Saturday, August 7, 2010

Newest Member To Pricing Plunge

This weekend we received the July Commercial Real Estate price report from CoStar.

The optimism in the market over the past few months has stemmed from the rise in prices for the most attractive properties in the most attractive locations in the country.  These properties are known as investment grade.

This past month the investment grade property prices rolled over, posting a month over month loss.  (Along with all other commercial property which has experienced uninterrupted free fall)

The chart below shows the decline. (Investment grade in blue)

The dead cat bounce we have seen in the economy and stock markets due to the short term artificial stimulus has sucked a tremendous amount of money back into these A+ properties.

As the economy rolls back over these investors will be slaughtered during the next wave down.

This will bring on a national pessimism toward the real estate sector that this country has never seen.  That moment will provide the buying opportunity that savvy investors are now waiting for.

August Jobs Report

The grand daddy piece of economic data for financial junkies is the monthly jobs report which comes out the first Friday of every month.  We received the data for the month of July this past Friday.

We lost 131,000 jobs for the month, crushing the optimistic expectations.

The good news you have probably read about was that the unemployment rate fell to 9.5% from 9.7% the previous month.

Why the drop in the unemployment rate when we lossed jobs?

When Americans have been unemployed for so long that they have given up looking for a job, the government no longer counts them as part of the work force.

Between June and July 381,000 thousand "left" the labor force.  With only 131,000 jobs lost, this actually shows up as a decrease in the unemployment rate, hence the 9.5% print.

The average duration of unemployment is now 34.2 weeks, and 44.9% have been out of a job for longer than 27 weeks.

The following chart shows the number of employees now having to take part time work as their hours are cut down:

And finally, we can take a look at where this recession stands in comparison to others over the past century in regards to job losses and time to recover.  The current depression is unprecedented.

Fortunately Obama has recently extended the Emergency Unemployment Claims which provides Americans with over two years of government checks.

With this free money coming in most will give up looking for work.  This will help the unemployment rate moving forward as they drop out of the labor force. 

Another victory for the current administration.

Thursday, August 5, 2010

Saving The Housing Market

As we head closer to election season there have been new ideas coming from the administration on how to revive the economy.  Over the past two weeks we have heard two that are focused on residential real estate.

A recent financial report released last week showed that there are currently 14.7 million homes that are underwater.  That means they owe more on there mortgage than their home is worth.

The reported also estimated the total amount of debt underwater at $770 billion.

The most recent plan being discussed was to allow debt held by Fannie and Freddie (who own or guarantee the vast portion of mortgages in the country) to pardon the amount of debt currently underwater.  This would bring mortgages to the value the homes are currently worth.

In addition they are discussing plans to take all Fannie and Freddie mortgages down to current interest rates.  Interest rates hit 4.49% this morning, an all time record low, due to both Fannie/Freddie's debt purchases and the anticipation of the Federal Reserve coming back into the market.  (Discussed here.)

The losses on the balance sheet of government owned Fannie and Freddie (the American taxpayer) would be beyond staggering.  Immediate losses would begin at $750 - $1 trillion, and would most likely be far higher due to secondary ripples the moves would create.

The greatest beneficiary would be the Too Big Too Fail (TBTF) banks such as Goldman Sacs, Bank Of America, and JP Morgan. An estimated $2 trillion in impaired assets would be significantly improved.

The government is now essentially run by these TBTF's, as they continue to lead the political contributions every election and collect record bonuses every year as America self destructs.  The ridiculous financial regulation bill that recently passed provides clear indication of who is in charge.

The pain for these actions to "save" housing would be reflected in the value of our currency.

The high paid management staff and traders working for the government sponsored TBTF banks, as well as the incredibly high paid salaried employees of the Federal Government, would have the luxury of protecting their wealth by purchasing gold, silver, oil, agriculture, and foreign currencies.

The real pain would be felt most by the poor and middle class who depend on the purchasing power of our currency because they collect wages, social security, unemployment, or pensions at a fixed rate.

In addition to these housing plans to "save" America, look for another massive round of deficit spending "stimulus" from the Federal Government as we move toward elections.  Along with subsidized low housing payments, the government may provide inefficient government jobs that we do not need (maybe another census count) or just send checks to Americans in the mail.

The correct action would be to allow homeowners to enter foreclosure and rent.  The banks should be forced to write down the losses on their balance sheets and the TBTF banks should fail.

There are close to 9,000 other banks in this country (about 85% of which are healthy and stable) who can continue the banking operations and would be happy to pick up the market share and make loans to homeowners, businesses, and consumers.

This would allow the system to cleanse itself of the bad debt and allow us to once again grow as a country.  Will this ever happen?  No.  The system will cleans itself when the value of our currency revalues itself far, far, lower.  This is the worst possible scenario for the country as a whole.

Wednesday, August 4, 2010

Jim Cramer Vs. The Tuna

On Monday the markets came out firing for the week opening up 208 points.

Jim Cramer, who some consider the face of the financial media and the lead cheerleader for CNBC, began his show Monday evening emotionally drunk with optimism.

Just in case some think I do not present an equally optimistic view on the markets, I present to you the bull case in all its glory.

(Feel free to stop the video at any time if you feel nauseous)

Now that Jim Cramer has had a chance to explain his view on the world.  Let me give you mine:

The ICI data released today shows 13 straight weeks of stock mutual fund outflows.  This is now $50 billion in stock sales from the public this year.  The market is now being pushed up by the commercial banks and high frequency traders artificially.  When they decide to sell, it will be free fall.

12% of Americans now live on food stamps.

1 in every 4 children today lives on food stamps.

There are 9.2 million Americans that are unemployed but that are not receiving an unemployment insurance check.  This number will begin to fall as Obama recently restored the Emergency Unemployment Claims allowing Americans to live on government support for two years or longer.

A recent Pew Research survey found that 55 percent of the US labor force has experienced either unemployment, a pay decrease, a reduction in hours or an involuntary move to part time work since the recession/depression began.

In America today, the average time needed to find a job has risen to a record 35.2 weeks.

50,000 homes per month are now being seized by banks.

Estimates show that based on the pending home sales plunge last month, we will face 11 months of home supply next month.

This number does not include the shadow inventory that will flood the market over the next 18 months.

$1.4 trillion in commercial real estate loans will need to be refinanced between 2010 and 2014.  50% of these loans are either 90 days delinquent or underwater.  These losses will lead to massive failures in the small banking industry.

The FDIC currently has 1000 more banks on its troubled watch list.

The FDIC's balance sheet currently has negative $21 billion to bail out these banks and protect the savings of Americans.  The FDIC has a $500 billion lifeline with the Federal Government that it will soon tap.

Our state governments are insolvent across the country.  The Federal Government is pushing through an emergency $26 billion funding bill for the states this evening.  This will be the tip of the ice burg necessary to keep states from declaring bankruptcy, which would lead to massive public jobs lost, enormous state pension funds going unpaid, and state unemployment checks going unpaid.

The Federal Government currently has no money to back up the FDIC or give to the State Governments.  Our country borrows hundreds of billions at debt auctions every month just to stay alive.  Think of a beggar on the street with a homeless sign.  The recent government projections show us breaking through the current debt ceiling of $13.9 trillion by February of next year.

China and Japan, our largest creditors, have recently stopped purchasing United States debt.  The clock is now ticking for the moment when the Federal Reserve becomes the exclusive buyer of US treasury debt.

I prefer to buy stocks and real estate when they are cheap, and sell gold when it's expensive.

We are a long, long, way from that world.

Cramer prefers the opposite strategy.  I will leave it up to you to decide.

Future Recession - Ongoing Depression

The following is one of the best financial reports put together this year.  It comes from Raoul Paul who retired from managing money at the age of 36 (due to extreme success) and now focuses solely on writing this letter.

For those looking for a better understanding of what is happening in the world today and where we are headed next, please enjoy:

GMI August

Monday, August 2, 2010

Jim Rickards: Deflation, Hyperinflation, And Romans

Excellent conversation this morning on CNBC with the always interesting Jim Rickards on his thoughts about deflation.

The interview on CNBC discussing Bullard's paper is fairly quick, if you want a more in depth discussion going into further detail on the Weimar hyperinflation then you can listen to a radio interview here with Jim on King World News:

King World News: Jim Rickards

For another fantastic interview with Mr. Rickards you can visit the two links below where he discusses the parallels between the United States Empire today with the historic Roman Empire.

Interview Part I

Interview Part II