Westwood’s Alpert Says US Home Prices Will Fall Further

Dan Alpert, managing partner at Westwood Capital, thinks that banks are under-reserving and that this will come back to haunt them when house prices fall in "the final leg down" of the housing crisis.  That is the right view if you read between the lines of the last post from Annaly Capital Management. I am in full agreement here that loan loss provisioning is artificially boosting earnings (and bonuses) when more prudence would be warranted. In an environment of permanent zero (PZ), this means trouble:

As the long end of the yield curve comes in due to either QE or what I have been calling permanent zero (PZ), as zero rates become a permanent state of affairs, interest margins have compressed.  Rates will compress even more the longer rates stay at zero percent because the expected future rates will start to come down (see here on bootstrapping the yield curve).

What’s more is that PZ will be a big problem in a Shiller double dip scenario because banks will be set up for huge loan losses despite recent under-provisioning. Meanwhile they will have no way to make it back on net interest as long rates come down in a recession while short rates remain at zero percent, killing net interest margins.

This is the problem with QE and PZ money: it works in the short run, but is toxic in the longer-term.  Now if liquidity was the real problem for banks, then the banks will have enough capital to ride through this. They will recover as many did in the early 1990s during the last banking crisis in the US.

If solvency is the banks’ problem, QE and PZ will be toxic.

The temporary effect of QE seems to have waned for now, so the yield curve remains steeper, which is good for banks.

On some of these issues, here is a good nine-minute conversation between Alpert and Bloomberg’s Jon Erlichman and Bill Cohan, now a Bloomberg contributor. Alpert also has some interesting things to say about Europe’s under-capitalized banking system.


(For those on Seeking Alpha who can’t view the video, click here for the CW feed.)

Also see John Lounsbury’s related comments here.

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