Bay Area Housing Bubble

SF Gate - States, banks reach foreclosure-abuse settlement

2012-02-09T12:53:00.000-08:00

States, banks reach foreclosure-abuse settlement

By DEREK KRAVITZ, AP Real Estate Writer

Thursday, February 9, 2012

U.S. Attorney General Eric Holder (5th from left) speaks while Housing and Urban Development Secretary Shaun Donovan (5th from right), Colorado Attorney General John W. Suthers (3rd from left) Iowa Attorney General Tom Miller (4th from left), and other officials listen during a news conference February 9, 2012 at the Department of Justice in Washington, DC. Holder announced that the federal government and 49 state attorneys general have reached a $26 billion agreement with the nation's five largest mortgage servicers to address mortgage loan serving and foreclosure abuses.
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U.S. Attorney General Eric Holder (5th from left) speaks ...Housing and Urban Development (HUD) Secretary Shaun Donov...Bank of America will pay the most to borrowers as part of... View All Images (10)
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U.S. states reached a landmark $25 billion deal Thursday with the nation's biggest mortgage lenders over foreclosure abuses that occurred after the housing bubble burst.

The deal requires five of the largest banks to reduce loans for about 1 million households at risk of foreclosure. The lenders will also send checks of $2,000 to about 750,000 Americans who were improperly foreclosed upon. The banks will have three years to fulfill the terms of the deal.

It's the biggest settlement involving a single industry since a 1998 multistate tobacco deal.

Federal and state officials announced at a news conference that 49 states had joined the settlement. Oklahoma announced a separate deal with the five banks.

The settlement ends a painful chapter that emerged from the financial crisis, when home values sank and millions edged toward foreclosure. Many companies processed foreclosures without verifying documents. Some employees signed papers they hadn't read or used fake signatures to speed foreclosures — an action known as robo-signing.

Under the deal, the states said they won't pursue civil charges related to these types of abuses. Homeowners can still sue lenders in civil court on their own, and federal and state authorities can pursue criminal charges.

"There were many small wrongs that were done here," said U.S. Housing and Urban Development Secretary Shaun Donovan. "This does not resolve everything. We will be aggressive about going after claims elsewhere."

Reducing loan principal will help some homeowners who are current on their payments but are "underwater," meaning they owe more than their homes are worth.

But consumer advocates and housing activists said the deal is flawed because it covers only a fraction of at-risk homeowners. Critics note that the settlement will apply only to privately held mortgages issued from 2008 through 2011.

Banks own about half of all U.S. mortgages — roughly 30 million loans. Those owned by mortgage giants Fannie Mae and Freddie Mac are not covered by the deal.

"The deal announced today is too small," said Pico National Network, a faith-based group that is active on housing issues. "It falls far short of providing real justice for homeowners and American families."

Economists also cited the size of the deal: Some said it was hardly enough to have much impact on the troubled housing market.

The settlement will be overseen by Joseph A. Smith Jr., North Carolina's banking commissioner. Lenders that violate the deal could face $1 million penalties per violation and up to $5 million for repeat violators.

About $10 billion of the settlement total will be used to reduce mortgage payments for underwater homeowners. Paul Diggle, an economist at Capital Economics, said that's a "drop in the ocean," considering that 11 million borrowers are underwater "to the tune of $700 billion."

Mark Vitner, a senior economist at Wells Fargo Securities, said the settlement helps the housing market in the long run because it allows banks to proceed with millions of foreclosures that have been stalled. Many lenders have refrained from foreclosing on homes as they awaited the settlement.

"We've got a lot of issues to work our way through in the housing market," Vitner said. "What this settlement does is allow that process to get started."

Bank of America will pay the most to borrowers as part of the deal — nearly $8.6 billion. Wells Fargo will pay about $4.3 billion, JPMorgan Chase roughly $4.2 billion. Citigroup will pay about $1.8 billion and Ally Financial will pay $200 million. Those totals do not include $5.5 billion that the banks will reimburse federal and state governments for money spent on improper foreclosures.

The deal also ends a separate investigation into Bank of America and Countrywide for inflating appraisals of loans from 2003 through most of 2009. Bank of America acquired Countrywide in 2008.

"The settlement includes far reaching relief that will help many of our customers and complement our already extensive efforts to improve our borrower assistance efforts and servicing processes," JPMorgan Chase said in a statement.

Under the deal, banks must make foreclosure their last resort. They are also barred from foreclosing on a homeowner who is being considered for a loan modification.

The banks and U.S. state attorneys general agreed to the deal late Wednesday after 16 months of contentious negotiations.

New York and California came on board late Wednesday. California has more than 2 million "underwater" borrowers, whose homes are worth less than their mortgages. New York has some 118,000 homeowners who are underwater.

In addition to the payments and mortgage reductions, the deal promises to reshape long-standing mortgage lending guidelines. It will make it easier for those at risk of foreclosure to make their payments and keep their homes.

Those who lost their homes to foreclosure are unlikely to get their homes back or benefit much financially from the settlement.

Some critics say the proposed deal doesn't go far enough. They have argued for a thorough investigation of potentially illegal foreclosure practices before a settlement is hammered out.

Under the deal:

_ Roughly $1.5 billion for direct payouts, in the form of $2,000 checks, for about 750,000 Americans who were unfairly or improperly foreclosed upon; another $3.5 billion will go directly to states.

_ At least $10 billion for reducing mortgage amounts.

_ Up to $7 billion for other state homeowner programs.

_ At least $3 billion for refinancing loans for homeowners who are current on their mortgage payments but who are underwater.

The deal is subject to final approval by a federal judge.

Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress

2011-11-29T21:39:00.000-08:00

Nov. 28 (Bloomberg) -- Bloomberg Markets magazine's January issue examines how the Federal Reserve and big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. And how bankers failed to mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. (Source: Bloomberg)
Fed Gave Banks $13 Billion in Secret Loans

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. No one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue. Betty Liu reports on Bloomberg Television's "In the Loop." (Source: Bloomberg)
Enlarge image Kenneth D. Lewis Former CEO of Bank of America Corp.

On Nov. 26, 2008, then-Bank of America Corp. Chief Executive Officer Kenneth D. Lewis wrote to shareholders that he headed “one of the strongest and most stable major banks in the world.” He didn’t say that his firm owed the central bank $86 billion that day. Photo: Joshua Roberts/Bloomberg

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

2011-08-19T22:28:00.000-07:00

The Dow rallied from its 1929 low of 198 to 294 in April, 1930. Thousands of Americans joined in that fabulous rally in the hopes of recouping some of their 1929-crash losses. But car sales topped out in 1928 as did manufacturing, and all during the giant 1929-30 rally the US economy crept lower, but few realized or recognized it.

When the Dow topped out April, 1930, the Great Depression started, as business began to crumble. From its high of 294 in April, 1930, the Dow fell to 157 by December, 1930.

I've had an eerie feeling all along that the whole market rise from the 2002 low to the 2010 peak was a repeat of 1929-1930. Even as the market roared higher following the 2002 low, the US economy acted like an invalid.

Remember, the crash of 2008 was "cut short" by the Fed. That bear market was never allowed to fully express itself. I thought that the 2008 crash should have been allowed to express itself. That would have resulted in the collapse of many of the "too big to fail" banks, and it would have cleansed the economy of half a century of ills, including Fed-created inflation and over-leveraging. But the Bernanke Fed said "No, we have learned our lessons from the Great Depression, and now we know how to avoid another Depression." So the Fed decided to pour trillions of newly-made dollars into the US economy. And the 2008 bear market was halted -- for a while.

But the bear has his ways. Bruin is going to have his way and finish the bear market one way or another. Suddenly, last night all hell broke loose as stock markets the world over plunged. The calamity was joined by the US markets on Thursday.

So what do I think is happening? I've said this before. The crashing stock market is terrifying US consumers, who immediately cut back on their buying and their orders. As consumers cut back, this impacts on the stock market, and we have a case of two wild hyenas eating each other. It's a case of the stock market "eating" consumers, and consumers frightening the stock market.

But can't the Bernanke Fed intervene and save the day again? Well, yes, they can create more money, on the theory -- that "give them the money and they will buy." But it hasn't worked this time. US consumers have already been hit too hard by confusion and the action of an erratic and puzzled stock market.

Gold -- I've been receiving many calls to the effect, "Should I sell my gold now?" My answer is that I don't have the ultimate answer to that question.

My thinking is that gold has been in a decade-long market. Most extended bull markets end with a third-phase period of torrid speculation and a mass entrance by the retail public. So far, we have seen neither.

My inclination is to ride the gold bull market until it provides a classic ending. That means sitting through many a coming correction and perhaps extended periods where gold does little or nothing. In other words, I may be doing something stupid but I'm sitting.

We don't have a lot of hints as to what the stock market will do next. But we'll work with what we have. Below is a daily chart of the S&P 500. Over the last week or so it has formed an exotic little formation. I would say that if the S&P gathers the strength to break out top-side of this formation, we're seeing some bullish action. But after all the negative action, if the S&P still chooses the bearish path and breaks to new lows, then we're in for another spate of down-markets.

In other words, after all the negative action, the market should be rally -- we need at least a "dead-cat" bounce to above 1208. If the market can't rally from here, then we know that something is really wrong!

GOLD -- Lord bless moving averages "that work." One MA that has worked beautifully for two years is the 150-day MA of gold. Note below that gold has "tested" or touched the 150-day MA of gold on five separate occasions over the last two years, and each time gold has held -- and then rallied to new highs.

Gold's latest run has taken it rather far ABOVE its 150-day MA, and now gold has me a bit nervous. Has gold run up too far? Does gold need a rest? Will gold sit on its butt, until the 150-day MA rises to touch it (nah, that would take too long)? Or is gold rising on a new and steeper angle?

Conclusion -- We've seen some extreme downside action. But Jim Stack of InvesTech Research reports that on the August 8th panic the ratio of declining stocks to advancing stocks was 77 to 1, a ratio never seen before in the past 80 years. The closest incidents were the May 1940 ratio when France fell to Germany; that ratio was 60 to 1. The second incident was on Black Monday during October 1987 when the ratio was 49 to 1. In both cases, those hugely high ratios marked a near-bottom, and within one month of those ratios the market was 10% higher.

A few days ago we saw down volume equal to 98% of up + down volume, an incredible extreme.

(1) My feeling now is that this bear market will probably not be a monster, but I believe that there is a fair chance that most of it is behind us.

(2) This will be a long and arduous recovery, and stocks bought here (even blue chips) will not prove to be winners over the next five years. I would not buy stocks for income.
The Dow today closed down 172 points, which is disappointing but not surprising. It's normal that traders want to go through this weekend with as few stocks as possible.http://www.blogger.com/img/blank.gifhttp://www.blogger.com/img/blank.gif

My PTI closed down 6 to 6269, leaving it bearish by 10 points. As for NYSE internals, 732 issues closed higher, 2320 closed lower. There were 7 new highs and 279 new lows. Down volume was 82% of up + down volume. I call it a mildly bearish day.

Dollar Index was down 0.23 to 73.97. December gold closed up 30.20 to 1852.20 another all time high. September silver closed up 1.74 to 42.43. Almost all precious metal items closed higher including GDX, GDXJ and GDM.

Sausalito Valhalla

Dk

Silver in solar panels

2011-06-15T21:57:00.000-07:00

Silver -- I want to talk about silver. Almost all informed scientists state that as the population of the world grows, we're going to need a lot more energy. Nuclear will be a big help, but because of the disastrous recent experience in Japan many people distrust and will vote against nuclear. Windmill power will help, but to manufacture windmills requires a good deal of rare earths. Here again manufacturers are stymied, that is, unless they buy their windmills in China (China has a virtual monopoly on rare earths).

One of the areas of electricity generation which is very practical and real is the solar panel. Solar panels require silver. Thin film silver requires materials that are more scarce than silver, tellurium and iridium. And so-called organic thin films which have many advantages over solar require a LOT of silver as well.

Thus, in future years as the demand for production of sustainable energy becomes increasingly insistent, there will be a huge demand for silver. So for now, solar and silver are linked together like brothers and sisters. The rising demand for solar energy will put silver in the spotlight as a much-wanted material. Unlike gold, silver will enjoy a huge industrial demand.

Granville -- My old buddy, Joe Granville, invented on-balance volume. Joe's thesis is that volume precedes price. For months, Joe's O-B-V studies have shown deterioration in the internal structure of the NYSE. Joe refers to the internal structure of the NYSE as the true market, and he considers the widely-watched Dow as the cover-up average, the one that often "hides" what the main body of the market is doing.

Writes Joe in his latest mailing, "The average market participant hasn't the vaguest notion of what deep trouble this market is in." Joe's conclusion -- "Now in free fall, the market will determine where support is. Right now there is no support."

Below we see more evidence of deterioration. This is our old friend, the percentage of NYSE stocks that are trading ABOVE their 200-day moving averages. As you can see the percentage has now plunged to 57.58% and it's nearing the halfway level at which time 50% of all the stocks on the NYSE will be trading below their 200-day MAs.

Note that the (blue) 50-day MA of this study is about to drop below the (red) 200-day MA. A cross-over would obviously be bearish.

Ben Bernanke is predicting an up-turn in business later this year. He's certainly not looking at my work.

If the Dow is down this week it will be the seventh week in a row. This is worse than anything that occurred in 1929! This sick market should be ready to rally. But can it?

7 characterisics of money

2011-05-31T21:07:00.000-07:00

Good money must have seven characteristics.

(1) It must be durable, which is why we don't use wheat or corn or rice.

(2) It must be divisible, which is why we don't use art work.

(3) It must be convenient, which is why we don't use lead or copper.

(4) It must be consistent, which is why we don't use real estate.

(5) It must possess value in itself, which is why we don't use paper.

(6) It must be limited in the quantity that is available, which is why we don't use aluminum or iron.

(7) It should have a long history of acceptance, which is why we don't use molybdenum or rhodium.

Only gold fits all seven characteristics.

Federal Reserve notes (now erroneously called "dollars") are issued by the Federal Reserve. They are created without sweat, ingenuity or risk by the Federal Reserve. The Fed is a creature of Congress and therefore, it can be pressured by the will of Congress. Congressional men and women are elected by the voters. The voters desire constant prosperity and tend to "vote their pocketbooks." Thus, the quantity of Federal Reserve notes can be a result of the desires of an impatient and often greedy electorate.

The quantity of Federal Reserve notes tends to be influenced by the wishes of impatient voters -- plus obedient politicians who value their jobs.

Unlike Federal Reserve notes, gold is fixed as to quantity. Gold is a currency that is not beholden to politicians or to any government. Politicians cannot increase or decrease the quantity of gold at will. When a currency is backed by gold, the quantity of that currency is out of the hands of politicians. This is the reason why politicians detest the gold standard. The gold standard leaves politicians helpless at a time when they wish to inflate or over-spend.

Fortune Magazine - "The Return Of Real Estate"

2011-04-13T22:24:00.000-07:00

I was very gratified last week to find a copy of Fortune magazine on the newsstand with a cover story titled: Real Estate: It's Time To Buy Again.

The article points to five trends as justification for improvement in the real estate market:
1) The steady decline in prices which has been going on nationally since 2005 has finally hit the level where it costs less to own a house than to rent in many cities.
2) The supply of renters has increased sharply in the recent past, which has already begun to cause rapid increases in rental rates.
3) Home builders have held back on building new homes for several years, creating the conditions for a shortage of new homes when demand goes up just a little bit.
4) Investors, responding to the big demand for rental units, are rapidly buying down the overhang of foreclosed homes which has dogged the market.
5) The U.S. economy does seem to be on the path to improvement, although we still struggle with high unemployment and weaker-than-normal consumer spending.

Gold - entering the third phase

2011-01-03T00:06:00.001-08:00

December 27, 2010 -- I have posted below the year-end price of gold starting with the year 2000, the first up-year of one of the greatest and least appreciated bull markets in history. Take in this series, you may never see its like again.

2000 -- $273.60
2001 -- $279.00
2002 -- $348.20
2003 -- $416.10
2004 -- $438.40
2005 -- $518.90
2006 -- $638.00
2007 -- $838.00
2008 -- $889.00
2009 -- $1096.50
2010 -- ?

I've been around a long time, and I've studied many primary bull markets. And now I want to venture a few of my observations.

In markets, I have never seen a series like the above end with a whimper or a fizzle. The end or the wind-up of such a series usually arrives with an upside "explosion," as those who have failed to participate in the series finally rush in to join in the apparent endless advance. This is the wild and wooly speculative phase of a great bull market. Big bull markets don't end with a sigh, they end in exhaustion.

(1) Most great primary bull markets last longer and carry farther than the majority of investors (even the bulls) expect.

(2) A great primary bull market is an expression of something changing in a very fundamental and meaningful way. Following a great bull market, the world is never quite the same.
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His father, Congressman Howard Buffett, understood gold, but his son, Warren Buffett, does not understand gold.

Maybe this will help Warren. Why is gold the ultimate and timeless money?

Good money must have a number of unique characteristics.

(1) It must be durable, which is why we don't use wheat or corn.

(2) It must be divisible, which is why we don't use a Picasso painting or jade statues.

(3) It must be convenient, which is why we don't use lead or copper or real estate.

(4) It must have value in itself, which is why we don't use paper.

(5) It must be transportable, which means that large values must be contained in a small area (a gold coin weighing only one ounce can be worth far more than fifteen hundred dollars).

(6) It must have a long history of being accepted as a store of value. Gold was considered valuable as long as 5,000 years ago in the age of the Egyptians.

(7) It cannot "disappear" or be used up in manufacturing as is copper and even silver. Thus, the gold coin that you have in your hand may have been part of Cleopatra's earrings centuries ago. Almost all the gold that has ever been discovered is still available in one form or another.

(8) It must not be the liability of any sovereign nation, nor should it require governmental law to make it money. For instance Gold requires capital, talent, risk, sweat and courage to recover or to accumulate.

Russell note -- It's possible that gem-quality diamonds can fit all the above characteristics but two. Diamonds are not divisible, nor do they have a long history of being stores of value.

Second note -- The Washington-based IMF recently completed its promised sale of gold. It was rumored that the IMF would have to sell its gold on the open market. Not so. The fact is that central banks eagerly gobbled up the IMF's gold. According to The Financial Times, the IMF sold its gold directly to the central banks of India -- 300 tonnes, Sri Lanka -- 10 tonnes, Bangladesh -- another 10 tonnes, and Mauritius -- two tonnes.

For the first time, more gold is being taken for investment than is used in jewelry. Asians have been gold buyers for years, while Americans have accumulated dollars and are just beginning to learn about gold. Meanwhile, the ignorant media continues to publish "beware" articles about gold. Soros announces that gold is the "biggest bubble" in the area of commodities, but the Soros largest holding is in gold. Sound as though Soros wants to knock the price of gold down so he can buy more on the cheap.

These billionaire investors; they have no consciences. Hmm. maybe that's why they're billionaires.

Dow greatest top in history - 3 years

2010-08-16T22:22:00.000-07:00

The Dow appears to be in a huge head-and-shoulders top. Note that this top has formed almost three years after the Dow hit its high back in October 2007. The fact that we now have declining tops, meaning a lower distribution pattern (below the primary top of October 2007) is bearish. I n the most recent pattern, the Dow seems to be working on an expanded "right shoulder" of its H&S top. I have drawn a line showing the support for the H&S pattern. The breakdown of the whole formation would come with a Dow close of 9600 or lower.

Note also at the top of the chart that RSI has turned decisively down. At the bottom of the chart I show on-balance-volume, which is in an ominous downtrend.

As I see it, the top we are witnessing began forming in October 2007 and is still in the process of formation. This makes it the greatest top, in duration, in history. Fantastic.

Speaking of on-balance-volume, this is the invention of my friend, the pioneering Joe Granville, who I have known and traded services with since 1960. Joe insists that volume precedes price. Joe has done a tremendous amount of work on his volume studies plus his studies of new highs and lows on the NYSE.

New highs on the NYSE topped out on April 26, 2010 at 674. Joe is convinced that was the high for the market, and once the high is put in, the market has nowhere to go but down. But it doesn't have to go straight down, the market can meander down in its own way.

Here's what Joe is saying in his latest report: "Between now and 2011, I expect the Dow to break the March 9, 2009 low of 6548.05. Once that happens, it puts the Dow in free fall with a limitless fall. What I see then is the worst decline in history, the reverse of this, the mother of all tops. Now there is no way the market can turn around and make new highs. I know that because I have the OBV numbers which all topped out in the recent March-April terminal leap."

Russell Response -- Could Joe be right? I think he could be, because this top, starting with the Dow October high of 2007, has extended for almost three years. It's the biggest and broadest top I've ever seen.

The collapse and crash could arrive with almost no one prepared for major trouble. The majority of professionals are still bullish, and the public has no concept of what it's like during a true generational bear market collapse.

Historically, the greatest moves in the stock market have come when the fewest number of people are prepared for it. Right now, the news is all of superior corporate earnings and better times next year -- and whether or when the Bernanke Fed will open the quantitative easing spigots wide.

Every primary bear market brings about one massive shocker. In the bear market of the 1930s, it was the epidemic of bank failures and the collapse of the Dow to the unbelievable value of 41.22 on July 8, 1932.

What could be the shocker of this bear market? This is obviously a Russell guess, but I believe the shocker of this bear market will be the collapse and death of fiat money. Bear markets exist for the purpose of getting rid of the corruption and lies and garbage of the preceding bull market. Fiat money is a lie and basically man-made garbage. I don't believe it will survive this bear market. Already, almost every fiat currency in the world has lost purchasing power against real money -- gold. I believe through suspicions and competitive devaluations, a decline in the value of fiat money will continue through the bear market years ahead.
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Gold -- is in the process of breaking out of the head-and-shoulder bottom as I thought it would. This move is capable of taking gold to a new record high.

Below a monthly chart of gold going back to 1999, one of my favorite charts. The red arrow points to the "golden cross." Monthly gold continues to climb and always well above its rising 50-month moving average. Question in New Yorkese -- "So what's not to like?"

I like the action in gold, no headlines, little comment, media doesn't seem to notice the insistent climb in gold, all around bullish action. Does your broker know that gold is near a record high? No? Then don't tell him. He might call all of his sleeping customers.

Gold and deflation

2010-07-08T22:22:00.000-07:00

Despite all the Administration's and the Fed's frantic efforts, the bearish forces of deflation and deleveraging are biting into the US economy. Although the Administration is practically begging consumers to "spend," frightened consumers are pulling in their horns and thinking of cutting spending or (horrors) even saving.

As for housing, the national inventory of homes for sales has surged to an 8-month supply. The fear among the real estate experts is that the inventory of houses to be foreclosed will shortly envelope the market and drive the price of houses even lower. This is the view of my favorite real estate expert, Bob Campbell, who writes the Campbell Real Estate Report out of Del Mar, California.

All the above is basically deflationary.

On top of that, as I've said a thousand times, Fed Chief Bernanke will absolutely not accept deflation. Even while he's keeping short rates at zero and flooding the system with over 2 trillion of new Fed Notes, the "economic poison" of deflation is creeping into the economy.

What can Bernanke do about it? According to ex-Professor Bernanke, "Deflation is always reversible under a fiat money system." In a speech a few years ago, Ben Bernanke laid out the plan -- "US dollars have value only to the extent that they are strictly limited in supply. But the United States has a technology called a printing press (or today, its electronic equivalent) that allows it to produce as many US dollars as it wishes at essentially no cost. By increasing the number of US dollars in circulation or even by credibly threatening to do so, the US government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those good and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."

Think of it. What Bernanke is telling us is that the government can create inflation simply by continuing massive quantities of dollars, the euphemistic "quantitative easing."

And in the event that quantitative easing doesn't create the desired inflation, the Fed has another trick. The Fed can buy all manner of debt including foreign debt and use it as collateral. In other words, Bernanke sees no limit to what he can buy in order to jack up the Fed's balance book.

Shrewd gold-accumulators are well aware of all of the above. As the deflationary and deleveraging forces press on the US economy, the Bernanke Fed is ready to devalue the US dollar in its ("whatever it takes") battle to hold back deflation.

With these thoughts in mind, I'm thinking of buying more bullion gold in the near future, this in view of the current correction in the gold price.

Let's boil the whole thing down to three sentences.

(1)The Fed will not tolerate the growing forces of deflation.

(2) To combat the deflationary forces, the Fed will devalue the dollar by printing trillions more of Federal fiat money.

(3) Once it is realized that the Fed is on the path to devalue the dollar, there will be a panic to buy and own gold.

Own gold and gold items and cash

2010-06-29T12:58:00.000-07:00

My investment strategy is now being voiced or followed by too many major hedge funds. The thinking is that as vanishing stimuli and de-leveraging takes over, the economies of the world pressured by central bank conservatism will force the US and western nations into a double-dip deflationary recession. The response will be to keep rates at zero and open the money spigots wide, wide, wide. This is where ownership of gold "was supposed to" come in.

Then, I ask myself, is this scenario too pat? Is it too popular? There's always a fooler. Where’s the fooler this time? I think the fooler will be the stock market. The stock market will be considerably worse than the smart boys are figuring on. Deflationary pressures will be severe and the need to re-inflate will be more pressing than ever.

Gold will be needed – not as a safe haven against inflation, but as a safe haven against crushing deflation. Deflation will flatten everything in sight including base metals, commodities, housing, job creation. The single island of preserving wealth will be gold. Unlike junk fiat currencies, gold cannot be devalued.

As I look ahead, the area that the experts do not understand is the stock market. Almost all the current opinions revolve around stocks remaining in a high-level trading range. This will prove to be an horrendous miscalculation.

Why do I think the stock market will be so rotten? Here's why. Look at the chart of the Dow in the current issue of Barron’s. Or study the chart of the Dow below. If this isn’t the mother of all head-and-shoulder top-formations, I’ve never seen one. If this formation falls apart, I expect the break to signal a the start of a brutal decline in stocks. The first area of support is Dow 10,000. The base of the entire formation comes in at Dow 9800. If the formation breaks down, I think all previous plans, scenarios and strategies will hit a stone wall. Wall Street and public sentiment will turn black-bearish. Consumers will head for the storm cellars and once in, they'll shut the door above them and lock it.

Question -- you keep talking about institutional selling. But from every corner, we hear how rapidly the economy is improving. I don't get it, if the economy is improving, why in hell would the smart money be selling stocks?

Answer -- First, you must understand that Wall Street is interested in only one thing -- MONEY. Wall Street feels no shame, no sorrow, no guilt, no remorse. Wall Street only has feelings for money. If the Street is truly bearish, if the institutions are negative, then their best strategy is to try to stir up optimism. And that's exactly what they're doing. Every plus in the economy, every improving statistic is blown up and fed to the media. You need an optimistic retail crowd to sell in to.

So shameless Wall Street creates the ideal background for selling stocks. Here look at the tell-tale evidence. "Distribution days" are days when volume expands on down markets. The profusion of distribution days is one of the studies that turned me bearish.

Here are the latest distribution figures covering the action of the last two weeks -- 3 for the S&P 500, 2 for the Dow and 2 for the NYSE Composite, and 1 for the NASDAQ.

So what's going on? Simple, the big money is unloading stocks all the while telling the public that the economy is improving. In the meantime, read Barron's, read Smart Money Magazine, read Fortune or Forbes. And what are they writing about? Stocks, stocks, stocks to buy. This is clearly against my advice which all along has been -- "Get the hell out of all stocks (except gold mining shares).

My position -- Own gold and gold items and cash. Write this on your blackboard ten times.

Gold at an all time high

2010-05-12T22:34:00.001-07:00

"The first desire of politicians is to be re-elected. What's so damn attractive (and profitable) about political office that makes grown men and women obsessed with holdong or remaining in office? Something is terribly wrong."

So while the public is losing money in the stock market, they are missing out in one of the greatest bull markets in history -- the gold bull market, which is now heating up. The smart money of the world is fleeing fiat currencies and loading up on gold -- as well they should.
...................................................................

The US has come to the crossroads. Unless we take drastic steps to reduce our deficits, we will face a crisis that will end US prosperity and turn the US into a weak and floundering has-been state (I should say a has-been empire).

There are three options available.

(1) Raise taxes, but taxes cannot be raised enough to wipe out the deficit.

(2) Cut spending, but Congress does not appear to have the "guts" to follow this strategy, nor would they cut enough even if Congress was actually ready to cut spending.

(3) Reform or cut the entitlement plans, and this includes such "third rail" programs such as Social Security, Medicare, Medicaid, all of which are driving our unsustainable deficits. And now add Obama-care, which will prove to be another super-expensive entitlement.

Wait, there is a fourth alternative, one that would diminish the debts of the US, and "sterilize" all debts. The fourth alternative is called INFLATION, and it is always the first choice of politicians.

As I review the first three alternatives, it's obvious that each of the three would cause PAIN to the American electorate, and therefore place US politicians in danger of not being re-elected.

So what's the path that Congress is most likely to follow? My own bet is that the path Congress is most likely to follow is to -- do nothing, and wait for a crisis to move them.

If nothing is done, I believe the US will almost automatically follow the path of inflation. Spending will continue as before, entitlements will continue and Congress will be too frightened and cowardly to do what the must.

The Obama crowd will continue to dream up stimulus and make-work programs and taxes, and the Fed will continue to create fiat currency to pay the bills. Thus, the debt crisis will be addressed with more debt.

I always turn to the markets to test my "scenarios." Gold is now at a new record high. Silver is now over 19 dollars an ounce and appear to be closing in on $20. Bonds, which hate inflation, appear to have topped out, and in my opinion are in a long-term bear market.

The central banks of the world along with the IMF has created or raised almost one trillion dollars in a desperate effort to keep Greece afloat and more important -- to avoid the collapse of the euro.

When gold rises, you must ask "rising against what?" I see rising gold as the enemy or alternative to all fiat non-intrinsic currencies. When nations create too much debt, their currencies come into question. We are now entering the era where sovereign currencies are being questioned. Can a nation go bankrupt? The unthinkable has suddenly become thinkable, and the world is thinking in terms of Greece, Spain, Portugal, Italy, and Ireland.

Yes, it's a new world, and it's a world choking on debt. It's a new world where the viability of sovereign money is actually being questioned. You can now speculate in derivatives that will allow you to "bet" on sovereign currencies. You can even place a bet on the viability of the once-great Yankee dollar.

Seasoned investors are now buying the one currency that needs no backing or guarantees from politicians. That currency is gold.

Gold is our only defense and protection against stupid and greedy politicians and governments.

If there is one investor and one stock that investors respect it's Warren Buffett and Berkshire Hathaway. Berkshire had a bad time last year, but now BRKA is making billions. Really, then why does the daily chart look like so bad? The answer is that Berkshire (owned mostly by the smart money and the institutions) is being unloaded in the face of the current improving economy. Forget the news, and follow the money. The (smart) money is saying "bye" to the stock market -- under the cover of the rising Dow. Ah, Wall Street should be renamed "cruel street."

June gold closed at an all-time record high, up 22.80 to 1242.70.

July silver up 0.369 to 19.66. July platinum up a huge 46.50 to 1747.30. Precious metals turning just a bit speculative. Germans with the great fear of inflation are leading buyers of gold.

2010-05-04T22:02:00.000-07:00

May 4, 2010 -- "I deny the power of the government to make paper money or anything else as legal tender." -- Thomas Jefferson.

The power and tyranny of government is blamed as the cause of many of our problems. But, in the end, we (the voters) must take the blame for what happens to us. Democracy depends on the intelligence of the people. There is nothing as powerful for the preservation of freedom as an informed electorate.

Now the newspaper industry is in deep trouble (the San Diego Union has just been sold). Fewer and fewer Americans read newspapers. And many newspapers across America are dying. This is depressing, but all is not lost. Electronic communication is taking the place of newspapers -- I think. Today we have cell phones, search engines, TV, the Internet, all new and exciting sources of information.

When dictators attempt to take over and brainwash a nation, they concentrate on three areas.

(1) They close the newspapers and take over the radio and TV stations and ban all sources of free information (China has in effect, banned Google).

(2) They outlaw all weapons, so the population cannot rise and overthrow the dictators.

(3) They ban gold, so that those who want to cross the borders and escape cannot do so.

Electronic information brought down the Soviet Union and Communism. Cell phones are now the enemy of the dictatorial government of North Korea.

But in the end, it's up to the people to bring about the kind of government they want. "We give you a republic," challenged Benjamin Franklin -- if you can keep it." Every voting American should post those words on his wall, as a wake-up call and as a warning.

The best guarantor of freedom is an educated populace. The greatest enemy of every dictator is an informed and armed populace.

Government debt to GDP - yikes

2010-05-01T19:04:00.000-07:00

These ratios show general government debt to GDP.

Ireland 40% UK 45% Spain 55% US 60% Germany 65% Portugal 70% France 70%
Greece 110% Italy 120% Japan 160%.

Studying these ratios, I have to think that almost fiat currencies are at risk. There's only one currency that is risk less since it needs no country to back it. That currency possesses one unique character. On it's own it IS intrinsic wealth. That currency is gold.

In the years ahead, fortunes will be made by those holding large commitments in gold. But forget profits, fortunes will be SAVED (preserved) by those who hold quantities of gold.

The other irony is that the US public owns no gold at all. Most Americans have never even seen a gold coin. As the price of gold rises, Americans are frustrated or puzzled as to what is happening. Remember, Americans have been brain washed for decades into thinking that gold is a "worthless relic." And now suddenly the world wants gold, and will pay a higher price for it every day. "Have we been swindled again?" Americans wonder as they watch the price of gold rise in dollar terms.

I want to repeat that in my rather lengthy experience, one of the most difficult feats to accomplish in this business is to enter a bull market and then have the guts, the tenacity and the foresight to ride that bull market over the length of its existence and to stay with it to somewhere near the top. What makes this so difficult is that all the while, the bull will try to shake you off its back.

I've been advising buying and accumulating gold for about ten years. I have no idea how many of my subscribers bought gold when it was below 400 and have held on to their gold ever since. From e-mails received, I estimate that hundreds of my subscribers did so. The higher gold goes, the more nervous and itchy these old-timers become. Many have never experienced the kind of profits (paper profits, or course) they now have, and they wonder if by staying with gold they are pushing their luck and becoming greedy. Every bull market I've been through ends up in wild speculation and frenzied buying. Somewhere ahead we're going to see that in this gold bull market. My advice: Stay with your gold and gold mining stock positions. The frenzy lies somewhere ahead. If I had to guess, I believe we'll see it before the year 2013.

Time to buy gold?

2010-04-28T21:31:00.001-07:00

I'll list a few of my reasons to buy gold.

(1) Goldman Sachs, the "smartest guys on Wall Street," are under siege. What's the complaint? These guys sold poisoned pill-products to their customers, and then made billions of dollars selling short the products they sold to their customers. Goldman has to decide whether to plead dumb and innocent or smart and sleazy. Of course, they'll plead dumb and decent ("they had no idea of what was going on").

(2) Gold is no longer seen as "just another commodity," but increasingly it is accepted as the "only safe currency" (this is increasingly the big money view).

(3) The Greek situation is far from being solved. Should Europe and the IMF bail out Greece? Germany is taking a hard stand against a bailout without very harsh new disciplines for Greece. Germany's lady leader, Ms. Merkel, is proving to be one tough baby, and she'll do what, in the end, is best for the fatherland. If Greece is bailed, will Portugal and Italy and Ireland be next?

(4) Managers of sovereign funds don't know where safety is. They know it's not in euros, and they suspect it's not in US dollars. What's left? Could it be gold? China and Russia think it is.

(5) My suspicion is that the stock market is tracing out a major top is becoming stronger. The stock market is loaded with amateurs who have been hoping to recoup their losses. If the stock market is actually topping out here, the public is going to turn black bearish. In the past month or two, many Americans have returned to the stock market, and others have bought foreclosed property under the belief that real estate has hit bottom and finally turned up. The Russell opinion -- if the stock market is topping here, I believe that the real estate market will sink to new lows (and this time we'll see the commercial real estate market collapse along with the housing market). If you're thinking of buying a real estate bargain, wait a while.

(6) Since March 2009, the stock market has staged a dramatic recovery. Thinking that a new bull market has started, many Americans have leveraged up again, while others have loaded up with stocks for the first time. A major stock market decline now would play havoc with the still shaky US economy.

(7) If the stock market turns down here, unemployment will rise again. This will drive the Obama administration up the wall and scare hell out of every Democrat. The odds of cutting the national deficit will then be zero.,

(8) The action of gold during this period is superb. I've asked to be in gold and cash, and to await developments. That's still my preferred position -- cash and gold.

(9) The reason I'm so focused on the stock market now is that if the market is topping, it's doing so in the face of rosy news in every area (except for employment). There's nothing more ominous than a stock market turning down in the face of a "bright" economy. At such times, nobody is ready or positioned for a sudden reversal .

(10) Gold is rising in the face of weakening oil. It would be dramatic and bullish if gold detached itself from oil and all other commodities.

(11) I also note the high number of "distribution days" - available in Investor's Business Daily every day. Latest on distribution days. 6 for the NYSE. 5 for S&P Composite, 4 for the Dow and 2 for the Nasdaq. That's too many for comfort.

(12) I've been saying, "After the calm comes the storm." We've had the calm with VIX sinking into the 15 area. But very recently, the VIX has risen to the 21 area, and this may be the early start of a coming storm.

Final message -- gold and cash, cash and gold. This is not the time to be "cute." This is not the time to be guided by what you hear out of Washington. This is not the time to be guided by what you read in the newspapers. Remember, newspapers and TV stations are businesses. They have a vested interest in being bullish and optimistic.

On this site, we follow the market. We listen to the news with interest, but we most definitely do not invest with the news.

The only time news is important is when there's an unexpected shock (or an act of God) so large that it affects the economy. The stock market is shocked only rarely, maybe once or twice in a decade.

A case for no inflation

2010-03-21T23:30:00.000-07:00

Just as a speculative thought experiment: perhaps the great contrarian trade of this decade is cash/the U.S. dollar.

The majority of economic observers seem convinced that the dollar is doomed, and not in some distant future. The basic reason for this unanimity is the reasonableness of the basic thinking, which goes like this:

The Federal Reserve and the U.S. Treasury are "printing money" and flooding the economy with easy money and credit, and the result of this debasement of the nation's currency will be rampant inflation.

In other words, if a nation greatly expands its money supply without expanding its production of goods and services, then all that surplus money ends up chasing scarce goods and services, and you get inflation: the same sum of currency buys less and less goods and services.

This is the goal of State policy, according to the standard line of thinking: The only way the Federal Reserve and the Treasury can "save" the debt-burdened U.S. economy is by creating high inflation, which enables debtors to repay debt with "cheaper" dollars. Everyone who owns debt or low-yield bonds will lose huge chunks of their assets, but for no-asset debtors, inflation will be the cat's meow.

But perhaps this thinking is wrong on virtually every important count.

While the Federal Reserve successfully goosed money supply in their massive "quantitative easing" campaign, money supply is no longer expanding at a fast clip.

The critical distinction between printing press and credit is rarely discussed: is money literally being printed or is it credit-based? The distinction has profound consequences. If a government prints stacks of currency and then distributes the freshly conjured money via helicopter drops (in the visually compelling imagery of Fed Chairman Ben Bernanke's famous "helicopter drop" quip), then the money supply has been expanded and distributed into the economy where it then leads to inflation if the production of goods and services lags money growth.

But if a government--for instance, the U.S. Treasury--prints bonds and sells those bonds to raise cash to distribute in the economy, that is not "printing money." The Treasury bonds are traded for cash presented by purchasers; the money already exists and is simply being transferred to the State for distribution into the economy.

If money is being created via the magic of fractional reserves (that is, via bank credit), then it does not flow into the economy if those banks do not lend it and if consumers do not borrow it. As Mish has repeatedly observed, banks cannot be forced into lending nor consumers into borrowing.

It seems the money "created" by the Federal Reserve and lent to private banks at near-zero interest rates is simply sitting in the banks as reserves to offset their continuing horrendous losses. As a result, it is not flowing into the economy, and thus it cannot trigger inflation.

In contrast, a State such as Zimbabwe does run its printing presses to create money, and this explains why it suffers from hyper-inflation.

It can be argued that the billions of dollars the Fed orders into existence and then trades for Treasury bonds (i.e. to buy T-Bills) is in fact "freshly created money" that flows into the economy via Federal deficit spending. True, but then the question becomes, do these purchases of Treasuries add enough to the $13 trillion U.S. economy to offset the reduction in credit as people and businesses either pay down debt or write off uncollectable/bad debt?

According to the Wall Street Journal (Drought of Credit Hampers Recovery), consumer credit outstanding has shrunk some $119 billion, or 4.6%, from its peak in July 2008, to $2.46 trillion.

Add in the mortgages paid down, paid off or written down in excess of new mortgages issued, corporate debt retired or written off, etc. etc., and it seems the deleveraging that is underway in both consumer and corporate balance sheets is reducing credit and money supply by hundreds of billions of dollars.

The Fed purchasing $300 billion or even $500 billion in Treasury bonds simply doesn't pump enough money into a deleveraging $13 trillion GDP-economy to create inflation. It merely offsets some of the destruction of credit going on at every level of the economy.

Thus you can have a central bank shoveling credit-created money into private banks where it sits, never entering the economy at all. How can that create inflation? Indeed, as has often been noted by Mish and others, this is what has happened in Japan for the past two decades: the central bank shovels money into private banks, who either engage in "carry trade" activities (borrowing at near-zero interest and then moving the money overseas to earn a decent yield elsewhere for easy profits) or they stash the funds to offset their ongoing losses in defaulted/impaired portfolios.

Those portfolios of impaired assets in Japanese, U.S. and European banks--just how much are they worth in a transparent "marked to market" setting? How many trillions of dollars in mortgage-backed securities, household debt, corporate debt and defaulted/impaired sovereign debt do these banks hold? If they had to sell those assets in an open market, how much would they fetch? How big would the losses be?

Nobody knows, but we can guess the losses are easily in the tens of trillions of dollars. The accounts of banks keeping defaulted mortgages on the books are legion; Japan has played the "waiting for better asset prices" game for decades, and now U.S. banks are playing the same game: accepting interest-only payments of a few hundred dollars from homeowners as an accounting gimmick to keep the loan on their books as "performing."

This artifice does nothing to clear the actual bad debt.

And how about all those impaired off-balance sheet liabilities? Regulators are not only allowing financial institutions to continue marking assets to fantasy, they are also allowing them to continue holding assets off their legitimate balance sheets.

Since we live in a credit-based monetary system and economy, then income and collateral are the foundations of credit/borrowing. Unfortunately for those wishing for vast expansions of borrowing to fuel inflation, real estate collateral is not just impaired, it has fallen to historic lows. We can only wonder what this chart would look like if all real estate was truly marked to market:

The point is that the collateral represented by the average U.S. household's primary store of wealth--their home--is near-negligible. Why? As noted above, houses are still being valued far above their true market value, so any reduction in value comes straight off the equity.

For example, a house valued at $300,000 on the bank's books justifies the $270,000 mortgage being held at full value. The homeowner supposedly has $30,000 in equity/ collateral. But if the house is actually marked to market at $250,000, the owner's collateral vanishes and the bank's "asset" (the mortgage) also declines in value.

Second, suddenly-prudent lenders won't lend more than up to about 75% of loan-to-value (except for the Fantasyland 3%-down payment loans backed by FHA, which are fast-defaulting). So much of the homeowner's equity is untouchable. The only collateral which is available to borrow against is that above 25%--perhaps 10% of the total vaulation of all homes in the U.S.

And since some 33% of all homes in the U.S. are owned free and clear (50 million mortgages, 25 million homes owned outright), then the "owners equity" is largely in the hands of those without mortgages. We might infer that anyone who resisted the temptations to use their house as an ATM machine via a home equity line of credit (HELOC) either does not want/need to borrow against their home or they are unable to for other reasons (such as low income, poor credit, etc.).

Put all this together and we can deduce that those homeowners who might desire to extract some equity from their homes via borrowing have no collateral left to borrow against.

What about other collateral, such as income? As we all know, functional unemployment/underemployment is around 17%. According to the BEA, personal income has declined by over $200 billion from 2008 to 2009. (Subtract government transfers and the number is more like $600 billion.)

"Net increase in household liabilities" hit $1.8 trillion in 2006 and $1.4 trillion in 2007 and then fell to $146 billion in 2008. Households are no longer borrowing (adding liabilities). Meanwhile, savings jumped from $178 billion in 2007 to $470 billion in 2009.

Mortgage debt rose by $1.1 trillion in 2005, $1 trillion in 2006, $686 billion in 2007--and then fell by $106 billion in 2008. No data is available yet for 2009, but you can bet both mortgage debt and new liabilities continued plummeting.

So household incomes have fallen, meaning there is less collateral for new borrowing, and new liabilities and mortgages have both collapsed from nearly $3 trillion in 2006 to $46 billion in 2008. Yes, from $3 trillion in new borrowing in 2006 to a total of $46 billion in 2008.

That is deleveraging, and adding $300 billion in money supply via Federal Reserve buying of T-Bills is offsetting a meager 10% of that decline in household credit.

Now that we've seen that housing and income collateral have fallen off a cliff and are not recovering, and that households are deleveraging ($3 trillion they were borrowing in 2006 has fallen to a mere $46 billion--more or less statistical error or pocket change in a $13 trillion economy)--then we might ask if those who still have assets would wish to leverage them into more borrowing/debt.

The vast majority (83%) of other financial assets are held by the top 10% households. here is a chart I reprinted recently in The Stock Market As Propaganda (March 10, 2010).

Equities (stocks) currently represent about $11.4 trillion of the total $33.3 trillion in financial assets. Business assets and real estate make up the remaining $20 trillion in total assets. According to the BEA, total household assets fell from $63.9 trillion in 2007 to $52.9 trillion in 2008--a decline of $11 trillion.

The recent stock market rally and "recovery" in housing has caused a blip up in total assets, which now appears to be rolling over.

Since the bottom 80% of U.S. households only hold 7% of financial assets ($2.3 trillion spread amongst 105 million households), then their ability to leverage their declining income and modest assets into huge dollops of new debt is somewhere between low and zero.

Recall that households added $3 trillion in new borrowing in 2006 alone. So those heady bubble days of credit/money supply growth are gone for good.

Since the top 10% households own $27 trillion in financial assets, we might ask what need they would have for new debt.

We might also ask what might happen if nobody comes forward to buy $1.5 trillion in new Treasury debt every year (money needed to fund the Federal deficit of $1.5 trillion a year) at very low yields. I outlined the high probability of this happening in The Trouble With Bonds (March 18, 2010).

Interest rates will rise. Recall that the Fed does not set yields for Treasury bonds; that is set by the bond market (supply and demand). The only way for the Fed to influence the yield of T-Bills is to buy them outright, as it has been doing heavily of late. Since every other major nation is also selling bonds to fund deficits, then we can anticipate some lively competition for investor's cash.

In the standard view that "governments just print money," then why governments sell bonds is never explained. Why don't all governments just print up money and spend that? Why go to all the trouble of selling bonds to raise cash to fund deficits? It comes down to the distinction between credit-based systems and currency-based systems.

Inflation is impossible in credit-based systems when credit is being paid down/destroyed/ written off and banks are wary of lending/risk and consumers refuse to (or cannot) borrow.

We might also ask what might happen to stocks, bonds and real estate valuations if interest rates rise: they tank as I explained in What If (Almost) All Assets Fall Together? (March 11, 2010).

As a side-effect, the meager assets of the bottom 90% of U.S. households would fall, and the "smart money" might well decide selling out before further declines occur is the wisest capital-preservation strategy.

Since so much debt is dollar-denominated, then there will be demand for dollars to pay down debt. That is the essence of deleveraging.

And since other assets will be falling as interest rates rise and risk aversion returns with a terrible vengeance, then "cash will be King." Dollars will rise in value, and the best and safest return on capital will be money-market funds or short-term notes.

Rather than doom the dollar, these trends suggest the dollar could rise in purchasing power and demand for years to come. I know this is contrarian, but ponder the distinction between "printing money" and selling bonds/attempting to expand credit in a credit-averse, collateral-impaired system.

So even if the Fed were able to force banks to lend to poor credit risks and deleveraging borrowers lost their sanity and added to their liabilities, then the economy still wouldn't grow/"recover." The "reflating the credit bubble" game is over.

Mt. Tam Cam - live Mount Tamalpais webcam

2009-11-24T12:07:00.000-08:00

I just installed a new webcam in Kentfield.

Click here: Mt. Tam Cam

Doug Kunst

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Stock market - upcoming crash

2009-11-16T22:19:00.000-08:00

Stating the Obvious: Why the Stock Market Should Crash
(November 16, 2009)

The trillions squandered on "stabilization" is not leading to "recovery" of the real economy; it is only life support keeping a sick economy from imploding. The stock market rally rests on rapidly crumbling sand.

I'm not saying the stock market will crash, only that if it had any relation to the real U.S. economy that it should crash, and soon.

The current politics of experience (a key concept in Survival+) is so warped by misleading statistics and orchestrated propaganda that it feels strange to state the obvious and find it is "that which cannot be spoken": the credit-dependent, consumer-dependent U.S. economy is going down, and going down hard, and the trillions of dollars borrowed and spent by the U.S. government and Federal Reserve to crank up a recovery have failed completely, utterly and totally.

The basic idea of Keynesian policy is simple: when the wheels fall off the private, quasi-free enterprise economy, then the government borrows and spreads mountains of money around like fertilizer which will stimulate "green shoots" of recovery.

The forgotten key to successful Keynesian policy is a government which has not been borrowing and spending trillions of dollars even during an era of so-called "prosperity." When a government like the U.S. has been propping up "prosperity" with trillions in borrowed money for a decade, then doubling or tripling the "stimulus" in the hopes that the green shoots will be enduring is truly farcical.

If the economy needed several trillion dollars in deficit spending to eke out the meager jobless growth of 2001-2007, then why does anyone think that doubling or tripling that deficit spending will create an enduring boom?

The truth is the U.S. economy has been dependent on Federal stimulus for years, both the indirect stimulus of artificially low interest rates and unlimited liquidity, and the direct spending of hundreds of billions of borrowed dollars.

Even before the financial crisis, the Federal government was borrowing and spending $400 billion a year to prop up "prosperity." All that spending simply papered over the rot at the core of the economy:

1. The primary support of the U.S. economy is consumer spending which is ultimately based on household income and assets.

Earned income has been flat to down for most Americans for years. The median income has been skewed upwards by the top 10% whose earnings have risen significantly. According to the Bureau of Economic Analysis, real disposable personal income-- income adjusted for inflation and taxes--declined 3.4 percent in the third quarter after increasing 3.8 percent in the second quarter.

In an economy dependent on consumer spending for 70% of GDP, how can GDP rise by 3.5% while personal income plummeted by 3.4%? Assuming that boost in GDP is real and not just statistical legerdemain, then where did it come from? From borrowed money, of course-- the Federal government borrowed and spent over $1.4 trillion in fiscal 2009.

In the good old days of 2002-2007, households would have borrowed and spent hundreds of billions as well. But the consumer, beset by declining assets ($13 trillion lost in the past two years), declining income (see above), falling housing values and worrisome employment trends (17% unemployment/underemployment, broadly measured), is actually cutting back on borrowing: Revolving Consumer Credit Drops 13.1% in August.

Consumer credit decreased at an annual rate of 5-3/4 percent in August 2009. Revolving credit (credit cards) decreased at an annual rate of 13 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent--the longest decline in consumer debt since 1991.

So while households are still burdened with almost $2.5 trillion credit card and nonrevolving debt (auto loans, etc.), they are paying debt down, not adding more.

And let's not forget that homeowners pulled out about $5 trillion in home equity in 2001-2007, and the home equity ATM is closed for good. That brings us to:

2. The primary asset in most U.S. households is a home, and home values are still dropping, foreclosures are still rising and the only force keeping the market from falling faster is the Federal government's defacto nationalization of the entire U.S. mortgage market.

Of the $1.5 trillion mortgage securities issued in 2009, a mere 1% ($15 billion) have been issued by banks 99% are backed by the government. The government owns over half the nation's $10 trillion in mortgages via its defacto ownership of Fannie Mae and Freddie Mac, and it has guaranteed virtually all the mortgages originated in the past year via FHA or VA.

The residential mortgage market is now effectively owned lock, stock and barrel by the Federal government and its private "central bank", the Federal Reserve.

Should the Fed and Treasury reduce their subsidies (that wonderful $8,000 giveaway tax credit to new home buyers or anyone claiming to be one), guarantees and outright purchases of mortgages ($1.2 trillion this year alone), then the mortgage market would instantly freeze up or start pricing in the very real risk that housing is not "recovering" and that anyone holding a mortgage could suffer huge losses if real estate continues declining in value.

Option Arm loans in Bay Area - ugly

2009-09-21T22:24:00.000-07:00

Of the 10 metro areas nationwide with the most option ARMs, three are in the Bay Area. They are the East Bay counties of Alameda and Contra Costa, the South Bay area of Santa Clara and San Benito counties, and the counties of San Francisco, Marin and San Mateo.

Together, these areas account for the second-most option ARMs in the country

Fitch said 94 percent of borrowers elected to make minimum payments only. The shortfall gets added to their loan balance, which is called negative amortization. The amount they owe can grow substantially.

After five years, or once the loan balance reaches a certain threshold above the original balance, the mortgages "recast" and borrowers must make full principal and interest payments spread over the loan's remaining life. Fitch said that new payments average 63 percent higher than the minimum payments, but could be more than double in some cases.

"When option ARMs recast, the payment shock is much more intense than we've seen (with other types of loans, such as subprime)," said Brown. "That makes them potentially much more damaging."

Unlike subprime loans, which were more commonly used for entry-level homes, option ARMs started out with high balances. In the five-county San Francisco area, option ARMs average about $584,000 and were used to buy homes averaging $823,000.

That means they'll spawn foreclosures among upper-end homes.

"The mid- to high-end real estate market is already stranded right now," "Any sort of extra inventory is not going to be welcome for that market whatsoever."

Option ARMs became widespread starting in 2005, which is why the recasts and higher payments will hit starting in 2010, five years later.

But now, on average, the amount these borrowers owe is 126 percent of their home's value, based on depreciation and not including the effects of negative amortization, Sirotic said.

That could explain the ominously high default rates. Even though most option ARMs have not yet adjusted higher, 27 percent of option ARM loans in the five-county San Francisco metro area are at least 90 days past due or in foreclosure.

The option ARM scenario will unfold over several years, which offers some hope that there may be time to avert a deluge of foreclosures. The bulk of option ARMs recast dates are spread out from 2010 through 2012. Especially for the loans that recast later, it's possible that a solution will arise, either through rising home prices allowing them to refinance, or through extra intervention from the government or lenders to help these borrowers.

"This will be another factor keeping home prices from recovering,"

From 2004 to 2008, almost one-fifth of all mortgages, for both home purchases and refinancing, in the San Francisco and San Jose metro areas were option ARMs - more than double the national average. Option ARMs were even more common in the suburban counties of Sonoma (25% of home loans) and Solano (28%). Though most option ARMs have not yet recast and hit borrowers with higher payments, they are going into default at extremely high rates. One quarter or more of all option ARMs in the regional areas are more than 60 days delinquent or already in foreclosure. Analysts say option ARM borrowers are so underwater that they may be choosing to walk away.

10 Pins for the Stock Market Bubble

2009-08-09T22:04:00.000-07:00

August 10, 2009

The "Recession is over" stock market rally is just another bubble awaiting a sharp pin. Here are ten such sharp little pins.

I really hate to pop anyone's bubble, but--oh, why try to hide it, I love popping bubbles, especially stock market, credit and housing bubbles. According to the standard-issue financial pundits (SIFPs), the stock market is not only in a new Bull Market but it's heading higher this month--S&P 500 is shooting to 1,200, guaranteed.

Before you join the euphoria, please consider these 10 sharp bubble-popping pins:

1. Structural unemployment is skyrocketing. Job Losses Moderate:

But structural unemployment worsened. The number of people who've been out of work longer than six months soared by a record 584,000 to 5 million, accounting for more than a third of all unemployment for the first time on record.

"Structural" is a polite way of saying there won't be any jobs for the long-term unemployed this year, next year, or the year after that.

2. The jobless rate declined because the work force shrank. This is typical smoke-and-mirrors statistics, courtesy of your Federal government: as people lose extended unemployment benefits, they are classified as "discouraged" and are no longer counted in the "headline" unemployment number.

Unemployment fell by 267,000 to 14.5 million, while employment fell by 155,000. The labor force declined by 422,000, which means the jobless rate declined because people dropped out of the work force, not because they got jobs. The employment-participation rate fell from 65.7% to 65.5%.

3. Everyone seems to have forgotten we need to create 250,000 jobs a month just to stay even with population growth. So while "only" 250,000 jobs were lost last month--never mind a big chunk of employment was linked to the "cash for clunkers" giveaway--that means we're still 500,000 jobs short of a return to a rising employment scenario.

4. The interest on all the debt the nation is taking on to bail out bankers and "stimulate" the dead credit-bubble model will place a drag on growth far into the future. At the end of March of 2009, Bloomberg reported that, "The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year." This amount "works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.

Even with today's dirt-cheap interest rates, the government spends over $400 billion on interest. Another couple hundred billion and we'll be paying more for interest than we are for Defense or Medicare.

5. Interest rates are set to double. A funny thing happened on the way to borrowing "free money" in the trillions; there isn't enough free money around for everyone to borrow unlimited amounts of it. So there's actually more demand for surplus cash than there is supply of surplus cash. That sets up a supply-demand imbalance which leads to higher costs of borrowing. Nothing fancy here--even the Fed economists understand this:

Seeking Alpha

In a 2003 paper, Thomas Laubach, the US Federal Reserve’s senior economist, calculated the impact on long-term interest rates of rising fiscal deficits and soaring national debt The study is damning because Mr Laubach was the Fed’s economist at the time, going on to become its senior economist between 2005 and 2008, when he stepped down. As a result, the doubling in rates is the US central bank’s own prediction. +3.5% because of rising deficit.

That would imply a sharp rise in the interest payments mentioned above; suddenly, the positive feedback/runaway debt scenario looks not just plausible but inevitable: interest on the national debt rises to $650 billion, equal to the Pentagon/Intelligence and Social Security budgets. As tax revenues plummet then the only way to pay the interest is to borrow more, increasing the interest due.

Repeat annually until insolvency/default. Recall that the stimulus deficit is 13% of the entire U.S. GDP; 5% is widely considered unsustainable; Argentina defaulted when its deficit hit 3% of GDP.

6. Tax revenues are tanking. Government revenue is at its lowest level since the Depression, and most states are on the verge of bankruptcy. Tax revenues cannot be manipulated like unemployment and thus tax revenues and sales taxes are far more accurate measures of economic activity than other metrics.

Raising taxes is politically risky (see "insurrection" and "throw the bums out") so what's the only way to continue funding runaway spending? Print and borrow--which raises interest rates.

7. Normal accounting and reporting rules have been suspended. The U.S. financial markets are still a hall of mirrors; mark-to-market is still a pipe-dream; mark-to-fantasy reigns supreme as the easiest way to prop up insolvent banks' balance sheets.

8. Commercial Real Estate is spiraling round the drain. Even mark-to-fantasy might not save banks when the tsunami of bad CRE loans hits in the coming months. Anyone want a faded-glory, half-empty, money-losing mall or three?

9. Consumers are retrenching generationally, not for a few months. Consumer credit (revolving and non-revolving) dropped at a 4.9% annualized rate in June, double the expected pace, indicating consumers continue retrenching and saving. Total outstanding consumer credit in June was $2,485 billion, $70 billion less than the $2,556 billion in June of 2008.

In the long years of bogus "prosperity," consumer credit grew every month like clockwork. $70 billion isn't much, but it's the start of a trend which essentially dooms consumer-based, over-leveraged economies like the U.S. to years or decades of (at best) meager growth.

10. Residential housing is not healed; it's still bleeding profusely. Nearly half of U.S. mortgages seen underwater by 2011. No collateral (as in, no housing equity) means consumers cannot borrow more money, even if interest remains at absurdly low rates (and it won't).

Lagniappe pin: healthcare "reform" will not lower healthcare costs by any measurable degree. At 16% or 17% of the entire U.S. GDP, healthcare (a.k.a. sick-care) will remain in essence a stupendous tax on the few remaining productive sectors of the U.S. economy.

Recession over, and stock market ready to boom on rising sales and profits? Color me skeptical; 10 or 11 pins are about to be pushed into the latest bubble and we'll see how thick that Bullish membrane really is.

Luxury Housing Sector in Marin County

2009-07-31T23:41:00.000-07:00

Luxury Housing Sector in Marin County Looks Up:

The real estate slump experienced last year looks like it’s about to take a turn for the better, especially in places like California which bore the brunt of the downturn. Marin County for one is looking up in terms of its luxury home sector, according to a report from real estate service provider Coldwell Banker Residential Brokerage. According to the report:

* There has been an increase in the sale of luxury apartments and houses over the past six months
* Homes are now closing faster, in under 100 days rather than in under 150 days a few months ago.
* The perception that the housing market cannot get any lower than this and that prices are only going to rise upwards has brought about this renewed interest in home ownership.
* People are realizing that low interest rates are soon going to be a thing of the past and that the buyer’s market may not last much longer; so they’re using the low prices to snap up good homes.
* The housing sector is looking up in all cities of Marin County
* Homes are selling for as much as 90 percent of their asking rates, a significant improvement from the 83 percent that was registered a few months ago.

And if you thought these signs of prosperity were being exhibited only by the rich and famous, the overall housing sector in the area is also showing signs of having reached rock bottom.

The median price of a single-family home in Marin in June increased to $800,000, and more homes were sold last month than in May, a real estate tracking firm reported Thursday.

Trouble in Paradise: Marin County - foreclosures double - commercial real estate vacancies top 41%

2009-06-18T23:27:00.000-07:00

Marin County commercial real estate vacancies top 41%

While not faring as badly as some California Counties, Marin County, according to the 2000 census, has the highest per capita income in the country, is awash in supply in commercial and residential real estate. Vacancy rates in class A commercial real estate is cited as being over a stunning 41% in San Rafael by the Marin Independent Journal. The Examiner recently reviewed one of the most extensive reviews of current foreclosures throughout Marin County provided by Foreclosure Radar. Foreclosures almost doubled to over 800 residential properties from the 440 cited by the Marin Independent Journal for 2008 (http://www.marinij.com/data/ci_11564640) just five months ago. The 800 plus Marin households cited are currently in pre foreclosure, foreclosure or being auctioned off by banks. The entire housing supply in Marin County according to wikipedia totals 61,000 (http://en.wikipedia.org/wiki/Marin_County,_California) .

Mortgage experts have often cited some localities in California as being relatively immune from harsh downturns in real estate due to a limited supply of new homes or office buildings due to stringent building codes, zoning and a anti growth stance among the local community. Estimated values for the distressed homes in Marin County ranged from $100k in Novato to a $3.6 mm home in Tiburon an $4mm home in Kentfield. Mark Hanson, Managing Director of the Fieldcheck Group thinks its going to get much worse before it gets better for the mid to high end of the residential market. " I don't think we have begun to see the beginning of this negative equity crisis yet. Its all about who can buy these homes at the higher end and with the home financing market tightening the way it is, the number of buyers that can put down $300k - $400 k cash in order to buy a $1mm plus home is getting smaller and smaller. Historically, 'move up buyers" would take up supply in the high end, but these potential buyers can't sell their homes at their desired prices and therefore can't move. I think we are heading for a castastrophic fall in home values in the upper end of the housing market. " According to the website: www.marinrealestatewiz.com/ , as of May 2009, 19 homes were listed for sale in Ross, with 0 being under contract.

The economic impact of the distressed markets and high upturn in vacancy rates is not good for the County and City government budgets within Marin County as the tax rolls suffer from lower taxes bases when homes are finally sold to receiving little to no income from vacant commercial properties. The inventory of unsold homes continues to grow, actual sales (which triggers precious sales tax revenues for the cities and County) have stalled. Meanwhile the continuing increase in the velocity of foreclosure listings further deteriorates local markets as banks auction off homes for rock bottom prices creating a downward spiral on property values.

Like many Counties around the state, the County of Marin has a large and growing unfunded pension liability with 14 recent retirees receiving over $100k for life from taxpayers. Estimates for unfunded public employee pensions and medical benefits range from $700mm to over $1 billion which means cuts in services and a "crowding out" effect for government services to taxpayers as all monies are used first to payoff cadillac pension and healthcare benefits. Recent statewide initiatives, backed by Governor Schwarznegger, leading Democrats and public employee unions, asked California voters to approve more taxes. Four out of five of these intiatives were soundedly rejected by voters, thus leaving policy makers and government leaders little room to manuever. The mandate and choices are few but one is clear: "cut spending....now." And local government leaders can no longer look to any budget relief from real estate sales as the economy continues its stall and with unemployment statewide at almost 10% and current and unfunded budget deficits soar.

According to the San Francisco Chronicle, home prices are seeing significant declines or "reductions" original asking prices from Marin County home sellers . In Tiburon, 28% of homes had to lower their prices close to 20%, In Mill Valley, 34% of homes put up for sale reduced their asking prices, on average by 8%. With multi million dollar homes, these write downs can be costly, particularly given most homeowners put up 20% equity or less to buy their homes. Should prices deteriorate more than 20% or more , many Marin homeowners find themselves in a "negative" equity situation...further fueling homeowners' concerns and heightening the risk of even more and more foreclosures perpetuating deeper declines in property values across the commercial and residential markets. This toxic swirl has already hit the lower end of the Marin residential markets hard in places like Novato, where homes have settled back 40% from their highs two or three years ago.

California is bankrupt

2009-06-01T22:58:00.000-07:00

If you make a decent wage (I don't, but many do) then the state income tax is about 10% as well. That rate is also among the highest in the nation.

What we have here is not just cognitive dissonance but pathological disassociation from reality: California is a very high-tax state, with among the highest rates in the nation in virtually every category of taxation. Voters rejected the bogus tax-and-borrow-more propositions for two reasons:

1. The propositions were deceptively written and presented in a ham-handed attempt to mask the fact they weren't tax increases. Voters rejected this incredibly crass attempt to deceive them. Lesson for state politicos: if you want a tax increase, ask for it in plain English.

2. Residents already pay high taxes, and the state has already garnered $40 billion per year in additional funding over this decade. We seem to have received little in the way of improvements for the extra $40 billion a year in state spending. Even in a state with 36 million residents, that is a stupendous sum. Therefore voters desire to send more of their money to a government which has shown little fiscal restraint and precious little oversight of current spending was low.

To understand California's impending bankruptcy, we have to consider these fundamental issues:

1. State, county and city employees are paid (wages and benefits) between 50% and 200% more than equivalent private-sector employees.

2. The California economy's real-world foundations--agriculture, entertainment, technology and tourism--are all in decline or pressured by state policies.

3. Overlapping state regulatory agencies are effectively strangling real-world businesses in favor of high-on-the-food-chain enterprises like attorneys and Web 2.0 firms--businesses which create few jobs and which ultimately depend on highly profitable real-world businesses for their own incomes.

4. The Prop 13 limits on raising property taxes has saved millions from losing their homes due to escalating property taxes even as it has unintentionally created vast injustices.

Let's tackle the last item first. Pundits both in-state and out-of-state are quick to identify not bloated public-employee pay and benefits but low property taxes as the culprit. My wife and I bought our residential property 17 years ago at a cost far below current values and we still pay $10,000 a year. Is that "too low"? If that's too low, then what do these pundits think average wage earners can afford? $20,000 a year? Do they really think $1,660 per month is "reasonable" for property taxes? How much do they pay?

The injustice in the system is obvious but difficult to rectify. To understand why, let's consider the other taxes: income and sales. A rough form of justice is implicit in both: everyone who buys something regardless of their income pays sales tax. Those who buy more are presumably wealthier, hence they pay more sales taxes than those of limited incomes. (Food is exempt from sales tax in California.)

Income tax is highly progressive in California, with moderate-income folks like myself paying modest sums (I paid $513 on adjusted gross income of $30,000) while high-income residents pay a stiff 9-10%. This too carries a readily comprehensible justice: higher income residents can more easily afford higher tax rates as they have more income above subsistance.

But a tax which is $1,200 for for one house and $12,000 for the identical house next door is explicitly unjust. The problem is that the elderly resident of the house paying $1,200 a year might be scraping by on a Social Security check, while the house across the street paying $1,300 a year in property taxes might be long-owned by wealthy pensioners pulling in $10,000 a month.

Meanwhile, the young family who foolishly bought in at the top of the housing bubble next door might be paying $15,000 a year in property taxes even as 65% of their income goes to pay their mortgage and property taxes. (I have friends who pay even more than this stupendous sum for their "fixer-upper" purchased in 2006.)

The only fair way to rectify this structural injustice is to consider the total income (not just taxable income, but all income) and total assets of the residents. Simply raising taxes on low-tax properties will only create new injustices as low-income retirees are forced from their homes by suddenly steep tax increases.

On the other hand, why should residents pulling down $10,000 a month pay 10% of the tax their neighbors pay? That too is unjust.

It seems obvious that some straight-forward adjusting based on income and assets could rectify the worst of the injustices of the current system. Yes, this would require a lot of paper-processing, but isn't justice worth some paper-pushing?

How about something along these lines: if you pay property tax of less than $3,600 a year and your gross income from all sources (including tax-free bonds) exceeds $100,000 a year then your tax jumps to $3,600 a year or 90% of the county's average property tax, whichever is lower.

Look, if you're enjoying an income of $100K or more, I think you can manage $300/month instead of $150/month in property taxes.

If you pay more than $10,000 per year in property tax, the property is worth less than $1 million and your household income from all sources is less than $100,000, then your tax drops to $10,000 per year.

Whatever parameters are set, a fairly limited set of adjustments like the above would rectify the worst injustices of the current system in short order. Yes, some would still pay much less than neighbors while others would pay far more, but some modest attempt at justice would still be worth the effort.

I know all you who work for government and quasi-government agencies like water boards, transit systems and school boards will find this disagreeable, but the vast majority of public employees are paid twice as much (or more) as their private-sector counterparts when benefits are factored in. I know for a fact that clerks in school district offices are paid well over $40,000 a year, with benefits exceeding $20,000 per year, while private-sector clerks with the same skillsets are worth perhaps $22-24,000 in the real world, with minimal pension benefits.

Including rich benefits and pensions, many public-sector employees in California are paid twice or more the market-rate value of their labor.

Since labor costs make up 3/4 of all government budgets, it is obvious the only long-term solution to deficits in states already groaning beneath high taxes is to bring public employee wages and benefits in line with real-world market valuations for that labor.

To date, California's public employee unions are fiercely resisting all but the most feeble reductions in their members' pay and benefits. Given the outsized share of labor costs in all government, this recalcitrance guarantees the state will become insolvent/go bankrupt and literally be unable to meet its payroll.

It is instructive to recall that in 1932, the city of San Francisco reduced its municipal salaries by 25% and limited city jobs to one per household. Note to public-employee unions: that is a real-world start you might do well to accept before even harsher terms are offered.

Overlapping dysfunctional regulations are driving real-world businesses under. Like a prissy spoiled princess, California has turned up its nose at enterprises like making steel (smelly), surfboards (let China worry about fumes), agriculture (uses too much water which I need to keep my lawn green and pool filled), aerospace (there's never enough taxes on the military-industrial complex) and physical technology (that wafer plant is too toxic for our taste, no matter what controls you install).

Oh, and every permit application will cost you big-time. The actual permit--well, what makes you think we'll actually lower ourselves to grant you one? If we do, the fee will hit you like a sucker punch to the gut. Then we'll add inspection fees, business licenses and a swarm of other junk fees. But really, we're "pro-business" here--we love businesses dumb enough to stay here. Sadly, the ranks of sucker corporations seem to be thinning.

As a result, California now depends on top-of-the-food-chain enterprises like attorneys (sue it if has insurance, don't bother if it doesn't), tourism and the horrifically overhyped fraud known as Web 2.0 (a handful of young coders constructing a web business suposedly worth billions but the only source of revenues from now until the sun explodes is advertising). In case nobody noticed, adverts only work on people with jobs and income.

Tinseltown is tanking. The Web is dismantling the film and music industries faster than you can say "Ten bucks to see a freakin' movie?" Unemployment in the film and music industries is rampant and growing. The costs of doing business in california are simply too high to make money.

The illusion of corporate headquartering in California is like a Hollywood set facade. Behind the corporate facade, global giants like Intel are basing most of their employees overseas or in lower-tax states like New Mexico and Oregon. Yes, Silicon Valley is still the place to come for venture capital; and yes, entrepreneurs are still starting companies. But once they need to grow, they have to exit the state to prosper.

The state organs of propaganda will deny all this, but then why are tax receipts down over 40% year over year? Is that because so many new businesses are prospering and hiring people?

The pathetic truth is California got by on a mere $100 billion a year in spending not many years ago and now there is great gnashing of teeth and weeping that the state is ruined if spending doesn't stay at $143 billion a year. If this were true, then how did we get by on $95 billion a mere decade ago? The answer to cutting $42 billion is simple: all agencies must revert to their 2001 budgets.

The housing bubble provided California with one last glorious shot of fantasy. No need to tax and spend prudently--housing will keep going up and the property tax increases are stupendous. No need to make anything tangible any longer--just fill office towers with brokers, attorneys and mortgage sales staff. Property taxes and capital gains from housing will keep rising forever.

Yeah, right. Welcome to reality, California. Either fix your structural problems or prepare your bankruptcy filing.

Signs Of Real Estate Rebound In San Francisco ~ video ~

2009-03-13T23:13:00.000-07:00

The real estate tracing firm Terradatum ran some numbers for CBS 5, which show that more San Francisco properties have gone into escrow in the last two weeks than at anytime in the last six months.

One reason is prices are down 10 percent city-wide, which has unleashed pent up demand. Adding to this are low interest rates, with 30-year-fixed rates now hovering around 5 percent.

See video: http://cbs5.com/business/real.estate.sales.2.956968.html

DK

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The Road to National Insolvency

2009-03-09T00:07:00.000-07:00

March 9, 2009

Insolvency does not just mean liabilities exceed assets--it also refers to being unable to pay the interest and principal on one's debts and cover one's other expenses. The U.S.A. is headed for this insolvency.

How could the U.S. government become insolvent? Easy: when the costs of servicing its rapidly increasing debt rise to the point that it is no longer able to pay its mandatory bills.

The Mainstream business media is offering some faint recognition that borrowing several trillion dollars a year might have some consequences such as higher interest rates and less money available for private-sector-borrowing: Will the Obama Budget Hurt Private Borrowers? The humongous sums the U.S. Treasury must raise in coming years may eventually make credit unduly expensive for businesses.

But let's start at the beginning and build a more comprehensive context.

1. The U.S. government does not "print money" to fund its deficit: it borrows the money on the open market by selling Treasuries (T-bills) of varying maturities.

2. If the Treasury sells a 90-day T-Bill, then in 90 days the coupon (face value) of that bond is paid and the Treasury has to sell another T-bill to replace the one it paid off. If the government pays off $1 billion in short-term T-bills in any particular week, it must auction $1 billion of new T-bills to replace those paid off, i.e. roll over the debt.

3. To cover this year's deficit, the Treasury must sell more T-bills. Thus the Treasury won't just auction $2 trillion of T-bills to fund the 2009-10 Federal deficit--it must also sell untold billions more to replace all the Treasury debt which is coming due and must be rolled over into new Treasury bills.

4. The current era of low interest rates a.k.a. "cheap money" has allowed the Treasury to borrow stupendous sums of money at low rates of interest.

5. Even as these historically low rates, the interest on the public national debt (that is, not including the interest paid on the Social Security Trust Fund, which is considered "intergovernmental holdings") reached $260 billion in fiscal year 2009. The Treasury includes all interest, including that "paid" to the Social Security Trust Fund for the Social Security taxes collected but promptly "loaned" to the the general fund to spend, so you find news articles like this: Uncle Sam Will Pay $450 Billion This Year Just to Cover Interest on National Debt

According to the Treasury Department report, released on Dec. 10, the federal government expects to pay $449,070,000.00 in interest on Treasury debt securities for FY 2009.

The Health and Human Services budget, which includes Medicare and Medicaid, will cost $739,241,000.00 for the fiscal year; Social Security Administration, $699,976,000.00; and the Defense Department-Military budget, $656,722,000.00.

Here is a link to the Treasury's accounting of the debt: The Debt to the Penny and Who Holds It. It states that the debt held by the Social Security Trust Fund and other governmental agencies is $4.4 trillion, and the remainder of the debt (owed to citizens or "external" owners) is $6.6 trillion.

According to the Treasury, the average interest paid on this $10.95 trillion in debt is 3.7%. In January 2001, not very long ago, the average interest paid was 6.5%--almost double the current rate. Historically, a rate of 6-7% is not uncommon.

6. Thus a return to 7% interest rates would in effect double the interest paid annually to nearly $1 trillion per year. As noted above, this debt is spread out over varying maturities, so a rapid rise in interest rates would only effect a small portion of old debt at first.

Nonetheless, all new debt would be paying the new higher rates, and every month more of the existing $11 trillion in debt would roll over at the higher rates.

Think of that $11 trillion in debt as a mortgage which resets to higher interest rates as the "owner" keeps adding debt. Just like the homeowner who manages to make mortgage payments when the low "teaser" rates are in effect but who is unable to pay the mortgage when rates revert to actual market rates, the U.S. government will become insolvent as rates rise.

But why would rates rise? Why can't they stay low forever? I believe certain "one-shot" circumstances are masking longer-term trends:

1. Central banks (i.e. other governments) are buying huge amounts of Treasuries. (Central banks are still buying large quantities of Treasuries (Brad Setser, March 7, 2009). Theories abound, including the perceived need of central banks to build reserves to protect their currencies, etc.

The reason I don't see this is as sustainable is governments everywhere are busy announcing massive fiscal-stimulus spending bills, and whatever funds they can collect from taxes, borrow or print will soon be diverted to essentially "anti-rebellion" domestic spending.

2. Global savings are not infinite. The U.S. comprises about a quarter of the global economy as measured by GDP; by at least some measures, for the U.S. Treasury to borrow $2 trillion a year then a significant percentage of total global savings must be diverted to Treasuries.

Recall that virtually every other government on the planet is also busy selling trillions of dollars of their own debt to fund their own deficit spending, and that private debt for new mortgages, corporate debt, etc. sucks up additional funds. It's not hard to foresee a point at which newly issued debt exceeds the available savings/surplus capital.

At that point, a competition for available funds begins, with the "winner" being the borrower who pays the highest interest rate and offers the most safety/security.

With the global economy in a complete freefall, global savings are also in a steep decline. Just as the demand for capital leaps, the supply of surplus capital plummets. That's the long-term trend.

3. The U.S. savings rate has jumped up recently, reflecting a new prudence/fear in U.S. households. But as unemployment rises, we have to wonder how many households will be able to save, say, $2 trillion a year to fund their own government's debt.

Yes, I know insurance companies and bond funds will also be buyers, but as people cash out their insurance and retirement funds to survive then this "national savings" might still decline.

4. Treasuries rocketed in value as the stock market's decline caused institutions and individuals alike to sell REITs (real estate funds), stocks and other securities and put their cash in safe Treasuries.

But with the returns on T-bills being so pathetic, at some point institutions' models for 7% annual average returns will require that they seek higher yields. At that point, money will actually flow out of Treasuries.

5. Major institutions like life insurance companies and pension funds cannot survive drawing 1% or 2% interest on their capital. They simply cannot put all their money in "safe" short-term Treasuries and continue to pay out redemptions and pensions. That reality suggests the rush to Treasuries will be short-lived, unless T-bills start paying 7%.

At some point fear will recede and the priority of professional money managers will shift from "safety" to "higher return." As noted above, they simply have no choice. Investors can earn 2% on their money themselves; why hire money managers? Because they're supposed to earn higher returns than T-bills.

There is a definite possibility of positive feedback loops triggering a mass exodus from Treasuries and a resultant jump in interest rates that surprises (almost) everyone. Let's say global savings dries up (already a reality) along with global profits and global tax revenues and indeed, every possible source of governmental revenues other than borrowing.

At some point, the desire for "safe" low-paying Treasuries will dry up, from a shortage of capital and/or a reversion to a less risk-averse model of portfolio management.

Once interest rates pop up, the face value of existing bonds plummet, causing a mass exodus which feeds on itself. The face value of bonds is exquisitely sensitive to the rates paid for new debt. A $1,000 bond earning 2% falls to $500 if rates pop to 4%. That is why any rise in rates would cause havoc in the bond market and cause selling as those holding bonds begin fearing the destruction of their wealth via plummeting bond values.

Once the psychological certainty of "low rates will last forever" is broken, then rates can rise quite quickly, and the value of bonds can fall equally quickly. A trickle then turns into a torrent, which causes rates to rise even faster.

One last trend few seem to fathom: tax revenues are about to plummet. As profits vanish and head counts drop, then so do taxes collected. As assets crash, then the fat capital gains taxes collected by states and the IRS alike are drying up like summer rain in Death Valley.

So all those rosy predictions that the deficit will shrink as the economy recovers--don't count on it. Capital gains will never return to 2005 levels, nor will financial-sector and real estate profits. Structural unemployment will remain far higher than most believe possible.

Four short years of $2 trillion deficits will effectively double the U.S. national debt and the interest it pays. The Social Security surpluses are "borrowed" every year without any notice, so the U.S. debt rose by $300 billion a year even when it supposedly ran a slight surplus; that $300 billion+ a year in new debt goes on top of the stated $2 trillion/year in deficit spending.

So the nightmare scenario is this: the debt doubles over the next 4-5 years, causing interest payments to double from $450B to $900B a year. But interest rates also double due to the global shrinkage of surplus capital and the monumental rise in demand for capital (borrowing). The $900B in interest then doubles to $1.8 trillion--roughly equal to Medicare, Social Security and the Pentagon combined.

Can't happen? Really? With tax revenues dropping along with profits, employment and assets, then where will the political will arise to cap entitlements and other spending? I predict the U.S. will continue borrowing trillions of dollars until it is no longer able to do so.

By then, the interest owed each and every year will crowd out all other spending. With the debt machine broken, the government will simply be unable to service its debt and fund all its mandated entitlements and other programs. It will be insolvent.

By Charles Smith

Middle Class: big trouble (long post)

2009-02-06T23:26:00.000-08:00

I found it interesting that President Obama has already identified the pressing need to rescue the middle class. Without a middle class, then government ceases to exist, because from the Roman Empire to the present, it is the middle class which pays the bulk of the taxes. The wealthy find waivers and exceptions via corruption and guile, while the poor pay little or nothing but extract much.

I am wondering if the American middle class is crumbling for structural reasons even beyond taxation and government-sponsored degradation of the currency. As destructive as those forces most certainly are, I wonder if the "de-scaling" of the U.S. economy isn't the larger factor.

By "de-scaling" I mean the loss of large organizations capable of generating office towers full of people profitably manipulating information. Simply put: small businesses have no need for HR (human resources) managers, facilitators, project managers, coordinators, assistants to the second vice president of marketing, etc.

The entire edifice of "middle class jobs" depends on large-scale enterprises in need of massive bureaucratic management. The smaller the enterprise, the more actual productive work is done by everyone and the less essentially unproductive "managerial" and "reporting" work is done by anyone.

If we boil down management to its essence, it is this: trying to get recalcitrant workers to do their jobs efficiently while putting the best possible face on things to superiors via reports, meetings, balance sheets, etc.

But all this management requires stupendous sums of money to support. Interestingly, as the Roman Empire lost its grip, its many edicts to the crumbling provinces were largely ignored; without an Imperial presence to track and punish slackers and corrupt officials, then all the reports, demands and communications were essentially one-way: ignored.

Basking in the afterglow of 25 years of prosperity (as bogus as it might have been), we have perhaps forgotten that huge enterprises with all the layers of management beloved by business schools have vanished without a trace: DEC and Wang, to name but two.

In previous recessions, as corporations lost money, they were forced to either strip out layers of management via ESSA--eliminate, simplify, standardize and automate--or go under. It is now widely held that U.S. corporations are "lean and mean" after all this "flattening" of management, but for every reduction in overhead costs a new one has popped up: for instance, Sarbanes-Oxley (SOX), a vast system of costly reporting which was supposed to collar corporate malfeasance.

Instead, the greatest thievery has occured under the nose of SOX. It is in effect a gigantic unproductive tax on large enterprises.

Other regulatory "reporting" systems also exact a staggering toll on private enterprises, and most of it is never questioned: it is truly useful? Now that thousands of jobs depend on it, there is bureaucratic resistance to any trimming of regulatory reporting.

One way to get out from underneath such onerous bureaucratic systems is to leave the country or shut down all but a skeleton crew. Those with no understanding of private enterprise bemoan the loss of "good-paying American jobs" without looking at what it costs to maintain the overhead of the enterprise, never mind its actual production costs.

In general, if you want to pay an employee $50,000, the position will cost at least another $50,000 in overhead. To actually make a profit, the company needs to get $150,000 of value out of the employee whose salary is $50,000.

Thus a reduction in sales will quickly lead to the need to shed not just the salary but all the overhead costs: the medical insurance, the reporting, accounting, etc.

The Federal Government, of course, has no need to turn a profit, and being able to borrow or print unlimited sums of money gives it elbow room no other enterprise can afford. In other words, the regulators and edict-givers can continue to grow even as their tax base shrivels.

We are fast approaching the point, in my view, where global corporations will have only "show" staffs in the U.S. because there is simply no way to make a profit in a global Depression with a high-cost U.S. workforce and regulatory structure to serve.

Goliaths like IBM already have more non-U.S. employees than U.S. based employees, and there is absolutely nothing on the horizon to suggest this trend will reverse: as the government raises the cost of overhead with ever more edicts and regulations and taxes, the pressure to leave the U.S. entirely only increases.

We would do well to recall that businesses of all scales must make a profit; losses will eventually take them down. The higher their overhead, the more likely their demise.

On the other end of the scale, small businesses are like the provinces of the crumbling Empire: they mostly ignore the Imperial edicts because they have no choice financially but to do so.

This is the essence of why I have predicted the blossoming of the informal economy: once the costs of a "legitimate business" with all its reporting, overhead and taxes becomes too high to bear, the entrepreneur has no choice but to slip beneath the radar and work out of his/her home/garage.

The government, of course, will attempt to seek out and punish these miscreants, demanding they pay fines, licensing fees, meet various regulatory codes, etc. But an interesting feedback loop is now in play: the more government squeezes business via higher fees and taxes, the more business owners will simply give up/be driven bankrupt.

To reiterate: the higher the overhead burden, the likelier the bankruptcy. Once the overhead reaches a certain level, cutting staff isn't enough to bring expenses down to match shrinking revenues: as absurd as it sounds, the enterprise could lay off every single worker and still have expenses above revenues due to fixed overhead costs.

As these once-prosperous business close, the government collects less tax, and at least at the local level, eventually this loss of revenue crimps their ability to chase down those who have slid into the informal economy.

You see where this leads. At the global-enterprise scale, corporations will continue to downsize costly, high overhead U.S. offices and staff in favor of lower-cost, lower overhead workforces elsewhere. At the other end of the scale, small businesses will disappear by the tens of thousands, and entrepreneurs who once paid huge sums of rent, taxes, medical insurance, fees, etc. will no longer be paying anything but their own living expenses.

At some point, local government will have to face the reality that their expenses will have to be aligned with diminished revenues. The city of New York has some 330,000 employees (if I recall correctly). Perhaps the economy of the city can only support 250,000. Now the city can attempt, like the Roman Empire, to raise more revenues by taxing the remaining middle class.

But given that small business already faces very high overhead costs, the proper metaphor is a rowboat so heavily loaded that the waves are already lapping over its gunwales. It won't take much more weight to sink it, and right now we see local government desperately shoveling more weight into everyone's sinking rowboat: higher sales taxes, higher fees, and ever more edicts and penalties.

Is there any recognition that higher sales taxes, fees and taxes are not exactly incentives to buy more or start new businesses? Apparently not.

So what happens to "middle class jobs" as private enterprise is de-scaled at both the global-enterprise and small-business levels? They vanish. And as tax revenues plummet in a never-ending down-spiral, then local and state governments will face the same constraints as private enterprise: something has to give, and it can't be the guys and gals picking up the trash every week. It has to be the private drivers of the police captains, and all the other layers of essentially unproductive labor on the public payroll.

Sadly, there is little evidence that we recognize the danger of taxing and regulating the productive middle class out of existence. Instead, all the feedback loops are in place to hasten its crumbling.

Bailouts and the future

2009-01-27T23:18:00.000-08:00

The federal government -- that is, you and I and every other taxpayer -- has taken ownership of giant home mortgagors Fannie and Freddie, which are by now basket cases. We've also put hundreds of millions into Wall Street banks, which are still flowing red ink and seem everyday to be in worse shape. We've bailed out the giant insurer AIG, which is failing. We've given GM and Chrysler the first installments of what are likely to turn into big bailouts. It's hard to find anyone who will place a big bet on the future of these two.

It gets worse. While Washington debates TARP II, the Federal Reserve Board continues to buy or guarantee or provide loans for a vast and growing pile of questionable financial and corporate assets, much of which are likely to be worth far less than the Fed has paid or guaranteed or accepted as collateral. We're talking big money here -- so far over $2.4 trillion. (The entire TARP -- parts I and II -- in combination with the proposed stimulus package come to just over $1.5 trillion.)

Taxpayers are on the hook for this Fed bailout money, too, of course. We have to pay the interest on the ever-growing debt used to make these payments or guarantees and loans. Yet while TARP II and the upcoming stimulus package are receiving a great deal of attention, this much larger public commitment by the Fed is not. That's partly because the media doesn't much of understand it, but also because the Fed is doing it in secret, using provisions of its charter never before utilized, and avoiding discussion before the full Board of Governors for fear such meetings would be subject to the Freedom of Information Act.

Put it all together and at this rate, the government -- that is, taxpayers -- will own much of the housing, auto, and financial sectors of the economy, those sectors that are failing fastest.

Madoff: taxpayer scam nobody is talking about

2009-01-02T23:32:00.000-08:00

Madoff pulls the wool over everyones' eyes.

In a brilliant piece of detective work and logic reasoning, writer Muhammad Rafeeq has exposed what Madoff is really at by pleading guilty to the $50 billion so called fraud.

Rafeeq worked for many years in large investment firms and knows how the system works. On reading that banks like HSBC and Santander and others have lost billions, he says there is absolute no way that these banks would commit money to a single institute like Madoff without an extensive history of accounts going back at least 3 years and investigation and analysis of the investment model, assets and other data. There are teams of specialists in these banks to do this all the time.

Rafeeq suggests that Madoff fund simply went bust in which case the investors would not be entitled to get any money back. But by claiming it is a fraud and Madoff has pleaded guilty, and the state accepts it, it means all the so called defrauded investors are entitled to be fully compensated under the US government's financial fraud protection scheme.

In this brilliant article Rafeeq brings to the fore what any of us should know as obvious if we think about it and Madoff has deceived us all twice. There is no way that so many people and so many institutes, banks and pension funds would have invested billions with Madoff with absolutely zero oversight or prior investigation.

The more likely scenario is that is hedge fund went bust as are up to 30% of hedge funds are expected to do so. But by pleading guilty, the entire corrupt and criminal system has gone along with his deceit and accepted. It means that the tax payer will ultimately be bailing out these losses. Expect more "frauds" like Madoff to be come to light and the CEOs to strangely plead guilty because they now all want to get on the bailout gravy train.

Here's some choice quotes from the article: The first caught his attention

....So a truly heartwarming confession. And it was apparently made to his 2 sons, both of whom who worked for the fund and who had absolutely no idea that this fraud was being perpetrated, until such time as this astounding confession.

But then I started to look more closely at the mix of investors who have lost money. About half of them are professional investing institutions....
...Spanish bank Santander had £2.1billion of client money with Madoff. HSBC has admitted to lending about £600million to funds who wanted to use debt to gear up their positions with Madoff.

Then the dots begin to join...

I have acted as a professional consultant to major EC and US financial institutions on corporate and institutional credit risk and the idea that anyone in HSBC or Santander could authorise large investment without the internal checks and controls being employed is almost impossible. To try and believe that EVERY institution that invested in Madoff circumvented their internal control procedures IS impossible. ....
....
When the credit committee are called together to review an application, everything is ready prepared for them ..... ..... the lower levels of credit approval process will have prepared a summary of all the application documentation, included in the meeting bundle, with the strengths, weaknesses, and other important credit risk points. This application will usually contain a set of audited accounts going back a minimum of 3 years and most likely 5 years. There will be a full credit breakdown of the investment profile of the business, Madoff's hedge fund, looking at how the fund obtains its returns; investment assets and investment methodology. After the committee is satisfied that all the issues and concerns have been addressed they will vote on the approval or otherwise.

The article provides even more compelling evidence....

So why plead guilty? The answer is simple. Look on the net and you will see that because this case is being labelled a fraud, it would appear that investors are going to be able to claim their investment back under the US government's financial fraud protection scheme. A judge has already given his approval in principle for compensation, without any evidence having been presented and financial fraud being demonstrated in a court of law. And it would appear that there will never be such a demonstration in a court of law. Why? It would appear that all the funds financial records are mostly "missing" (rather like Dov Zakheim's US$1.4tn) and those few records that do survive are in a terrible mess.

However, since the guy has pleaded guilty we do not need to demonstrate the fraud, because he says he is guilty.

And look further on the net and you will see that these "victims" have also been told by the US tax authorities that they will probably also be entitled to claim back some taxes on these defrauded sums.

Rather than saying this hedge fund has gone bust, due to its choice of investment assets and investment methologies, a scenario which is highly probable in the current financial paradigm, since all the professionals are predicting that at least 30% of all hedge funds are about to fail, more than 700 of them, the CEO chooses to fess up to fraud. If the CEO admits the fund has gone bust, then all those wealthy members of the Jewish community get nothing, but if the CEO admits to fraud they get their money back as compensation from the US tax payer, just as they are also drawing money back from the tax payers with the other hand.

The lesson to learn from this article and relatively simple logical reasoning about the facts of the case is how shallow all the other coverage has been and how easily the public even in a huge swindle like this is distracted from the key kernel of truth that common sense thinking about the facts demonstrate.

It should also be quite clear that all the investors and institutes that will get their money back, know that Madoff is falsely pleading guilty and carrying out a fraud by pretending it to be a fraud. Thus they are essentially parties to the crime too.

The informal economy: how to make it

2008-12-30T22:17:00.000-08:00

As small businesses close their doors and corporations lay off thousands, the unemployed will of necessity shift their focus from finding a new formal job (essentially impossible for most) to fashioning a livelihood in the informal economy.

One example of the informal economy is online businesses--people who make a living selling used items on eBay and other venues. Such businesses can be operated at home and do not require storefronts, rent to commercial landlords, employees, etc., and because they don't require a formal presence then they also fly beneath all the government junk fees imposed on formal businesses.

I have mentioned such informal businesses recently, and the easiest way to grasp the range of possibilities is this: whatever someone did formally, they can do informally.

Chef had a high fixed-cost restaurant which bankrupted him/her? Now he/she prepares meals at home and delivers them to neighbors/old customers for cash. No restaurant, no skyhigh rent, no employees, no payroll taxes, no business licenses, inspection fees, no sales tax, etc. Every dime beyond the cost of food and utilities to prepare the meals stays in Chef's pocket rather than going to the commercial landlords and local government via taxes and fees.

All the customers who couldn't afford $30 meals at the restaurant can afford $10. Everybody wins except commercial landlords (soon to be bankrupt) and local government (soon to be insolvent). How can you bankrupt all the businesses and not go bankrupt yourself?

As long as Chef reports net income on Schedule C, he/she is good to go with Federal and State tax authorities.

Now run the same scenario for mechanics, accountants, therapists, even auto sales--just rent a house with a big yard or an apartment with a big parking lot and away you go; the savvy entrepreneur who moves his/her inventory can stock a few vehicles at a time. No need for a huge lot, high overhead, employees or junk fees. It's cash and carry.

Lumber yard? Come to my backyard lot. Whatever I don't have I can order from a jobber and have delivered to your site.

This is the result of raising the fixed costs of starting and running a small business to such a backbreaking level that few formal businesses can survive.

One example of hundreds/thousands: 20 years ago I paid about $200 for a building permit for a $40,000 starter home. (Not in California, in Hawaii.) Locally in California you pay $350 just to have a staffer "review" your plans--even for a modest bathroom renovation. If they reject your plan for some reason, you still pay the fee. If they approve your project, the permit is much, much more. Oh, and they charge you for the electrical and plumbing permits, too.

Yes, I understand the movement to charge end users of government services; those who use the services should pay. Fair enough. But then what's happening to the 8.5% sales tax we pay, the $10,000 property taxes we pay, and the hundreds or thousands in other fees and income taxes we pay? Why don't those taxes go down if end users are picking up the tabs for "government services"?

Why have state and local government budgets all climbed by 30%-50% in a mere decade?

In a way, it doesn't matter; very few can operate a formal business profitably, and so they close their doors and scrape up a living in the informal cash economy. Local government will see its revenues wither and eventually insolvency will force a radical re-thinking of government revenues, expenses and services.

Until then, watch for the informal economy to grow and the formal economy to wither.

Until recently, the "growth sectors" of the U.S. economy were government and healthcare a.k.a. sick-care. As tax revenues plummet, then all government hiring below the Federal level will reverse into lay-offs. As for healthcare: as formal employment declines, so too will the funds flowing into insurance and healthcare via employers. As employers go belly up, the torrent of money flowing into healthcare will dry up.

Never mind that people want and need care; they can't afford $50,000 for tests and a few visits, or $120,000 for a procedure. Once employers stop paying premiums, then the healthcare industry will find its non-Medicaid/Medicare revenues declining. The future in healthcare is cash and carry, too; few recognize that yet, but more will as the formal economy continues down its high-fixed cost/debt-implosion death-spiral.

Those who survived the collapse of the Soviet Empire have experience with informal economies. Many of you have heard of Dmitri Orlov's Reinventing Collapse: The Soviet Example and American Prospects . We turn now to correspondent A.C.'s commentary on the informal economy in Eastern Europe after the Iron Curtain fell. (A.C. was responding to a previous entry.

From Charles Smith

Job cuts: the vicious cycle

2008-11-19T17:09:00.000-08:00

Every business in the nation is trying to cut back on their overhead. The easiest and quickest way to do this is to fire as many employees as possible. These unemployed reduce their expenses by cutting back on shopping and anything they can do without. The vicious circle is on. As consumers cut back, industry suffers and in turn tries to eliminate more employees. This is the death spiral that can lead to depression. I think it's starting to happen.

The quest for physical gold continues. I was told this morning that some dealers are now adding an 80 dollar premium over the gold price for gold coins (if you can find any coins). Yet the hedge funds, who are receiving redemptions, continue to be sellers of "paper gold" (GLD) in order to raise cash, thus holding the price of gold down.

The Selling Pressure Index is at new highs for the bear market, and the Buying Power Index is at new lows. This is obviously a bearish combination.

The primary bear market was re-confirmed today. The direction of the market is to lower levels.

From: DTheory

Obama and taxing the rich

2008-11-06T17:51:00.000-08:00

Welcome to Wall Street, Mr. Obama. What you're seeing is an 915 point down-Dow salute. You say you're going to raise taxes and spread the wealth from the rich to the poor? You're going to be a modern Robin Hood? I don't think the markets are going to like your plan. In fact, I'm damn sure they don't. You see, the markets aren't concerned with racial progress. The markets are interested in possible future prosperity, and they don't give a hoot about a new president who talks about distributing the wealth, assuming that there is any wealth.

Your prize, Mr. Future President is a full minus 8 on my PTI and (gulp) what looks like a second 90% down-day in a row. Wow, talk about a NYSE cheer, you're seeing it, Mr. Obama. And today, the VIX was up 9.12 points to close at 63.68. Ye gads, it looks like tomorrow is going to be a wild one. I thought the market might test the lows, and it looks like it's going to happen.

From: RR

San Francisco: 2nd best place to invest

2008-10-30T16:10:00.001-07:00

If you're a homeowner seeing property values plummet, look to the commercial real estate market for solace. It might tell you which areas will recover fastest--and which will likely remain weak.

The Urban Land Institute recently asked 700 real estate professionals to name the best (and worst) places to invest in commercial real estate in the coming year. Those surveyed included private developers, Realtors and Real Estate Investment Trust executives. Their answers also apply to the residential market, since the single-family-home sector typically follows the economy. As wages go up and there are more jobs, more people can buy homes, pushing prices up.

The best cities in which to invest are those that are considered gateways to international investment, have vital downtowns where people can forgo cars, and don't have a glut of condos or office space.

These traits landed Seattle the No. 1 spot on the list. No city scored above a 6.15 on a scale of one to nine (one being an abysmal place to invest and nine being excellent).

Seattle is "a diversified market, has a good base of business and is becoming a 24-hour city," says Stephen Blank, senior resident fellow, finance, of the Urban Land Institute. "It's going to be in a good position to come back."

San Francisco comes in second with a 6.12. The City by the Bay learned from the tech crash of 2001 not to overbuild. There is a reasonable supply of office and apartment space, which should limit vacancies. San Francisco's port is also expected to help the city during the downturn as Americans continue to rely on Asian imports.

2008-10-27T19:41:00.000-07:00

Question -- When is a house a bargain?

Answer -- The formula I've always used is that when you buy a house it costs you 10% a year of the price to carry that house -- which includes mortgage payment and loss of income, insurance, taxes,, repairs, etc. A house is a bargain when you can buy a house and rent it out and cover all expenses with your rent. In other words, your rent income per year should be 10% of the cost of your house.

That's the way it worked during the Great Depression. My dad, who was a top real estate man and I would go over hundreds of "breakdowns" and in those days there were any number of deals where you could buy a house in NYC that was only half rented out, and you could make money on that house. The problem was that everyone was scared to part with their money, and nobody wanted to "do deals."

There was one large hotel in Manhattan that my father wanted to buy. The hotel bar alone was covering the cost of buying the hotel. My father went to many financiers trying to borrow the money to buy that hotel. Nobody was willing to put up the money on that fabulous deal. Confidence in the future was zero. If you had any money, you hung on to it like grim death.

Are houses today anywhere near the bargain prices that existed during the Great Depression. I'm afraid the answer is "no, not by a long shot." Can housing decline that far? The answer is in human emotions and confidence, how low will it go? In this market nothing will surprise me.

What is the VIX.

The VIX (often called the "fear index") closed Friday over 70. What is the VIX? It is a measure of volatility and a sentiment indicator.

What is volatility? Some define it as the possible rate and magnitude of change in price. When prices are calm and tend to have an upward bias, volatility is low and traders feel bullish.

Conversely, when the market sells off strongly, anxiety among investors tends to rise. Traders rush to buy puts, which in turn pushes the price of these options higher. The increased amount investors are willing to pay for put options shows up in higher readings on the VIX. High readings typically represent a fearful marketplace. Paradoxically, an oversold market that is filled with fear is apt to turn and head higher.

From: DowTheory

90% down day in stocks: 2 days in a row

2008-10-07T21:51:00.001-07:00

Almost behond belief, today was a second day in a row in which a 90% down-day was produced. The stock market appears to be in full panic mode.

The market, bigger than Putin -- Bloomberg -- Russia halted stock trading for the second day after a record 19% rout, with its exchanges at their lowest level in three years. European stocks and US index futures advanced while Asian shares pared declines today after Australia's bigger-than-expected 1% interest-rate reduction ignited speculation other central banks will also cut borrowing costs to cushion their economies. Russell Comment -- I expect a half percent cut in Fed Funds from the Fed and soon.

Yesterday was another 90% down day, which produced the mind-blowing number of 1973 new lows on the NYSE. In other words, an incredible 59% of all the stocks traded on the NYSE yesterday broke to new lows. This was by far the worst performance I've ever seen on the NYSE. Because 90% down-days are usually followed by 2 to 7 days of "bounce" (rallies), we might expect such action for the rest of the week. But a rally here would not mean that much, it would be just be typical action following a 90% downside day.

Fear and panic is starting to spread across Wall Street, Main Street and the world. Most investors have never seen market action like what we're seeing now. This is real bear market action such as we've not seen since 1973-74. I expect this downtrend to end with an all-out panic-type crash. That would clear the air and serve to reduce the huge inventory of stock for sale. When the store of "stock for sale" is emptied out, we will be close to the time when the institutional bargain hunters are ready to re-enter the market. That action will be characterized by a 90% up-day.

Unfortunately, all the current action is taking place below the halfway level of the 2002 to 2007 advance. Thus, the 50% Principle has been activated, and it's conceivable that the Dow will decline close to or at the level of the 2002 low (which was 7286). What I'm saying is that it's been my experience these big bear market declines tend to go further on the downside than most people are prepared for, just as the great bull market of 2002-2007 climbed further than most people thought possible. The 50% Principle is in no way part of classic Dow Theory, but I follow it because it has proved useful -- George Schaefer used it with great success during the 1950s.

I've suggested over and over that subscribers move to cash (T-bills and T-notes) and gold bullion. As for gold, I prefer one-ounce gold coins held in your possession in your bank vault. I prefer the actual possession of gold to a piece of paper stating that you own a certain number of ounces of gold. I do not expect the US government (as per 1933) to call in all privately-held gold, but it would not surprise me to see the US government halt all trading in gold.

Why would the government do that? Gold is the enemy of fiat paper, and the Fed is going to print one hell of a lot of Federal Reserve Notes. The coming deficits will be staggering, and ultimately our overseas creditors may insist on partaking of our gold hoard (as did DeGaulle) rather than accepting an endless amount of fiat paper, which can be created "out of thin air" by the Federal Reserve. I see a coming battle of fiat paper vs. gold in the future, and gold (real Constitutional money) will be the winner.

I can tell you that it's going to take a series of trillion-dollar budget deficits plus enormous government spending programs as the Fed attempts to turn the contracting US economy around. Mr. Bernanke fears potential deflation like the plague -- the Fed can halt inflation in its tracks (remember Volcker?), but once deflation takes over, deflation is extremely difficult to reverse. Russell suggestion -- We must start a huge rebuilding program (as per the Depression) to repair the crumbling infrastructure of the US -- highways, bridges, buildings, city streets, with a strict overseeing board to rout out corruption.

Currently, the US government attacks its citizens via two phenomena -- taxes and inflation. We must get rid of the Fed, the engine of inflation.

You doubt that deflation has crept into the US economy? Then please study the chart below -- this is the CRB Commodity Index, and it's currently plunging.

Crash

2008-09-29T18:24:00.000-07:00

"Shifting debt from the financials to the government won't bail out this stagnant supertanker, and I fear that will be the subsequent sentiment when the bailout bill is passed." Ned Davis of Ned Davis Research.

I watched the Obama-McCain debate. The two spent much of the time talking about how they were going to get rid of earmarks and about how they were going to cut way down on government spending. Neither of them get it, they just don't see the picture. Consumers are not going to be spending, they'll be cutting back. Just as corporations and businesses are cutting back on their overhead and on their spending where ever they can (much of it will be in the way of lay-offs).

If the economy is going to improve, it will be up to the government to do the spending. Governments all over the world will have to run up big deficits and increase their spending. After all, what got the US out of the Great Depression of the 1930s? It was the massive spending of World War II that finally turned the US economy to the upside. The giant war effort and related government spending put everybody to work, including millions of America's women. Jobs were plentiful. And now Obama and McCain are competing in promises to CUT government spending! Forget it. To get out of this recession, the US government will have to spend as it never has spent before, along with running trillion dollar deficits. The government will have to embark on a giant "rebuild America program." Our streets and freeways are shot, our bridges are tattered, the US government will have to engineer a massive "make work" program to rebuild America. Unfortunately, as I see it, Washington will be tempting to start another war.

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Is there anything more prescient and sophisticated than the stock market? Yes, there is, and it's the bond market. But how can we know what the bond market is thinking? There is a way -- it's called the Confidence Index (CI), which is a figure posted every week in Barron's. The CI is a ratio of the YIELDS on the highest-grade bonds and the YIELDS on medium-grade bonds. The bond market is obsessed with safety and the return of the money is considered more important than the return on their money. When the bond market feels confident, it moves toward the higher yields of the less-safe medium-grade bonds. When the bond market doesn't like what it sees ahead, it moves toward the safety and lower yields of the highest-grade bonds.

As bond buyers move to the safety of the highest-grade bonds, the CI declines. When bond buyers move to the higher and less-safe yields of medium-grade bonds, the CI rises.

Below are some CI numbers along with the dates. Many years ago the CI had a wide following. The old formula we used was that the CI projects the stock market trend two to four months into the future.

2007 --
May 25 - 87.1 -- A high CI number showing great confidence.
June 29 - 86.4 -- Confidence slipping.
July 27 - 82.8 -- Confidence still declining.
August 31 - 83.6
Sept. 28 - 85.0
Oct. 26 - 81.8 -- Getting worse.
Nov. 30 - 78.7 -- Dropping below 80, a bad sign.

2008 --
Jan. 25 - 76.1 -- The ominous declining trend of the CI continues.
Feb. 29 - 74.0
Mar. 28 - 72.3 -- New low in the CI.
April 23 - 73.8
May 20 - 75.0
June 22 - 72.6
July 25 - 71.6 -- Another low -- no comment needed; danger flashing.
Aug. 29 - 68.5 -- Under 70 often signals a recession.
Sept. 19 - 74.1 -- A slight improvement.
Sept. 26 - 69.3 -- This is the latest statistic, and it's an ominous new low. The bond market is still opting for the highest-grade bonds and thereby willing to sacrifice yields. On the latest numbers, the bond market is "saying" that the economy will be worse in the period of two to four months ahead. This is a caution signal for all buyers of stocks.
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Gold -- European banks have reduced their sales of gold to the lowest levels in a decade. Much of the selling by European banks took place between October and December, last year (from today's Financial Times).

Below a chart of three years of weekly gold. Gold has climbed back above its (blue) 50-week moving average, and RSI is above 50 and is trending up. At the bottom of the chart MACD is about to turn up, and the histograms are approaching zero. The Full Stochastic at the very bottom of the chart is moving up and oversold bottom and appear to be heading up.

On top of everything else, down volume, as I write is 94% of up + down volume, meaning that today could be another 90% down-day. Goldman is down over 18 points, Morgan is selling at 20.94, GM is selling at 8.99, all in all, a ghastly day. There's a hard rain a'comin'. Start cutting expenses and try to save.

From: DOWtheory

More on the market

2008-09-18T22:12:00.000-07:00

September 18, 2008 -- When the ratio rises, gold is out-performing the gold miner shares. The disconnect between gold and gold mining stocks may be over. Yesterday, for a change, the shares actually did better percentage-wise than the metal, which is why you see the ratio dropping at the end of the chart line. My only objection to owning the leveraged gold mining shares over bullion is that the gold shares are stocks, and in a rotten general market those who own the gold shares are tempted to throw their gold shares in with the rest of the falling common stocks. Which is what has been happening since last July. Of course, the purest play is actually owning the metal via gold coins in your possession. The gold mining shares are valued on many factors other than the price of gold. Of course, you can ascribe all of above to my own bias in favor of bullion.

Lowry's ominously reports that since this decline began, there have been a total of nineteen 90% down-days, the most of any period in the 75 year history of the Lowry's studies. I see this as massive distribution of stocks, and the implications of this are not pretty. Why have large sophisticated interests been so anxious to unload stocks, many times on rallies? We'll know the answer to this question in the fullness of time. I can't come up with the exact reason, but the action is hardly comforting.

The national debt of the US is now compounding negatively. No currency can hold up in the face of our over-spending and rapidly compounding national debt. Speaking of money, the Fed over a two day period injected over $120 billion into the US banking system. Just this morning it was announced that the Fed would quadruple the amount of dollars central banks around the world can auction to close to $250 billion "to address the continued elevated pressures in US dollar short-term funding markets." Central banks around the globe are flooding their banking systems with much-needed liquidity, and of course, gold is taking note of this trend as the net total of fiat currencies around the world surges.

This is global inflation.

In the end, gold conquers all. Back in July 1999, the Dow would buy 44 ounces of gold. Things change -- as of yesterday (see chart below) the Dow would only buy 12.62 ounces of gold. Since 1999, the Dow has lost 71% of its value in terms of gold. I expect this ratio to decline to 5 or below, before the next few years are over.

Many ignorant gold detractors claim that "gold is just another commodity". Really? The chart below shows the ratio of gold to the CRB Commodity Index. Just another commodity? Then why is gold surging while world commodity prices are falling?

The VIX was down 3.12 to 33.10.

From another standpoint, the "external market" looked deceptively good today with the Dow up 410.03 and Transports up 182. But the "internal market" didn't cut it --with up volume only 57.4% of up + down volume -- we're looking for a 90 percent upside day -- and today was far from that. So we wait for the hoped-for 90% upside day. Today there were 72 new highs and a fat 1041 new lows --33531 stocks were traded on the NYSE so a large 29.4% of all stocks traded today hit new lows, hardly a healthy showing. With crossed fingers, we wait for that elusive 90% up-day.

From: DowTheory

The Economy: stock market

2008-09-17T17:41:00.001-07:00

The U.S. government took control of American International Group, Inc. in an $85 billion bailout to prevent the bankruptcy of the nation's biggest insurer and the worst financial collapse in history.

Time zones -- In the past, September and October have seen some costly market action on the NYSE, but at the same time many bear markets have ended in the September-October zone. I was around in 1949 after the fierce bear market that began in 1946 topped out. The Averages hit their lows in December of 1947, and by mid 1949 a great bull market was born.

Then there was the 1957 mess. The Dow hit its low in October, and by December the Rails hit their low. In 1958 it was all up and away for the market.

Next, I lived through the 1973-74 horror show. The Averages hit their God-awful lows in the October-December period, and from there it was higher and higher.

In 1980 the lows were recorded in March-April, and again in 1982 late-July and early-August saw the blessed lows. So each big downer is different and each one dies in its own way. Let's hope that the current down-leg dies in the next several months as so many have before. I've learned never to depend on an exact repeat where the market is concerned, but these last couple of months of the year have me on my guard.

Yesterday I wrote that I was afraid that the next phase of the economy would be a cut-back by US consumer in their spending. This usually starts with a cut in discretionary spending, eliminating the easy stuff, movies, restaurants, expensive clothes, jewelry. The chart below of the consumer discretionary spending ETF shows signs of topping out on a daily basis.

The next phase after a drop-off in discretionary spending is a general cut-back by consumers at all retail outlets. And here we see the retail ETF also looking toppy. It's been years since Americans have actually cut back on their spending. As I've said before, the current two generations are the only two in US history that have never seen hard times. Anyone under 50 in the US has never had to deal with hard times. This probably explains why Americans are so blase about the current awful stock market action. Do you know anyone who is now sitting in 100% cash? Do you know anyone who has a collection of bullion gold coins? Most Americans have never seen a one-ounce gold coin.

Good Lord, what have they done to the Wall Street I grew up with and loved? First there was Merrill, Lynch, Pierce, Fenner and Bean, and there was Lehman Brothers, and Goldman Sachs and Morgan Stanley. Lehman and Merrill didn't make it, and now we have only two masters of the universe -- Goldman and Morgan. Charts are below. Will they make it or will there be none? Hmmm, I don't like the looks of these two charts. Give my regards to Wall Street, the street is looking rather bare. Will Wall Street go the way of 52nd Street, the lost home of jazz in New York? Hey, I'm not going back to Manhattan, I'm saying out on the West Coast where it's safe.

Below, a daily chart of Goldman.

And Morgan Stanley.

Question -- I note that lately you've been emphasizing gold coins above all other forms of gold. Why?

Answer -- You may think my answer is silly. People don't tend to trade their coins. When gold goes through one of its vicious corrections, my experience from the 1970s is that many subscribers panic and sell their gold. I don't know of a case where a frightened subscriber wrapped up his gold coins and hauled them over to his coin dealer to sell them. It just doesn't seem to happen. People seem to become too attached to their beautiful gold coins. Then, when gold turns around and heads higher, the coin-holders remain IN THE GAME. That's the simple reason why I suggest that subscribers hold gold coins. They just don't sell them!
....................................................................................................................
I'm beginning to hate that meaningless phrase, " Taxpayers money." It's ALL taxpayer's money. How is it that nobody ever mentioned the multi-billions the US spent on the war in Iraq, who's money was that if it wasn't taxpayer's money?

Hey, do you really want to know about taxpayer's money and taxpayer's debts? The national debt of the US is now $9.671 trillion. The annual interest on this debt in fiscal year 2008 will be $500 billion. US taxpayers are paying the ever-increasing annual cost of carrying this debt including money borrowed from Social Security. Cost of carrying the national debt since September 28, 2007 is $1.93 billion a day, and the nation is now in recession. Yet, in the last 36 years the US Dollar has lost 80% of its value. In the year 2007 if you had bought goods costing one dollar, back in 1971 those same goods would have cost you twenty cents. (I well remember the ten cent loaf of bread, and the nickel subway or ferry ride in the NYC of my youth -- figures above courtesy of Ed Reinke.)

All the above is why I continue to hold those shiny one-ounce gold coins. What will they be worth in ten years? What will the dollar buy in ten years?

Gold opened this morning up over fifty dollars to above 830 (Dec. gold). This tells me that the next crisis will be in the dollar. Gold is the safe haven for a deteriorating dollar.

Question -- Do have a bias as to which way the stock market works out? Are you completely subjective and neutral?

Answer -- Of course I have a bias as to the US and its outcome -- I put my life on the line for my country. I have five kids. The last thing I want to see is this country falling apart at the seams. Is that answer enough?

This market has the soul of a murderer. I said this before. Just when all the smart money has moved out of stocks and is in the "safe haven of US dollars," there'll be a run on the dollar. Surging gold represents a run on the dollar. Buyers are getting rid of dollars as they buy gold, which is what we saw today. How do I know if there's a true run on the dollar? Watch the bonds, they'll be falling out of bed.

The VIX was up 5.85 to 36.15.

LATE NOTES: Today there were only 12 new highs and 1018 new lows. 3312 stocks were traded today, which means that almost one-third of all the stocks traded today hit new lows -- a ghastly performance. Lowy's reports that today may have qualified as a 90% down day. I ask myself, will the Dow decline to the point where it yields a classic 6%.? I certainly hope not, but I'm ready for anything.

There are those who have made fun of the so-called crazy "gold-bugs." These are the people, many are my subscribers, who have held on to their gold like the bite of an angry pitbull. The last man standing will be he who owns gold. When all is lost, gold will still be the island of indestructible wealth.

What you read here I don't think you will read anywhere else. Feel free to send a copy of today's site to family members and friends, and even to your broker with the blessing of this old veteran.

50% Principle finally turns bearish.

Sadly, I must report that the Dow closed today down 449 points at 10609.66 -- a tragic close. This takes the Dow below 10725, which is the halfway level of the entire rise from the Dow 2002 low to the 2007 Dow high. The great stock market balance has finally tipped over to the downside, and the extent of the potential market losses ahead are now unknown. I was hoping that the downside of the Dow could be confined to the area above 10725, but this was not to be. I now urge subscribers to move as far as possible into cash and T-bills with a balance against catastrophe via gold coins.

I just spoke to my coin dealer, who told me that he is able to get sporadic groups of American Eagles, but Krugerrands are "off the market" and where available are selling at huge premiums. He can obtain Canadian Maple Leafs and in rare cases odd lots of various gold coins. The US mint is out of Eagles.

December gold closed today up 70 dollars to 850.50. Shades of 1979, and subscribers who were with me in the '70s know what I mean.

Scoreboard --- Markets - Percentage of Change for this year
Index 2008
Dow Industrials -16.6%
Mumbai -33.4%
Toronto -11.6%
Singapore -29.0%
Stockholm -25.2%
Sydney -25.3%
Frankfurt -26.1%
Paris -27.2%
Milan -30.4%
Johan. (Comp.) -13.7%
Zurich -18.0%
Brussels -30.3%
London -22.2%
Amsterdam -28.0%
Mexico City -16.7%
Japan (Nikkei) -24.2%
Hong Kong -34.2%
Seoul -26.9%
Shanghai B -65.9%

Lehman crashing a shocking 6.36 points: almost a 50% drop.

2008-09-09T22:53:00.000-07:00

There's nothing scarier than a market that goes steadily lower with no obvious reason and no news. Today was a weakish down-day with down volume only 46% of up + down volume, far from a 90% downday. This time Transports joined the Dow in breaking preceding lows, so the downside is in harmony with both D-J Averages, no non-confirmations here. The volume leaders today included many large banks and financials with Lehman crashing a shocking 6.36 points to 7.79, almost a 50% drop. That's enough to scare even the staunchest bull. And where it ends, nobody knows.

Where's the damn outrage? -- The two CEOs who were relieved of their duties at Fannie and Freddie, as I understand it, received parting gifts of $9 million and $14 million. Disgusting! And what about the CEO's of all the big banks and the 219 local banks on the "watch list." They allowed their banks to buy so many toxic bonds that when the bonds were priced to market, the banks were seen to be under water. What happens to all these moron CEOs? Do they get kicked out with gifts of millions too? Where's the responsibility? Where's the justice? Where's the outrage? Why aren't charges brought against these fakers who got away with super-stupidity and derelictions of duty? Why are they receiving millions as they are kicked out of office? Disgusting, shameful, ugly! And there's no outrage.

The economy: not looking good

2008-08-13T22:48:00.000-07:00

We've recently seen the greatest expansion of credit in history. It was a product of Asian and Mid-Eastern countries holding down the value of their currency by creating more of their own money and buying dollars. The Fed got into the act in 2003 when it held down Fed Funds to 1% for month after month. It was a wild expansion of money and credit. Now the party is over.

The US and the economies of the free world run on credit. In the US it now takes six dollars in credit to produce one dollar in Gross National Product. Maybe the biggest problem today is that the banking system has become so traumatized that it is restricting credit. Today "nobody can get a loan," the complete opposite of the situation which existed prior to the housing bust. The danger -- constricting credit will impact heavily on the nation's GDP. If that happens, say hello to a blistering recession.

With credit being restricted, a second and very serious danger surfaces. That danger is asset deflation. The very thought of asset deflation sends chills of fear up Fed chief Ben Bernanke's spine. Credit contraction, asset deflation -- shades of the Great Depression.

What's the antidote for deflation? It's print, print, print. What would gold's reaction be to "print, print, print"? Gold's reaction would be -- rise, rise, rise.

I just received the latest issue (Aug. 18) of Fortune magazine. On the cover is a picture of Meredith Whitney, currently the hottest analyst in the nation (she called the credit meltdown a year ago before anyone else knew what was going on). So what's her verdict now? Here it is, fresh out of Fortune --

"Whereas her peers keep searching for some sort of light at the end of the tunnel, Whitney thinks the tunnel is about to collapse. Bank stock investors will get crushed if they jump back in now, she contends because the banks are facing much bigger credit losses than what they've reported so far. Moreover, Whitney is convinced that the economy is about to sink into an "early 1980s-style" recession that will devastate the 10% of the population that became over-extended during the housing boom. "It feels like I'm at the epicenter of the biggest financial crisis in history," says Whitney.

If the sage Meredith Whitney is correct, the market is probably fated to fall apart. That is, if the stock market has not yet discounted all the bad news she's talking about. So there's always that nagging question -- how much of the bad news has the stock market already discounted?
.......................................

Discouraging development from Lowry's -- At yesterday's close Lowry's Selling Pressure Index was at exactly its multi-year high. Major stock market lows have never in the 75-year history of Lowry's occurred within a month of a new high in the Selling Pressure Index.

The best hope for the bulls is that this market will record a final bottom in the October-November period of 2008. The further best hope is that the Dow will be able to register its final low this side of Dow 10,725.

From: DowTheory

How to recognize the "bottom of the market"

2008-07-17T22:54:00.000-07:00

(Money Magazine) -- This is already one of the worst national housing downturns in half a century. But what's really scary is that judging from the still-huge overhang of unsold homes - one of the key indicators of the market's prospects - things could get worse. In fact, much worse if the economy slips into recession.

But real estate is a local game. Your region could be in far better shape than the country as a whole. Median prices for existing single-family homes in a third of the country's metro areas are actually higher than they were a year ago, according to the National Association of Realtors.

Remember too that during the boom, regions moved at different times. Las Vegas and San Diego were among the first markets to take off. Boston spiked early as well, but not to the same degree. And Albuquerque and Portland, Ore. soared later.

This isn't to say that you'll be able to precisely time the market. But keeping track of a few key indicators will give you a general sense if a turnaround is near.

For starters, pay attention to changes in your local job market. The more new jobs created, the greater the demand for homes. Conversely, an uptick in unemployment - or a persistently weak labor market - can warn you a recovery may still be far away.

Of course, this is just one indicator. Here are the key questions to answer to determine how healthy your market is - and if it's anywhere near coming back.

Is the housing stock shrinking?

The problem in most markets today is simple: too many homes and too few buyers. Therefore, the best signposts to look for are a significant reduction in the supply of homes and a jump in sales, says Mike Larson, a real estate analyst with Weiss Research.

But getting local data on inventory and sales isn't that simple. Your local realtors association or a competent agent should be able to provide you with basic supply and sales figures, though the type of data will vary. So be sure to ask for as much as you can: monthly inventory of homes in your area, average days on the market and total number of homes for sale.

The typical inventory in a stable market is about six months' worth of houses, and homes tend to stay on the market for about 90 days.

Ideally, you'd want your market to be close to these levels. San Francisco, for instance, is slightly above it, with 6.3 months of homes for sale. But because of the local nature of housing, it's more important to see whether your region's housing stock is returning to its pre-housing-bubble levels.

As for sales, because housing is seasonal, pay attention to year-over-year growth in home sales, not monthly changes, says Joel Naroff, chief economist for Commerce Bank. In other words, see how many homes sold this August vs. last August - not July.
Are home prices falling at a slower pace?

A telltale sign of your local market starting to heal: The rate of home-price declines should start to slow.

If you start to track these figures, be patient. "You need at least three months of smaller price drops to be confident the market is really shifting, since housing numbers are really volatile and are affected a lot by the weather,".

So if you're a buyer who's looking for the best deal, wait at least that long. If you're a seller, be even more patient. That's because even if prices stabilize, they could stay low for a while. In fact, it likely will be months before prices rise again.

Is it cheaper to rent than to own?

Here's a useful back-of-the envelope calculation: Take the price of the type of home you want in your market. Now call around or ask your broker to see how much it would cost annually to rent a similar property in the same region. For example, if you can purchase a home for $540,000 but can rent a similar one for $36,000 a year, your so-called price-to-rent ratio would be 15.

In general, buying starts to look attractive when the P/R ratio is around 15 or lower, says Newport. (The current national average is 12.5.) As your market's P/R ratio falls, more sellers are likely to come into the market. So demand could pick up and help stabilize home prices.

Of course, 15 is just a ball park. For a more sophisticated analysis, see how your market's current P/R stacks up to its pre-housing-boom levels. For price-to-rent ratios for dozens of key markets, check out the table at the bottom of the page. Then, for comparison, ask local realtors and rental agencies for an estimate of prices and rents back at the start of this decade.

In Miami, for instance, the ratio jumped from 12 in 2000 to nearly 30 in six years, according to Moody's Economy.com. It has since fallen to 22, but that's nearly double what it was at the start of the decade. "That's a pretty big premium," says Larson.
Are houses more affordable?

Unless a significant percentage of households in a market can afford to buy homes there, sales won't rise. It's as simple as that. So check your region's affordability level.

The National Association of Home Builders calculates this figure - which it calls its housing opportunity index - for about 220 metro areas. The index considers a home "affordable" if no more than 28% of median family income in that area is required to pay for it.

The national average is 53.8, which means that slightly more than half of the homes purchased recently were deemed to be affordable. But again, it's not fair simply to compare local data with national averages. So if you really want to know if conditions are improving, check if your region's affordability index reading is climbing. In St. Louis, affordability has risen from 77% a year ago to 80% today.

Now there's one more indicator you might be aware of: foreclosures. The rate of foreclosures in your region is certainly one sign of the health of your market. But this is a lagging indicator. It can sometimes take six months or more from when a homeowner first defaults to foreclosure.

Also, remember that a primary reason defaults are occurring today is that home prices are tumbling. With no equity, owners cannot refinance out of unaffordable mortgages. To refinance, then, many homeowners would have to see prices not just stabilize but rise.

So "by the time foreclosures peak and start falling, the market will have already bottomed out and turned around," says Larson. In other words, buyers will have missed the sweet spot.

Money Magazine
First Published: July 15, 2008: 5:46 PM EDT

Stock market: not looking good

2008-07-04T00:00:00.000-07:00

When I got yesterday's Lowry's figures, I gasped. I've been following the Lowry's service since the '60s, and I've never seen figures like these. The spread between the Buying Power Index (demand) and the dominating Selling Pressure Index widened yesterday by 20 points (supply surged while demand sagged). The negative spread as of yesterday was 504 points. This is the greatest negative spread in the 75-year history of Lowry's.

Even at the disastrous 1974 bottom, the spread was about 265 points. Of course, volume is higher today and there are more stocks traded today; nevertheless, the Lowry's studies are telling us that this market is severely oversold, even allowing for all adjustments. And still there are no signs or hints that a great bottom has arrived. With the Dow at its lowest level since August 2006, and with the Transports finally melting, the market apparently is fated to go lower. It will continue to sink until the institutions enter the market in a major way and at last establish a bottom.
The places to be are in cash (T-bills) and gold (your choice as to what proportion of each to be in).

Why is the market heading down so persistently? I could spout for hours about the fundamentals, and you probably could too. The best answer is the simplest and most direct answer. This market continues to go down because it has not yet fully discounted the worst that lies ahead.

And what might that be? I'm not going to get into that -- you want to know how bad it can get -- turn to Noriel Roubini on the Internet or Doug Noland or John Hussman or any of a hundred well-versed bears. I deal with the market, I listen to the market. My job is the market. What I'm interested in now is what level will the market have to sink to -- before it has finally discounted the worst.

I don't think 98% of investors, and this includes professionals, have any idea of how fragile this market is, and how close the price structure is to a dramatic collapse.

Lowry's Buying index: 75 year low

2008-06-24T22:38:00.000-07:00

Yesterday's statistics show that the Lowry's Stock Buying Power Index sank to a new multi-year low while their Selling Pressure Index is only a few points from a multi-year high. The spread between the two is the widest in the 75-year history of Lowry's.

With a spread this wide, I'm thinking that something climactic should be coming up. Somewhere ahead, the two indicators of supply and demand must halt their spread and reverse. But where and when? I'm thinking that the turn must come with some kind of extreme wipe-out, some kind of final collapse which will create a solid bottom. The bottom, by the way, will be the place where stocks have declined far enough (and discounted enough bad news) so that they finally attract the big institutional money.

So far, we have not arrived at that place. It lies somewhere ahead. Aside from upward blips and even impressive rallies, the big picture now is for a decline that takes the market down to a level where the big money finds stocks irresistible. We're not there yet. We're just not there.

I continue to believe that heavy selling will come in. Heavy selling in the face of disinterest in buying can give you some big days on the downside.

2008:

Crude oil up 42.5%
Ethanol up 20.7%
Heating oil up 43.9%
Natural gas up 76.5%
Unleaded gas up 39.5%

Cattle up 1.0%
Corn up 58.8%
Soy beans up; 26.4%
Wheat down 2.2%
Coffee up 5.9%

Aluminum up 32.7%
Copper up 25.7
Platinum up 33.4%
Gold up 6.0%
Silver up 13.4%.

S&P 500 down 10.24%
Frankfurt DAX down 18.32%
London FTSE down 12.23%
Paris CAC down 19.64%
Hong Kong Hang Sang down 18.33%.
Tokyo Nikkei down 9.47%

Singapore Straits down 14.04%.
Seoul Composite down 9.57%
Sydney All Ordinary down 15.76%
Taipei Telex down 7.40%
Shanghai Shanghai B down 44.42%

From: DowTheory

More bad news on the economy

2008-06-22T23:11:00.000-07:00

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets. le the "Crossover" index of lower grade corporate bonds could reach 650/700 in a renewed bout of panic on the debt markets.

"I do not think I can be much blunter. If you have to be in credit, focus on quality, short durations, non-cyclical defensive names.

"Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.

RBS expects Wall Street to rally a little further into early July before short-lived momentum from America's fiscal boost begins to fizzle out, and the delayed effects of the oil spike inflict their damage.

"Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point," he said

"The political fall-out could be substantial as finance ministers from the weaker economies rail at the ECB. Wider spreads between the German Bunds and peripheral markets seem assured," he said.

Ultimately, the bank expects the oil price spike to subside as the more powerful force of debt deflation takes hold next year.

.......................................

Morgan Stanley warns of 'catastrophic event' as ECB fights Federal Reserve

By Ambrose Evans-Pritchard, International Business Editor. the Telegraph.

The clash between the European Central Bank and the US Federal Reserve over monetary strategy is causing serious strains in the global financial system and could lead to a replay of Europe's exchange rate crisis in the 1990s, a team of bankers has warned.

"We see striking similarities between the transatlantic tensions that built up in the early 1990s and those that are accumulating again today. The outcome of the 1992 deadlock was a major currency crisis and a recession in Europe," said a report by Morgan Stanley's European experts.

Jean-Claude Trichet is taking a hard line on rates. Just as then, Washington has slashed rates to bail out the banks and prevent an economic hard-landing, while Frankfurt has stuck to its hawkish line - ignoring angry protests from politicians and squeals of pain from Europe's export industry.

Just as then, the dollar has plummeted far enough to cause worldwide alarm. In August 1992 it fell to 1.35 against the Deutsche Mark: this time it has fallen even further to the equivalent of 1.25. It is potentially worse for Europe this time because the yen and yuan have also fallen to near record lows. So has sterling.

The point of maximum stress could occur in coming months if the ECB carries out the threat this month by Jean-Claude Trichet to raise rates. It will be worse yet - for Europe - if the Fed backs away from expected tightening. "This could trigger another 'catastrophic' event," warned Morgan Stanley.

How to survive

2008-06-12T22:17:00.000-07:00

To survive today in the investment business entrails two considerations -- first, you must not make any major stupid mistakes. Or let me put it this way, to make mistakes is human, we all make mistakes -- but the disaster is to stay with your mistakes. Once you realize that you've made a mistake, you've got to reverse your position -- get out and the quicker the better ("the first loss is the best loss").

The second task in surviving is to be low on debt or preferably out of debt, and to own something of undisputed tangible value. Some of the items in the "eternal" value category are gold, silver, a home owned free and clear, a great work of art, a few gem-quality diamonds.

If you own a business during tough times, the secret is low overhead. High overhead during hard times will chew up any business and spit out the pieces. I consider debt a form of overhead. You find a way to service your debt or you'll lose your business.

If you're solid and solvent during tough times, you can remain on the compounding path. This entails holding good stocks, and reinvesting the dividends as they come through. Or you can take positions in bull markets on a timing basis. This entails buying stocks when the market is clearly oversold, and selling those stocks when the market becomes frothy.

Right now, as I see it, we're pretty much on the sidelines and awaiting the next great buying opportunity. This means waiting for the next major oversold bottom. Where or when that bottom arrives is unknowable. What we do know (hopefully) is how to identify a major bottom when it finally arrives. In other words, to predict is impossible, to identify is possible, not easy -- but certainly possible.

From DowTheory

Economy: next three to six months

2008-05-20T23:52:00.000-07:00

(Bloomberg, May 19) -- "The index of leading U.S. economic indicators rose in April for a second month, the first back-to-back gain since October 2006, signaling that the current slowdown will be short-lived. The Conference Board's gauge increased 0.1 percent, better than forecast and matching the gain in March, the New York-based research group said today. The measure points to the direction of the economy over the next three to six months."

Best months to buy and sell a home

2008-05-07T22:40:00.000-07:00

The best months to buy a home are late July, August, Dec, and early January. Buyers are on vacation or tied up with the holidays. As a result, there are less bidders driving up the cost of properties.

The best months to sell your home are early March through the end of June. And the Fall months of Sept, Oct, and early Nov. The kids are in school and parents have time to look for homes.

Commercial mortgage-backed securities

2008-05-04T17:23:00.000-07:00

Billionaire Sam Zell said institutional investors are beginning to return to the market for mortgage-backed securities that finance commercial real estate deals and new construction.

“I believe the overall market has already started to ease,” Zell, chairman of Equity Residential, the largest US apartment owner, said in an interview in New York. “Is it in large volumes? No. Is it the first natural step in the evolution? Yes.”

For the first time since July, when credit Markets froze in reaction to rising home-loan defaults, investors are starting to move their money from Treasury bonds, whose returns are below the inflation rate, and into commercial mortgage-backed securities. Insurance Companies and pension funds need to earn at least 6% to cover their liabilities, Zell said.

The yield on the two-year Treasury note closed at 2.258% yesterday, while one measure of the cost of commercial real estate borrowing, 10-year fixed conduit spreads, dropped 28% in the last month, according to Morgan Stanley.

Zell, 66, sold Equity Office Properties Trust, the largest owner of US office buildings, for $39 billion including debt in February 2007, five months before the credit crunch.

‘Ex-urban’ offices

The value of the best office buildings in city centres will weather the slowing Economy, Zell said. He said he’s more concerned about flashy glass towers built in far suburbs.

“I’m sure there’s going to be some casualties, particularly in what I would call ex-urban, the glass-block commodity office building,” he said. “I don’t think there is going to be any casualties in Manhattan, I don’t think there’s going to be any casualties in any of the first-class office space around the country. The commercial real estate market is going to do terrific no matter what the Economy does, short of a depression.”

International investments will also continue to boost US commercial real estate, with available opportunities overriding overseas antipathy toward President George W Bush, Zell said.

“After they get through bashing George Bush, the very next question is, ‘Where’s my visa?’ There is not another environment in the world that matches the US in terms of opportunity, creativity, acceptance of change, acceptance of failure.” Zell said.

In June, Zell bought Chicago-based media company Tribune Co for $8.3 billion and took it private. Tribune’s holdings include the Chicago Tribune newspaper, the Chicago Cubs baseball team and its Wrigley Field home, and WGN-TV. He remains chairman of Equity Residential, the largest US owner of rental property.

Zell ranked 164th on Forbes Magazine’s list...

Housing stock: looking good

2008-04-28T00:13:00.000-07:00

- I just read a really frightening piece entitled "The Coming Mortgage Meltdown." And I think to myself, "Yeah, but the market has to know all about this and more." So I have to wonder, am I seeing things? C'mon, Mr. Market, don't play tricks with me. No these aren't tricks, they're charts, and charts, unlike politicians and Fed statisticians, don't lie.

So I punch out the chart below, XHB (I follow this chart closely), and darned if it doesn't look as though it's turned bullish. XHB is the S&P's Homebuilders exchange traded fund. Could the homebuilders be turning bullish in the midst of a time of countless foreclosures and widespread bearishness in housing?

XHB turned up in January, and as of today I see that XHB has rallied above both its 200-day and 50-day moving averages. That doesn't seem logical or possible, not in the current state of real estate pessimism. I need more proof.

The D-J US Real Estate Index Fund is turning up as well. It turned up from a January low, and as of today's close, IYR is above both its 50-day and 200-day moving averages.

Could the stock market be telling us that it has discounted the worst of the housing disaster -- and that real estate is fated to turn up in the months ahead? That would be counter to all the bearish housing talk that is now filling the newspaper and TV. Is this possible? Yes, it's possible. And what a bullish shocker that would be.

This whole real estate situation is so important for the economy and so opposite to what we read and hear. ICF the iShares for the Cohen & Steers Realty Major Index Fund. This Index represents the relatively large and liquid real estate investment trusts. The chart is as bullish as it can be. Hey, the sun may be rising on the whole housing and real estate picture. If so, you probably won't hear about it until maybe this summer. Remember, the market is always first to see a turn.

Stock Market: bull market since Jan. 22 lows

2008-04-21T22:48:00.001-07:00

You already know why I thought the D-J Averages established a bottom on January 22. The market at the January 22 lows had discounted the worst that could be seen ahead, even as the bad news continued to fill the airways and newspapers.

What gives the Averages the incredible ability to "see the future," to discount what none of us individually can see? Ah, that's what's so fabulous about the stock market. The stock market is a compilation of what everybody knows about everything. And what everybody knows is far ahead of what any single person or any group or any collection of experts know. It's all part of what I call the "miracle of the markets," but what's also needed is the ability to interpret what the markets are telling us.

The most spectacular markets are those that are counter-intuitive. These are the markets that are "marching to a different drummer," markets that are rising in the face of bad news or falling in the face of bullish news.

The current market has been rising in the face of what experts many call "the worst economic news to emerge since World War II," and the market has been doing this ever since January 22. In fact the bank news and the housing news and the employment news has been so spectacularly rotten that most people have failed to notice what the stock market was doing. The first quarter of the year 2008 was a stock market classic, a textbook example of a market that is looking past the ugly news of the day.

The question now is -- "what lies ahead?" I think the action of the market will tell us what lies ahead in the economy. If the market stalls here, backs off, slips into a deep correction, it will be telling us that the road ahead for business will be spotty, difficult, and slow-going. If the market continues to move higher, if we start seeing expanding volume as stocks advance, then I believe the US economy will brighten rather faster than most people are prepared for. If the market turns sluggish and meanders sideways, then I believe it will be telling us that business will be doing the same thing -- just trying to "muddle through" as John Mauldin describes it.

You'll notice that most of the talk these days boils down to various experts and CEOs presenting their assorted guesses as to what lies ahead. You can see and hear their opinions on TV, you can read their warnings in the newspapers, you can monitor their guesses on your computer. But as for me, I depend on the markets to tell me what may lie ahead. The markets are the money. And I stick with that old adage that tell us -- "Money talks, BS walks."

I might also note here that the short interest on the NYSE has now climbed above 16 billion shares -- this is the highest recorded short interest ever. In order for the shorts to make money, they need a declining market, preferably a market declining on rising volume. So far, the shorts have not received that kind of a market. That means that we have a record short interest locked into a market that refuses to fall apart. A rising short interest in a market that refuses to head down is a potentially explosive market. My guess is that in due time the current huge short interest will be driven out by way of a rising market.

The big picture is for the Dow to advance to new highs in the months ahead (and it may take a year or so). If the Dow is fated to rise to new highs, the Dow will take a large number of stocks with it. The further implications of this will be that the US economy will be due to improve, and very possibly to boom in the period ahead. In fact, I expect this bull market to end with an unexpected bullish explosion in both stocks and the US economy.

I have no idea what might cause such a boom. The stock market has its secrets and its remarkable intuitive and discounting powers. The stock market can tell us what, but it never tells us how or when.

What about the primary bear market that will inevitably follow when this greatest of all bull markets finally tops out? Ah, that's another story, and it will not be a pleasant one. At this point I associate the next bear market with the US dollar's loss of its reserve status.

From: DowTheory RR

George Soros and Jim Crammer: bullish

2008-04-03T16:39:00.000-07:00

Soros is one very smart fellow, he's made fortunes, and he's always worth listening to -- Russell

April 3 (Bloomberg) -- Billionaire George Soros called the current financial crisis the worst since the Great Depression and said markets will fall more this year after a brief rebound.

``We had a good bottom,'' Soros said yesterday in an interview in New York, referring to the rally in stocks and the dollar after JP Morgan Chase & Co. agreed to buy Bear Stearns Cos. on March 17. ``This will probably not prove to be the final bottom,'' he said, adding the rebound may last six weeks to three months as the U.S. moves closer to a recession.

Last summer, worried about market disruptions that started with rising subprime-mortgage defaults, Soros, 77, returned to a more active role in managing the $17 billion Quantum Endowment Fund, whose profits pay for his philanthropic projects. Quantum returned an average of 30 percent a year before Soros started using outside managers in 2000 for much of his money.

He also decided to write a book, his 10th, ``The New Paradigm for Financial Markets'' (Public Affairs, 2008). Released today online, the book explains the causes of the current meltdown, a crisis he says has been in the making since 1980, and the trades he put in place this year to protect his wealth, much of it in Quantum.

Soros has bet on declines in the dollar, 10-year Treasuries and U.S. and European stocks. He expected foreign currencies to rise, as well as Chinese and Indian equities. The latter bet helped Quantum return 32 percent in 2007. Quantum's returns this year have ranged from up 3 percent to down 3 percent.

The euro has climbed 7.5 percent against the dollar this year and the Japanese yen has gained 9.1 percent. These and other currencies may continue to strengthen, he said.

"There is an increasing unwillingness to hold dollars, though there's a lack of suitable alternatives,'' he said. "It's a period of heightened uncertainty.''

Federal Reserve officials dropped their benchmark interest rate 2 percentage points this year to 2.25 percent, and Soros doesn't see that they can lower the rate much further, given the weak dollar.

"We are close to the limit,'' he said.

As for his wagers on developing markets, Soros hasn't abandoned his holdings in India, even with the 22 percent drop in the benchmark Indian index this year.

"The fundamentals remain good,'' he said. He is less certain about what will happen to Chinese H shares, which trade in Hong Kong.

Credit default swaps -- a way to bet on the creditworthiness of a company -- may be the next crisis area because the market is unregulated, and it's impossible to know whether counterparties can meet their obligations in the event of a bond default. The market has a notional value of about $45 trillion -- or about half the total wealth of U.S. households.

Soros recommends the creation of an exchange with a sound capital structure and strict margin requirements, where current and future contracts could be traded.

The cause of the current troubles dates back to 1980, when U.S. President Ronald Reagan and U.K. Prime Minister Margaret Thatcher came to power, Soros said. It was during this time that borrowing ballooned and regulation of banks and financial markets became less stringent. These leaders, Soros said, believed that markets are self-correcting, meaning that if prices get out of whack, they will eventually revert to historical norms. Instead, this laissez-faire attitude created the current housing bubble, which in turn led to the seizing up of credit markets and the demise of Bear Stearns, Soros said.

To avoid a super-bubble in the future, Soros said banks must control their own borrowing. They must also curtail lending to clients such as hedge funds by demanding greater collateral and margin requirements on loans.

Asked if such moves would make it impossible to achieve returns like those of his pre-2000 days, Soros laughed.

"Since I'm designing these regulations, they would not hurt me,'' he said. ``We made direction bets but we haven't used leverage'' like the $25-to-$1 borrowing that brought down John Meriwether's Long-Term Capital Management LLC in 1998.

...............................................

Not to be left out, here's the latest from wild-man Jim Cramer (who can be very intuitive ). This is from the latest Mar. 31 New York Magazine (I love this magazine).

"What do you call it when the stock of the country's fifth-largest investment bank trades at $50 on a Thursday and at $3 the following Monday? It's been called the most dramatic fallout from the credit crisis, an epic stock market analyst's whiff, and one of Wall Street's greatest collapses. All true, but I call it something else. I call it a bottom. Not just for the stock itself, which happens to be the venerable Bear Stearns, but for the whole stock market, and for the long-suffering housing market, too."

Russell Comment -- You heard it right -- the Cramer-man is now in the bull camp, saying that the bottom is in. Mr. Cramer, meet Mr. Soros, and let's see if you two can come up with the trillion dollar answer.

.

Watching the Dollar Die

2008-03-19T23:22:00.000-07:00

This piece should be read carefully. If Roberts is correct, somewhere ahead there's going to be a run on the dollar. The run could be in a few months or a few years, I have no way of timing it. But common sense tells me that there will be a run. This is one of the main reasons why I believe we must hold gold -- and forget the timing. There is no sense or excuse for timing, since I don't hold gold for a potential profit, I hold it as a store of wealth. Gold is the only money (currency) that does not need the backing of some nation or some central bank. Gold is wealth on its own, accepted as wealth at any time in any quantity in any situation.

Gold is not only the "anti-dollar," gold is the "anti-fiat currency." From a financial survival standpoint, gold is the ultimate insurance policy in a debt-laden world of ultimately worthless paper.

Watching the Dollar Die

Paul Craig Roberts
Mar 17, 2008

I've been watching the dollar die all my life. I sometimes think I will outlast it.

When I was a young man, gold was $35 an ounce. Today one ounce gold bullion coins, such as the Canadian Maple Leaf, cost more than $1,000.

Our silver coinage was 90% silver. People sometimes melted coins in order to make silver spoons, known as coin silver, which can still be found in antique shops. Except for the reduced silver (40%) Kennedy half dollar which continued until 1970, 1964 was the last year of America's silver coinage. The copper penny departed in 1982. As Assistant Secretary of the Treasury, I opposed the demise of America's last commodity money, but I couldn't prevent the copper penny's death.

During World War II (1941-1945), nickel was diverted from coinage to war, and the US mint issued a wartime silver (35%) nickel.

It is not easy to find items to purchase with today's US coins, but the silver coins of the same face value still have purchasing power. The 10 cent piece of my youth contains $1.42 worth of silver at today's silver price. The quarter is worth $3.55, and the half dollar contains $7.10 of silver. The silver dollar is worth 15.2 times its face value. These are just the silver values of coins that might be worth far more depending on condition and rarity. The silver in the wartime nickel is worth $1.10, which is 22 times the coin's face value. Even the copper penny is worth 2.5 cents.

When I was a young man enjoying travels in Europe, the German mark or Swiss franc traded four to one US dollar. The euro, which is today's equivalent to the mark or franc, costs $1.55.

People who haven't accumulated much age have little idea of the corrosive power of "acceptable" inflation. Unlike gold and silver, fiat money has no intrinsic value. When money is created faster than goods and services it drives up prices, thus driving down the value of the money. If freely traded currencies are excessively printed or if inflation, budget deficits, and trade deficits drive currencies off their fixed exchange rates, prices of imports rise as the foreign exchange value of the currency falls.

Today the US, heavily dependent on imports, is subject to double-barrel inflation from both domestic money creation and decline in the dollar's foreign exchange value.

The US inflation rate is about twice as high as the government's inflation measures report. In order to hold down Social Security payments, the government changed the way it measures inflation. In the old measure, inflation measured the nominal cost of a defined standard of living. If the price of steak rose, up went the inflation rate. Today if the price of steak rises, the government assumes that people switch to hamburger. Inflation doesn't go up. Instead, the standard of living it measures goes down.

This is just one of the many ways that the government pulls the wool over our eyes.

With the dollar value of the euro rising through the roof, today a vacation in Europe is far more costly than in the past. Thanks to China, so far Americans have been sheltered from the greatest effects of the dollar's declining value. Our greatest trade deficit is with China. The prices of the goods from China have not risen, because China keeps its currency pegged to the dollar. As the dollar goes down, China's currency goes with it, thus holding down price rises.

The resignation of Admiral William Fallon as US military commander in the Middle East probably signals a Bush Regime attack on Iran. Fallon said that there would be no US attack on Iran on his watch. As there was no reason for Fallon to resign, it is not farfetched to conclude that Bush has removed an obstacle to war with Iran.

The US is already overstretched both militarily and economically. An attack on Iran is likely to be the straw that breaks the camel's back.

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review.

Sonoma: Sales down 44% - Price down 22%

2008-03-13T17:37:00.000-07:00

Sonoma County home prices continued their plunge in February as sales slowed to a crawl.

Only 254 new homes, resale homes and condominiums were sold in February, down 43.9 percent from a year ago.

The median price tumbled to $400,000, down 22.3 percent from a year ago — the biggest drop in the nine-county Bay Area.

In an attempt to pump more money into the housing market, federal housing agencies agreed last week to temporarily back loans up to $662,500 in Sonoma County and as high as $729,750 in pricier parts of the Bay Area.

The program could stimulate sales of higher-priced homes, Prentice said.

The Federal Reserve is trying to pour Draino into the lending system.

A year ago jumbos accounted for 59.8 percent of all Bay Area home loans. Last month they were just 28.9 percent.

Is this going to help in Sonoma County? Can the jobs support the current lower housing prices yet?

Banks: "systemic margin call"

2008-03-08T09:16:00.000-08:00

NEW YORK (Reuters) - Wall Street banks are facing a "systemic margin call" that may deplete banks of $325 billion of capital due to deteriorating subprime U.S. mortgages, JPMorgan Chase & Co (JPM.N), said in a report late on Friday.

JPMorgan, which sent a default notice to Thornburg Mortgage Inc. (TMA.N) after the lender missed a $28 million margin call, said more default notices and margin calls were likely. The Carlyle Group's mortgage fund also failed to meet $37 million in margin calls this week.

"A systemic credit crunch is underway, driven primarily by bank writedowns for subprime mortgages," according to the report. . "We would characterize this situation as a systemic margin call."

The credit crisis that began about a year ago will likely intensify after Friday's weak February U.S. employment report "that most definitely signals recession," JPMorgan said.

Indeed, corporate bond spreads widened to a new record on Friday, surpassing levels seen in October 2002 during a boom in bankruptcies following the dot-com crash. U.S. employers cut payrolls in February for a second consecutive month, slashing 63,000 jobs, the biggest monthly job decline in nearly five years, the U.S. Labor Department reported on Friday.

"The weak February employment report points to an economy in recession," JPMorgan said.

The JPMorgan report included a revised bleaker forecast for subprime-related home prices. The bank now sees home prices falling 30 percent, from its prior 25 percent forecast. Those prices have declined 14 percent since mid-2006, JPMorgan said.

The U.S. jobs results also came after the Federal Reserve expanded the amount of its short-term auctions to $100 billion in total in the central bank's latest effort to ease credit concerns. Ongoing concerns about bond insurers, known as monolines, and their effort to save their top ratings also are weighing on market sentiment.

Gold history and why to buy

2008-02-29T22:08:00.000-08:00

In January 1980 gold topped out at a price of 850 US dollars per ounce. Down goes gold -- down and down, year after year until gold reaches a low of 256 in August of 1998.

There, despised and ignored, gold sinks to its historic bear market low. From its ignominious low of 256, a new primary bull market is born. But 28 years of decline has soured the US public on gold. If they are interested at all, they abide by the wise men of the government and the Federal Reserve. "Gold is history," they are told. "Gold is a story who's time has past." "Gold is a relic from another era, a useless metal used in fancy dentistry and in jewelry.

Under a cloud of disinterest and false tales, gold starts up again. Slowly, almost surreptitiously, gold rises to 300, then to 400, to 500 and 600. Nobody is interested. Some of the old gold mining stocks move higher. They pay no dividends. Nobody is interested in them. Names from the past appear and are taken over. Dome Mines, Homestake and Campbell Red Lake. Skeletons dancing into view and then disappearing.

Gold works its way still higher. A few people remember that gold is money, and they suggest that gold be purchased. But frequent sharp declines and occasional deep corrections frighten the early buyers of gold. They take their profits. Nevertheless, the metal reaches the 700s. A small group of admirers known facetiously as "gold-bugs" urge their followers to buy gold. "It's cheap," insist the gold-bugs, "gold is as cheap as dirt -- buy it."

Then, in January 2008, gold does the impossible. It breaks out above its old 850 peak-level of 1980. After 28 years of being held back, gold bursts is chains and breaks free. Gold pushes above 850 into space never seen before by the yellow metal. It's like a prisoner who, having been held in a dungeon for 28 years, suddenly escapes from the darkness of his cell and emerges into the glare of sunlight.

Twenty-eight years of compression has been released. The advance above the 850 level is still quiet, almost eerie -- but relentless. "It's speculative nonsense," growl the analysts, "it's manipulation by a crazy element that is living in the past." But gold continues to work higher. By February gold is nearing the thousand-dollar-an-ounce mark.

In the meantime, silver, the other monetary metal is pushing towards twenty dollars an ounce. Silver, that sold as low as 23 cents an ounce in 1932, is now selling close to twenty dollars an ounce. "Lowly silver at twenty bucks a pop, I don't believe it."

In the meantime, the US is dealing with an incredibly difficult situation. The nation is straining under the onus of a potential housing collapse. The new Federal Reserve Chairman, Ben. S. Bernanke, is fearful that the housing disaster with send the nation into recession and worse -- deflation. Bernanke is well aware that the two thirds of US families own their own homes, and that consumer buying is responsible for 70 percent of the Gross Domestic Product of the US. On top of everything else, the great banks of the US are in trouble. Bernanke must save the banks and he must hold back the forces of deflation.

But good Lord, what about inflation? The Fed has made its decision. Their first task is to keep the US out of the grip of recession. This allows gold and silver to further express themselves. The lid is off 28 years of compression and imprisonment. The great bull market in precious metals pushes higher. In the background, twenty central banks from around the world print their fiat paper in an orchestrated effort to insure prosperity.

Meanwhile, the great gold bull has broken free of its chains. A strange and unprecedented union of forces has emerged. The US public is unaware of the great phenomenon that is playing out before their eyes. Somewhere ahead, the US public will enter the bull market. Will it be in 2008, in 2009, in 2010? The timing, as we might suspect, is known only to the mysterious gods of the market.

12 Steps to 'catastrophic' meltdown

2008-02-21T18:02:00.000-08:00

February 20, 2008

Recently, Professor Roubini's scenarios have been dire enough to make the flesh creep. Now he states that there is "a rising probability of a 'catastrophic' financial and economic outcome". The characteristics of this scenario are, he argues: "A vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe."

Prof Roubini is fonder of lists. Here are his 12 steps to financial disaster.

Step one is the worst housing recession in US history. House prices will, he says, fall by 20 to 30 per cent from their peak, which would wipe out between $4,000bn and $6,000bn in household wealth. Ten million households will end up with negative equity and so with a huge incentive to put the house keys in the post and depart for greener fields. Many more home-builders will be bankrupted.

Step two would be further losses, beyond the $250bn-$300bn now estimated, for subprime mortgages. About 60 per cent of all mortgage origination between 2005 and 2007 had "reckless or toxic features", argues Prof Roubini. Goldman Sachs estimates mortgage losses at $400bn. But if home prices fell by more than 20 per cent, losses would be bigger. That would further impair the banks' ability to offer credit.

Step three would be big losses on unsecured consumer debt: credit cards, auto loans, student loans and so forth. The "credit crunch" would then spread from mortgages to a wide range of consumer credit.

Step four would be the downgrading of the monoline insurers, which do not deserve the AAA rating on which their business depends. A further $150bn writedown of asset-backed securities would then ensue.

Step five would be the meltdown of the commercial property market, while step six would be bankruptcy of a large regional or national bank.

Step seven would be big losses on reckless leveraged buy-outs. Hundreds of billions of dollars of such loans are now stuck on the balance sheets of financial institutions.

Step eight would be a wave of corporate defaults. On average, US companies are in decent shape, but a "fat tail" of companies has low profitability and heavy debt. Such defaults would spread losses in "credit default swaps", which insure such debt. The losses could be $250bn. Some insurers might go bankrupt.

Step nine would be a meltdown in the "shadow financial system". Dealing with the distress of hedge funds, special investment vehicles and so forth will be made more difficult by the fact that they have no direct access to lending from central banks.

Step 10 would be a further collapse in stock prices. Failures of hedge funds, margin calls and shorting could lead to cascading falls in prices.

Step 11 would be a drying-up of liquidity in a range of financial markets, including interbank and money markets. Behind this would be a jump in concerns about solvency.

Step 12 would be "a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices".

These, then, are 12 steps to meltdown. In all, argues Prof Roubini: "Total losses in the financial system will add up to more than $1,000bn and the economic recession will become deeper more protracted and severe." This, he suggests, is the "nightmare scenario" keeping Ben Bernanke and colleagues at the US Federal Reserve awake. It explains why, having failed to appreciate the dangers for so long, the Fed has lowered rates by 200 basis points this year. This is insurance against a financial meltdown.

Is this kind of scenario at least plausible? It is. Furthermore, we can be confident that it would, if it came to pass, end all stories about "decoupling". If it lasts six quarters, as Prof Roubini warns, offsetting policy action in the rest of the world would be too little, too late.

Can the Fed head this danger off? Prof Roubini gives eight reasons why it cannot. (He really loves lists!)

These are, in brief: US monetary easing is constrained by risks to the dollar and inflation; aggressive easing deals only with illiquidity, not insolvency; the monoline insurers will lose their credit ratings, with dire consequences; overall losses will be too large for sovereign wealth funds to deal with; public intervention is too small to stabilise housing losses; the Fed cannot address the problems of the shadow financial system; regulators cannot find a good middle way between transparency over losses and regulatory forbearance, both of which are needed; and, finally, the transactions-oriented financial system is itself in deep crisis.

The risks are indeed high and the ability of the authorities to deal with them more limited than most people hope. This is not to suggest that there are no ways out. Unfortunately, they are poisonous ones. In the last resort, governments resolve financial crises. This is an iron law. Rescues can occur via overt government assumption of bad debt, inflation, or both. Japan chose the first, much to the distaste of its ministry of finance. But Japan is a creditor country whose savers have complete confidence in the solvency of their government. The US, however, is a debtor. It must keep the trust of foreigners. Should it fail to do so, the inflationary solution becomes probable. This is quite enough to explain why gold costs $920 an ounce.

The connection between the bursting of the housing bubble and the fragility of the financial system has created huge dangers, for the US and the rest of the world. The US public sector is now coming to the rescue, led by the Fed. In the end, they will succeed. But the journey is likely to be wretchedly uncomfortable.

martin.wolf@ft.com

Economy thoughts

2008-02-19T22:29:00.000-08:00

The entire world, it seems, is being subjected to inflation. But various areas of the world are gaining strength and others are losing strength. Classically and historically, gold gravitates toward strength. And we see that gold is moving toward Asia. While the US accumulates debt and unfunded liabilities, Asia and particularly China, accumulate gold. While Americans are spenders and consumers, Asians are accumulators and savers.

Interestingly, the picture isn't completely logical and it isn't all black and white. Americans are free and America possesses a powerful military. Wealthy and wary citizens from nations that are not so free covet a home in the US "just in case." I see it here in La Jolla. Wealthy foreigners are buying homes in La Jolla because La Jolla is "safe" and it is "free" and it's located on the ocean and it has a great climate and top medical facilities and it's, well, it's a beautiful place to live. I walk down our main street, and I hear every language under the sun. And a LOT of Asians.

So money is coming to America from overseas. And as the dollar declines against other currencies, the US has become "Bargain City" to the world. Everything in the US looks "cheap and on-sale" to people who own non-dollar currencies.

Question -- I see what you're saying, but if gold is rising and inflation is increasing, why doesn't the Fed just raise rates as Volker did and choke off inflation?"

Answer -- Good question, and the answer is that the Fed has two objectives at this time. The first is to save the big Wall Street banks. The banks MUST BE SAVED at all costs (they're the backbone of the financial system), and that means a steep yield curve and low short interest rates.

The second Fed objective is to stave off a recession. A recession can bring on deflation -- and Bernanke doesn't even want to hear the word, deflation. Bernanke is absolutely dedicated to halting any symptoms of deflation. The way to avoid deflation is -- print money (which is inflationary) and keep rates low. Remember, Bernanke is a student of the Great Depression and he's an expert on the long Japanese recession of 1989 to 2007. And Bernanke wants no part of either of these depressing phenomena.

Question --By implication are you saying that "there ain't goin' to be no stinkin' recession"?

Answer -- Yes, that's my guess. We're obviously experiencing a slow-down in many areas of the economy, but other areas (agricultural, mining) are booming. Let me put it this way -- I don't believe we're going to be dealing with an old-fashioned across-the-board recession. We're going to be dealing with an uneven economy, some areas in bad shape, some in fair shape, and other in excellent shape.

Question -- OK, so what do we do?

Answer -- Here's one answer. A third of your "wealth" should be in gold. Another third should be in a paid-up home. And that last third should be in cash in the form of T-bills. And then we wait. You and I wait. What are we waiting for? I don't know, maybe the same thing that Hillary and Obama and McCain are yammering about -- CHANGE. And believe me, change is coming.

From: Dowtheory

VIX was up to a very high 28.97. Nervousness is sky-high

2008-02-06T23:35:00.000-08:00

It looks increasingly like the presidential race will be McCain vs. the Clintons -- or possibly vs. Obama. The significant trend -- Dems turned out in far greater numbers than did the Republicans. Meaning -- a significant number of Republicans have "had it" with the Bush administration and all it stands for. The next US President will either be Hillary or Obama.

S&P is down 9% for the year, so far this has been the worst start in the history of the S&P. What does this say for the entire year 2008? I don't think it says anything, but I do know this -- I'm more interested in how this year ends than how it begins!

Year to date: S&P down 8.9%, Dow down 7.5%, Transports up 2.2%, Utilities down 6.2%, NASDAQ down 12.9%, Russell 2000 down 8.4%, Wilshire 5000 down 8.6%.

Preferred position -- Cash (T-bills) and gold (mostly the metal).

Yesterday was a 90% down-day, meaning that we saw panic-selling. Did that clean out most of the sellers or is there still a lot more stock for sale?

The VIX was up .73 to a very high 28.97. Nervousness is sky-high.

Yesterday was a 90% down-day -- and normally after a 90% down-day there is usually a recovery-rally lasting a few days and sometimes a bit more. Therefore, today's action was not good at all, market might have ("should have") rallied but it did not. Ah well, we take what the market gives us, and the market gave us very little today.

California: 61% above historic norm

2008-01-28T23:50:00.000-08:00

Historically, median home prices and median incomes have always shared a close relationship. From the mid-1970s to 2001, the historical ratio of median housing value vs. median household income was consistently between 2.6 and 3.0.

What this essentially means is that median home prices were (on average) 2.8x the median household income for the last 30 years. Using this 2.8 formula, it is very easy to estimate what median home prices would be if the most recent bubble never happened.

Median Home Prices by Region

Region Current Median* What the Median Should Be % Difference
Northeast $258,600 $145,760 44%
Midwest $159,800 $133,941 16%
South $173,400 $122,875 29%
West $309,800 $146,297 53%

It is obvious to most people that we are in the midst of a national housing bubble. Nevertheless, there are still plenty of naysayers who are telling anyone who will listen that there are local bubbles only.

Using the 2.8 formula, it is clear that local bubbles aren't the problem. Median home prices are inflated in every U.S. region. In the West, where the median household income is $52,249, median home prices are more than double what they should be. The situation is similar in the Northeast, where the median household income is $52,057.

Median home prices are not quite as high in the South and the Midwest, where median household incomes are $43,884 and $47,836 respectively. Even so, prices are still 30 percent higher than what they should be in the South and 16 percent higher than what they should be in the Midwest.

California Median Home Prices

Current Median* What the Median Should Be % Difference
$402,000 $158,606 61%

There is no doubt about it. California was hit hardest by the housing bubble. Although prices have always been slightly elevated in the state, they grew by leaps and bounds during the housing boom.

The result is that home prices are 61 percent higher than they should be given California's media household income of $56,645. In some areas of the state, such as San Francisco and Oakland, median home prices are so inflated that they are more than 11 times the median household income.

From: What if housing bubble did not happen

Bear Markets

2008-01-25T21:58:00.000-08:00

their gain or loss for 2008 so far (statistics are as of yesterday morning) --

Dow down 7.5%
S&P 500 down 8.4%.
S&P 400 down 10.32%
Russell 2000 down 9.48%
Wilshire 5000 down 9.09%

Crude oil (bbl) down 9.8.%
Ethanol (gal) down 5.5%.
Natural gas up 1.9%
Unleaded gas down 9.3%

Aluminum down 1.9%
Copper up 1.0%
Gold up 5.7%
Silver up 7.4%
Platinum up 1.9%

Cattle down 6.3%.
Corn up 2.9%
Wheat up 2.3%
Soy beans down 0.8%
Cotton down 1.5%.
Lumber down 6.4%
Coffee down 3.7%
Orange Juice down 6.9%

Frankfurt DAX down 20.18%
London FTSE down 13.13%
Hong Kong Hang Seng down 13.38%.
Paris CAC down 17.41%
Tokyo Nikkei down 16.29%
Seoul Composite down 14.16%
Singapore Straits down 14.2%
Sydney All Ordinary down 15.10%
Tapei Talex down 12.91%
Shanghai down 12.86%.

Let me put it this way -- Unless you've been in gold and silver, you've probably been losing money this year, at least so far.

What do I look for when I'm looking for a bear market bottom? The classic method of identifying the area of a bear market bottom has to do with VALUES. At great bottoms such as 1932, 1942, 1949, 1974 and 1980-82, stocks were selling at great values. By that I mean that blue chips were selling at price/earnings ratios in the 10 and below range. They were also offering fat dividends, many in the 6 to 8 percent range and even higher.

Those were big bear markets, and they ended with stocks selling "below known values." That type of vicious, even brutal bear market is rare, and they come along maybe once or twice in a generation. Whether we are operating in that type of extreme bear market, of course, I don't know. As I said, these bear markets are rare and they are associated with disastrous conditions. The odds are always against this type of severe bear market appearing..

All true bear markets end in downside exhaustion. The public is out, traders have disappeared, most professionals are beaten, the news is grim, and sentiment is black. One hears such expressions as "It's the end of capitalism as we know it," or "Wall Street will never recover from this one." The public is disgusted with investing. The newspapers are filled with horror stories about investors who have lost their money.

Often, but not always, amid such despair, the Dow or the Transports will sink to a new low. But the companion Average will not follow -- a dramatic non-confirmation takes place. This is what occurred at the 1974 bottom. The non-confirmation will mark the final bottom. And strangely, it's been my experience that at that time investors are so beat-down, so discouraged, that few even notice the dramatic non-confirmation in the Averages.

From: dowtheory

Hillsborough: number 1

2008-01-22T18:25:00.000-08:00

25 top-earning towns

1. Hillsborough

3. Los Altos Hills

7. Blackhawk

17. Saratoga

21. Piedmont

23. Alamo

CNN Top Earning Towns

Stocks: DOWN volume was 92.5% of up

2008-01-15T23:28:00.000-08:00

You hear a lot of arguments about whether the great American consumer is going to continue consuming. Last night I went through the daily charts of about 25 leading retailers. If consumers are still flocking into the stores, it seems to me it should show in the retailers. It hasn't. In fact, just the opposite is true. Even in the "better" stores such as Coach or Tiffany where the wealthier clients are supposed to "keep on buying, regardless of the economy" the indications are strongly negative.

Is Tiffany the place where wealthy people go to buy diamonds? It once was, but not any more. Tiffany is now just a better-class chain store, catering to a somewhat "better-off public." It doesn't seem to matter. These days the direction of Tiffany's stock is down, down, discouragingly down.

Ironically, diamond prices have been heading heavenward. The latest cover of Rapaport magazine (the bible of the diamond business) shows a large arrow pointing north. Within the arrow you read, "Diamond Prices 2007, Up, Up and Away. " Sorry Tiffany, when you decided to go for the middle class buyers and volume, I think you lost the really big spenders. But your stock -- what a waterfall.

Ralph Lauren, he's of the fancy Polo Brand. You too? Ralphie has made multi-millions with his concept of dressing Americans to look like retired millionaires or at least like Harvard preppies. He's done an excellent job of it, and now he sells everything from luxury towels to men's ties to women's evening gowns. The stock hasn't paid attention, at least not recently.

Coach brought in some really good designers, and the stock took off like a rocket on the upside. It was as though Coach had become a whole new company. But something awful has happened to Coach's stock. What ever it is, it hardly looks like a prediction of growing sales.

Whole Foods has been a winner, at least, up to recently. The food is good, the prices are high, and now competition is coming in from some of the huge food chains such as Ralph's and Safeway. At any rate, the stock has been whacked. People looking for lower-priced food? Could be.

What's wrong with three-dollar coffee? Nothing, except you can make a good cup of coffee with the new Nestle machine and those little capsules that cost about a half a buck each. And think of the money they save if they drink two cups every morning at the office instead of buying their coffee at Starbucks. You know the old joke, there are just too many Starbucks. You're in a Starbucks, you go to the bathroom and there's another Starbucks in the bathroom. Whatever, the stock has been on a downside tear.

I really like the Target stores. They offer great value in their merchandise. I think the Target stores are superior to Wal-Mart stores. But that hasn't helped Target's stocks, which has done the equivalent of a swan dive. What you see on this chart can't be good for retailing -- or am I missing something?

So in answer to the question, "Will consumers cut back on their spending in the weeks and months ahead," my answer is "Judging from the retail charts, I think they will cut back, if they haven't already."

And are the high-end people holding up their spending? My answer is, "If they are, I don't see it."

The Fed must have received a hint of something very unpleasant, because the latest rumor is that a Fed Funds cut of maybe .75% is coming at the end of the month. That would be a shocker. Well, the charts above are sort of a shocker, and the way the stock market is going, it may be "shock time" all around!.

So far, I haven't changed by recommendation. Gold and cash, cash and gold. And the oft-recommended utility stocks have really held up remarkably well, at least so far.

To repeat, I don't like the stock actions above, I don't like them at all. Remember, roughly 70% of the Gross Domestic Product of the US comes from consumer buying. Roughly 19% of the world's GDP comes from the buying of American consumers. It's not a very appetizing picture. Maybe it's time to climb down into the storm cellar. I hope I'm wrong, but I'm thinking that a large economic storm is building, and it's aiming to hit hard in the weeks and months ahead.

There were 811 advances on the NYSE and 2524 declines. DOWN volume was 92.5% of up + down volume -- almost surely a 90% down-day, which is a panic down-day, and a very bearish indication.

There's something very wrong occurring in the US and throughout the world. I'm convinced that it has to do with the whole sick banking system. It was hard to find anything that was up today.

It's a dash was for cash. But how safe is fiat paper?

Expect to see the central banks of the world set forth an avalanche of fiat currency -- the idea will be to get cash into the hands of consumers. But what if consumers are afraid to spend the cash -- instead they want to save it? Ah, then we have that rarity -- it's called "pushing on a string."

Overseas markets are getting killed. Hang Seng Down 1,232.7 or Down 4.77%

From: dowtheory

New book

2008-01-06T22:45:00.001-08:00

Dow signals a recession: if it drops below 12,743

2008-01-04T10:49:00.000-08:00

On November 21 the D-J Averages provided us with a bear signal, as the D-J Industrial Average confirmed the prior breakdown of the Transports. But bear signals are usually accompanied by surging volume, scary plunges, and fear selling. That didn't happen on November 21, and that had me wondering. The market continued down with the Averages hitting November lows of 4366.78 for the Transports and 12,743.44 for the Industrials.
Nothing is simple and mechanical in market analysis. Sometimes you have to use your instinct and your intuition and your grey matter. I was a bit taken aback by the lack of high volume and fear selling at the November 21 bear signal. After the bear signal, the Industrials lost only 56 points, taking the Dow down to its November 26 low. Such a minor loss following a bear signal seemed not only odd but suspicious. Therefore, I surmised, if this is really a bear market, the Averages should continue lower -- in fact, they should re-confirm the bear market by breaking below the next set of lows, the November lows.

Breaking to new lows would be doubly important, because the news was turning grim. The big banks were being hit by outrageous losses in subprime mortgages. The Financial Indices were falling apart. Warnings of hundreds of thousands of foreclosures were the talk of the town. Leading economists were warning of "a recession in 2008" and those warnings are still with us.

If all these ghastly events lay before us, then surely the bear market should continue and the Averages should dive to new lows below their November lows. And that still might happen. But you know something -- it hasn't happened.

I'm not a dreamer. I know what it will mean if the November lows are violated. It will be the market's forecast of tougher times ahead.

But what if the November lows hold? What if one or both Averages refuse to violate their November lows? I would take that as a sign that the stock market has discounted the worst. I would take it as an indication that the stock market has absorbed all the bad news and the bearish forecasts and has said, "We see the worst that lies ahead, and we've discounted it.

There isn't going to be any recession. The housing and banking situations may be bad but they will be managed."

Friday the Dow is 12,870

From: Dowtheory

Brain-Dead Predictions about Housing

2008-01-01T23:54:00.000-08:00

January 2, 2008

What would the New Year be without some predictions? Rather than strive for wild guesses from the edge, I'm going with predictions so obvious they qualify as brain-dead. Nonetheless--or perhaps because of their tremendous obviousness-- they carry profound implications for the U.S. economy and culture.

1. Housing prices will fall farther and longer than every guess being bandied about in the mainstream and financial media. You know the stories--expert #1 foresees a 15% drop, expert #2 says a 30% decline is possible in the frothiest markets, etc.

Why fuss around with namby-pamby numbers like 15-30%? I'd say it's absurdly obvious that 80% to 100% declines are already baked into some areas--yes, houses won't find buyers for a $1, i.e. the value will suffer a 100% decline to zero.

2. The housing market won't turn around in 2008--or 2009, 2010, 2011, either. The really smart folks will be saving their money for 2012 or maybe 2013, when years of grinding losses will have stripped the assets of everyone who bought real estate with the idea of retiring on the proceeds. At that bottom, everyone will be disgusted with real estate, both residential and commercial, and no one will be dumb enough to sink dead money into an asset class which continues to decline in value year after year.

At that point, say Q1 2013, then housing will again become a buy.

How can a house become worthless? Just ask residents in depopulated areas of Detroit. If people pull up stakes because jobs disappeared, then houses drop to zero value. This is not some bleak future--this has been the case in areas of Detroit for many years. (Note that the larger Detroit-Ann Arbor-Flint metropolitan area actually gained population in 1990-2000.)

Will this happen everywhere? Of course not. But four other easily predictable forces will trigger huge declines in areas which have been seen as "safe from price decline."

3. Exurban burnout and job losses will take a toll. Take two hideously long commutes to distant jobs, a centerless, lifeless suburb in the middle of nowhere, take away one job and presto, you get an empty subdivision of essentially worthless McMansions nobody wants at any price. Add a dash of decay which acts as a catalyst, and you speed up the abandonment of the exurb.

4. People will "double up" as the economy sours. As I have commented here many times, the population of San Francisco rose by 52,000 (7.6%) in the dot-com boom in 1995-2000, even though the number of new housing units increased by only 5.4% between 1990 and 2000. Take a look at these numbers, all courtesy of the U.S. Census Bureau:

housing units in S.F. 2003: 346,527
residents in S.F. 2003: 751,733

residents per unit: 2.17

housing units in S.F. 1990: 328,471
residents in S.F. 1990: 724,000

residents per unit: 2.20

Looks pretty stable, right? But the population was 776,733 in 2000--meaning 50,000 people moved into the city in the late 90s and 25,000 had left by 2003.

The city added 18,000 units in the full decade 1990-2000, which historically correlates to about 37,000 residents. Indeed, the number of residents per housing unit has actually declined since 1990.

So what's the point? Just this: 5% of a population can move in or out of a city regardless of how many housing units are present. Simply put: people double up in boom times when housing is in short supply and in recessions when money is short.

Many single people bought houses they couldn't afford in the bubble. So did families. So where are they moving? In with someone else is the answer for many. Some people who are trying to hang onto their homes are taking renters, who then leave vacant apartments or condos behind, while others who have bailed out are moving in with other family members or friends.

Take 75 million housing units nationally and 5% of the population doubling up, and you get 4 million empty residences. You think the inventory of empty homes is high now, look what happens when people start losing their jobs. They will get very creative about living quarters, and very creative about cutting expenses they can no longer afford like mortgages and rent.

Houses can't be moved (at least not cheaply), but people move all the time. And when they move away from places, the price of housing in that area declines. It's supply and demand, and as money gets tight the demand for housing drops. People take roommates, move back home, double up.

5. Houses built where they should not have been built will be abandoned. Large swaths of known floodplains are now covered with subdivisions in the Sacramento Delta region. No doubt the same can be said of certain stretches of the Mississippi River region and other coastal and riverine flood zones.

Back in the good old days of say, 2007, governments might have reckoned they had the funds to rebuild dikes and other engineering wonders to protect a few thousand new homes. But as the economy sours, governments are suddenly short of funds. And as people leave those distant suburbs, then the stark reality will become apparent: it isn't worth tens of millions of dollars to protect a few thousand homes (many standing empty) which should not have been permitted in the first place.

Of course the homeowners will feel entitled to government protection; it is a natural assumption that if the county allowed the builder to build the homes, then it was "safe" to do so. New Orleans is not the only inhabited area with grave risks of flooding; the willy-nilly building boom saw thousands of houses tossed up on land which was rather clearly unsuitable due to heightened risks of flooding, etc.

Will government buy out beleaguered homeowners? No doubt there will be cries to do so, and other voices noting that governments are now broke or in deficit mode. Lawsuits will be filed and much money will be spent resolving a crisis which resulted from lax approval of questionable building sites.

6. Poorly built McMansions will be abandoned as the costs of repair exceed the value. Those of you not in the building trades may scoff at this, but go find a "new home" which has had the plumbing fixtures and copper piping ripped out (to be sold for the scrap value), a swimming pool filled with guck and leaky flashing around the chimney, not to mention broken windows, buckled hardwood veneer flooring and damp, rotten carpets. The cost of fixing all this is huge, especially if water has leaked into the framing or subfloor.

Although I can't locate the source, I remember reading that in the depths of the 1930s Depression a premiere commercial building in New York sold for less than the installation cost of its elevators in 1928, just before the Crash.

If you doubt that property can drop 80% or more in value, recall that real estate remains a business proposition: if you can't make money owning this asset as a business, not as a speculation, why buy it? If you can't rent the property for a profit, and keep it rented through thick and thin, then why risk buying it? Owning a property which sits empty for months or years is a very sure way to go broke. If you can't sell it, then you walk away and start over. That's Capitalism with a capital C, folks.

In honor of football season, let's trundle out a football metaphor: you can toss the ball in the end zone, but if there's nobody there to catch it, you still lose.

From: http://www.oftwominds.com/blog.html

Redfin's new study: better ways to sell your home

2007-12-31T23:30:00.000-08:00

Redfin's 7 sales tactics

Don't shoot too high: Homes priced right to begin with often to sell for more than those that have to come down from an unrealistic initial price.

Price for the Web: Prices just over a certain threshold, such as $350,000, will be excluded from Web searches capped at that amount, cutting potential views by as much as 7 percent.

List on Friday: A study showed listings appearing on Friday get an average of 7.7 percent more visitors in their first week than those hitting the market on Thursday, which is the worst day.

Stay engaged: Studies show engaged sellers tend to sell their homes faster and for more money than typical sellers.

Market online: Post listings to sites that do not get automatic feeds from multiple listing services. A study showed each Craigslist posting, for instance, generates 11.9 visits to a listing's Redfin page.

Don't move: A study found sellers of vacant homes are 9.5 percent more likely to cut their prices than occupied homes.

Wait until nearby foreclosures are off the market: A study found a foreclosure costs neighboring sellers an average of $5,000.

Foriegn buyers

2007-12-27T23:04:00.000-08:00

New York condos lure deal-seeking Europeans

By Christine Haughney

The sidewalks of New York are crammed this month with European tourists on shopping sprees, picking up gifts that cost far less in the United States than they do at home because of the weak dollar. But they are not just crowding into boutiques and department stores. Some are also shopping for condominiums.

"There's bargains to be had," said Kerry Miller, a public relations executive who with her husband, Marty, a disc jockey, was working through her Christmas gift list by buying sweaters at Abercrombie & Fitch and makeup at MAC, as well as touring 32 apartments. The Millers, from Malahide, Ireland, a suburb of Dublin, searched for a one-bedroom condo. They made an offer for $700,000 on one apartment in the meatpacking district and are waiting to hear back from the seller.

While natives remain wary about real estate and worry about bonuses and the economic climate, foreign tourists are keeping brokers busy with their eagerness to buy up New York apartments, which many see as investments.

"The exchange rate is like a gift from God for Europeans," said Danielle Grossenbacher, the broker for Coldwell Banker Hunt Kennedy who showed the Millers around. "Everybody is feeling they have an opportunity to purchase a piece of Manhattan."

These buyers are transforming a traditionally slow month for New York real estate brokers at a time when brokers nationwide are struggling to sell homes. This year, New York brokers are waking before dawn to talk by phone with European buyers about amenities and closing costs and working late advising foreign buyers in town on the best places to shop for gadgets and clothes.

The number of foreign buyers has doubled in the last two years, according to data from the research firm Radar Logic. In just the last 18 months, they have bought one-third of all new condos that were up for sale, said Jonathan Miller, an executive vice president at Radar Logic and its director of research.

"We'd have had difficulty absorbing the elevated level of new development coming on the market without foreign buyers," Miller said. "They are a key source of demand for new development."

Donna Olshan, a New York broker, said that in December she typically received calls only from a few Wall Street bankers who had gotten their bonus numbers. This month, she said, a record number of foreign buyers have called, sent e-mail messages and shown up at her office shopping for real estate.

"We're seeing a flurry of foreign activity from Britain, France and Italy, looking to spend their pounds and euros," Olshan said.

Foreign buyers are helping shield New York from the housing slowdown that has plagued the rest of the nation and are providing a ready market for thousands of newly built condominiums. They like condos for the amenities and flexible rules that allow renting the apartments as investments. That many units are in neighborhoods that are not traditionally residential like Midtown and the financial district does not seem to bother the shoppers. They like that those neighborhoods are well known.

Diane Ramirez, president of the real estate brokerage Halstead Property, said foreign buyers would make up about 20 percent of the firm's sales transactions in 2007 in terms of dollars spent compared with nearly 15 percent in 2005. Ramirez said that five years ago, there were no apartments for foreign buyers because the market was made up mainly of co-ops whose owners would not welcome them into their buildings.

Real estate brokers project that foreign buyers will continue their shopping sprees for condos and clothes through the new year with the expectation that the dollar will continue to weaken.

Jonathan Fletcher, who works in information technology, and Aine Marshall, a dentist, came to New York from London to buy a $1 million investment property. Fletcher, who is considering buying in the financial district, where he believes there is opportunity for appreciation, plans to put down his deposit money first and wait for the dollar to weaken more before paying for the entire apartment. Even if he does not buy an apartment, the savings from shopping in the United States covered the cost of the trip, he said. They spent a total of $8,000 on clothes, a camera and a $5,000 drum set that would have cost about double back home.

Foreign buyers often purchase quickly because they largely view these apartments as investments like a bond or a stock. Dorothy Somekh, a Halstead broker, said that in an afternoon a Belgian couple she represented bought a $1.7 million two-bedroom condo at the Sheffield in Midtown to rent out for about $7,500 a month. After the couple signed the contract, they headed to Abercrombie & Fitch to shop for clothes for their daughters.

"They're not really sophisticated investors," Somekh said. "But they thought, 'Where else can I put my money?'"

Recent auctions of art have brought out incredible prices.

For example -- Dec. 27 (Bloomberg) -- Sotheby's, the world's second-largest auction house, sold about 46 percent more art this year as U.S., Russian and Asian collectors bid up prices for contemporary artists such as Francis Bacon and Jeff Koons.

Sotheby's art auctions in 2007 totaled $5.33 billion, up from $3.66 billion a year earlier, according to preliminary figures on Sotheby's Web site. Contemporary art sales in New York in November more than doubled to $418.3 million, the Web site said.

Sotheby's and its larger competitor Christie's International are increasing their dependence on contemporary art after an 11- year quadrupling in values.

"The contemporary-art market is flooded with liquidity but it won't last forever,'' said New York art dealer Richard Feigen, whose clients include Paris's Louvre museum.

Breakdown of our modern day banking system

2007-12-22T11:32:00.000-08:00

The news of the coming torrent of housing foreclosures has been all over the newspapers for weeks if not months. I have to believe that the stock market has taken it all in -- and that this "coming disaster" has been fully discounted.

But there other and even bigger problems, and Bill Gross, he of the giant PIMCO funds, is warning about it. "What we are witnessing is essentially the breakdown of our modern day banking system, a complex of leveraged lending so hard to understand the Fed Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August." Later Gross adds, "As the commercial paper market shrinks by hundreds of billions a month, central bankers worldwide are facing a giant stress test of the modern-day shadow banking system. The publicized and photographed overnight 'runs' on Contrywide and the UK's Northern Rock in mid-august were nothing compared with what's taking place in the shadows of the real banking system. Credit contraction, with its inevitable companion of asset destruction, is spreading with the speed of an infectious bacterial disease. "How does one protect 'deposits' during a run that no one can see? To be blunt, what does this mean to your pocketbook? ... Home prices have been the obvious first hit, down 5% nationwide already, with perhaps another 10% to go over the next several years. Following in lock-step have been financial stocks followed in short order by consumer-based equities as jobs and disposable income falter."

Is that scary enough for you? Let me put it this way. Bill Gross is one of the smartest men in the business, he manages billions in assets and has access to the best information on the face of this green earth.. Gross is worried, not just about the subprime situation, more importantly he's worried about the whole US and world banking system!

But you know what -- I'm going on the premise that the stock market knows everything that Bill Gross is warning about. If the problems ahead are ominous and fated to tear the international banking system apart, the stock market must be aware of it.

A critical test -- So far I must report that the stock market doesn't give a damn about the coming disaster. Because if Bill Gross is right, then the stock market should be falling apart and plunging wildly below its November lows. THAT ISN'T HAPPENING!

From: DowTheory

1 million mortgage loans will default in 2008

2007-12-14T23:02:00.000-08:00

For U.S. homeowners, builders, bankers and realtors, the crash of 2007 will only get worse in 2008. Everyone from mortgage-finance company Fannie Mae to Lehman Brothers Holdings Inc. expects declines next year. Existing home sales will drop 12 percent and existing home prices will fall 4.5 percent, Washington-based Fannie Mae says. Lehman analysts estimate almost 1 million mortgage loans will default in 2008, up from about 300,000 this year.

"We're only halfway through the housing shock,'' said Ethan Harris, Lehman, the fourth-biggest U.S. securities firm by market value. "It's just a matter of time before the weakness spreads to the rest of the economy.''

Comment -- Nasty, but the market obviously is well aware if all of the above. Please fix the following firmly in your mind. If the November lows hold (Dow 12743.44, Transports 4366.60) then all of the above has been fully discounted in the market's price structure. But if both of those lows are violated, we're in for some really tough times and almost surely we're heading into a first-class recession.
From: DowTheory

Today's SF Chronicle: 9% decline for 2008

2007-12-12T10:45:00.000-08:00

Forecasting a 9 percent decline in average home prices on the statewide level in 2008. And he said an additional 15 to 20 percent drop in 2009 would not be out of the question.

"We disproportionately enjoyed much higher home price appreciation over the last several years with the uses of subprime and Alt-A loans," Adibi said. "This is going to come to haunt us."

In the last steep housing downturn, Adibi said, it took 54 months for San Francisco home prices to fall from peak to trough; in San Jose it was 60 months, and in Oakland it was 51 months. To get back to the previous peak price levels took another 3 years, roughly.

"I don't see anything that would suggest the current downtrend is going to level off soon," said Michael Carney, executive director of the Real Estate Research Council of Northern California. "In fact, I think we might be seeing a gathering of momentum in the downward direction. I think we're more toward the beginning of a process than toward the end of it."

The median asking price for a single-family house in San Mateo County, for instance, has fallen from $948,000 in November 2005 to $767,000 this November.

The average number of days on market, meanwhile, has jumped from 59 to 100 in the same period. Most distressing to Calhoun, who studies home prices and sales each month gleaned from MLS records, is the number of sales - only 517 in November in Santa Clara County - the lowest number for any month since 1998.

PMI Insurance: 41 percent increase

2007-12-08T16:02:00.000-08:00

Down the road, the mortgage insurance will go away," when there is sufficient equity in the home. " And then the mortgage payments will be less than having the piggyback payment."

To that end, borrowers who expect to be in a home for several years might want to consider mortgage insurance on a primary loan as opposed to taking out a piggyback loan.

"I tell my clients, mortgage insurance is not a forever thing," said Cryer.

In the first 10 months of the year, about 1.7 million new private mortgage insurance policies were issued, a 41 percent increase from the same period a year ago, according to the Mortgage Insurance Companies.

"The deductibility feature for both government and private mortgage insurance has made insured loans more attractive,". "It's a lot harder to get those more exotic loans given the nature of the market."

The deduction is more likely to help moderate-income borrowers save on their taxes when buying lower-priced homes, said Cryer, the mortgage broker.

Three out of four California homeowners and 88 percent of homeowners nationwide who have purchased mortgage insurance through Walnut Creek-based PMI Group Inc. meet the income criteria for taking the mortgage insurance deduction.

The Bay Area's higher housing prices can result in much higher premiums, along with the potential for higher tax savings.

"It will reduce your taxes," said Bruce at San Ramon-based Armanino McKenna, LLP. "There's no reason not to take it."

While there is clearly a tax advantage, Coblentz pointed out in today's stricter lending environment, borrowers who could afford a median-priced home are more likely to have higher incomes that would disqualify them for the tax break. "With real estate prices so high here in the Bay Area, this will not help a lot of potential home buyers. The (income) limit is too low," he said in an e-mail.

The world's "lending machines"are frozen

2007-12-04T17:58:00.000-08:00

"The introduction of CDS (credit default swaps) coincided with a favorable economic climate for creditors and debtors. Since the nadir of the last credit cycle in 2002, creditors had a uniformly positive lending experience with virtually no defaults. The CDS market blossomed and the issuance of credit expanded, untethered by considerations of risk. From a modest infancy, the notional value of CDS today surpasses the amount of underlying cash bonds by an order of magnitude. CDS contracts now total $45.5 trillion of outstanding credit risk, growing at an amazing nine-fold in the last three years alone. Putting such a large number in some perspective, $45 trillion is almost five times the US national debt and more than three times US Gross National Product."

The US and the world is facing an almost unbelievable problem. Nobody knows what type or quality of risk they own. This has put a huge HALT to lending. Talk of another Fed rate cut this month sounds heartening. But a rate cut has nothing to do with solving the basic problem. The fact is that the US and the world's "lending machines"are frozen. The credit risk is now so huge that it's almost beyond comprehension.

Stocks and the Credit Markets

2007-11-26T19:11:00.000-08:00

I don't see the stock market even hinting of a bottom yet. Technically, I note this -- I've been following the Lowry's statistics since the 1960s. Their Buying Power Index reflects buyer's willingness to buy or accumulate stocks. Lowry's Buying Power Index is now roughly 60 points below where it was at the August lows. Buyers would not enter the market at the August lows, and now Lowry's Buying Power figures are even lower. This suggests that buyers will demand considerably lower prices before they will be even thinking about serious buying.

Also, on a common sense basis, current prices hardly suggest that we have seen a full bear market correction of the greatest bull market in history. After all, the S&P is currently selling at 18.30 times earnings with a mini-dividend of 1.99%. These are statistics characteristic of a bull market peak, not a bear market bottom.

"There is now increasing evidence that the liquidity and credit crunch in international financial markets is back to its summer peaks of August and, in most dimensions, even worse than in the summer; financial markets are now in a “virtual panic mode” according to a market participant (as reported by the FT).

"This worsening of the financial markets turmoil has occurred in spite of the hundreds of billions of dollars and euros that have been injected in the financial system by the Fed, the ECB and other central banks and in spite of the 75bps cut in the Fed Funds rate by the Fed. This massive easing of liquidity – both its quantity and price - has miserably failed to stem a severe liquidity crunch that is now back to the summer peaks, as evidenced for example in the interbank markets – both in US and Europe - by the sharp widening of Libor rates - at a variety of maturities – relative to equivalent maturity government yields and/or policy rate; such sharp rise of spreads to summer levels signals a worsening of the liquidity crunch"

From: DowTheory

Banks and the "Legal Title" paperwork

2007-11-23T23:14:00.000-08:00

Deutsche Bank got a hard shock a few days ago when a judge in the state of Ohio in the USA made a ruling that the bank had no legal right to foreclose on 14 homes whose owners had failed to keep current in their monthly mortgage payments.

A US Federal Judge, C.A. Boyko in Federal District Court in Cleveland Ohio ruled to dismiss a claim by Deutsche Bank National Trust Company. DB’s US subsidiary was seeking to take possession of 14 homes from Cleveland residents living in them, in order to claim the assets.

Here comes the hair in the soup. The Judge asked DB to show documents proving legal title to the 14 homes. DB could not. All DB attorneys could show was a document showing only an “intent to convey the rights in the mortgages.” They could not produce the actual mortgage, the heart of Western property rights since the Magna Charta of not longer.

Again why could Deutsche Bank not show the 14 mortgages on the 14 homes? Because they live in the exotic new world of “global securitization”, where banks like DB or Citigroup buy tens of thousands of mortgages from small local lending banks, “bundle” them into Jumbo new securities which then are rated by Moody’s or Standard & Poors or Fitch, and sell them as bonds to pension funds or other banks or private investors who naively believed they were buying bonds rated AAA, the highest, and never realized that their “bundle” of say 1,000 different home mortgages, contained maybe 20% or 200 mortgages rated “sub-prime,” i.e. of dubious credit quality.

Indeed the profits being earned in the past seven years by the world’s largest financial players from Goldman Sachs to Morgan Stanley to HSBC, Chase, and yes, Deutsche Bank, were so staggering, few bothered to open the risk models used by the professionals who bundled the mortgages. Certainly not the Big Three rating companies who had a criminal conflict of interest in giving top debt ratings. That changed abruptly last August and since then the major banks have issued one after another report of disastrous “sub-prime” losses.

A new unexpected factor

The Ohio ruling that dismissed DB’s claim to foreclose and take back the 14 homes for non-payment, is far more than bad luck for the bank of Josef Ackermann. It is an earth-shaking precedent for all banks holding what they had thought were collateral in form of real estate property.

How this? Because of the complex structure of asset-backed securities and the widely dispersed ownership of mortgage securities (not actual mortgages but the securities based on same) no one is yet able to identify who precisely holds the physical mortgage document. Oops! A tiny legal detail our Wall Street Rocket Scientist derivatives experts ignored when they were bundling and issuing hundreds of billions of dollars worth of CMO’s in the past six or seven years. As of January 2007 some $6.5 trillion of securitized mortgage debt was outstanding in the United States. That’s a lot by any measure!

In the Ohio case Deutsche Bank is acting as “Trustee” for “securitization pools” or groups of disparate investors who may reside anywhere. But the Trustee never got the legal document known as the mortgage. Judge Boyko ordered DB to prove they were the owners of the mortgages or notes and they could not. DB could only argue that the banks had foreclosed on such cases for years without challenge. The Judge then declared that the banks “seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test,” the Judge concluded, “their weak legal arguments compel the court to stop them at the gate.” Deutsche Bank has refused comment.

What next?

As news of this legal precedent spreads across the USA like a California brushfire, hundreds of thousands of struggling homeowners who took the bait in times of historically low interest rates to buy a home with often, no money paid down, and the first 2 years with extremely low interest rate in what are known as “interest only” Adjustable Rate Mortgages (ARMs), now face exploding mortgage monthly payments at just the point the US economy is sinking into severe recession.

Is this a real problem??

What investor would be interested in any of this debt?

Forclosures peak this month and March 2008

2007-11-21T07:17:00.000-08:00

The October forclosure figure is a 568 percent increase over the same period in 2006.

There were 8,818 properties sold in September in foreclosure auctions with a value of $3.6 Billion dollars, according to ForeclosureRadar.

“We see no sign of a foreclosure peak at this point, and we don't expect to see one until the third or fourth quarter of 2008 at the earliest,” says ForeclosureRadar.

“The sales we are seeing now are from missed payments in March. So current auction sales really have not yet been impacted by either August’s liquidity crunch or the ARM reset peaks this month and again in March 2008,” he says.

Homebuilders getting killed Monday and Tuesday

2007-11-20T09:25:00.000-08:00

Housing and Recession

2007-11-15T00:49:00.001-08:00

Click on image to read

Dow coming close to 12,845

2007-11-12T23:38:00.000-08:00

The PTI closed right on its moving average.

Lowry's statistics continue to deteriorate with Buying Power at a seven month low.

If the market is down tomorrow, the PTI will almost surely deliver a stock market sell signal. The Dow closed today just 142 points above a Dow Theory bear market signal.

If the Dow closes below 12845.78, particularly on rising volume, then the primary trend of the stock market will be down according to Dow Theory. Looks like an interesting week ahead. Be very conservative here. Remember, in a bear market everyone loses but the winner is the one who loses the least.

From DowTheory

Stock market trends: bearish

2007-11-07T17:39:00.000-08:00

Transports broke below their August 16 support today -- but Industrials closed 455 points above their own August 16 critical low of 12845.78. If Industrials close below that figure, the great primary trend of the market will have turned down, and -- we'll be in a primary bear market.

If a bear market is signaled, it will be imperative to be off margin and light or out of all common stocks with the exception of top-quality gold shares.

If or when a bear market is signaled, there is absolutely no way of knowing its duration or extent. It could conceivable be a short-lived affair or it could be an extended and crushing disaster. There is just no way of knowing in advance.

Is there an ideal position to be in if it turns out we're in a primary bear market? None that I know of, since every situation is different. But if I had to pick an ideal situation, it would be one half of liquid assets in gold and the other half in cash. What kind of cash? For most people, the kind of cash they are familiar with -- US dollars.

The VIX was up an amazing 5.10 to 26.49 as panic was in the air.

"When a stock or a commodity (GOLD) advances into new territory or to prices which it has not reached for months or years, it shows that the force or driving power is working in that direction. It is the same principle as any other force which has been restrained and breaks out. Water may be held back by a dam, but if it breaks through the dam, you would know that it would continue downward until it reaches another dam, or some obstruction or resistance which would stop it.

"Therefore, it is very important to watch old levels of stocks and commodities. The longer the time that elapses between the breaking into new territory, the greater the move you can expect, because the accumulative energy over a long period naturally will produce larger movements than if it only accumulated during a short period of time."

If gold can close above its 1980 peak price of 850 -- it will have overcome a resistance level that has held it back for 27 years! Thus, a decisive closing about 850 could bring about at least a doubling of the current dollar price for gold.

If gold can close above its 1980 peak price of 850 -- it will have overcome a resistance level that has held it back for 27 years! Thus, a decisive closing about 850 could bring about at least a doubling of the current dollar price for gold.

Suddenly gold is in the news. The public is reading about gold an actually asking questions. "Why is gold going up?" "What's the meaning of the rise in gold?" "Should I buy gold?" "Is there something wrong with the dollar?" "Where does one buy gold?" "Is silver related to gold?" "How much does it cost to buy a gold coin?" "What is GLD?" "Who sells gold coins, and if I buy a few, where should I keep them?"

Yet our citizens have been kept in the dark about gold for generations. Instead, Americans have been touted on the value of fiat money, rudderless money. This fiat money is created by a private banking cartel (the Fed). This transfer of US money-creation has never been authorized by a Constitutional amendment.

I've said this before, but I'll repeat it -- the whole system of fiat (paper) money is the greatest fraud ever perpetrated on the American people. Our defense against this "counterfeit" money is, and always has been, Constitutional money -- gold and silver. Federal Reserve Notes (currently termed "dollars") are a blatant lie. Today, rising gold is dragging that lie out into the open.

From: DowTheory news

More on Gold and deflation

2007-11-03T00:07:00.000-07:00

We have a key barometer at our disposal. It's called gold. We also have a fierce problem at our doorsteps. It's called deflation. Yesterday, we saw the stock market's reaction to the Fed's meager quarter-point cut in the Fed Funds. The market's reaction was to take a swan-dive -- I might even call it a semi-crash.

Why did the market take a dive? Here's the background. The housing situation is deteriorating. The specter of mass foreclosures next year is haunting the building and real estate industry and its workers. US consumers are growing increasingly pessimistic. US consumers are pessimistic about the war, they're pessimistic about our President, they're even more pessimistic about Congress, they're pessimistic about their inability to keep up their standard of living because of rising prices, they're pessimistic about their government's debts -- and their own debts. And they're pessimistic about Social Security and Medicare and their own and their children's futures.

Where might all this pessimism lead to? It will lead to a cut-back in consumer spending. Consumer spending amounts to nearly 70% of the Gross Domestic Product of the United States. If consumers cut back substantially, the nation will sink into recession.

The ramifications of a recession are international in scope. US consumer spending comprises 19.3% of the world's GDP. If the US goes into recession, it will impact adversely on the world economy.

Fed Chief Bernanke's got a brutal problem. He'd probably like to go all-out on the path of inflation, knock deflation on its fanny. But to do that means we must kiss the dollar good bye. Already, Bernanke is hearing the hoots and the warnings. The New York Sun newspaper is now calling the US dollar "The Bernanke." The world is sneering at the once all-powerful "Yankee dollar." And that's not a good omen.

What would happen if the US let the dollar fall, and I mean fall hard? We know that the Fed talks to central banks the world over. But the biggies, China, Russia, the Mideast, would they stand for a crashing dollar? After all, they hold billions in US securities. What would they do? What is Bernanke to do?

Maybe Ben should come out with the truth. Maybe he should announce that if the US goes into recession, the whole world is going to feel the pain -- and that will create political and social problems across the face of the globe. Therefore, the US must inflate.

GOLD is a barometer. Currently, gold appears to be holding its own. Is that enough? Remember, Bernanke has to do whatever it takes to inflate, and the key gauge will be the price of gold. To put it another way, if Bernanke can't get gold moving higher, we're in trouble. If gold rallies above 800 and continues to climb, we'll know that Bernanke is succeeding in holding off deflation. But if gold begins to slide, if the gold charts start breaking down, then we'll know that deflation is on the verge of winning the game. And I promise you that if gold loses, we'll all lose.

So the great drama is starting to unfold. The US must hold off the forces of deflation at all costs.

From: DowTheory

"Is it subprime?" or is "It Californian?"

2007-10-31T20:25:00.000-07:00

Some analysts predicting top to bottom falls in prices of as much as 40 percent, California looks headed for a recession. Don't be surprised too, if in six months the question angry bond holders ask is not "Is it subprime?" but "Is it Californian?"

Make no mistake: California matters. It's the world's 10th biggest economy, it generates 13 percent of U.S. GDP and its homes are collateral for billions of bonds held by investors around the world.

The situation has worsened dramatically since a freeze in global capital markets in August made it much tougher and more expensive to get a subprime or large loan.

And with unemployment rising in the state, in part because of job losses in construction, finance and real estate, things could get a lot worse.

"We are heading into a state recession and that will take an already horrendous mortgage problem and take it over the top," said Christopher Thornberg, of Beacon Economics.

"Prime loans will be in trouble too. We've got a giant mess on our hands."

Essentially, the same factors that drove housing prices upward in California are now conspiring to take them back down again.

Prices in the state have tripled in the last decade, but most of the gains have come since 2003, when subprime and adjustable-rate lending took off. That allowed people to buy homes with debt they really were not able to repay. As long as prices went up, no problem: borrowers were able to refinance when the introductory rate rose or even sell for a new higher price that more than paid off the debt.

But when prices begin to fall - by 6-9 percent in the major metropolitan areas so far - that logic no longer held. What's worse, the investors who had been buying the debt got wise and cut off the tap. Market rates have gone up, lending criteria have gotten tighter and a bunch of borrowers have handed the keys back to the lenders, who then try and sell into a plunging market.

In Sacramento County in September, 27 percent of all sales were by lenders who had repossessed homes.

Alex Barron says if you really want to see how far prices will fall, look at auctions of bank-owned real estate and at some of the fire sales now being held by developers.

"The builders are already pricing their homes 30-40 percent lower than they were at peak," he said.

"(Bank-owned) prices have come down 30 percent or so from where those loans used to trade at, as well. If the last clearing price is that much lower, everything is going to get there sooner or later."

A report released by Goldman Sachs last week called Californian house prices 35-40 percent over-valued in a note to clients.

Gains up through 2003 were largely driven by good fundamentals, rising disposable income and falling interest rates, according to the note. But in 2004, as "affordability" loans such as subprime took off, so did house prices. As of the last quarter of 2006, 41 percent of all loans in California were subprime.

Barron sees top-to-bottom falls of 50 percent, while Thornberg is looking something on the order of 25 percent.

While these are far worse than consensus, falls of those magnitudes in California house prices would have far-reaching effects.

California would tumble into recession, raising the risks of a national recession. The rate of default by prime borrowers would also spike upwards, putting further pressure on bank balance sheets and deepening and hardening the credit crunch.

Those types of house price falls are almost certainly a lot higher than the assumptions used by the ratings agencies, so expect to see another round of shock and losses by holders of so-called safe bonds.

If the bailout fund for bank-affiliated structured investment vehicles (SIVs) is going to be $80 billion, how big a fund will we need for California?

From: Patrick.net news

Home Builders and Calif. decline forcast

2007-10-23T23:20:00.000-07:00

The home builders are now getting massive cancellations on their home sales. For the most recent quarter, here are the cancellation rates for the nation's biggest builders.

KBH homes .........50%
D.R. Horton .........48%
Lennar Corp..........32%
Pulte Homes..........28%
Toll Bros...............24%

Oct. 22 (Bloomberg) -- Californian homes are overvalued by as much as 40 percent and stricter lending standards will probably contribute to ``material'' price declines, according to analysts at Goldman Sachs.

Prices in the state ``have proven surprisingly resilient, given the severe curtailment of credit availability and rising unemployment,'' the analysts said in a note to investors. ``However, we believe that a downturn is imminent.''

In August, the median price for houses in California was $589,000, though economic conditions only support prices of $350,000 to $380,000, the analysts said. The average U.S. home is 13 percent to 14 percent overvalued, the report estimated.

Home sales in California, as in the rest of the U.S., are being hurt by the collapse of the subprime-mortgage industry. Lenders are requiring higher credit ratings from borrowers seeking mortgages and are demanding larger down payments. Standards are particularly strict for jumbo loans, mortgages higher than $417,000, which are common in California.

The median price for houses and condominiums in California will probably drop 4 percent to $553,000 in 2008, the Association of Realtors said Oct. 10. That would be the biggest decline in 15 years.

Baby Boomers - Social Security - Gold

2007-10-11T16:39:00.000-07:00

The monster drain on money as the first segment of the Baby Boomers helps themselves to their share of Social Security. These are the people who were born in 1946 and are now 61 years of age. Shortly, an increasing number of these "baby boomers" will be taking early retirement.

Why do I say that? Heck, read the papers. All you hear are these four words -- "escape," "vacation," "travel" and "retirement." But as I said, it's just starting. We're beginning to move into what I call the "Social Security Express Lane." This is the period when those people who were born between 1946 and 1964, 80 million in all, will qualify for Social Security.

The boomers are from a different era. The boomer dream appears to be -- "I made a fortune at age 45, and I retired. Now I'm playing golf seven days a week and lovin' it."With the SS trust fund bare, cleaned out and holding only government IOUs, how are all these boomers going to be paid? On top of that, there's Medicare, which is now paying out more than it's taking in. Looking at the whole picture, the Heritage Foundation warns, "This is the single greatest economic challenge of our era." You think the US government's balance sheet is over-the-top now? Listen, over coming years, these programs will rack up $50 trillion in government obligations. How's it all going to work out?

I have my own thoughts on the Social Security and Medicare situation. I believe that the US government will address the situation two ways. The first way will be to scale back on the benefits -- there's just no other choice. The second way that the US government will address the situation will be through monetary inflation. The government will have to print the money to cover the coming tidal wave of unfunded liabilities. This process will have a brutal impact on the dollar. The purchasing power of the dollar will continue to head down. In my lifetime I've seen the purchasing power of the dollar lose 80 percent of its value. And I have to wonder what the dollar will buy ten years from now -- fifteen years, twenty years. It's very sad, indeed.

This is the reason to own gold. I hear a lot of talk about gold not keeping up with inflation, gold spending twenty years between 1980 and 2000 doing nothing or simply declining. Forget it, that was then, this is now. As I see it, the third phase of the great gold bull market lies ahead. Gold is fated to rise to "impossible" heights in terms of current US dollars. I know this sounds far-fetched to today's impatient holders of gold.

But for a great move to materialize, it has to be considered to be "almost impossible" in advance. Another way of putting it is that for a move to by huge, the public has to be clean of the item to start with. Ideally, nobody should be in the item. And today the US public is "clean as a whistle" when it comes to owning gold.

From: RR at DowTheory

Third phase of the stock market

2007-10-05T22:59:00.000-07:00

I envision the housing mess slowly being resolved. I see the "cheap" US dollar rendering US manufacturing very competitive (at last). I see world liquidity staying at high levels, and I see a period of coming extraordinary prosperity. In the meantime, with communication and computers increasingly available, the downtrodden populations of the world will see the benefits of freedom or at least the benefits of free enterprise.

Note that the Dow is pushing subtly higher and higher. Where's it going? It's going ever closer to the "big show," that's where it's going As a matter of fact, I believe the Dow is leading the way to the "big show." Yes, the Big One, the mega-third phase of this bull market lies ahead. It may take into next year, but it's a'comin'. So hang on to those Diamonds (DIA).

How about Dr. Copper? I haven't talked about this "international barometer" of world health for a while. As a matter of fact, Dr. Copper is pressing against its ceiling, the ceiling being outlined by that extended horizontal blue line. China is a major user of copper, and so is most of Asia. If copper still possesses its barometric properties, then the world economy continues to be in good shape -- actually in better shape than the US is in, since the US is still wrestling with its housing "sickness."

From: DowTheory

Outlook for the economy

2007-10-05T08:26:00.000-07:00

We expect overall job growth to slow during the next six to nine months, as the declines in home sales and residential construction ripple through the broader economy. Rising mortgage rates and higher energy costs will also cut into discretionary income, causing consumers to cut back.

But even with all the challenges we see today, spending will still increase. The rise will simply be less than we have seen in recent years. Real personal consumption expenditures should average a 2.2 percent pace over the next three quarters.

San Francisco Chronicle: blogger in business

2007-09-25T23:17:00.001-07:00

He practiced what he preached, refusing to buy a house. Instead he and his wife rent a Menlo Park bungalow for themselves and their two children. Today, the housing market has indeed slumped, giving his views some credence.

"Nobody calls me crazy now," Killelea said. "I haven't changed; it was just a matter of waiting for the fundamentals to catch up."

Killelea's blog attracts 14,000 readers a day, drawn to his sardonic take on the market and numerous links to news articles that bear out his premise. His site ranks high in Google searches of "housing market" or "housing crash."

The site exemplifies a new real estate Web genre: "bubble bloggers."

There are scores of bubble bloggers who passionately believe the housing market is so out of whack that it is destined to collapse. What Matt Drudge is to political gossip, housing bubble bloggers are to real estate doom and gloom. They range from acerbic to inflammatory but definitely don't mince words. They rail against the real estate industry, sometimes spin conspiracy theories, and lately indulge in schadenfreude about the housing downturn. Bubble bloggers say they inject a healthy dose of skepticism to counterbalance excessive cheerleading from real estate industry professionals.

"Bubble bloggers weren't taken seriously until six months ago, and now everyone's taking them seriously, which is fantastic," said Brad Inman, founder and publisher of Inman News, a wide-ranging real estate Web site. "They really served a purpose when they were a voice in the wilderness."

But many real estate agents are less enthusiastic.

"I laugh at bubble bloggers," said Matt Lanning, a Realtor with Zephyr Real Estate in San Francisco, whose sfhomeblog.com takes a considerably more upbeat view of the market. "I don't claim the world is always going to be stable, but there is no way the San Francisco market will collapse. It's a lot like the sensational journalism we're seeing with subprime mortgages which are far less of an issue than the media is making them out to be."

As for Killelea, Lanning said: "He has not been right about anything. Most of what he does is scour the Internet looking for anything to back up his position as someone who is forecasting the coming apocalypse of the real estate market."

Killelea's rhetoric can be strident, but in person, he is low-key and pleasant. With alert blue eyes behind wire-rim glasses and close-cropped reddish hair and mustache, the 42-year-old seems like an ordinary Silicon Valley tech guy - which, in fact, is his day job.

Killelea does contract programming work but said he can take off months at a time from his $100-an-hour software gigs because he took his savings from renting instead of buying, invested in the stock market and did quite well. His last job ended in March and he's just thinking about looking for a new one.

He would love to work on the blog full time but it brings in only about $1,000 a month.

That revenue comes laden with irony. The blog carries Google ads, which use an automated scan of site content to place ad links, so most ads on Patrick.net feature a selection of mortgage brokers, real estate agents, home builders and "get rich quick in real estate" schemes.

"The sheer joy is that all the people I think caused the problem" advertise on the site, he said. "I can not only complain about them; I can take their money while I'm doing it. They would probably be horrified to know their ad is on my page. "

Killelea spends several hours a day working on the blog: writing entries, responding to every e-mail he receives, reading about 100 news links his readers send in daily, and picking 10 to 20 to post under the banner "Housing Crash News."

Some headlines he linked to on Monday: "We're in deep doodoo," "Worldwide bubble troubles," "The new money pit: Housing bust gets worse" and "Bernanke has snookered us all."

Why doesn't he include news and views from other perspectives?

"I have no pressure to be balanced, and I'm not balanced," he said.

Some of his predictions are so far out there that they seem unlikely to come true. For instance, he thinks Bay Area houses won't be worth buying until the median price is cut in half, to about $300,000.

Could that really happen?

"I have faith," he said, putting his hand over his heart, only half mockingly.

Killelea didn't set out to become an apostle of housing pessimism. He says he just applied the same analytic skills he uses in programming to the housing market after his first brush with house hunting.

In 1999, he and his wife tried to buy a house in Berkeley at the height of both the dot-com bubble and housing mania.

"It all felt rigged," he said. "Everything was set up to get me to overbid and not do an inspection; basically throw caution to the wind. It just felt really wrong. I felt like a sheep among wolves."

After being consistently outbid, the couple decided to rent instead. They found a charming Menlo Park two-bedroom on a tree-lined street for $2,700 a month. After a couple of years when the rental market softened, they asked for a rent reduction and now pay $2,350. "I would be paying out and losing about three times as much" to own the equivalent house, he said. "In some big urban areas like Manhattan and the Bay Area, it may never be cheaper to own" than rent.

After the dot-com bubble burst, Killelea assumed prices would return to normal - but instead they continued to soar as the Federal Reserve lowered interest rates.

"I got out there and started looking at things and realized people were bidding even higher than before," he said. "It was pretty clear so many people were getting in so far over their heads that this was going to end in tears for a lot of people."

He started his blog three years ago and soon found a receptive audience.

"It became a full-blown obsession, not just for me but for other people, too," he said.

Indeed, the blog draws a dedicated group of readers and participants, many of them also renters-by-choice.

"I begin every morning with it," said Peter Christiansen of South San Francisco, who first came across the blog in 2004. "For me, it's become the only source of information on the housing market. I don't need anything else. It's the best source of informed participants I've ever participated in on the Web; people really seem to know what they're talking about."

Like many of the site's participants, Christiansen eschews buying real estate. Instead, the mental health counselor owns a mobile home on a rented site.

Patrick.net creates a sense of community, Christiansen said. "We are people I would describe as value investors," he said. "The one thing that probably holds all of us together on Patrick is that we're mostly people who are really suspicious of bubbles."

Killelea has set up one practical proposal to cut out the middleman in real estate through his site. He calls it Real Estate Dating Service, a place where home buyers can post what they're looking for - price, size, location - and sellers can scan the listings and contact buyers directly. About 730 buyers have signed up, but he hasn't tracked whether any sales have occurred as a result.

Every once in a while his two worlds - programming and blogging - collide. Time was, Killelea was best known as the author of "Web Performance Tuning," a geeky manual that helped him get jobs. Now his fame as a bubble blogger has spread - not always to his advantage.

"Once a guy called me in for a job interview just to berate me," he said. "I don't do this language called Ruby that he wanted, so I said, 'Why did you bring me here?' He said, 'I want to talk to you about your Web site.' He complained about how he had overpaid for a house in Palo Alto and couldn't get out of it. It was not a civil conversation."

Credit percentage of GDP - all time high of 340%

2007-09-24T22:46:00.000-07:00

Americans may be disappointed that the Federal Reserve's interest rate cut won't necessarily translate into lower monthly mortgage payments and a revival of the housing market. "Mortgage rates won't stimulate demand,'' said Scott Anderson, senior economist at Wells Fargo. "The Fed may be a little impotent here because what caused this housing crash was overpriced housing, not mortgages.''
When trading in any overpriced asset-class slows dramatically, there's only one "cure." That cure is lower prices.

I just received and finished reading a paper by one of my favorite economists, Richard Duncan (he authored the terrific book, "The Dollar Crisis, Causes, Consequences, Cures"). Duncan is one of the very few people who fully understands what's going on in the US and world economies. Please study these two paragraphs carefully.

"Bubbles are easier to inflate than to sustain. The US property bubble is now beginning to deflate, and the risks to the US and the global economy are greater now than they were when the stock market crashed six years ago -- greater because the global imbalances have become so much larger as a result of the US property bubble. If US consumption now begins to contract, as appears likely, US imports will decline, and the world will also go into recession, possibly a very severe one.

"Credit growth drives economic growth. Total credit in the US as a percentage of GDP has grown from 150% in 1969 to 240% in 1990 to 340% today. It is not difficult to understand that rapid credit expansion boosts consumption and investment and employment and asset prices. However, excessive credit growth also eventually causes economic overheating and asset price bubbles. So long as additional credit is forthcoming everyone can simply borrow more this year to pay interest on the money they borrowed last year. Those bubbles pop when the individuals and/or corporations who borrowed the money are unable to pay it. That is the situation we are experiencing today."

Now the world bubble (due to a number of causes and triggered by the subprime disaster) is beginning to deflate. This has created an international credit crisis. If the world bubble continues to deflate, it's going to result in a global recession or worse. The only way to halt this deflation is for the US government to increase its ratio of debt to Gross Domestic Product (GDP). This will require the US to spend additional hundreds of billions of dollars -- maybe well over a trillion dollars to offset the deflationary forces of the credit contraction.

Richard Duncan believes that the US may have to spend a trillion dollars or more over the next four years just to stave off credit contraction and deflationary forces.

The question then arises, how can the US finance the huge amount of spending (debt) that must be created in order to offset the forces of deflation? The usual way would be to sell Treasury securities to our foreign friends and their central banks. But what if the central banks (already choking on US dollar-denominated securities) have accumulated enough dollars? In that case, the US will have to sell bonds to the Fed, and the Fed would create the money needed to finance the deficits.

But wouldn't this process be highly inflationary? Yes, of course it would -- basically, it's monetizing the debt, which is always inflationary. Yet increased inflation is what is needed to counteract the deflationary force of the deflating world bubble.

The question then arises, assuming deflation can be held off, how can the whole mess be solved in some permanent way in the future? The answer, I believe, is that the world must move to a new monetary system with an anchor in something tangible, an anchor that will force discipline. The only tangible item I can think of that will fit is gold.

Market talk and gold

2007-09-21T20:15:00.000-07:00

I'm hearing and reading a lot of dire predictions about the market and the economy and where it's all heading for in the ominous months and even the year ahead. The forecasts tell us that the housing mess will get messier. After all, just because rates are lower won't make frightened potential home-buyers want to rush in to buy a house. Furthermore, in the past, contracting credit has almost always led to recessions and bear markets -- so what's so different today? Next year it's a given that we're going to be dealing with an epidemic of home foreclosures, and there's nothing bullish about that. No, there's no shortage of bearish forecasts, you can read about "the coming disasters" in every newspaper and financial publication.
In the meantime, Ben S. Bernanke and the Fed crowd have opened up the floodgates of liquidity, while at the same time they've dropped both the Fed Funds and the Discount Rate a full (and surprising) half-percent each.

The Bernanke dilemma -- move fast to avoid a recession -- or attend to the swooning dollar. It's no contest -- the Fed will avoid a recession at all costs. The Fed has justified it's action by announcing that there's little or no danger of inflation, so why worry if we lower rates? To Bernanke, a recession means the possibility of deflation, and deflation is something Bernanke doesn't want in his vocabulary.

But there are problems. One is that the dollar is falling out of bed, and this has to be worrying our foreign friends, who hold tens of billions of securities all denominated in dollars. As the dollar sinks, our overseas friends are taking enormous losses. Should they sell their US holdings, should they stand pat and take it, or should they simply diversify out of dollars and hope for the best?

Question -- suppose the pessimists on the economy prove to be correct -- or even partially correct? The Fed is currently increasing M-3, the broad money supply, at a 14% rate, and if the economy doesn't respond to that, they'll push the M-3 growth rate even higher -- to 15%, 17% or 20%, whatever it takes. They'll also drop interest rates again -- and again. If, despite all the Fed's machinations, the economy doesn't respond, we could easily experience something akin to hyper-inflation as the Fed funds go totally wild.

Ironically, all this is providing the ideal background for gold. For our protection, it's OK to sell dollars and switch into euros or Canadian loonies (dollars), but what if we're moving into a situation which can best be termed competitive devaluations? That's a condition where all fiat currencies tend to lose purchasing power? And what would these various currencies be losing purchasing power against? Currently, the fiat currencies are losing purchasing power against wheat, soy beans, heating oil, gasoline, basic foods such as bread and vegetables along with the cost of utilities, medical care, college tuition. And, of course, fiat currencies have been losing against gold.

he VIX was down 1.45 to a low for the move at 19.00. Stock market heading up -- investors calming down.

Pretty good action for a Friday in a still-nervous stock market. Market is a bit overbought, and now a lot of left-behind investors are waiting for a decline so they can get in. The market, being the ornery mechanism that it is -- won't oblige.

Credit Crunch: 4.87 percentage points above Treasuries

2007-09-20T22:12:00.000-07:00

The pain has been particularly acute, of course, in housing, where creditors have lost massively and the specter of foreclosure looms over homeowners unable to cover escalating mortgage payments. Nor has the leveraged lending business been spared. The spigot of new commitments has shut tight. The average risk premium on high yield bonds leapt to a recent high of 4.87 percentage points above Treasuries, compared to June's record low of 2.63 percentage points, an almost seismic adjustment for the tortoise-like debt market.

Never before in the history of capital markets has so much money been lent to so many challenged borrowers.

The statistics are indisputable. In 2007 (until the market effectively shut down), more than 32% of new lending was to companies planted on the lowest rungs of the credit ladder, compared to 20.9% in 2006, the previous peak, according to JP Morgan. That brought these borrowers' share of outstanding debt to above 25%, also a new high. Much of that debt was amassed, of course, by private equity buyers, whose average leverage ratios for new deals in 2007 reached 6.6 times cash flow, another record.

So why, given such seemingly incontrovertible worries, have interest rates on junk debt stayed stubbornly low? First, for all the chatter about liquidity crises, vast pools of uninvested capital remain in place in hedge funds and elsewhere, eager for the next "buying opportunity." Even amid the summer ugliness, whenever trading values of outstanding debt appeared about to crumble "value" buyers emerged to prop them back up again. Still more capital is now being raised to invest in this debt, some of it by the very banks whose imprudent practices helped create the problem.

Stock market and housing

2007-09-18T23:04:00.000-07:00

There were 2995 advances on the NYSE and only 334 declines. UP volume was an amazing 96.4% of up + down volume.

Total volume expanded bullishly to 3.40 billion shares.

The VIX plunged 6.13 to 20.75, one of the biggest declines in the VIX I've ever seen. Fear is collapsing with today's super-bullish action.

Looks as though this was another 90% up day, but this time the missing ingredient came in -- EXPANDING VOLUME. The primary trend of the stock market is bullish. The secondary trend of the market is bullish.

The stock market has discounted the worst that it can see ahead, and that's enough for me. There isn't going to be any housing disaster, there isn't going to be any recession. Don't get me wrong, there's still going to be plenty of trouble for the people who are stuck with rotten mortgages, but the stock market is saying that the housing trouble is not going to flatten the economy. The stock market is saying that in due time the housing trouble will be put behind us.

Latest -- On the news of the Fed Funds cut, gold surged over 8 dollars in the aftermarket with the Dec. contract at 731.70.

From: RR

"Campbell Real Estate Report": 40% to 50% drop in prices

2007-09-12T18:44:00.000-07:00

The great "Campbell Real Estate Report": Bob was the first to call the top of the real estate boom in his August 2005 reports. Robert is now very bearish on the future of real estate pricing. He thinks prices could drop as much as 40 to 50%. I asked him how this could happen without setting off a recession. His answer is that "It can't." He thinks a recession is in our near future.

From: RR

Loan Resets: March of 2008 biggest jump

2007-09-12T10:55:00.001-07:00

Here’s a very concrete example to flesh out the issues. You have a hypothetical 2/28 ARM portfolio of $1.2 million original balance. It contains 12 $100,000 loans, one originated per calendar month of 2005. Each loan will have a first rate adjustment in each calendar month of 2007. The “12-month reset projection” for this pool, considering only the first adjustment, is very simple: each month, 1 loan resets, for a dollar amount of $100,000 per month or $300,000 per quarter.

But what if you do not limit yourself to just the first reset? The 2/28 will, if it does not prepay, reset every six months after the first reset. If we assume no prepayment, then, and include subsequent adjustments, we get 1 loan resetting in January-June, but 2 loans resetting each month from July-December. Starting in July, there is 1 loan hitting its first reset and 1 loan hitting its second reset. If you simply counted resets, you would show 2 loans in July-December, for a balance of $200,000 per month. If you tried to total up the monthly balances for a year, you’d end up showing $1.8 million in resets on a $1.2 million portfolio of loans. You could say, in a certain context, that $1.8 million in resets are scheduled for 2007, but that is not saying that $1.8 million worth of loans are “at risk.”

And, of course, not every loan will survive on the books after its first adjustment. It could pay off voluntarily (refi, home sale) or involuntarily (short sale, foreclosure). If you wanted to take a vintage of originations and project out a reset schedule, you would have to make projections of prepayment and default. If you started with current outstandings, you would already have your prior prepayments and defaults removed from your pool, but you would still have to project these into the future, unless your goal was a “what if” scenario that involved no loan paying off or defaulting until its reset date.

Even if you wanted to do that, there’s no reason to assume that all reset-related defaults will be due solely to the effect of the first adjustment. It is the most wicked reset for the borrower, but the ugly fact of the 2/28 ARM is that borrowers who survive the first adjustment, possibly just barely, will get another smaller one in six months, and then another one in another six months, until the loan reaches either fully-indexed (then-current 6-month LIBOR plus margin) or its lifetime cap (usually start rate plus 6.00 points). Given the depth of the teaser discounts, the hefty margins, and the movement in LIBOR since these loans were originated, there is no reason to think many of them won’t keep adjusting upward every six months for two years until they hit indexed or capped. So the borrower who just barely survived the first reset might go down at the second one. The borrower who more comfortably survived the first reset might go down at the third one. There is a point to “cumulative” projections of resets.

However, you would still have to adjust these numbers further. You would also project index values forward (to guess when caps will come into play and loans would stop adjusting), and you would have to take into account varying margins. I could assume for our hypothetical pool that all loans have the same margin, but in the real world they don’t.

You will, therefore, see differing presentations of reset volume, and those differences may have a lot to do with prepayment speed assumptions, underlying index movement assumptions, or the weight of caps and margins in a particular pool of loans. That does not mean that someone is lying to you, although you may or may not find the underlying assumptions reasonable (assuming you can figure out what they are).

Today, Reuters reports this:

About $75 billion in adjustable-rate U.S. mortgages are going to reset in the fourth quarter, most of which will emerge next month. Of the loans resetting, around 75 percent are subprime mortgages.

As far as I can determine, this $75 billion number includes only the first reset of any ARM (the date on which it changes from “fixed to floating” rate), based on Q207 securitized outstandings, and has no prepayment adjustments. If you assume even conservative prepayment speeds, the actual number of resets will be lower. However, if you “add back” subsequent adjustments for loans that survived their first adjustment, the raw number of resets is higher. The Bank of America chart CR posted several weeks ago shows securitized plus non-securitized, which is why it has such large numbers compared to the Reuters number. I believe, but cannot verify, that it also includes only the first adjustment.

From: http://calculatedrisk.blogspot.com/2007/08/arm-reset-charts.html

Getting a Jumbo Loan: testing today's market

2007-09-09T20:39:00.000-07:00

If wholesale lenders have difficulty finding buyers, this will be reflected in the prices and other terms they quote to mortgage brokers and small lenders. And that's what I decided to look at.

My data consists of wholesale price quotes from 12 large wholesale lenders. As a base case, I first defined a "cream-puff loan" -- this is a 30-year fixed-rate mortgage for $417,000 on a single-family property being purchased as a permanent residence for $550,000 by a borrower with a FICO score of 720 and who fully documents income and assets.

All 12 lenders quoted prices on the cream-puff at various rates. The prices are points plus small fixed-dollar fees, which I combine into one price. At each rate, I have the price quoted by each lender, so I know not only the best price, but also the dispersion of prices by the different lenders. The quotes are as of Aug. 7.

For example, at 6 percent, the lowest price was $4,039 and the highest was $6,589, with other quotes in between. This is a spread of only $2,550, which is exactly what one expects to find in a well-functioning, competitive market.

In my second pass, I upped the loan amount to $418,000, leaving all the other features of the loan unchanged. It remains a cream-puff loan in all respects other than size -- it is now a "jumbo" loan, ineligible for purchase by the agencies.

At the same price, jumbo rates were 0.625-0.75 percent higher. I do not have a comparable figure for the period just prior to the recent market upheavals, but I have looked at the spread on many occasions over the years, and it was always 0.25-0.375 percent. To my knowledge, the current spread is larger than it has ever been.

The price dispersion was also higher on the jumbos. For example, on a 6.625 percent loan, the best jumbo price was $4,494, but the highest was $11,639, a spread of $7,145. On 7.5 percent loans, the best price was a rebate of $5,059 while the highest was $14,987, a spread of $20,046. Two of the 12 lenders did not provide any price quotes on the jumbo.

With my third pass, I changed the jumbo loan from a purchase loan to a cash-out refinance, and from full documentation to no documentation. Everything else remained the same. This moved the loan into a much riskier niche.

Only four of the 12 lenders quoted prices for this loan, and one of the four was way off the mark. At 8 percent, the best quote was $3,253; next best was $10,623; and the worst, $13,218. The best quote by the fourth lender was $14,091 for a 9 percent loan.

“Everything was great until about a month ago. Then, on one day – Thursday, Aug. 9 – everything changed as lenders shot up rates on jumbo loans to 9 percent and further tightened guidelines,” said Syd Leibovitch, owner of Beverly Hills-based Rodeo Realty, which mostly deals in homes worth more than $2 million.

“It became almost impossible to find a jumbo loan.”

For 10 days, Leibovitch said, sales of high-end homes came to a screeching halt. “We lost about a half-dozen deals,” he said.

Finally, towards the end of the month, sales picked up a bit as alternative sources of financing – chiefly savings and loans and credit unions – began to step in.

The mid-range market went through similar turmoil last month.

“We had a dramatic slowdown in activity in August. When the credit crunch hit, people didn’t know what to do and they just froze. It was like the Sept. 11 aftermath all over again,” said Gregory Holmes, associate manager with Coldwell Banker residential brokerage in Studio City.

Holmes said that “shock to the system” washed out almost all the buyers with less than prime credit or those who were unable to come up with 20 percent down payments.

However, he said there are still some buyers who do qualify for prime loans and can come with a $150,000 down payment on a $750,000 home. “They are just a little harder to find now than a year or two ago when we had all those bidding frenzies.”

This is bad news for all borrowers other than those seeking cream-puff loans for $417,000 or less.

WSJ

Stock Market: another 90% up day

2007-08-31T22:28:00.000-07:00

It looks as though today was another 90% up-day. That would make three 90% up-days so far in August -- August 17, August 29 and August 31. Pretty impressive, if not spectacular.

A lot of we old-timers watch the Baltic Dry Index which is an index of dry shipping of such items steel, coal, wheat, etc. The graph shows that world commerce is moving along at great speed. No world recession while the Baltic is hitting new highs.

Market is becoming overbought, and it will be interesting to see how much backing-off we see on the next decline.

All the major stock averages are now graded bullish. The bull is pawing the ground and snorting. Make sure you get out of his way. If you have any shorts, get the heck out of them first thing Tuesday morning. This is not a shorters market.

Housing: should be 3 to 4 times your income

2007-08-23T23:08:00.000-07:00

Just as stocks break free of fundamental metrics of value in speculative manias, so too do houses. But just as stocks retrace to historical levels of price-earnings ratios, so too will housing retrace to historical levels of income-to-value ratios. Historically, this is about 3-to-1: long-term, houses cost about 3 times household income. Since the median household income in the U.S. is abour $46,000, U.S. incomes would support house values of abour $125,000 - $140,000.

As I have noted before, my parents/step-parents each bought houses in highly desirable locales in the early 70s (Honolulu and Pasadena) at 2:1 (twice annual income) and 4:1 (four times a schoolteacher's annual income to buy in highly desirable Manoa Valley in Honolulu.)

As recently as 1997, friends were purchasing small homes in very desirable S.F. Bay Area communities for $160,000 - $175,000--four times a modest (for this area) household income of $40,000.

In other words, to return to a normal trendline, one that was in place a mere decade ago, even the most desirable areas will command no more than 4 times median income. That would put house prices in Honolulu, the S.F. Bay Area, West L.A., Connecticut, Northern Virgina, etc. at about $180,000 - $200,000 -- not $600,000.

Real estate trends stretch out over much longer time spans, and as a result we can foresee a lengthy, painfully drawn-out decline in housing values over the coming decade.

Could this really happen in the Bay Area?? High paying jobs + Land Use restrictions?

From: www.oftwominds.com

Money Market Funds: infected by mortgage loans

2007-08-21T21:32:00.000-07:00

Money market funds were invented 37 years ago to offer investors better returns than bank savings accounts while providing a high degree of safety. Most of the $2.5 trillion sitting in these funds is invested in such assets as U.S. Treasury bills, certificates of deposit and short-term commercial debt.

Unlike bank accounts, money market funds aren't insured by the federal government. They almost never fail. Unbeknownst to most investors, some of the largest money market funds today are putting part of their cash into one of the riskiest debt investments in the world: collateralized debt obligations backed by subprime mortgage loans.

CDO's are packages of bonds and loans, and almost half of all CDO's sold in the U.S. in 2006 contained subprime debt, according to a March report by Moody's Investors Service. U.S. money market funds run by Bank of America Corp., Credit Suisse Group, Fidelity Investments and Morgan Stanley held more than $6 billion of CDO's with subprime debt in June, according to fund managers and filings with the U.S. Securities and Exchange Commission. Money market funds with total assets of $300 billion have invested in subprime debt this year.

$300 billion in money market funds could be infected by CDO's. That's really sweet. No wonder there's a rush to buy T-bills

Fed Bailout: impossible this time around

2007-08-10T15:53:00.000-07:00

"Earlier, Alan Greenspan and many others thought that the CDO's and derivatives in general were wonderful because they spread risks broadly. But these debt instruments also encouraged risk-taking, especially among subprime mortgage brokers and lenders whose attitude was, "I originate this garbage, securitize it, I sell it -- and then I forget it. Also, the reality is that risks can be transferred, but never eliminated. Someone ends up holding the bag, and it will probably be well beyond the usual highly-leveraged and unregulated hedge fund suspects. We expect many trustees of conservative pension funds as well as mutual fund investors to be shocked!. Shocked! when they learn about the trash that's in their portfolios.

"Finally, when the risks are spread so widely, it's nearly impossible for regulators to organize bailouts. They could with the S&L collapse in the late 1980s-early-1990s because those lenders were regulated and largely retained their mortgage loans. Similarly, the bailout of Long-Term Capital Management in 1998 was possible because it was a single institution. Not so with today's highly leveraged, opaque and widely distributed derivatives."

Gary and his organization do extensive research, and as usual Gary's latest mailing is loaded with great charts. One chart in particular caught my attention. It's the ratio of the coincident to the lagging indicators. The ratio has an outstanding record of predicting recessions. This ratio hit a high in 2005 and it has been declining ever since. The latest reading (June, 2007) shows the ratio at new lows, in the area where many previous recessions have started. The ratio of coincident to lagging indicators appears to be hinting that a recession lies ahead. The intensity of the stock market decline may be saying the same thing. From: Gary Schiling

Prime Loans: getting harder to get

2007-08-09T00:18:00.000-07:00

U.S. home-mortgage market is starting to pinch even buyers of high-end homes with good credit records, in the latest sign of rising anxiety among lenders and investors.

This surge in rates on so-called jumbo loans is particularly notable because rates on 10-year Treasury bonds have been falling. Normally, mortgage rates move in tandem with Treasurys, but market jitters have caused investors to ditch mortgage securities.

Lenders -- having already slashed lending to subprime borrowers, as those with weak credit records are known -- now are jacking up rates on jumbo mortgages for prime borrowers. These mortgages exceed the $417,000 limit for loans eligible for purchase and guarantee by Fannie and Freddie. They account for about 16% of the total mortgage market

Lenders were charging an average 7.34% for prime 30-year fixed-rate jumbo loans yesterday. That is up from an average of about 7.1% last week and 6.5% in mid-May.

Losses on most types of prime mortgages have remained very low. Even so, lenders have raised rates on prime jumbo loans defensively because they are unsure what rattled investors may be willing to pay for them.

Investors who buy loans and securities backed by mortgages have fled the market for almost any loan that isn't guaranteed by Fannie Mae or Freddie Mac ($417k limit)

What does this do to the high end Bay Area Market? Anyone seeing an effect?

WSJ

Mortgage resets: the worst is yet to come

2007-08-06T23:09:00.000-07:00

It will take longer than you might think for that negative influence of mortgage resets to decrease.

Let's take a look at the following table. This shows the amount of adjustable rate mortgages that reset each month for the first half of this year and will reset for the next 18 months.

Note that these reset numbers are a driving factor in the increasing rise in foreclosures. Pay attention to the numbers I highlight in red for January through June of 2008. The largest portion of mortgage resets is not until next year.

"We have just seen $197 billion of mortgage resets so far this year. That is less than we will see in two months (February and March) of next year.

The first six months of next year will see more than the total for 2007 or $521 billion. This suggests to me that the number of foreclosures is due to rise dramatically from the already high current levels, putting more homes into a weak housing environment."
The statistics are out, the bad news and ominous possibilities are openly discussed. The stock market is now in the process of measuring and discounting the entire housing and subprime process, and this could drive the market lower. In fact, it would not surprise me to see the stock market decline irregularly into the October period (that's just a guess, not a prediction). From: DowTheory

Mortgage: implosion

2007-08-02T23:45:00.000-07:00

Starting in the spring of 2005, these adjustable rate mortgages began to get a lot more popular, largely because regular mortgages no longer allowed many buyers to afford the house they wanted.

They turned instead to a mortgage that had an artificially low interest rate for an initial period, before resetting to a higher rate. When the higher rate kicks in, the monthly mortgage bill typically jumps by hundreds of dollars. The initial period often lasted two years, and two plus 2005 equals right about now.

The peak month for the resetting of mortgages will come this October, according to Credit Suisse, when more than $50 billion in mortgages will switch to a new rate for the first time. The level will remain above $30 billion a month through September 2008. In all, the interest rates on about $1 trillion worth of mortgages, or 12 percent of the nation’s total, will reset for the first time this year or next. A couple of years ago, by comparison, only a marginal amount of mortgage debt — a few billion dollars — was resetting each month.

So all the carnage in the mortgage market thus far has come even before the bulk of mortgages have reset. “The worst is not over in the subprime mortgage market,” analysts at JPMorgan recently wrote to the firm’s clients. “The reason for our pessimism is that loans originated in late 2005 and all of 2006, the period that saw peak origination volumes and sharply decreased underwriting quality, are only now starting to reset in large numbers.”

The flood of those homes onto the market will further depress house prices. So will the newfound conservatism of mortgage lenders, which will make it harder for tomorrow’s buyers to get a mortgage. (Thank goodness.) The S.& P./Case-Shiller index of home prices covering 10 major cities has fallen about 3 percent since its peak last summer. Two or three years from now, JPMorgan predicts, the index will have fallen 15 to 20 percent. Adjusting for inflation, the decline will be worse.

There has never been a real estate bubble like the one of the last decade. So it’s impossible to know what the bust will bring, especially when there are still so many mortgages that are about to get a lot more expensive.

From: patrict.net via NY Times Aug. 3rd