U.S. Home Foreclosures May Top 100,000 In January

by Tamara Keith

Over the holidays, many lenders put foreclosures on hold. But that temporary freeze is over now. Industry watchers are expecting thousands of foreclosed properties to hit the market in the weeks and months ahead.

Home foreclosure sales slowed down at the end of 2010 for two reasons: the regular holiday foreclosure freezes, and the remnants of the so-called robo-signing scandal.

In the fall, many lenders put evictions on hold while they reviewed their foreclosure procedures. Rick Sharga of RealtyTrac says that’s behind us now — and the pace of foreclosure is about to pick up.

“I’d be really, really surprised if we didn’t see a probably record quarter in the first quarter of this year,” he says.

Sharga expects banks to repossess close to 100,000 homes in January alone.

Link to full article

Quick Post-Election Thought

Should be interesting to see the impact on business now that the election’s over.  Businesses hate making decisions in a vacuum, and now that the election’s over maybe they’ll loosen up a little.  Plus, the results should be business-positive.  Basically, I expect to see a lot of gridlock in Washington, which I think businesses will like at this juncture.  The Federal Reserve will still be running amok printing dollars, but at least maybe we’ll see some cost-cutting out of Washington; and maybe Obama’s & the liberal Democrats’ zeal to raise taxes will be held in check by the Republican conservatives.

At some point I expect another “surprise” as the banks come to grips with the massive underwater derivative positions they’re still sitting on (positions that are hidden by the phoney-baloney accounting the government’s letting them use to hide the losses on their balance sheets).  Increasing home foreclosures will just put more pressure on the banks as the derivative values plummet further and the banks find themselves sitting on a large inventory of unsellable homes. I’m just not sure of the timing of this “surprise”, but I expect it this year or early next year.  Naturally, the banks and the government are doing everything they can behind the scenes to hide the mess; but it’s there and it’s not going to go away.  Just look at all the bank failures we’ve had.  I expect to see some big bank names added to the failure list this year.

The Joys of Recession

By Dan Amoss

The big questions of the moment: What kind of economic environment do we face? And more important, what’s already priced into the stock market? Here’s my view on these themes: The real job creators in the U.S. economy, small businesses, will not expand hiring as expected. There are many reasons for subdued hiring plans; an emerging reason to avoid expansion and hiring will be heightened expectations that tax rates will soar in the future to pay for out-of-control government spending.

So I expect over the next several months, mainstream pundits and forecasters will start worrying about tepid hiring, even as the pace of job losses slows. As we “lap” the 2009 corporate cost cutting by early 2010, and top lines fail to rebound, earnings estimates will have to come back down. I’m amazed at how many sell-side analysts are modeling V-shaped recoveries in 2010 earnings. Most stock prices are disconnected from reality.

Another big question is how will policymakers respond to a sluggish- to-nonexistent rebound in hiring? The economically illiterate, and those with preconceived “big government” agendas, will use any crisis as an excuse to expand government. You’ll be ahead of the game if you realize — as many in the media and academia clearly do not — that the government has no resources. It’ll take money out of one of your pockets, skim some off for its cronies, and expect you to be grateful when they put some of it — debased by the Fed’s inflation, of course — back into your other pocket.

The labor market is dealing with a structural imbalance fueled by government-sponsored housing and credit bubbles. Many will call for the government to “solve” this labor market problem, which will cause a new type of market dislocation. By early 2010, some will push for the federal government to start hiring the chronically unemployed in “New Deal” type of programs.

Where you stand on this question will determine your expectations for the future performance of most stocks. I certainly don’t enjoy having such a bearish outlook on the economy, but it’s the conclusion I reach after weighing all the evidence about the real economy; the credit markets; and policymakers’ damaging, distorting influence.

For example, corporate CFOs and Treasurers are happy about the recent bull market in risk. They know much more about their prospects than outside investors, so their balance sheet management is revealing. In a word, the approach toward capital structure is “defensive.” Heavily indebted companies are flooding the market with follow-on stock offerings to pay down debts. They’re also taking advantage of the Pollyannaish mood of the corporate bond market to issue risky bonds at attractive rates, as default risk seems to be a distant memory of bond buyers. Many corporate bond investors have taken the Fed’s bait to reach for yield, regardless of credit risk.

Amazingly, credit risk is a quaint, distant memory for most, when it should be the first consideration for shareholders — especially shareholders of highly leveraged companies like banks and REITs. In leveraged companies, shareholders’ claims can evaporate very quickly when asset values deflate and cash flow dries up.

For banks in particular, credit risk often accelerates out of nowhere. Remember how many big-time investors bought stocks like the failed Washington Mutual because it appeared to be “well capitalized”?

It’s shocking how many banks the FDIC still deems to be “well capitalized,” despite the fact that foreclosure activity is accelerating.

Foreclosure activity is crucial to the outlook for bank earnings. Mortgage losses will become a big problem for bank stocks in 2010. Mark Hanson of Mark Hanson Advisors does great work on the details behind the headline foreclosure and housing price statistics — the kind of granular, non-ivory-tower research that’s missing in Wall Street and Washington, D.C. In an update a few weeks ago, Hanson wrote:

The chart below shows the national monthly notice-of-trustee sales (late stage) versus foreclosures (last stage) counts from March through August. In that short six-month period, there have been 390,000 NTSs that have not resulted in a foreclosure (circled in red). Many are on trial [modifications].

If we assume that 250,000 of the 390,000 are presently on a trial and 40% fail, then beginning shortly 100,000 new foreclosures will spit out over a short period of time that will be added to the foreclosures that will occur naturally for reasons mentioned previously. If 60% fail, then the number goes to 150,000. With foreclosures only averaging 73,000 over the past six months, this new stream of foreclosures is significant — it has the potential to double foreclosures over a single month.

The banking system has slowed down the necessary process of “working out” unmanageable debts. Deliberately delaying loan foreclosures and write-offs — whether through government edict or smoothing out loss recognition over time — has the effect of backing up the plumbing in the system of credit intermediation. It’s the post-1990 Japan scenario of sweeping bad loans under a rug because “we can just hold on until asset values come back.”

I’ve written repeatedly about the accounting for — and resolution of — toxic assets throughout the banking system, because I see it as crucial to the outlook for both the U.S. economy and corporate earnings. The longer this is delayed, the more likely the U.S. economy suffers a fate even worse than post-bubble Japan. We have a scenario of defensive, undercapitalized banks, combined with a huge population of effectively bankrupt U.S. consumers. This is a problem that requires comprehensive debt restructuring and resolution before we can have a sustainable economic recovery.

Net-net, the outlook for economic recovery is questionable, at best…which means that the outlook for rising share prices is even more questionable.

Bernanke’s Remedy: Pump More Blood Into a Corpse

By Mike WhitneyInformation Clearing House” — Credit is everything. Without credit expansion there’s no recovery because there’s no pick-up in overall demand. But credit growth is going backwards. The banks have tightened lending standards and the pool of credit-worthy applicants has vanished. Bank lending is off 14 per cent since October 2008. Private credit is presently decreasing at a 10.5 per cent annual rate. The situation is getting worse, not better.

October 05, 2009 “

From the UK Telegraph:

“Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation…

“Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an ‘epic’ 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.

“’For the first time in the post-Second World War era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew,’he said. (Ambrose Evans-Pritchard, “US credit shrinks at Great Depression rate prompting fears of double-dip recession”, UK Telegraph)

Foreclosures, delinquencies and defaults are all up. Foreclosure activity is currently at 300,000-plus per month and rising. A huge shadow inventory is being kept off-market to maintain prices. The drip, drip, drip-effect of excess inventory dumped onto the market will keep housing in the doldrums for a decade. Homeowners are unable to borrow on underwater homes. Everything points to a long-term slump in spending.

Corporations are finding it harder to roll over their debt, bank loans are defaulting at a historic pace, and commercial real estate is imploding. Credit destruction is unprecedented, massive and ongoing. The capital hole is bigger than the Fed and bigger than the Treasury. It can’t be plugged with liquidity alone.

For now, the government can fiddle GDP with $800 billion infusion of stimulus, but what happens when the political will for more deficit spending dissipates? What happens when foreign investors demand the Fed stop writing checks on an overdrawn account?

The Fed has fixed nothing. The banks are still underwater, output is at record lows, and unemployment is climbing towards 10 per cent. Fed chair Ben Bernanke’s multi-trillion dollar rescue programs have kept a wobbly system upright, but nothing more. The economy’s underlying problems are still the same. The Fed’s quantitative easing (monetization) program has sent stocks surging, but done nothing to stimulate the economy. That’s because equities bubbles have negligible impact on aggregate demand; there’s no knock-on effect. The real economy is still flatlining while Wall Street parties on. Bernanke’s plan has been a total wash.

The government cannot deficit spend forever. Eventually, GDP will have to depend on wage growth and credit expansion. Given the political and institutional bias against labor, (and opposition to wages that rise with productivity) the only way to fuel the economy is through credit growth. And there’s the rub. Households have lost nearly $14 trillion in wealth since the crisis began and are in no position to resume borrowing at pre-crisis levels. Consumers are cutting back on spending and paying down debt. They have no other choice.

This is from Bloomberg News:

“Americans plan to refrain from boosting their spending even after the biggest drop in consumption since 1980, signaling concern about the direction of the economy over the next six months.

“Only 8 per cent of U.S. adults plan to increase household spending, almost one-third will spend less, and 58 per cent expect to ‘stay the course,’ a Bloomberg News poll showed. More than 3 in 4 said they reduced spending in the past year.

“Underscoring consumers’ austere attitudes, 77 per cent of respondents said they have cut back on spending during the past year, 59 percent said they have made a bigger effort to pay off debts and 48 percent have put more money aside as savings.” (Bloomberg News)

Savings are up and spending is down. The economy is headed into a long-term funk; the “new normal”. The Fed’s sleight-of-hand programs and Obama’s stimulus elixir haven’t changed the prevailing downward trend. If anything, they have made matters worse. Consider this from Janet Tavakoli, author of “Dear Mr. Buffett” in an interview with Max Keiser:

“Regarding the outlook, my analysis is grim. I am not a doomsayer, I follow the cash, and so far, I’ve been correct, and the government has been wrong. Here’s the situation. We are at greater risk of a total meltdown due to a deflationary collapse than we were in 2007. After the greatest Ponzi scheme in the history of the capital markets, we’ve seen history’s greatest fiscal and monetary expansion, but it hasn’t worked. Debt levels of consumers and business exceed the capacity to repay.” (Janet Tavakoli On The Edge With Max Keiser)

The Fed has done nothing to restructure the financial system so the same problems which killed Lehman and thrust the global economy into a tailspin, persist today. When the stimulus runs out and the Fed ends its $1.25 trillion purchase of (Fannie and Freddie) mortgage-backed securities and $300 billion in US Treasuries, interest rates will rise, housing prices will tumble, and the economy will nosedive. Bernanke will be forced back to the printing presses, the only hope for reversing the deflationary spiral. This will trigger the next crisis, a run on the dollar.

This is from an article by Alice Schroeder of Bloomberg News:

“In all the talk of inflation because the Treasury is printing so much money versus deflation because it may not print enough, there is one type of inflation that is rarely discussed. This is the mega-inflation caused by a sudden currency devaluation. Currency is like any financial innovation, an obligation secured by assets. When the obligation is perceived to have increased far beyond the level justifiable by the assets, which in this case make up a country’s economy, a bubble has formed……Right now, the American economy is worth less than the value implied by the market value of its obligations.” (Gold Tells You U.S. Bubble Hasn’t Popped Yet: Alice Schroeder, Bloomberg)

The system crashed because it was built on the false assumption that an unregulated shadow banking system could generate an infinite amount of credit without sufficient capital. This proved to be wrong. Capitalism requires capital. The trillions of dollars in loans, complex debt-instruments, off-balance sheet operations and derivatives contracts were all stacked atop a tiny scrap of capital which eventually collapsed beneath the weight of the debt. This system (securitization) which created the mess, cannot be restored. It required a strong currency, artificially low interest rates, and credulous investors who were unaware of the inherent risks of illiquid assets. Those conditions no longer exist, nor have they for more than two years. Even so, the Fed continues to pump blood into a corpse hoping for some fleeting sign of life. This is why an even bigger crisis cannot be too far off.

Link to Article

Deferring Financial Disaster

By James West
MidasLetter.com
Thursday, October 1, 2009

 

Those who read the contrarian and alternative financial commentators may well be forgiven for wondering why the financial doomsday oft predicted hasn’t quite materialized. The financial crisis heralded by the crash in October 2008, preceded by the demise of Bear Stearns and Lehman Brothers, among others, by all accounts was the tip of the iceberg and the advent of the Great Depression of our age.

Exuberant markets and slap-happy finance ministers, combined with record profits at the investment banks of Mordor, or Wall Street, are supposed to convince us that the worst is over, calamity has been averted, and with sober and moist eyes we roll up our sleeves to prevent the ghosts in the machine from re-emerging. A more masterful symphony of optical delusion has never been conducted, and the invisible puppeteers manipulating the strings of marionettes Ben Bernanke and Timmy Geithner are smug in their continued anonymity.

Meanwhile, unemployment continues to rise, foreclosures and delinquencies ditto, and but for select industries, decline and bankruptcy are the measure of balance sheets, not growth.

The principle tool of deception for this motley crew of G7 finance ministers and the Invisible Hands that control them is currency. With these key economies now flush with capital in the uppermost layers, victory can be claimed by pointing to the balance sheets of those institutions who have averted disaster by capturing the lion’s share of this manna from heaven. That the capital is not filtering down meaningfully into the broader economy in the form of investment and lending is the clearest sign that the worst is yet to come, and we now merely pause in the eye of this economic hurricane.

Keep in mind, if the Great Depression that started in 1929 is a fair analogy, then we are in the autumn of 1930, and the peak of contraction globally did not manifest itself until 1933, when unemployment in the United States reached as high as 25% in some areas. Within that four year overall plunge were several mini-bull rallies that lent solace to the fearful, albeit temporarily.

The major difference between the period from 29-33 and now is that the governments of that era did not have either the ability or the willingness to print money with abandon, because they knew that the outcome of such policy would certainly be future inflation, which would itself handicap any chances of recovery.

Since we now live in an era where its only what is happening right now that matters, the financial overseers seek solutions that immediately repair the illusion of prosperity in perpetuity, even if it means a smaller and smaller percentage of the population is fooled.

The act of printing currency with abandon equates to deferring the financial reconciliation required to achieve balanced budgets into future generations. As long as we print money, and agree to value that money as legal tender, the illusion can go on ad infinitum.

But what happens if, from the bottom up, people start saying “Hey wait a second…this cash is counterfeit!”?

Well that’s what is happening with the price of gold. Even the government of China is hedging its bets that its own currency will suffer devaluation in lock-step with the excess of U.S. currency afloat. After all, China’s foreign reserves are the largest collection of American funny money there is outside of America.

So despite the glad-handing and cheerful sentiment echoed by the mass media controlled by about 7 men, the financial disaster continues to unfold, and the only reason the masks are still on the players in the ersatz performance is to pick clean the pockets of those susceptible to such disingenuity.

For the rest of us, preparations must be made for the next leg down.

There are two things to own going forward. Precious metals and the companies that mine them. The very worst tsunami is a boon only to the surfers crazy enough to catch the wave, and that will exactly be the situation when the fragrant chile hits the fan part 2. Instead of a thrill though, the owners of shares in mines that produce gold will be rewarded with financial security in perpetuity, barring unforeseen acts of foolishness.

Gold producing operations will soon see their valuations increase dramatically. Lifted on that rising tide will certainly be soon-to-be-producers and to a lesser extent, explorers of advanced economic deposits.

The long term deterioration of the U.S. Dollar has been underway for decades. Its days as a viable currency are numbered. History proves this. Buying gold and gold related assets will soon also reveal itself to be the only sound investment of the next 10 years.

Hope Doesn’t Pay the Bills

By Dan Amoss

Hope doesn’t rhyme with hype…but it should. Because the hope-driven rally that’s unfolding on Wall Street relies on little more than hype. Stock market bulls continue to buy stocks on the basis that improving confidence — not an improving labor market — is all we need to have a roaring economic recovery.

Hmmm…I’m not so sure about that.

The bulls expect that confidence, government spending, and inventory restocking will lead to a recovery in employment, which will lead to an improvement in credit quality throughout the banking system. They have yet to think through why the economy would even need an inventory rebuilding cycle if incomes and private sector credit are both still contracting.

One would hope that inventories aren’t being rebuilt in response to “faux demand” from federal stimulus spending, because those inventories would have to be liquidated in the future, once manufacturers realize that it was simply a “head fake” in demand.

We can’t accurately label what’s happening now a “jobless recovery,” because the labor market has yet to even stabilize — let alone recover. Hiring intentions remain near an all-time low, and there’s little reason for hiring activity to pick up on a sustainable basis. The National Federation of Independent Business Index that measures job openings fell to a 27-year low in August.

In my view, stocks have rallied far beyond any link to underlying value or probable earnings prospects. Instead, stocks continue to rally on the basis of Ponzi psychology. This rally, led by “junk stocks,” seems to be reaching some kind of crescendo, as weaker and weaker hands become the marginal buyers. This is how markets usually top — when the marginal buying pressure dissipates, and stronger, more patient buyers wait until prices go much lower before investing.

The stocks of Fannie Mae, Freddie Mac, AIG, and Citigroup have led the charge, despite all being zombies propped up by gigantic government guarantees of their towering liabilities.

It’s interesting that the media and analyst coverage of bank earnings reports have focused on “provision expenses” – i.e. the money that banks set aside to cover future loan losses. Provision expenses, overall have been dropping, thereby leading the bulls to assume that the worst of the housing/credit crisis is over. But the reality is that banks should be INCREASING their provision expenses, not reducing them…at least if they wish to be honest about the growing losses still lurking on their balance sheets.

For example, as I pointed out to the subscribers of my trading service, Strategic Short Report, investors need to focus on the balance sheet, not the income statement. Washington Federal (WFSL) is a classic example. The bank’s steady net interest income seems to be all that investors are focusing on right now, while ignoring the massive imbedded credit losses from bad loans that are still sitting on the bank’s balance sheet.

WFSL is following the “hope and pretend” playbook, because it’s not building up its allowance for loan losses as quickly as its non- performing loans (NPLs) are mounting. For instance, management is slow in accounting for its 43% in non-performing land development loans in its income statement. Management hopes that recoveries will be high if they can hold onto those loans for a few years. Wishful thinking is not prudent banking.

Washington Federal’s fiscal year ends on Sept. 30, it will report earnings in mid-October, and it will file its 10-K by the end of November. Odds are good that management — along with its auditors — uses this reporting period to air its dirty laundry. Analysts would lower their earnings estimates in response.

Washington Federal is just ONE of the many banks in the country that still face serious – and perhaps fatal – balance sheet stresses. Commercial real estate loan losses will create the next major balance sheet trauma for most banks.

Commercial real estate loan losses are still in the “first inning,” which will be a problem for almost every bank in the country…but good for the ProShares UltraShort Real Estate ETF (SRS) – a stock that goes up in value when REIT stocks go down in value. This stock has been revisiting its lows lately, as REITs have been rallying. But this is no reason to panic. The fundamental outlook for REITs (which SRS sells short) remains bleak, and the market will soon wake up to this fact.

The core of the bear case for REITs rests on falling comparative property values, falling rents, falling occupancy rates, and tight to non-existent refinancing conditions. Refinancing conditions are important because if lending remains tight, this will push up the amount of property foreclosures and liquidations. And conditions will remain tight because the regional and community banks that typically lend against commercial real estate collateral are not answering phone calls from desperate borrowers. They’re nursing hangovers from their existing commercial real estate loans, and have regulators watching their every move.

Richard Parkus, head of mortgage backed security research at Deutsche Bank, published an interesting piece on the horrid performance of commercial real estate and commercial construction loans. Parkus estimates that net charge-offs on commercial construction loans could be in the range of 25%, since cumulative default rate could be in the 50% range, with 50% loss severity. Multiply the default rate by severity to get a 25% charge-off rate on the roughly $530 billion in construction and land development loans within the U.S. banking system. This equals about $132 billion, which is an awfully big hole to fill, considering the tiny size of the capital cushions at most of the smaller banks with exposure to these loans. The hole is so large at hundreds of tiny community banks that they will be taken over by the FDIC.

Most of these construction loans were underwritten with “interest reserves,” which is money set aside to cover the loan’s payments during the construction phase of the project. Delinquency rates are already high, but usually soar when the borrower eventually burns through its interest reserve.

This is an area that the banking bulls are missing: default trends tend to be non-linear, especially in an economy as weak as this one, and especially in mortgages in which so many borrowers have massive negative equity — and therefore have little incentive to keep paying. By non-linear, I mean that default rates can appear to be under control for a while, then shoot up in the shape of a “hockey stick” if you’re looking at a graph.

Parkus estimates that cumulative commercial real estate charge-offs will be in the range of 10% of the banking system’s $1 trillion in core commercial real estate loans. That’s a $100 billion hole in the banking system’s capital that many banks will not be able to “earn their way out of.” I think 10% cumulative charge-offs could be conservative. Thus far, according to SNL Financial data, commercial banks have charged off just 1-2%. So in baseball parlance, “we’re only in the first inning” of the process of recognizing and writing off whole commercial real estate loans sitting on bank balance sheets.

As this occurs, this will lead to a flood of foreclosures and liquidations, which will push down market prices for commercial properties — the same types of properties owned by REITs. Look out below.

Whose Economic Recovery?

By Danny Schechter

September 10, 2009

President Obama’s highly anticipated health care speech started on a totally different subject: The economy.
“When I spoke here last winter, this nation was facing the worst economic crisis since the Great Depression,” he told Congress and the people at home. “We were losing an average of 700,000 jobs per month. Credit was frozen. And our financial system was on the verge of collapse.”

“But,” he went on, “thanks to the bold and decisive action we have taken since January, I can stand here with confidence and say that we have pulled this economy back from the brink.”

Applause. Applause. Applause.

Are we back from the brink? And what brink is that? On Labor Day, HBO featured a powerful documentary about a GM Plant in Ohio that was shutting down. It showed the workers, teary eyed and forlorn, making the last truck on “their” assembly line. Their faces told the rest of the story as they asked themselves and each other, “What do I do now? What happens to my family and my life?”

They had no answers, and neither, alas, does Barack Obama.

A “jobless recovery” will not give these workers the money to buy into even the cheapest health care coverage, public option or not.

Look around Mr. Obama: the unemployment rate in real terms is over 16%. The consumer economy is shattered. The commercial real estate market is imploding, and, yes, more foreclosures are on the way according to the Washington Post:

A new report foresees another wave of foreclosures, as option adjustable-rate mortgages — an entire class of specialized home loans — will soon reset to higher payments. Estimated to jump by 63 percent on average, the higher rates will likely push many of the already-strained loan recipients over the brink. The loans, also called pick-a-pay loans, are a prime example of the risky lending techniques that created the housing crisis: Borrowers were allowed to pay back the loan with as little as they wanted each month, though that meant many paid less than the interest due…the report says the fallout from the loans could be felt for years, especially in states already hit hard by foreclosures.

Just who is back from the brink?

If you listen to the Fed, the glass is more than half full. If you listen to economists like Simon Johnson, it’s way more than half empty, as he wrote on Baseline Scenario:

In the absence of effective financial regulation – i.e., both during the 1920s and again since 1990 – the Fed has operated in a manner that encourages the formation of sequential bubbles. This destabilization of our financial system is not a minor matter; the damage caused – human, financial, social – is already enormous.

And we are very far from being done.

Don’t take my word for it. Lou Jiwei, the chairman of China’s sovereign wealth fund said recently, “It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that. So we can’t lose.”

Yes, We Can… Lose, that is, Mr. Lou. And Yes We Are, Mr. Obama. The problem is that we are still in some Bernanke fantasyland, thinking that if we keep saying everything is ok, it will be.

Here’s Washington’s blog on real unemployment as opposed to what the Bureau of Labor Statistics is saying:

… Paul Craig Roberts – former Assistant Secretary of the Treasury and former editor of the Wall Street Journal – and economist John Williams both said in December 2008 that – if the unemployment rate was calculated as it was during the Great Depression – the December 2008 unemployment figure would actually have been 17.5%.

Williams says that unemployment figures for July 2009 rose to 20.6% According to an article summarizing the projections of former International Monetary Fund Chief Economist and Harvard University Economics Professor Kenneth Rogoff and University of Maryland Economics Professor Carmen Reinhart,… unemployment could rise to 22% within the next 4 years or so.

Hello, Mr. President? Why can’t you bring to the discussion of the economy the same passion and fact-based arguments that you brought to the health care debate?

Why can’t you propose serious reforms on the financial sector? Why can’t we jail the financial criminals?

The answer seems to be that Wall Street will be a far more tenacious and resourceful enemy than the health care industry perhaps because they already own much of the Congress.

Remember Senator Dick Durbin’s comment, ‘the bankers run the place.”

Alan Blinder a former vice-chairman of the Fed fears that pressure for financial reform is losing steam in part because of the power of what he calls “The Mother Of All Lobbies.” He writes, “in the case of financial reform, the money at stake is mind-boggling and one financial industry after another will go to the mat to fight any provision that might hurt it.”

Obama acknowledged we are not out of the woods yet. (What woods?) But what are the likely consequences? How long can people live without anything coming in? How long can we live on upbeat projections?

“There is no doubt class antagonism is stewing,” says the editor of the blog Naked Captalism. He expressed a fear of a reaction that will go way beyond flag-waving tea parties:

… I am concerned this behavior is setting the stage for another sort of extra-legal measure: violence. I have been amazed at the vitriol directed at the banking classes. Suggestions for punishment have included the guillotine (frequent), hanging, pitchforks, even burning at the stake. Tar and feathering appears inadequate, and stoning hasn’t yet surfaced as an idea. And mind you, my readership is educated, older, typically well-off (even if less so than three years ago). The fuse has to be shorter where the suffering is more acute.

One is reminded of the title of that movie, There Will Be Blood. Rather than show contrition or compassion for its own victims, Wall Street is hoping to jack up its salaries and bonuses to pre-2007 levels. The men at the top are oblivious to the pain they helped cause. They are getting away with the crime of our time.

And the people – The People – who potentially can challenge all this by action on the ground are being mesmerized by the false hope that recovery is here or right around the corner. How long before they realize you can’t eat optimistic speeches?

Bad News for Homeowners – Good News Concerning Water, Food, and Energy

Joel Bowman, reporting from Manhattan, New York City…

The tide is rising…and American homeowners are strapped into their concrete boots.

According to a new report by Deutsche Bank half of U.S. mortgage- holders will be “underwater” or “upside down” on their loans by 2011 – that is, they will owe more on their loan than their property will be worth. And it’s not just those risky subprime borrowers who will feel the pressure of the rising debt waters (although the report suggests up to 69% of home “owners” in that category will be submerged).

As it turns out, prime conforming loans, those ordinarily considered to be the safest bets, will sink the quickest. The report suggests that 41% of these relatively “safe” home loans will be underwater by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009. Furthermore, forty-six percent of prime jumbo loans (those greater than $417,000) will be larger than their properties’ value, up from 29% over the same period.

Partly, this equity to debt inversion will be due to continued fall in home prices. Covering 100 U.S. metropolitan areas, the bank predicts home prices will tumble another 14% through the first quarter of 2011, for a total drop of 41.7%. The problem is exacerbated when people simply give up on their loans, knowing full well that, without jobs or a rise in the value of their home anywhere on the horizon, they might just be better abandoning the whole situation and starting from scratch (with a demolished credit rating, of course).

It goes without saying that your editors have no idea what home prices will do tomorrow. Maybe the government will bulldoze excess inventory to stimulate prices on the supply side. (That sounds just dumb enough for them to undertake, come to think of it.) Or maybe they will fall another 14%, as Deutsche Bank forecasts. Either way, the days of the ARM ATM seem to be over. And, without a job to supplement that home equity “income,” consumers might find the going tough for some time.

This dour news, however, has nothing to do with the column below in which Rude favorite, Chris Mayer, offers some unusually uplifting news for commodity investors. Please enjoy…

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Oil and Water Do Mix
By Chris Mayer

The oil price is stubborn, like a two-year-old who refuses to eat his mashed peas. Despite all evidence that the market is well supplied, oil is over $70 a barrel again as I write. Taking the view out to the horizon, though, I think it will go higher and will drag the price of most commodities higher in its wake.

Part of the reason for the rise is weakness in the dollar. People often say that oil is denominated in dollars. But maybe it is the other way around; dollars are denominated in oil. A dollar is worth how much oil it can buy. Part of oil’s rise is simply marking down the value of the dollar. Weak dollar means higher oil prices.

People will blame the higher oil price on speculators, but something interesting is happening in the markets for minor metals like molybdenum. Prices are rising, too. The silvery metal, used to strengthen steel, is now $15 a pound — nearly double the $8 and change it fetched in April. This is significant, because there is no futures exchange for “moly.” It trades on a physical spot market. Speculators play a very small role here. The buyers of the metal use the metal.

So there is a demand story shaping up here, too, mostly focusing on a fragile recovery of some sort and mostly centered on China and the emerging markets. The market is looking ahead.

For instance, over the weekend, South Korea reported numbers that show signs of a recovery in that country. Industrial output fell less than expected, and trade volume surged to $60 billion. That was its best showing since last October. Also, South Korean companies have been reporting better-than-expected results.

The biggest buyer of South Korean goods is China. Still, it’s a confusing time because of all the stimulus money that governments around the world have been spending. So it’s hard to say what’s real and what’s just an illusion created by a temporary spending binge.

Another piece of the puzzle from last week: Spot iron prices in China (meaning iron ore for immediate delivery) topped $100 per ton. That’s the highest level since October 2008. The other breakthrough in iron ore last week came when BHP Billiton, the world’s largest miner, announced that a third of its customers were moving to prices linked to the spot market.

This is big news for the industry. The old way was to have annual contracts with a negotiated price. This was bad for iron ore companies because the contracted price lagged the increase in iron ore prices. And when iron ore prices fell, steelmakers just reneged on their contracts. As the iron companies found out, having contracts was a great way for iron ore producers to cap their upside and leave them with all the downside. Not so good.

The industry now looks like it is moving toward more spot pricing, which is a good thing for the producers. Iron ore prices have rallied too, along with crude oil and moly.

Every rally, like every bottle of beer, has a finite life span. There will be lots of bumps along the way, but the prices of many commodities — such as oil, iron ore and moly — will tack higher, in my view.

The price of water is also rising — at least in China. I’ve long watched for this, as it affects companies like Hyflux (HYFXF:pink sheets) – a stock I recommended to the subscribers of my investment service, Mayer’s Special Situations. Water rates in China are well below average. One cubic meter of water in China costs about one tenth of what it does in Germany, for example.

Yet as we’ve covered here, China has a serious water crisis. Mother Nature did not smile on China when it came to water. The amount of water available per capita is only a third of the global average. Low prices only make that worse. Raise the price and people will get smarter about how they use water.

So finally, many cities are raising the price of water. The WSJ points out several places where water prices could rise 25-48%. Shanghai, for instance, raised water rates 25% in June and plans another 22% increase next year.

This is all good for Hyflux, which is in great position to capture those increases. The fact that those water prices are now rising partly explains why the stock is up 80% from its lows.

The stock was too cheap before, anyway. As I pointed out in an e- mail alert on March 16, Hyflux had gotten about as cheap as it has ever been on an earnings basis when it hit $1 per share. I continue to believe that Hyflux has a great future and enormous growth potential ahead of it.

One other note on the news this week: Japan is shifting its focus to investing in agricultural commodities. Japan is the largest importer of food in the world, with an annual bill of more than $40 billion. Now Japan’s big trading houses are looking to invest in assets that produce soybeans, wheat, corn and more. They are eyeing grain elevators and export terminals and grain processors. Some of them are investing in their own farmland.

Mitsui, for example, has nearly 250,000 acres of farmland in Brazil. Itochu, Japan’s fourth largest trading company, aims to double the amount of grain it handles. (All of this from the Financial Times piece this weekend titled, “Japan Thinks Global to Fix Food Shortage” by Javier Blas).

Years of underinvestment in food production around the world is now catching up with us. So I continue to believe that some of the best performing stocks over the next few years will come from the ranks of commodity companies that keep the world supplied with water, food and energy.

I like to say that now is a good time to invest in those things that keep civilization a going concern. The budding economic recovery may prove to be a mirage, but dwindling water and food and energy resources certainly will not.

It’s PRIME TIME: Stage 2 of the U.S. Collapse

Dave “Dave From Denver” Kranzler

To listen to our political leaders, the mainstream media and financial bubblevision t.v. programs, you would think that the financial crisis has stabilized and the housing market is bottoming. But if you un-spin the data fed to us by the Government and the media, the facts show that the financial system is on the precipice of another very large crisis. As the housing market collapse spreads into the prime-rated mortgage sector, a veritable avalanche of foreclosed middle to high-end homes will flood the market, triggering a much larger credit and economic crisis than what was experienced during the past 18 months.

The onset of the financial crisis in this country last year was largely precipitated by the inevitable bursting of the housing and mortgage bubble. In what was an unregulated multi-trillion dollar Ponzi scheme, the price of houses rose to unsustainably insane valuation levels, fueled by the reckless and tragic use of no-holds-barred mortgage financing. This “Stage 1″ of the financial collapse was triggered by an escalation in defaults and foreclosures primarily in the subprime and Alt-A mortgage sectors. The associated collateral damage from this reverberated into the implosion $100′s of billions of off-balance-sheet assets and derivatives, many of which were fraudulently rated by the rating agencies and recklessly pumped into investors by Wall Street. This took the Dow from 14,000 to 6,440 and was addressed by the Government/Fed with as much as $24 trillion in direct monetary injections and financial guarantees. During this Stage 1 we saw the Government takeover of Fannie Mae, Freddie Mac, the de facto Government takeover of AIG, the collapse of Bear Stearns, Lehman, Merrill Lynch, Countrywide, Washington Mutual, Wachovia; the U.S. auto industry, among many any other corporate failures and smaller regional bank collapses (64 smaller bank failures this year as of 7/24/09).

Stage 2 of the financial collapse of the U.S. is being triggered by the accelerating rates of default/foreclosure in the prime-rated mortgage market, as well as the collapse of commercial real estate. I am going to focus on the residential mortgage component, as it is three times as large as the commercial real estate mortgage market. Whereas the subprime and Alt-A mortgage markets are roughly $1.5 trillion combined, the prime-rate mortgage market is in excess of $10 trillion, depending on your source of data. For purposes of my analysis, I am using data presented by Mark Hanson of Field Check Group in his “7-19 Mortgage Default Crisis – Brutal Past Two-Months” article posted here (any housing/foreclosure data I use comes from this article):

http://www.fieldcheckgroup.com/2009/07/19/7-19-mortgage-default-crisis-brutal-past-two-months/

I have been asserting that the housing collapse would not end until prices fall enough to balance out the supply/demand equation. This includes the inventory of new and existing homes for sale, the inventory of foreclosed homes either on the market or being held by banks but not listed for sale AND the inventory of rental units. Data released this past week show that the rental unit vacancy rate surged to an all-time high. This will put downward pressure on rental rates, of which I am already seeing evidence in Denver. As rental rates decline, it becomes relatively more attractive to rent rather than to own, putting more downward pressure on the price buyers will be willing to pay to buy a home vs. rent.

The biggest problem, however, facing the housing market, is the impending surge in bank foreclosure inventory, fueled by the rapid increase in defaults and foreclosures in the $10 trillion prime mortgage sector of the market. Delinquencies surged in May and foreclosure inventories hit new highs. The May foreclosure rate hit 2.79% of all mortgages. This foreclosure rate increased from April to May by 6.2% and surged from May 2008 by 88.3%. Further troubling is the 5% spike in the rate of delinquencies from April to May. This compares to the April to May average increase in delinquencies over the past four years of 1.1%. The increase in delinquencies from May 2008 to May 2009 spiked up by 50%.

What’s most troubling about this data is that the main source of these horrific foreclosure/default numbers is the rapid increase in defaults in Prime-rated mortgages over the last six months. Once a mortgage defaults, it typically takes 12 to 18 months for the property to be foreclosed and either listed for sale for held in suspense by banks hoping for a miracle in the condition of the housing market.

The default/foreclosure statistics for Prime mortgages are starting to follow the same statistical path experienced in the subprime and Alt-A markets. Currently, over 12% of all subprime mortgages and 8% of all Alt-A mortgages have been foreclosed. Let’s assume that the total foreclosure rate for the prime mortgage market eventually hits 5%. I believe this is a conservative estimate given what has already occurred in subprime and Alt-A, the surging rate of delinquencies in the prime sector and the rapidly escalating rate of unemployment, which directly correlates to mortgage defaults. Assuming 5% means that $500 billion in prime mortgages will be foreclosed. This equates to the entire size of the subprime mortgage market. Imagine the damage this is going to cause to the entire financial system in this country. And my guesstimate may well be way too low (it is not too high, I can assure you of that).

To put this in perspective, Stage 1 of the financial collapse primarily affected the middle to lower income demographics who purchased a home using subprime and Alt-A financing. A lot of these properties are being purchased and turned into rentals, fueling the rental inventories. In what will be a much larger and more severe Stage 2, accelerating defaults in the prime mortgage sector will cause foreclosures to balloon in the upper-middle (think of overbuilt suburban McMansion developments or overvalued renovation homes in trendy urban areas) and high income neighborhoods. Anecdotally, as I drive through all the trendy renovated urban enclaves around Denver, I see “for sale” and “for rent” signs popping up like uncontrolled weeds as homeowners attempt to avoid foreclosure by selling or renting. It’s one thing for an investor to scoop up several low-priced homes and rent them out, hoping for future price recovery. But how will the housing market ever absorb a massive increase in larger, overvalued homes which would never have been built in the first place if a housing bubble never occurred?

As this prime mortgage-financed foreclosure inventory balloons, it is going to drive prices down to levels thought unimaginable. As the value of the collateral for the mortgages declines, banks and investors who own the associated mortgage and mortgage-related paper will suffer massive hits to the value of their assets. Even worse, we will see another round of derivative-related bank and insurance company implosions, some of which will vaporize into thin air the way Bear Stearns and Lehman did, and Countrywide, Wash Mutual, Wachovia and Merrill should have, were it not for the taxpayer financed bailouts of these firms. This Stage of the financial collapse will likely bring down several large State and corporate pension plans as well.

And finally, how will the Federal Reserve and Treasury deal with this impending financial explosion? If it took $24 trillion of direct and indirect financial support and monetary printing in order to “stabilize” the shock of Stage 1, how much money-printing will it take in order to hold the system together as Stage 2 materializes and engulfs our system with multiple financial disasters? It can be argued that the collapse of CIT is the first sign of Stage 2 hitting. It will be interesting to see which other financial firms hit the wall. We know that Bank of America – which sits on Countrywide and Merrill Lynch’s subprime mess, Wells Fargo – which sits perched on Wachovia’s $122 billion of explosive Pay-Option ARM paper, and GE Capital – a giant-sized CIT – are prime candidates to be vaporized by their nuclear balance sheets.

To conclude, based on the spin-free data presented above, a bottom to the housing market is nowhere in sight. In fact, I would argue that housing prices have at least another 30-40% to fall from where they are now. This is a guesstimate based on all of the above evidence. I don’t know what general level of valuation will mark the end of the housing market freefall. I do know that all the so-called experts (like Ben Bernanke et. al.) who said less than 18 months ago that the financial crisis would be contained to the subprime mortgage market and would top out at $200 billion were tragically wrong in their assessment. I also know that I am on record saying prices will revert to 1981 levels and that this crisis would end up costing $5-10 trillion. Looks like the jury is out on home prices and I was way too low on the dollar cost. I also know that, not only are we nowhere near a bottom, but that the worst is yet to occur.

Clearly, the above analysis means that investors should be taking advantage of this bear market stock rally to sell their stocks, sell all of their bonds except for maybe Treasury TIPS and start moving as much money as possible into physical gold, silver and mining stocks.

Investors – Stay Out of the Water

Stay Out of the Water
By Bill Bonner

This week began with shrieks of joy. First, a federal court came down on Bernie Madoff like a brick on a baldhead. Madoff, convicted of lying to investors, drew a sentence that only a sea turtle or a swamp oak could complete. Then, like children playing in the sea, investors were teased by one wave of good news…and tickled by the next.

Bloomberg reported that “Wall Street’s largest bond-trading firms say the worst may be over for investors…” Then, General Electric’s CEO, Jeffrey Immelt and famous investor George Soros both said that the crisis is “behind us” and that growth will begin again next year. Finally, analyst John Dorfman opined that the stock market would be a safe place for their money at least through the end of the year.

And now comes the big American holiday – July 4th. Investors pack their suntan lotions and head off to the beach for Independence Day. With Jaws in a cage, they had judged it safe to go into the water. But then came Thursday’s news. Instead of going down as predicted, the number of job losses for June went up. Another 467,000 people became unemployed last month. The figure even surprised us; we didn’t think there were that many people who still had jobs.

And so…this weekend, investors walk along the beach deep in thought. Is it safe to go back into the water…or not? They should listen carefully. That gurgling sound they hear is not mermaids singing, it is the world economy, drowning.

As we reported in this space, the feds’ bailouts, boondoggles and bankers’ bonus plans aren’t working. At the end of last year, they predicted unemployment over 8% in 2009 – if the stimulus plan were not enacted. But it was enacted. Unemployment is at 9.5% already and it is still rising. It will be over 10% before the end of the year. Global trade is collapsing; exports from Germany and Japan are down about 40% from a year before. Prices are going down too – with a report this Wednesday that the entire Eurozone has slipped into negative inflation. And from Britain came data showing a contraction of 2.4% in the first quarter, bringing the year-to-year decline to nearly 5%. “Economy shrinks at 1930s rates,” said the headline in Wednesday’s Telegraph.

When we look at America’s employment numbers, we feel like a school doctor. We would call the authorities, except that it was the authorities who should be arrested. After the feds got finished with them, the numbers told of a better-than-expected drop in May U.S. payrolls. The key to this uplifting news was not a genuine improvement, but new and improved techniques in torture. Water- boarded with seasonal adjustments and birth/death models, the numbers began to see jobs everywhere. As for “discouraged workers”, meaning those who gave up looking because they couldn’t find a job, these unfortunate souls disappeared from the jobless figures altogether.

John William’s Shadow Government Statistics reports that without these twists, the numbers tell the same story they’ve been telling all year – unemployment is still getting worse, at about the same pace as earlier in the year. “The unadjusted annual decline in May payrolls was the worst since May 1958,” says Williams. And if they were allowed to speak freely – as they did in the ’30s – the figures would show real unemployment at over 20% of the workforce…or about 30 million people. That approaches Great Depression levels…and we’re still only in 1930, not 1932. As for those still working, an additional 1.5 million U.S. workers have been “forced into part time work” according to the Financial Times.

Analysts compare these sharp drops in trade, prices and employment to what happened after WWII. Come 1946 and the world had little use for so many soldiers, machine guns and artillery shells. Millions of young men were ‘de-mobed’ and joined the unemployed. And smokestacks suddenly stopped smoking. But that was at the very beginning of 62- year period of credit expansion. Consumers had pent up demand for houses, cars, and other goods and services…and they had the wartime savings to buy them with. Even so, it took three years of adjustment after the war before the stock market began to turn up.

Now, we are at the other end of the cycle – the beginning of a major credit contraction, with no pent-up demand, no savings, and too much capacity to turn out too much stuff that too many people don’t have the money to buy.

Meanwhile, housing prices are still going down in America…and with housing goes the lenders’ collateral. U.S. residential property prices have fallen 33 months in a row. So many houses are “underwater” that the United States is beginning to look like the lost continent of Atlantis.

More foreclosures are coming. U.S. mortgage loans typically call for “down the road modifications” that lead homeowners into a kind of financial cul de sac with no way out except foreclosure. According to a study by T2 Partners, there are three more big waves of foreclosures still ahead – including those in ‘prime” loans, home equity lines of credit, and in commercial real estate.

“When [these mortgage loans] start adjusting upward it will turn millions of homeowners into over-levered, underwater renters, and ensure housing is a dead asset class for years to come,” says Mark Hanson of the Field Check Group.

With incomes falling and house prices weak, consumers will miss payments, default, and cut back spending. Business earnings will decline; bankruptcies will increase. This economic undertow is treacherous. Investors should stay out of the water.