Saturday, July 30, 2011

The American Student Loan Trap

I met a girl at the pool this morning who is going to law school here in Charlotte.  During the conversation she mentioned that her undergraduate student loans were $80,000 and her graduate school loans will total $150,000!  $230,000 in total student loan debt before she steps foot into the workforce.

Then she can begin accumulating credit card, auto, furniture, and mortgage debt.  She will most likely start out $500,000 in the hole if she purchases an average priced home here in this area.

For those of you out there (myself included) that say it is no big deal because she can just walk away from the debt, not so fast.  Studen loan debt is not cleared during bankruptcy, it stays with you forever.

I wished her the best of luck, and went happily on with my day thinking it would be a good time to segway into a graphic such as the one you can see by clicking on the following link: AMERICA IN DEEP

Friday, July 29, 2011

GDP Collapses: Future Effect

Perhaps the most important piece of economic news released (the monthly jobs report would be a close second) is the GDP number which is released once per quarter.

The GDP (Gross Domestic Product) is the sum total of an economy for a given country.  It tries to measure everything: manufacturing, consumption, imports, exports, government spending, etc, etc.

Economists and financial analysts use the number as a baseline to measure the current value and future price projections for stocks, bonds, and the currency within that country.  It is also a helpful measure to know whether a country will be able to pay back its debt, but we'll get back to that last one in a second.

This morning we received the second quarter GDP and it was a complete nightmare arriving at 1.4% annual growth.  The first quarter was revised from 1.9% to .4%!

The number was of course shocking to Wall Street and the media who seem to believe America is in some state of recovery.  The truth is, which is hard for them to understand through the fog, that America entered a depression in December 2007 and what we have seen since are mini stages of growth and recession within the major trend.

What I found most fascinating on the release of the news was not the stock market plunging, but that gold simultaneously rocketed up to new all time record highs.

This means that a large portion of the market now understands that any slowing in the economy means an equal and opposite reaction in the size of additional money printing ahead from the Federal Reserve.

I have been talking about this for years now, and while a few years ago it took the market months to put the two together, this morning it happened simultaneously.

This disastrous GDP number opens the door for additional stimulus from the Federal Reserve in the form of QE3. (this only weakens the economy further which I have discussed in the past, but provides a temporary shot of heroine to confuse market participants)

The Fed's "dual mandate" to keep inflation under control and stimulate the job market can be best described by the picture below.  I can only imagine the stress Bernanke will find himself in as he has truly painted himself into a corner. 

Finally, it is important to remember that GDP projections are used to determine future budget surplus/deficits for the federal government. A larger GDP means higher tax receipts (income) which would lower the annual deficit if spending were to remain the same.

The White House has projected GDP growth of around 4.5% over the next five years.  Today's GDP numbers show how ridiculous those projections are. We may move back into negative growth soon without additional temporary stimulus - think heroine. 

Understanding this will help astute investors predict what the real budget will look like moving forward as GDP/income collapses and spending will soar.  As long as Bernanke is at the helm, the price of gold may be more undervalued today than it was in 1999 at $250.

Thursday, July 28, 2011

Foreign Real Estate Purchases

Where foreigners are spending their cash to purchase US property:

(click for larger image)

Europe Slowly Sinking

The world continues to stay focused on the developing soap opera of the "Debtmageddon" debt ceiling taking place on center stage where the most recent "drastic" republican cuts have been announced at $3 trillion in total.

Gasp.  Who knew they had that kind of real thunder and power behind their strong words? 

Soon after the CBO had a chance to run the actual "real world" cuts that would take place under the plan, and they came in at.....brace yourself.....$95 billion in cuts per year.

On a $1.4 trillion annual deficit.

Anyway, let's focus on the real world.  The United States will get its real debt crisis soon enough when our foreign creditors decide to stop funding the party.

But not yet.  The real debt crisis continue to unfold in Europe where Italian rates have rocketed higher today toward 6% :

Spain has also once again crossed the magic 6% numbers:

I have discussed it in length in the past but these rates getting out of control are a major problem for the global economy and could bring massive financial shocks to the system.

This week we received the Case Shiller home prices which fell again month over month, and are now down 4.51% year over year, the biggest drop since November 2009.  As the shadow inventory continues to build and more homes move underwater, the housing market is like an anchor tied to the foot of a drowning economy.

With no jobs, falling home prices, stocks on the verge of collapse, and a surging cost of living, Americans have the pleasure of sitting at home and listening about whether higher taxes or lower spending will save them.  The truth is that they will get neither, and at some point the rock star that never has to sleep and parties every night will hit the wall.  Then the real depression will begin.

Governor Christie On Debt Ceiling

While I try not to focus on politics, mainly because I view Democrats and Republicans as the same monster, I cannot hide my favor for governor Christie from New Jersey, someone I have brought up in the past as a small light of hope for our country.

He is perhaps the only politician I have seen who actually puts into action spending cuts that he knows will most likely ruin his chance for re-election in the short term because it is the right thing to do for his state in the long term.

The following is a recent statement regarding Washington's ridiculous antics around the debt ceiling:

Monday, July 25, 2011

Bank's Shadow Inventory

The following chart shows the continuous growth of the shadow inventory in the real estate market.  Shadow inventory refers to homes hidden on the balance sheets of banks that are currently being held off the market.

I hope to buy the last one that hits the market.