will be show of stupidity to actaully have a mortgage. The concept Home ownership will turn as Toxic as the Gulf

No job increases (more likely decreases) , no rising wages with inflation on all other living costs equals a unprecedented second or third blow disaster that should finally topple this bitch considering the shape we’re in now.

Oh yeah we will have billions x billions of 1099s driving up the cost of doing business. That will add to inflation for the companies that still have pricing power. For those who don’t , well flat margins can’t be compressed any longer.

Escapeclaws's picture

"contractors who try to make a year’s income on your house for repairs since they have no idea when the next job will come"

You hit the nail on the head with that one. I noticed that my car dealer seemed to be doing the same thing. Kind of scary to get it fixed nowadays, but the dealer went on a fishing expedition when I had the car inspected, so I was a hostage to that.


Spitzer's picture

The fed doesn't even need to print in order to get currency inflation. When the economy cannot service the debt the debt gets sold off.

TheGoodDoctor's picture

They can try to inflate their way out of housing all they want but if wages don't keep up who the fuck is going to be able to afford a house? It's possible to have inflation in other areas and still have deflation in housing. It's going to get ugly.

chrisina's picture


"But somehow there's a group who think that the Fed is determined to print but not to print enough for the job."


It's not exactly that. It goes:

"But somehow there's a group who think the Fed is determined to print but has no fucking clue what's "enough for the job", so that the risk is very high that either they'll print too little and will not result in what was intended (deflation instead of mild inflation), or will print too much and will also not result in what was intended (hyperinflation instead of mild inflation)."

The Fed trying to produce mild inflation with successive massive doses of QE is a bit like someone trying to shake ketchup out of an old bottle. Shake once, shake twice, still no ketchup. Shake a third time, and you've got a big red splash all over your plate. 


Nobody has a fucking clue what's "enough for the job" . That includes Bernanke and all the King's men. The Japanese have failed finding that measure for the last fifteen years, but somehow there are people like you who seem to think that Bernanke is so much more clever and knows exactly what's "enough for the job".

Please explain why you believe Bernanke knows more than anybody else? Is his track record in predicting the crisis and its evolution that stellar (Hint: check his speeches in 2007/2008/2009, he wasn't right one single time, but somehow now he knows exactly what's "enough printing for the job")? 

So I'll ask you a simple question : what's "enough for the job"? How many more trillions of QE and how many doses? Just give me round numbers.

trav7777's picture

the slide in housing prices will be protracted.

There's enough fraud and sausage hiding to keep prices fluffed some as they slide

I think I need to buy a gun's picture

i think he is right and i think something big is going down. Lets say a currency split on all soverign debt. say 1 new gold backed dollar for every 3 old fiat dollars. This opens the housing market up again as those that remain house prices fall further but only have 1/3 of the debt. The banks own all the houses now and they are being recapitalized thru buying treasuries. The current dollar will be null and void and what will remain is gold backed treasuries throughout the banks. If you look at the new 100 dollar bill it has gold markings on it and it does not have "Federal reserve note on it" This cuts into the gold price but only makes gold worth 12000 an ounce and not 54-36 thousand and ounce. Credit card debt and car loans  and student loan debt a 1 for 3 as well or completely gone however they do it..........our new money is gold backed treasuries.......fdic insurance would be eliminated.

Tom Servo's picture

The Series 2009 $100 bill redesign was unveiled on April 21, 2010 and will be issued to the public on February 10, 2011


While it does have a GOLD 100 and ink jar and quill on it, unfortunately, it says "Federal Reserve Note" in the upper left hand corner.


Oh yeah i thought all these loans were contained?  some bald bearded douche said so...


chrisina's picture

what makes you believe the Fed has enough Gold to issue a new gold backed dollar at the rate of 3 old Fiatcos?

If the Fed were to issue a new hard asset backed dollar in the future, it wouldn't be backed by Gold (they have so little of it) but by the millions of houses they'll end up taking possession of when the mortgages backing the securities they bought and will buy in the future go bust.

(NB : same thing happened with the Weimar republik)

Also, I don' understand your concept of "Gold backed treasuries"? Where's the Gold backing those treasuries. Liberty 33 has what, max. $200 billion in their vault? And the US Govt debt is what, $14000 billion? Just over 1% Gold backed?

I think I need to buy a gun's picture

The deflationists are technically correct if we have a gold standard thats whats missing they aren't saying that on financial tv. but crude oil and other natural resources will go up 12 times to pay for our new gold backed currency. That mean oil will be to the moon, They best way to play oil is to buy actual barrels. Unfortunately this system will be the beginning of the end of suburban suv way of life for most as oil prices will be thru the moon ....

chrisina's picture

Doesn't make any sense. If, as you say, Oil prices go through the moon and nobody appart from the super rich can afford it, where's demand going to come from that explains such "through the moon" price?

drwells's picture

"Have the government actions of the last year successfully spurred the animal spirits of Americans, resulting in a self-sustaining recovery?"

Bernanke sacrificed a blue-tailed chicken to the snow demons while skipping rope in diapers and a propeller beanie at the stroke of midnight. That ought to do it.

Mainstream economics: because phrenology and necromancy need something to make them look good.

Sherman McCoy's picture

People periodically have doubted Warren Buffet's investing acumen. That hasn't worked out so well. I'd tend to give the billionaire the benefit of the doubt He may be wrong, but that's still the way you're supposed to bet. If Shiller is so smart, why isn't he rich?

whatsinaname's picture

Buffett has benefited from the 401k insanity that started in 1982. Take a good look at a linear graph for the Dow or S&P since 1930 and check what happens after 1982. Buff bought most of his stocks around the time of the oil crisis around 1974. If sheeple were to smarten up Buff would look like the Buff he really is.

spekulatn's picture

How is it noone is talking about the fraud that is fannie and freddie? No hearings. No primetime specials. No fat ass MikeMoore movie. No Lady gagger protest songs. Nothing. Zilch. Nada. Just radio fuckin silence.

Talk about a story. 

It was Todd Harrison at Minyanville who put the bug in my brain about this fannie crap. He wanted to know how Franklin Raines was able to avoid the whole "mortgage mess?"  

Good question, me thinks.




drwells's picture

I won't even get started. Every day he spends not only out of jail but stealing $100K a MONTH from taxpayers is another blot on the honor of our former country.

Quinvarius's picture

Since he cannot stack the deck this time, he is just throwing darts like the rest of us.

rawsienna's picture

Consumer confidence is a levels consistent with recession - housing, bank stocks and all securities that are hurt as consumers either default or pay down debt are to be avoided. Fed will try to keep asset prices up but it can not last if Nominal GDP growth is below 3%