Friday, November 11, 2011

30 Year Mortgage Rates Back Under 4%

The rate on a 30 year government mortgage loan has once again fallen below 4% this week, clocking in at 3.99%.  With lenders knowing they can unload all mortgages onto the FHA, Fannie Mae, and Freddie Mac (the taxpayers) rates have continued their downward march all year long.  The Wall Street Journal reported this morning that the reserves at the FHA are dangerously low.  They will soon need quarterly tax payer bailouts alongside Fannie Mae and Freddie Mac who are currently collecting every month.
Realty Trac reported this week that foreclosure activity hit a 7 month high in October.  The Core Logic home price index reported that home prices fell 1.1% month over month in September.

Zillow reported this week that 28.6% of all mortgages are now underwater (owe more than the home is worth). That is up from 26.8% in the second quarter.  There are over 50 million mortgages in our country.

Most of these 14.3 million underwater home owners continue to make their payments every month.  When most begin to walk away we will see the real foreclosure crisis begin.

2012 Election: Romney Vs. Obama

I spent two hours on Wednesday night watching the Republican debates, and I felt, as I'm assuming most Americans felt, embarrassed for our country.

The Perry moment was the highlight of the night in terms of shame, but at all times I thought I was watching a Saturday Night Live sketch screening.

The exception of course is Ron Paul, who is a poor speaker and gets too excited when trying to put thoughts together, but has a firm understanding of the global economy and what is in store for America this decade.

He is the only candidate, democrat or republican, who would make tough decisions that America desperately needs.  If Ron Paul was elected and his spending restrictions were imposed it would send our country into a deep depression.  It would be very similar to what we experienced in the 1930's, although some society safety nets would blunt the blow to the poor and middle class.

We would live through a few terrible years where our standard of living would fall tremendously, and the debts would be allowed to liquidate throughout the system.  Housing prices would fall, large investments banks would collapse, inefficient businesses would fail, and many government workers would have their exorbitant pay cut and their pensions lowered.

What happens then?  We hit bottom, and with the system cleansed of the toxic debt our country begins to rebuild on a solid foundation.  Unimaginable you say?  This blueprint was used the past three years by another country so we have a first hand account of what the outcome looks like.

During the financial crisis of 2008 every nation around the world took the toxic debt on their bank's balance sheets and placed them on the backs of their tax payers.  They nationalized the debts, and they nationalized many industries that were formally private (auto, mortgage).  Only one country decided not to go this route.


Iceland decided to let their banks fail.  The debt was liquidated and the country itself declared a semi-national bankruptcy sending it into a deep depression.  All other countries looked at Iceland during 2009, the peak of their pain, and laughed at their stupidity.  Our stock market came roaring back and a temporary artificial floor under home prices was created using trillions in printed dollars and additional government debt.  America cheered incumbent Obama and his bank, auto, and mortgage nationalizations that had saved us.  He poured it on with an additional $800 billion in stimulus to the roaring ovation.  Iceland's politicians were scorned.

Then something happened.  Iceland hit bottom in late 2009 and early 2010 and started to grow with their new foundation in place.  Unemployment begin to fall.  Trust was back in the banking system.  Loans were made to businesses and real estate owners at prices the banks knew were free market levels.

Now Iceland is booming.  The rest of the world is stuck at high unemployment with an entire banking system that is underwater with toxic loans.  The banks will not lend money to small businesses or home owners because they can't.  The governments have stepped in and piled more toxic loans on their own balance sheets to try and artificially stimulate the economies.

This can be seen in Europe, Japan (who began this process in 1990 and is still stuck in malaise), the UK, and the United States.  All  nations who need their systems to cleanse, but who have politicians who refuse to ever tell their people that there will be anything but sunshine.  They only promise more.

18 months ago Greece woke up and found that the bond market would no longer lend to them.  3 weeks ago Italians woke up and found out the same thing.  It happens like a flick of a light switch and when it comes it is over. 

So here we are again.  It appears clearly now that it will be Romney vs. Obama.  Both men are the same.  No changes will be made.  I will drive to the polls and write Ron Paul's name on the ballot for the same reason someone throws a penny into a fountain thinking it may help their life.

I will go home to watch the results of the Romney/Obama election and begin to make serious considerations about whether America is the country I want my children to grow up in, a thought I believe will cross the minds of many people my age who have a clear understanding of what is coming.

But that is all looking forward.  The future tense.  America is a time of now.  Now and today we have our comedic republican candidates who can best be summarized by Jon Stewart.

The Daily Show With Jon StewartMon - Thurs 11p / 10c
Indecision 2012 - Mercy Rule Edition
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Thursday, November 10, 2011

Understanding Exchange Traded Funds: ETF's

Most investors today have something called Exchange Traded Funds (ETF) in their portfolio. ETF's were essentially non-existent 10 years ago, but now they dominate a major portion of trading on the stock exchange. They have made a tremendous impact in markets like gold (GLD) and silver (SLV) by creating a liquid market for investors to speculate on the direction of prices. 

Most investors have a limited understanding of how these funds actually work.  The following video provides an excellent and simple demonstration on everything that goes on behind the scenes when you push buy or sell on your computer.

Betting On The Market: Flashback To 1997

I spent some time this morning watching this fascinating short film from PBS released in 1997 called "Betting On The Market."  All clips are real time interviews from that year during what is now seen as the beginning of the bubble years for the stock market's final burst of hysteria.  (Greenspan gave his famous "Irrational Exuberance" speech in 1996 which is widely considered the point when the market entered the bubble phase)  We know now that the stock market collapsed just 3 short years later beginning in March of 2000, decimating the dreams of just about everyone shown on this film.

I did not have the good fortune to be an active participant during the 1996 - 2000 bubble years (I was in high school worried exclusively about girls and playing basketball), which makes it that much more interesting to watch what was taking place during that time.  While I have taken the time to read many books describing mania's, panics, and crashes going back hundreds of years, it is completely different when you can visually see it.

As I have said many times, I believe it is extremely important to study the past in order to understand what is ahead for the future.

Part 1:

Part 2:

Part 3:

Part 4:

Wednesday, November 9, 2011

Jim Rickards Discusses The Currency Wars

There are names such as Kyle Bass who will always have a home on this site for any interview that he takes part in.  Another is Jim Rickards whose understanding of the big picture and global capital flows is as strong as any mind on the planet.  He spoke with CNBC this week:

Italy Debt Crisis: Contagion Spreading

Italian Prime Minister Silvio Berlusconi pledged to step down yesterday after Parliament took a vote to approve austerity measures. (spending cuts)

The was seen by some as the end of Italy's troubles, the country which has now become the spotlight of the global sovereign debt crisis.

I wrote back in January in 2011 Outlook: Sovereign Debt that I felt that the crisis in Europe would spread from Greece to Portugal to Ireland to Spain to Italy.  I then said the crisis would move from Europe to Japan to the UK to the United States.

All I have as a market observer and participant is the ability to see that these nations have taken on too much debt and have no possible way to pay it back.  While endless research reports and books have been put together to show the numbers in detail, that brief summary is all an average investors needs to understand.

Knowing which countries would be affected by the all consuming debt crisis was easy to spot, but the order in which the countries would be affected was impossible to know.  It is like trying to determine weather patterns.  To come back to a recent analogy, imagine that there are 5 homes located on different coastal cities in Florida, and there are 5 other homes that are located in Kansas City.  You are asked to determine which of the 10 are most vulnerable to a hurricane.

The obvious answer is the 5 homes sitting on the coast line.  Then you are asked which home would be damaged first by a hurricane.  This is a much more difficult question because you do not know which way the weather will move next year.

The market is the exact same way.  If someone asked me 12 months ago about the European crisis I would have told them Italy was in trouble.  However, I would have guessed that they would have their "reckoning day" in the bond market after Spain.  The market chose them first and here we are.

Understanding this you can easily extrapolate into the future that Japan, the UK, and the United States will soon be experiencing the same situation.  These are homes sitting right on the beach.  My guess is that Japan will come first and the United States will come last.  Does that mean that I want to own assets in the United States?  Of course not.  The hurricane could just as easily strike here first.

The goal is to put your investments into a home in the center of the country.  A home that is far less likely to get hit by a coastal hurricane.  Why put your money into a country that is bankrupt when in today's world you can just as easily put your investments into a country or currency that is safe?

After a home/country is destroyed by the hurricane/bond market then it will be a tremendous time to purchase investments in that area.  This decade will provide the greatest opportunity since the Great Depression for those that moved themselves out of harms way before the hurricane hit the shores.

James Turk Interviews Eric Sprott

Excellent interview with James Turk and Eric Sprott discussing:
  • Dangerous Leverage In Banking System
  • Demand Pressure Being Put On Silver Supply
  • US Debt To GDP Compared With Greece
  • The IMF Creating SDR Currency