Saturday, September 19, 2009

Cash For Everything

Lets begin with housing this weekend as we've officially begun phase two of the residential real estate meltdown. The following is the chart showing resets for option-A loans:

The resets will peak in the middle of 2010 and stay high through all of 2012. The foreclosures continue to pour onto the banks balance sheets, and the banks are doing everything in their power to delay the defaults. If a homeowner stops making payments, it may be 9-12 months before they receive a notice of default in the mailbox. The banks don't want the loans because they don't want to take the write downs.

This may very well end up being the worst time in human history to lend an American money to buy a home. However, this week we received word that mortgage rates are now approaching below 5%. The lowest rates we've ever seen in this country!

Its better to think of it this way: Would you lend someone $300,000 of your money to purchase a home at a 5% interest rate? Of course you wouldn't. So what is going on here? Who is lending these people this money for nothing?

The government is, and that's where the story gets interesting.

Just a few years ago the Federal Housing Administration (FHA) guaranteed about 3% of the loans in our country. This year that total is up to 25%. It is now estimated that they are guaranteeing about 80% of all new loans created.

This week they announced that their reserves against losses had fallen below their mandatory minimum. They currently hold $30 billion in reserves to protect against $1 trillion in mortgages. This is taxpayer money being lent, not some private bank trying to create profitable loans.

The FHA requires only 3% down on their loans (the majority of new loans are choosing to only put down 3%), and with the new government subsidy (cash for dumpers) most buyers are now purchasing their homes with 100% financing. They are walking out the door with a mortgage and starting their life underwater.

The losses coming for the FHA will be monstrous and may equal Fannie and Freddie by the time this debacle has ended. (Fannie and Freddie are filling in for the other 20% of mortgage guarantees) We now have a 100% nationalized government run mortgage enterprise.

The government needs home prices to rise in order to make money in their new business. How can they get prices to rise? You know the answer to that, we'll save that thought for another day.

This catastrophe is only what is happening in the housing sector. The same initiatives are being put in place in every aspect of the economy. Cash for clunkers, cash for dumpers, cash for bankers, cash for everyone.

The people of this nation hit a wall with their ability to borrow and spend in 2006. They could not stomach any more debt. They stopped borrowing and they started saving money. This is very, very, important for an economy to heal, rebuild, and begin growing again.

Our government will not let this healing process to happen. They will not allow the real recession to begin, and they are force feeding the new debt down the throat of every American.

This has now created the final bubble to burst: the US bond market and the US dollar. How long before it bursts? I have no idea. I read articles from many people who saw the danger in subprime bonds back in 2003 and began shorting that debt. They were laughed at in the market for four long years until 2007, when subprime debt became close to worthless.

The same thing is coming for US debt, but it will be much worse. At least the subprime debt was backed by a home. The US bond market and US dollar are backed by the ability of our government to tax its citizens in the future to repay the debt. The citizens here now owe $100 trillion and have no productive or manufacturing base. Our economy is based on borrowing and spending, and it is entering retirement phase.

The dollar and treasury bonds are only pieces of paper. They are worth nothing.


Wednesday, September 16, 2009

Fantasy World Feels Great

Once again I find myself having to devote the majority of my time here having to separate the fantasy world from the real world. In fantasy world things are looking pretty fantastic right now:

Ben Bernanke announced two days ago that statistically the United States is now out of recession. The same comments have been echoed from Barack Obama and Treasury Secretary Tim Geithner. These three men have spend the summer touring and speaking to let the everyone know that they have saved the country from recession.

Behind one of the speeches I thought I saw a large mob of angry protesters that were there to let Obama know their thoughts on his reckless policies. I must have been mistaken though, because that was not covered on national television.

Why was it not covered? That's the real world. What else is going on in that world? I'm glad you asked.

Over the past two weeks insider shareholder selling for American stocks has risen an astounding 85% from the already high number. They purchased a total of 4.6 MM and sold a total of 471 MM. Insiders are the people that run the companies, look at the actual balance sheets, and can make the best decisions on the direction of American business.

But wait, stocks are soaring right now. Going back into fantasy world, I turned on the news and hear interviews from people who sell stocks for a living telling me this is one of the best times in history to take advantage of "cheap" stocks.

Martha Stewart was asked this morning on CNBC if the American consumer would ever come back. "Of course they will," was her response. "Because people want to buy things."

Ahhh, now I understand. Back to the real world:

Bank of America and Citigroup announced record defaults on their credit card debt this past month. It has taken about two full years but the process has come full circle. Americans took out loans on their homes to pay for their expenses in the early part of this decade. When that credit went dry they turned to their credit cards to cover the difference in fantasy life vs. the real world. Now we have reached the point of maximum debt.

Meanwhile the commercial real estate market is in free fall. The asset values are disintegrating as the banks do everything in their power to keep the loans from defaulting and recognizing the losses. Everyone prays for a real estate boom to save them as the debt drowns everything around them.

The boom seems to be happening elsewhere, however, and people are starting to take note.

Central banks announced this month that they will become net buyers of gold and silver for the first time since 1988. They have been able to sell their metal over the past twenty years in an effort to keep the prices low. However, we are now nearing the breaking point and its become every man for himself as we move toward the collapse of the American dollar.

China has become even more aggressive.

In a recent interview with a national gold and silver dealer, he said that he is trying to set up direct relationships with the silver mines to purchase the metal out of the ground as it comes available. He is doing this to be prepared for the coming rush of demand on its way.

Unfortunately, he said he is running into problems with this strategy. Why? China is already in line in front of him. As they move around the world and purchase gold mines, they are setting up relationships with the silver mines to be first in line to purchase.

Just like the central banks, they are positioning themselves for what is coming.

That is the government strategy. On the ground level, they have just allowed silver to be purchased by the public as an investment alternative.

These strategies are a comprehensive move across the board to diversify the country out of United States currency.

But that is just the real world. Its more fun to talk about fantasy. Obama is working toward free health care for everyone, all jobs provided by the government, and coming soon to a mail box near you: more free checks in the mail.