Thursday, December 10, 2009

The Crest Of The Tidal Wave

I do not enjoy being the bearer of bad news but what little time I spend watching or reading the mainstream news I can tell that the United States has once again lost its collective mind in euphoria.

Not only do an endless stream of market and economic commentators talk about our exit from recession, they speak of a tremendous growth that is now upon us.

However, one only has to turn off the television, close the newspaper, and open their eyes to see what is actually happening.

A CNN survey this week found that 84% of Americans believe the economy is still in recession.

A record 37.2 million people, or about one out of every eight Americans, received food stamps in September.

This month's job data showed that 17% of Americans are still out of work. Alternate data using the same measurements from the 1980's, shows that the unemployment rate has crossed 20%.

1 out of every 4 mortgages in this country are currently underwater, meaning they owe more on their mortgage than their home is worth.

Obama's 47 percent approval rating is the lowest of any President in history, 10.5 months into their Presidency.

The recent talk from the Obama camp is that due to their brilliant management the TARP program has lost $200 billion less than they expected. In their reports they make no mention of the bottomless pit of money that AIG has become, or the billions lost in the auto company nationalization, or the billions lost in the Fannie/Freddie nationalization.

They fail to mention that the Fed has increased its balance sheet by over $1 trillion to purchase the toxic assets in the market including many that were on bank's balance sheets.

Their focus is that the large banks by and large have and will continue to pay back their TARP gift. What is ironic about the situation is that the banks are in far, far, worse shape today than they were 12 months ago during the "financial crisis."

What has temporarily hid this from the public is the accounting change for banks made last March. Banks are now allowed to mark their assets to "myth" instead of market. This means they can claim that a commercial real estate building that is worth $10 million is worth $20 million. They have to take no write downs and profits magically appear.

My question is......if the banks are in such good shape, why are they hoarding $1 trillion in cash at the Federal Reserve instead of lending that money out into the economy?

Ah, the reason is that the banks understand that they are still insolvent. Even more scary is seeing that they are actually more leveraged today then they were at the peak of the real estate boom.

So due to the return of the TARP money, plans have already been made to use the money toward "job creation," as if the TARP money was some basket of profits. The money is borrowed debt, which has to be borrowed/taken from the economy to create Obama jobs. The notion that the money is available is a game of smoke and mirrors, a sales job.

In truth we are not at the beginning of economic growth, but in the early stages of economic disintegration.

Our state budget shortfalls are massive and some sort of bail out will be needed soon to stem the hemorrhaging. The banking system has been nationalized and is now insolvent. The FDIC which stands behind the saving deposits of Americans at their banks has no money.

The FHA and other government entities are now creating 96% of all new mortgage loans purchased today. The FHA, Fannie Mae, Freddie Mac, and Ginnie Mae will continue to need endless billions in lifelines in order to keep funding the collapsing housing market. Waiting in the shadows is well over 10 million in foreclosures that will eventually have to be unleashed on the market. This does not include the $1.3 trillion in mortgages the Fed plans on selling into the market next year to soak up the liquidity.

Over the past 12 months, the 2009 fiscal year, we have run a $1.4 trillion deficit. This is "on balance sheet" accounting. When you account for "off balance sheet" items such as wars, social security, and medicare, we ran an $8 trillion deficit for the 2009 fiscal year.

For the past two months, the first two of the 2010 fiscal year, we have run a $296 billion "on balance sheet" deficit. Many estimates project the total budget deficit to approach $10 trillion this year alone.

Just as many in 2005 saw home price appreciation as never-ending, many people today believe that we can continue down this path permanently. They believe that mortgage rates will always be less than 5%, and that government T-Bills will always yield 0%. To me those look bubblicious, but it will be up to the market to decide.

I believe we have less than 18 months before the country we live in today becomes a shadow of its former self and, as I continue to repeat, opens up opportunities for prepared Americans to invest in the rebuilding of our country.

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