Saturday, March 23, 2013

CNBC Forced To Briefly Face Reality: Asked What If Interest Rates Were To Rise?

The clip below is entertaining due to the fact that everyone involved in the segment most likely believed that they were going to have another regular panel discussion, similar to the endless stream of other panel discussions they have throughout the day, where they discuss how stocks go up forever and the economy is sound.

That was until Peter Schiff began to lob grenades into their myopic fantasy world.

A concept I like to focus on here is that the world we see, touch, smell, and taste around us every day is artificial for a very simple reason: interest rates are currently being held artificially low. While that concept is so simple in thought, most dismiss it immediately for two main reasons:

1. They either do not understand why interest rates are currently at artificial levels
2. If they begin to work through the process of what would occur should interest rates rise it becomes so uncomfortable that their mind immediately begins to justify reasons why it will not happen

The entire 2013 Outlook was dedicated to this concept not only here in the United States but in the entire bond market throughout the world.

I tried to walk through step by step to first show why interest rates were nearing the end of the current debt super cycle, and then look at what some of the ramifications will be when they reverse course.

It is amazing to me how much the panel "experts" on the segment below remind me of those that were on the network just before home prices collapsed. Ironically, I believe their view on why home prices could not fall back then were the same reasons just listed above. They either didn't understand why home prices were overpriced, or the thought of prices actually reversing course and the consequences of that occurring made them justify reasons in their mind why it could not happen.

Schiff also mentions that there are many nations that do not have an FDIC like guarantee on their depositor accounts which strengthens the quality of their banking sector. Why? Because their citizens have to make intelligent decisions on which banks to hold their money. Responsible banks are awarded with a larger base of deposits which they can then lend out at a profit. This is how a free market works. On his site, MISH recently looked at the example of New Zealand.

Before you move on with your day, just take a few minutes to think about what would occur if interests rates were to just normalize: move up 3 to 4 % from their levels today. To get you started his is just a small list:

- Many bond funds (that the average investor has recently flooded into) would take tremendous losses
- Banks loaded with debt would take massive losses on their positions
- The assets on the Fed's balance sheet would be underwater - not allowing them to sell assets back into the market and execute their "exit strategy" that we have heard so much about
- The derivatives market, laced with hundreds of trillions of dollars in interest rate swaps, could begin a daisy chain implosion
- Commercial real estate purchased at ultra low cap rates and mortgage rates would see their values collapse
- The cost to borrow for residential home buyers would rise
- Many governments (U.S., Japan, Europe, U.K.) would see their annually cost of interest overwhelm their incoming tax receipts

Billionaire Wilbur Ross was asked this week what has him worried? His answer: the potential for interest rates to normalize. Click here for his full discussion.

Friday, March 22, 2013

From The First Tweet To Starting A Revolution

Pretty cool look at the growth of Twitter over the past 7 years.

A look at "The Innovator," the man responsible for the Twitter sensation:

Thursday, March 21, 2013

Cyprus Depositors Lose $5 Billion - American? $400 Billion: Per Year

The following is a very simple conversation with Jim Rickards and Laurn Lyster, but it is a concept that is crucial to understand. As people becomes outraged over the $5 billion that will soon be removed from the savings accounts of Cyprus citizens (we will soon find out exactly how they will calculate the theft), they are quickly comforted by the fact that such a thing could never happen in the good old United States.

Rickards explains that through interest rate manipulation, Ben Bernanke is extracting $400 billion, per year, from the citizens of the United States and handing it over to the banks. He explains the concept quickly, so let me take a step back before you watch the video to put a foundation in place on the discussion.

When you walk down to the local bank and deposit $100 into an account, you have just lent the bank $100. The bank has the right to then take your money and instantly reinvest it somewhere else. In order to have this right they agree to pay you a standard market interest rate on your savings.

Let's say that when you first deposited that money 10 years ago you were getting a 3% return on your savings. Although that is low historically, it was still a return on your money above inflation in an investment you knew was safe.

Fast forward to today and that money in the bank is most likely providing you a return that is very close to 0%. The 3% difference that they were paying you before and not having to pay you know is an addition to the banks income every year. By not paying you that money, they just keep it. On the other side of the balance sheet you have now lost that 3% per year income. 

What is this on your $100 savings account?  Only $3 per year.

What does Rickards calculate the entire wealth transfer is from the citizens of the country to the banks?

$400 billion - every single year

This money that would be in citizens pockets for saving, spending, or reinvesting is spread out across massive banking salaries and enormous banking bonuses. A lot of it is put into highly speculative assets like the stock market to gamble.

As Rickards says, during a normal point of "recovery" that everyone says that we are in, interest rates would be at least 3% and rising. This money would be transferred back to savers and retirees, instead of debtors and speculators.

Tuesday, March 19, 2013

2005 Or 2013? Developers Hosting Lavish Parties For Get Rich Quick Speculators

The video below provided by Diana Olick and CNBC provides a visual look at the mania that has returned to South Beach. Condo developers are now taking formally bankrupt projects and bringing them to completion all across the city. The same story that we heard in 2005 is now front and center:

"Foreign buyers will continue to support this market as their money pours in. The limited amount of inventory and surge in demand will continue to push prices higher, which will only create the urgency for others to buy now."

Really? Is it possible that this could actually be happening again? Are people truly insane?

The phenomenon is certainly not a Miami story as the real estate madness is spreading across the country. The Fed has promised free money for everyone, forever, and investors have already in many ways become more drunk off the liquidity than they were in 2007.

Some of the largest investment groups have plans to take their newly acquired army of single family homes that they are purchasing with government (tax payer) backed loans into the secondary market to securitize them (remember that term from all the movies on the financial crisis). If not, click here for a quick video that will explain. We all understand how this story ends. Investors will make as much as possible during the rise and many will walk away with billions. When the music stops they will simply once again walk away from the real estate and hand it back over to the government (tax payers) and Federal Reserve when prices collapse.

When will the insanity end? Of course I have no idea as the Fed could announce tomorrow that they are purchasing $200 billion in mortgages per month instead of the current $40 billion. The government could announce that they are now providing 0% interest loans on homes instead of the current 3%.

So what could possibly derail this freight train?

Bloomberg reported this week that the enormous funds that are buying these homes and putting them on the market are starting to run into an unexpected problem. As the number of homes for rent continues to flood the market every month some of the homes are taking much longer than expected to rent and rent prices are even beginning to fall in some areas.

We can only hope that these investment groups will be able to bundle the mortgages on as many of these homes as possible and sell them to the pension funds of school teachers and fire departments before they collapse in price once again.

Here is how close we were to prices finding a real bottom before the strength of the Fed artificially began pushing prices back up toward bubble territory.

Why do I say artificially? Home prices should rise based on the strength of an economy: job growth and income growth. Not free money and speculators chasing prices higher.

Try not to laugh when you hear the buyers comments at the end of this video.

Sunday, March 17, 2013

Nigel Farage On The Italian Election & Immigration Into Britain

As with the top financial minds around the world, when Nigel Farage speaks, you're going to hear it hear. One of the few sane voices in European politics and by far the one with the most courage to speak for the people. Unfortunately, just as in the United States, a few sane voices do not create change. It is only collapse that creates change as politicians (like little children) will always push back any potential pain to the furthest possible moment.