Saturday, November 17, 2012

The Government Home Mortgage Bubble Is Beginning To Implode

The mainstream financial world was shocked this week the Wall Street Journal released an article titled "FHA Nears Need For Taxpayer Funds."

I have been discussing this coming bailout and disaster for years now. In 2009 I wrote an article called The Four Headed Monster, in which I described the new role taken on by the FHA in the mortgage market and how it would ultimately lead to that headline.

While long time readers have known this was coming, we can review briefly where we stand today.

The following chart shows the breakdown of mortgage originations (the entity that provided the loan) going back to 2005. It shows that over 50% of loans created came from the private sector (non-government) during 2005 - 2006. At this point the government's share of the market was already extremely unhealthy (they provided the other 50%). Before 1997 the role of the government in the mortgage market was far less.

You can see that beginning in 2008, things went from very unhealthy to a complete communist take over. The private portion of the mortgage market (the orange section) essentially has disappeared. The government now controls everything. VA are veteran loans (red), GSE's represent Fannie/Freddie (blue), GN is Ginnie Mae (green), and FHA is the Federal Housing Authority (green). All are government programs. Click for larger image.


Fannie and Freddie, which should have disappeared completely or been drastically reduced in size during the summer of 2008 have stepped up and begun purchasing and insuring even more mortgages than they were at the peak of the crisis. However, they needed a third entity to step in and help carry the load.

Enter the FHA.

The FHA has become the new de-facto subprime lender for the government. They kept their down payment program at only 3.5% as home prices were plunging, understanding that these loans would instantly move underwater. This allowed less financially intelligent buyers to step in front of a moving freight train and be decimated by the housing collapse. The tax payers were responsible for any clean up needed.

Now we are there. The next chart shows the loans insured by the FHA that are 90 days past due. They stepped in beginning in late 2008 to take over the subprime market and now those loans are beginning to default in mass. In September the number of serious delinquent loans rose to 738,991, which was 10% of their total $1.08 trillion in loans guaranteed. This only represents those are are 90 days past due. 17.3% of their total loans are delinquent.


AEI estimates the current capital shortfall at $48 billion, a number that is rising fast.

What will happen? Money will continue to be sent from the federal government (tax payer) to pay for these losses. The federal government will issue treasury bonds, raising the deficit, in order to send these funds. The Federal Reserve will continue to fund this deficit with a printing press through QE programs.

This is the exact process I laid out in 2009 in The Four Headed Monster. Now we are seeing it live.

As a brief refresher, let's discuss for a moment what would happen if they government stepped away from the mortgage market (or only became 50% of the market again instead of 100%), something every mainstream analyst says would bring "the end of the world."

Home prices would collapse. Banks holding the loans would take huge losses. The government would take huge losses on their nationalized mortgages.

The cost of living for every person in the country would fall significantly. Instead of going into debt and making mortgage payments on a $300,000 home, a homeowner could rent until they had a large enough down payment to purchase that same home that now costs $50,000 to $75,000. Their 20% down payment would be reduced from $60,000 to only $10,000. Their monthly mortgage payments would be 3 to 6 times less than they are now and they could have the same home paid off well before retirement.

Instead of being a debt slave to the government or a bank for the next 30 years (or probably much longer) they could own their home free and clear and use their money to purchase other goods - stimulating the economy in a healthy manner.

Would this ever happen? Of course not, but I just wanted to show you how terrible the "end of the world" would be. Change only comes when we reach a crisis. Until then, enjoy the temporary home price bounce. I really hope the Fed can bring mortgage rates down to 0% and the banks can hold the shadow inventory off the market forever. It will sucker as many people into the market as possible back in before we reach the real price correction that is coming.

For a thorough discussion on how the real estate market will look over the next few years I recommend reading through:

The Complete 2012 Residential Real Estate Outlook.

*This will be updated as we moved closer to January 1 as part of the 2013 outlook.*

Friday, November 16, 2012

Ron Paul's Farewell Speech To Congress

The following is a 45 minutes speech that I understand most of you will not watch all the way through or even watch at all. Some of you, who know and appreciate Ron Paul, will watch it in full.

Soon after I gained an understanding of the problems both the country and the world faces financially, something I talked about last weekend, I found out that Ron Paul was the only person in politics with a firm understanding of these problems and a firm understanding of real Austrian economics.

The few of us out there who understand what is coming and hear our voices go unheard or even laughed at, depending on who you are trying to talk to or help, have had the benefit of watching Ron Paul try and do the same thing in politics. He tried to speak out and make a change in a world where people's jobs and livelihood (politicians) are based solely on making sure they make the worst possible decision for the country in the long term.

Paul discusses how not only have things not changed, but they are now moving exponentially in the wrong direction. This will set up the ultimate end game, the worst case scenario, and we will soon find out that 2008 was the warm up.

If you only care about listening to people with a strong financial understanding and could care less about politics, I'll let you know that Congressman Paul's portfolio has been heavily weight toward gold and gold related assets for a very long time. With gold's recent run from $250 to $1750, I would venture to say that his portfolio has performed not only better than any other politician, but most of the hedge funds around the world as well.


Thursday, November 15, 2012

Raising Taxes Lowers Total Income Collected: A Visual Walk Through

The following video provides a simple and easy visual walk through of American tax history showing that when taxes have been lowered a greater amount of total tax dollars have been collected. Please forward this to anyone who still believes that raising taxes will help balance the budge deficit.

I had the opportunity to listen to the weekend addition of the Financial Sense Newshour on my way down to Atlanta this past weekend for a wedding. In the third hour of the program the host told a story of a successful business owner living in Southern California on the beach. He loved to sail, loved the weather, and really enjoyed living close to his family.

He was very close to picking up and moving everything in 2010 when taxes were raised aggressively on businesses. After the most recent tax hikes in California, which now take over 50% of what he earns in order to pay the state's bloated pensions, he has decided to shut down operations and just move out of the state. He will have to lay off most of his employees.

I would imagine that many Californians, the "evil" Americans who make a lot of money, hire workers, and pay most of the taxes are now facing the same decision. As they pack their bags, lay off their employees, and take their tax dollars to a more tax friendly state (see Florida or Texas) it will decimate the revenue in California. The state will most likely comply by raising taxes further, running more business out of the state, and the process will repeat. This will insure that public workers continue to receive their $100k plus pensions annually.

Look for California to begin their bailout talks as early as next year as this process gains momentum. Perhaps Bernanke will step in and purchase California debt directly, instead of buying the debt from the federal government after the bailout.

You can download the audio story of the California businessman here: California Leaving - The Last Straw.

The Gold Bull Market: Where Do We Go From Here?

The gold bull market of the 1970's was far different than the one today in large part because it was focused almost exclusively in the United States. Today the entire world is on a fiat paper money system, and there is a collective awakening from citizens and investment managers (not just in the United States but in every country) that something is wrong with the money they are working for every day.

There is a second major difference from the 1970's compared with today. Beyond every day citizens and investment managers there is a third party that has entered the party as well - governments. As the currency wars rage on, there have been a select few countries that have put the pieces together early and are now trying to play catch up to prepare for the end game. 

One of those countries is China. It is impossible to track exactly what the Chinese government is doing in the gold market, but we can use the data we have available to put some of the important pieces of the puzzle together. It is important to understand that if we could see behind the curtain to everything China was doing, (and if they are acting in a manner that I am going to speculate they are here) then the gold price would already reflect this action (be far higher in price).

First we begin with the "official" data we have available. The most recent official gold holdings of the major countries around the world show that while China stands at sixth place, they currently have less than 2% of their paper currency reserves backed by the gold they own. This is an extremely important concept to understand. It means that if paper money collapsed tomorrow and countries had to revalue their currencies and move back to a gold standard (that existed throughout hundreds of years before 1971), China's wealth would fall by 98%. This is in stark difference to the United States which has over 76% of its currency backed by gold.

China knows this, and I believe they are doing everything in their power to quietly raise their gold holdings to protect them from what is coming. There are two places where we can see this occurring. The first is in their long standing recycling of the paper dollars they receive. Up until just a few years ago, when China took in American IOU's they recycled almost all of it back into the United States. Their treasury holdings recently have not only stagnated, but they have fallen by $125 billion year over year.

This is something that almost no one talks about and many people still assume today that China is buying up US dollars to "take over America." They are playing a far different game completely; a much smarter one.

So where are all those excess dollars going? As I mentioned, we cannot see everything they are doing because they do not have an open balance sheet like a business, but we can track some of their actions with specific buy orders.

One of those is the imports (purchase) of gold from Hong Kong. Since early 2011 their imports from Hong Kong have skyrocketed and continued month over month at an unrelenting pace. China has imported more gold just in 2012 alone, 582 tons, than India has in total reserves (we still have 3 more months of data coming this year). That number is staggering.


China is racing against the clock. They know that at some point the paper they own is going to be revalued in the open market. Any time gold falls in price they have taken the opportunity to enter the market with massive buy orders. 

Some may be wondering how China could accomplish this with gold already in a "bubble" as we have read and seen in mainstream news. With everyone now purchasing gold it must make a huge portion of the global asset allocations right? Back in 1980, gold and gold related assets made up over 15% of asset allocations. Where does this number stand today? Less than 1%, seen in the pie graph below.


How about the supply side? At the peak of every bubble you see supply surging (tech IPO's in 1999, new homes in 2005) as new investors looks to take advantage of the current high prices. Spot the point on the chart below where you see the massive spike in supply due to current gold bubble "euphoria." Gold production (circled in yellow), after being stagnant for over a decade, is now back to only about where it was in 2001! The total value of this production (circled in green) is the paper price revaluation, not an increase in actual ounces. This opens up a conversation for the value found in gold mining stocks today - something I will save for another day.


Next up we have a great chart showing the total fake money created between 1930 to 2008 by the four main developed regions of the world: USA, Britain, Europe, and Japan. It then shows the total fake money created in these countries since 2009.


So if new supply stays stagnant (it takes years to bring a mine into production), China's demand continues to grow, and total global asset allocations moved just slightly above the paltry 1% seen today, what do you think would happen to the paper price of gold?

This is how we will enter the mania stage of the market. 

If you think the available gold supply is small there is another precious metal that could be considered a spec of dust in the vast ocean of paper money around the world today. Throughout history there has been at least ten times the amount of above ground silver available to purchase compared to gold. This is why gold has always been considered a "more" precious metal.

Today there is 50% less silver available to purchase than gold. This means that based strictly on a supply basis revalued against paper money silver should be worth 2 times more than the price of gold. Today it is worth 53 times less.

What if just a small fraction of the paper money moved toward the physical spec of dust that is silver? Rather than scare you with a number, I'll let your imagination think about where the paper price could go.

For a discussion on purchasing precious metals vs. stocks this week see:

Should I Buy Stocks Or Gold Today?

h/t ZH, Reuters

Fun With High Frequency Trading Before The "Big One" Arrives

Everyone I have heard interviewed that has an in depth knowledge or personal experience working with the high frequency trading industry says that the flash crash was only the warm up and there is a far bigger event coming. It is impossible to avoid forever based on the size and scope of HFT in the market today.

For a primer and story-like way to learn about this mysterious portion of the stock market, I always recommend people begin with the book Dark Pools, which was released earlier this year.


Wednesday, November 14, 2012

Should I Buy Stocks Or Gold Today?

There is usually a surge in traffic to the site here when there is a pronounced sell off in stocks or a large upward move in gold. The reason is that longer term readers know that a central theme here is the over-valuation in stocks and the under-valuation in gold found in the markets today. Recently there has been both a large sell off in stocks and a large rise in gold, something we have not seen since the summer of 2011. This has brought people here to find out the all important.....why?

I tend to write less when these type of events are occurring because unlike the mainstream media I do not view the markets as some sort of daily cause and effect mechanism where stocks fell today because of "........" Or gold rose today because of ".........."

Stocks are in a long term secular bear market that began in 2000 and gold is in a long term secular bull market that began the same year. My focus has always been to beat the table as hard as possible to the potential danger when stocks are rising rapidly (when investors want to buy the most) and to beat the table as hard as possible to the potential opportunity when gold and silver fall rapidly in price (when investors want to sell the most).

The goal has been to discuss why we are in secular bull and bear markets, where we are in those cycles, and to try and keep investors safe from their own emotions during the counter cycle trends.

So unfortunately, if you want to read why stocks are down you will not find it here today - we already talked about it in depth as stocks were close to new highs and euphoria was manic. See US Stock Market Prices & Sentiment Soar: Shorting Opportunity? Here we look forward, and if you can look forward and make the correct investment decision while looking forward, it should always feel like you're making the wrong decision at that specific time.

Does that make any sense? I hope it does for some of you.

Let's apply that to where we are right now at this moment. Stocks are over-sold in the short term. Does that mean you should buy American stocks tomorrow? Absolutely not.

What is means is that I would not apply short positions tomorrow morning - after the market has fallen now for a full week. Applying a short position today and capturing some of the downside momentum and pessimism entering the market now feels like the best possible move. This means it is the worst.

I would not be a buyer of gold tomorrow morning. Does that mean you should sell? Absolutely not. It just means the pessimism that was in the market a few months back, when I was pounding the table to buy, has subsided. Now you just hold on and wait for investors to panic again.

I'm not a day trader who looks at charts so I'm not trying to provide trading advice. I'm trying to open your mind to discarding the daily noise and just focusing on the big picture while being able to feel the short term optimism and pessimism move in and out of the market.

As we move forward I will continue to discuss why stocks are going lower and gold is going higher in the long term. 

If you are looking for stocks to add to your portfolio today I would recommend you look at China. I will be covering this topic in detail soon (especially if shares continue to fall in price - magnifying the opportunity). For a primer you can review this recent post:

China's Stock Market Continues To Plunge: Buying Opportunity?

What Is "The Fiscal Cliff?"

It is the topic streaming through media headlines, and the following shows the soaring number of Google searches for the term since Obama was re-elected.


I have spent little to no time discussing it here because I believe a compromise will be reached. In the meantime it gives the mainstream media the ability to blame the daily fall in stock market prices over the "fear" of going over the "cliff." Or some even want to blame it on Obama. The truth is that the global economy is slowing, earnings are falling, and trade is grinding to a halt - a more important topic I will be discussing in far greater detail this week.

For those that want the details on this cliff, the Wall Street Journal provided a great graphic this week going through the numbers. Click for larger image:


Tuesday, November 13, 2012

Drink Some Coffee - Live Happier & Healthier

While I think that the commodity sector in general is in a long term secular bull market that began in 2000, there are some commodities I favor more than others. Some because of their investment appeal such as gold and silver, and others because of the amount I use them in my daily life such as coffee.

I only started drinking coffee about 3 years ago, and now I can't imagine a day, or even a morning, without it. The following infographic brings you through how coffee originated and even explains how it helps people live a healthier life (if enjoyed in moderation - something I certainly cannot say I do).
Coffee Revolutionized the World
Created by: OnlineMBAPrograms.org

The Dominance Of The Smart Phone Commercials On Football Sunday

I normally do not watch commercials (due to the use of tivo), but I have been out of town the past few weeks during football Sunday and have been watching the games at friend's houses, where I found that there are surprisingly people in the world that still watch things live.

What stood out to me was the staggering amount of commercials for both smart phones and tablets. The following chart from Barrons shows why. The smart phone market has essentially gone parabolic since 2009 and the tablet market has been picking up similar speed since 2010. This has come at the expense of the PC market where sales have stagnated and fallen.

I recently purchased the Samsung Galaxy S3, which I have enjoyed so far, and I am very interested in the new tablets that can convert to PC's when you flip them over. I plan on doing some research and perhaps will make a purchase soon on a new product in this market (after watching all the commercials on Sunday of course).


Monday, November 12, 2012

David Rosenberg - CNBC Interview

Good discussion with one of the world's best economists on what would happen if the US were to go over the fiscal cliff (I do not believe we will, but it is important to discuss the outside chance that it occurs).