Friday, January 13, 2012

Foreclosure Filings To Surge in 2012

The L.A. Times provided a nice graph yesterday showing the annual foreclosure filings dropping off significantly this year from years past.

This was due to the robo-signing scandal that stormed the markets in late 2010 and continued through most of 2011.  Banks were unable to determine who owned the mortgages, which created a delay in foreclosing on the homes without proper title. From the L.A. Times article:

California and other states are likely to see an enormous wave of long-delayed foreclosure action in the coming year as banks deal more aggressively with 3.5 million seriously delinquent mortgages.

And experts said that dealing with the foreclosure process, from issuing notices of default to selling repossessed homes, is likely to push housing prices lower this year before the real estate market has a chance to recover.

The real estate market was in "full delay mode" last year on foreclosures as banks worked to correct legal problems with procedures in many states.

During 2012, it is anticipated that a large portion of these delayed foreclosures will finally appear on the market for sale as the robo-signing issue is unwound and banks begin to give up and take their losses.

The government is already fast at work on new programs to help the housing market during this important election year.  I discussed their most recent plan in 2012 Federal Housing Program: Renting Foreclosures.

Quote Of The Day

An excellent visual reminder for anyone who puts any credence behind Bernanke's words.  Watch what he does, not what he says.

Wednesday, January 11, 2012

Eric Sprott On Silver

Billionaire Eric Sprott discusses the silver market at the Casey Research Summit.

United States Government Debt Vs. Greece

The Gross National Debt:

United States Annual GDP:

Tuesday, January 10, 2012

2012 Federal Housing Program: Renting Foreclosures

This site has become a continuous tirade against the endless, ridiculously stupid, decisions made by our politicians and central bankers who run this country.  So how do I feel about the Fed's new foreclosure program?

I love it.

The program is designed to sell Fannie and Freddie inventory in bulk to investors who could then rent out the properties. 

I couldn't believe it when I heard the details.  This is the first notion of intelligence to enter the housing market discussion since the crisis began.

We had our last housing downturn in 1990 during the savings and loan (S&L) crisis.  The government stepped in, bundled the bank owned properties together, and sold them off in a program called the Resolution Trust Corporation (RTC).

Prices for homes fell and real investors with real capital entered the market to purchase the homes.  The housing market cleared, found a bottom, and began to recover.  This is how a free market system is designed to function.

The housing market will bottom when the shadow inventory on the banks and GSE's balance sheets are allowed to enter the market for sale.  Then the government needs to back away from the financing market.

What will happen?  Interest rates and borrowing costs will rise, and the price of housing will plunge. 

Investors will enter the market and begin purchasing the surge in inventory.  The surge in supply hitting the market will cause the price of rental properties to fall significantly, lowering the cost of Americans to live every month.

As prices fall, more Americans will walk away from their homes and rent.  The banks will sell these homes to investors who will then rent them out.  Monthly rental and living costs will continue to fall lower and lower as the inventory continues to hit the market.  This lower cost of living would be like a massive tax cut or stimulus program to the economy.

Then home prices will find a bottom and our government will be removed from the market.  Banks will take massive losses.  Fannie and Freddie will take massive losses.  Those losses are already in place now whether they take them now or we take them in 2018.  The only difference is that Americans will have a drastically lower cost of living right away instead of waiting for the supply held in the shadows to hit the market.

While I continuously state my opinion against the stupidity of our leaders I need to make sure I commend them when they come up with something intelligent.  I stand and cheer the idea of selling properties in bulk to investors to rent them out.  Bring on the RTC 2.  Bravo.

Sunday, January 8, 2012

Purchasing Precious Metals: NAV Considerations

I am not a financial advisor.  I would recommend speaking with one before making any financial decisions.

I want to take a moment to discuss the NAV for precious metals funds.  NAV means Net Asset Value of the fund.  In simple terms it means the premium you pay for the value of the physical metals stored at the fund.

For example, this past week the PSLV, Sprott's Physical Silver Trust that buys and stores only physical silver, crossed a 32% NAV to reach a new record.

This means that investors are paying 32% over the spot price of silver to invest in the fund.  When the fund launched at the end of 2010, I decided to put my 401K funds that were invested in SLV into the PSLV.  At the time the NAV was only 4%.  I was very fortunate to enter at the beginning.

I always recommend that new investors establish their initial core position in physical metal through either coins they keep on hand or coins held through a company such as goldmoney.  After that position is established they may want to use some of their money in their 401k to invest into a fund, and I am usually asked where I would recommend they invest.  If you are looking for a gold only fund the premium on the Sprott Physical Gold Trust (PHYS) is still low(currently only 6.4%). 

But what about silver?  With the premium now above 32% it is a more difficult decision. I would still not recommend using the SLV, as there have been countless allegations that the fund does not hold all the physcial metal it claims to back the price and is just another "paper" promise.  I use the SLV fund strictly as a very short term trading tool.

There is another option in the Central Fund Of Canada; symbol (CEF).  This is a fund, similar to Sprott, that buys and stores physical precious metals.  It keeps 55% of its holdings in gold and 45% in silver.  While this fund does not offer the 100% silver exposure of the PSLV, its premium is currently less than 1% making it a less expensive purchase.

So in review, I would begin your accumulation by purchasing physical precious metals you can either keep at home, in a deposit box, or with a company like goldmoney.  Then you can begin accumulating through a company such as the Central Fund of Canada or a Physical Sprott Fund.  When a strong physical position has been established you can then branch out into the more speculative areas of the precious metals sector: gold mining stocks.  I would absolutely recommend purchasing a professional resource that dedicates themselves to researching the best available stocks.  My two personal favorites are:

Gold Mining Stocks: The Gold Stock Analyst

Silver Mining Stocks: The Morgan Report

If you would like a professionally managed gold stock mutual fund, I would recommend the Tocqueville Fund managed by John Hathaway, which focuses on gold mining stocks.  The symbol is (TGLDX).

To open an account with Goldmoney allowing you to begin storing physical precious metals easily and electronically, click here:

GoldMoney. The best way to buy gold & silver

2012: Inflation Vs. Deflation

This following comes from the section of my 2012 Outlook: Gold and Silver.

In the financial world today there are essentially three categories of financial analysts/economics that become visible after a considerable amount of time studying market data and history.

Category 1: The 99%

The first category are the 99%. This is the large army of people you see being interviewed all day long on television that work for financial firms. They are your average money manager. They tell you that a portfolio should be composed of a percentage of stocks and bonds based on your age. They tell you that stocks go up about 10% per year and that bonds provide less growth opportunity but provide the safest location for your money. They get a paid on a commission basis based on the amount of money you have invested with their company. Their goal is not to veer to far away from their peers so if they are wrong they will be with the crowd and not singled out: meaning they will not lose their jobs.

The consensus among the major financial firms entering 2012 is that stocks will rise 9% this year. Entering 2011 it was that stocks would rise 10%. The year before, the same. The year before, the same. When asked about precious metals they discuss the high risks, lack of dividends, and how they did not protect you from inflation from 1980 to 2000. They never mention that they receive no commission for funds invested precious metals.

Category 2: The Inflationists

This is a group of financial analysts and economists that have a taken some personal time to study both market history and the current market conditions that exist in the world today. They have to courage to move away from the group think and can feel that something is different now.

They look at the balance sheet of the United States and understand that it is not possible to pay off our liabilities and there is a fork in the road that is right in front of us. They believe this moment will be met with money printing to ease the debt burden.

Category 3: The Deflationists

The inflationist argument is easier to understand and it is why investors who first venture off the path are drawn to it. I was first introduced to this world years ago through the eyes of money manager Peter Schiff, which then led me to the study of Austrian Economics.

After spending a considerable amount of time studying the argument laid out by the inflationist camp, my natural reaction was to look for those out there that both understood the inflationist argument and then had an opposing view that they could back up with a strong counter-argument. I found that these people existed, but their numbers are extremely small due to the fact that 99% of the financial community does not understand the thought process of category 2 thus creating an even smaller group that has taken further steps to try and disprove them.

That is why I think the deflationists are very special and are composed of some of the brightest minds in finance today. Some of the names in this elite group are Robert Prechter, David Rosenburg, and Gary Shilling.

The general argument for the deflationists is that there is a coming fork in the road ahead of us that is composed of an enormous debt burden the size of which the world has never seen. Coming debt defaults will overwhelm any ability central banks have to print new money, causing the total money supply plus credit to shrink in size; the definition of deflation.

Where I Stand

Albert Einstein once said that the level of a man's intelligence should be judged based on his ability to hold competing ideas in his head simultaneously.

I spend time on Friday nights reading the work of Elliott Wave and Robert Prechter when they release their subscription newsletters. Then on Saturday mornings I listen to a radio program hosted by Jim Puplava called Financial Sense where he discusses market events, interviews guests, and talks about his outlook for the future.

Prechter is strongly in the deflationist camp and Puplava is strongly in the inflationist camp. By the time I finish listening to both arguments Saturday afternoon my head is hurting. My mind is trying to simultaneously process both sides and come up with some sort of conclusion. It is tough to describe, but I understand what Einstein meant with his quote.

I think this is why many members of the inflation camp do not spend time really studying the deflation side. For example, those that have not taken the time to research the deflationary argument will usually say that the Fed is printing money and their balance sheet is expanding which means we have inflation. What they do not understand is that the Fed is only one side of the balance sheet. They must also look at the debt and credit contraction taking place and being removed from the system. This process is far more difficult to process simultaneously.

You can take a few years to study the long arguments of both side (and I recommend you do so because it is extremely fun to research), but I will provide you with an opportunity now to skip to the end of the story and arrive at where both sides come to a head. It can be summed up in two simple words:

Political Will

That is the key phrase. Both sides understand and admit there is a debt crisis and the current economic outlook is terrible thus not allowing for a normal restructuring of the debt. Both sides understand that central banks have the ability to print an unlimited amount of debt to ease this burden, and that the scorecard for both sides is based exclusively on the total supply of money and credit in the system, not the short term direction of any specific asset price.

The deflationists believe that the mountain of debt is now so enormous that when we reach that ultimate point, central banks are going to be overwhelmed and will not be able to stop the cascading debt defaults. They will not have the political will to provide the amount of bailout money needed. This is what occurred in 2008 when Lehman failed, there was no political will to save them. It is what is occurring today as the European Central Bank has not yet entered the market with the force needed to stem the sovereign debt crisis.

Inflationists believe that when we reach the ultimate point, when the financial system has its back against the wall, that the central banks will step in with everything they have to keep their current system moving forward.

I believe that in order to have the political backing or will to do this we have to first have one more major "Lehman" type moment. This will once again rock the markets and the financial system. It could come from the failure of Greece, a French bank failure, a geo-political black swan event, a terrorist attack, or a natural disaster. It is impossible to know what the catalyst will be.

Up until now, just as we moved along during the subprime crisis in 2007-2008, governments and central banks have kept everything together with duct tape and glue. They have bailed out Greece just as they bailed out Bear Stearns. They have created bailout funds in the form of EFSF just as they created SIVs back in 2007-2008. They have opened up borrowing lines in the form of global swap facilities just like they cut the Federal Funds rate back in 2007-2008.

The question is, will they let a Lehman even occur again this time, and if they do, will the cascade of debt defaults be too much for the central banks to backstop even if they enter the market after with a bailout?

Because the direction of the markets are now backed by the political will to bailout, it is far more difficult to navigate the future. In a normal business cycle you can make investment decisions based on the analysis of a company's balance sheet and their prospects for future growth. Now, in our globally central planned world, you must make investment decisions based on how much money you believe will be printed in Europe during 2012.

I believe that we have one more deflationary shock in front of us. This shock will provide both governments and central banks with the political will to print the level of money needed to create an inflationary environment.

So which camp am I in? I am in both. Deflation first, inflation second. However, as an investor you must be prepared for both. You must have safe cash ready if we enter a period of deflationary deleveraging so you have the ability to purchase assets before the next inflationary cycle. If they do not let a Lehman moment occur and central banks have the political will to inflate directly out of this current debt crisis, then you must be have some protection or insurance for that scenario as well.