Housing Rebound? “Not so fast”

By Mike Whitney

October 29, 2009 “Information Clearing House” — Senate Democrats are a dogged bunch. And they’re not easily deterred from their primary duty of kowtowing the big banks. Case in point, the first-time home-buyer tax credit, the controversial bill which provides an $8,000 tax credit (re: subsidy) for new home buyers. Changes in the bill, will provide a $6,500 credit to homeowners “earning up to $250,000 for couples” if they have lived in their home for five years.

The Senate is pressing ahead with the bill despite overwhelming disapproval from liberal and conservative economists. Their main objection? It’s a waste of money. The Brookings Institute estimates that the $8,000 credit costs taxpayers $43,000 per home. This is based on the fact that 85% of the nearly 2 million buyers were planning to buy a home anyway. The new add-ons to the bill mean that its final costs will be much greater than originally anticipated.

The senate bill is nothing but a $6,500 bribe to keep people in their homes and out of foreclosure. It’s another giveaway to the banks so they don’t have to face the mountain of debt they generated through fraudulent loans. The banks aren’t satisfied with merely blowing up the financial system and extracting trillions of dollars from taxpayers to fix the mess they left behind. Now they want to ensure that they’re a constant drain on public resources, by diverting dollars earmarked for healthcare or state aid into broken institutions run by high-stakes gamblers. The Congress has played a critical role in this fiasco.

The Senate has also shrugged off the many reports of fraud related to the home-buyer credit. Here’s an excerpt from the Wall Street Journal which summarizes hundreds of similar stories:

“News of the latest taxpayer-funded mortgage scam has traveled fast. The Treasury’s inspector general for tax administration, J. Russell George, recently told Congress that at least 19,000 filers hadn’t purchased a home when they claimed the credit. For another 74,000 filers, claiming a total of $500 million in credits, evidence suggests that they weren’t first-time buyers.

Among those claiming bogus credits, at least some of them were definitely first-timers. The credit has already been claimed by 500 people under the age of 18, including a four-year-old. This pre-K housing whiz likely bought because mom and dad make too much to qualify for the full credit…

As a “refundable” tax credit, it guarantees the claimants will get cash back even if they paid no taxes. A lack of documentation requirements also makes this program a slow pitch in the middle of the strike zone for scammers. The Internal Revenue Service and the Justice Department are pursuing more than 100 criminal investigations related to the credit, and the IRS is reportedly trying to audit almost everyone who claims it this year.” (“First Time Fraudsters”, Wall Street Journal)

Does it bother senators that the public is being plucked like a Thanksgiving turkey, once again?

Everything that has been done to prop up the ailing housing market, has really been aimed at helping the banks. The Fed has launched the biggest government intervention in history– purchasing more than $900 billion in mortgage-backed securities, $200 billion in agency debt, and another $300 billion in long-term US Treasuries–all to stabilize a market which was sabotaged by the Fed’s low interest rates and the banks abyssal lending standards. Private label “securitized” mortgages have defaulted at 5-times the rate of conventional loans, clear proof of fraud.

The Fed’s capital injections will eventually add $2 trillion to the aggregate value of the residential real estate market. The Fed is doing its best to prevent the market from clearing by keeping home prices artificially high. That’s the only way to avoid more bank failures.

The Fed’s intervention is a sign of desperation. In the long-run, the action is unlikely to have any bearing on prices which will be determined by incomes and supply. Housing inventory is still unusually high, which is putting downward pressure on prices. Distress sales (short sales, foreclosures etc) represent 45 percent of all home sales, which reduces the number of creditworthy buyers for organic sales.

So, what has the Fed’s multi-trillion dollar intervention achieved aside from creating a fake market with fake interest rates, fake financing, fake down-payment ($8,000 first-time home buyer giveaway) and fake media coverage of a fake rebound. Not much, really. The Wall Street Journal’s James Hagerty sums it up like this in “Uncle Sam Adds 5% to Prices of Homes, Goldman Says”:

“Uncle Sam’s interventions in the housing market have pushed home prices 5% higher on a national average than they would have been otherwise, Goldman Sachs estimates in a report released late Friday….
…
But these artificial props won’t last forever and may have created a false bottom in the market.

“The risk of renewed home-price declines remains significant,” Goldman economist Alec Phillips writes in the report, “and our working assumption is a further 5% to 10% decline by mid-2010.” (James Hagerty The Wall Street Journal)

Over $1 trillion has been committed so far, and prices have budged a mere 5%. Does Fed chair Ben Bernanke really believe this is an affordable plan?

The Administration’s Making Home Affordable Modification Program (HAMP) will have only a marginal effect on the rate of foreclosures when the next wave of pay-option adjustable-rate mortgages and other oddball loans come due. And, when the loans reset, more banks will default pushing even more inventory onto the market at firesale prices. Foreclosures have exceeded 300,000 for the last 3 months and the inventory-backlog suggests the worst is still to come.

This is from Diana Golobay at housingwire.com:

“Recent analysis by the Amherst Securities Group indicates the housing industry will not only worsen as a delayed pipeline of foreclosed loans begins to liquidate, but that the Administration’s Making Home Affordable Modification Program (HAMP) will have no lasting effect on keeping delinquent loans current…

Amherst estimates this “shadow inventory” at around 7m housing units, or 135% of a full year of existing home sales, compared with 1.27m units in this bucket in early 2005. The backlog is due to high transition rates, low cure rates and a longer timeline for loan liquidation — in other words, loans continue to transition into the delinquency/foreclosure pipeline at a rapid pace, but are moving out at a very slow pace.

The loans, however, are “destined to liquidate” and will impact the signs of recovery seen in recent months by pulling down house prices through distressed sales.(“Amherst Sees 7m Foreclosures Poised to Distress House Prices”, Diana Golobay, housingwire.com)

So, what can Bernanke do to head-off a bigger meltdown in housing?

The Fed revealed its long-term strategy in the minutes of its September 22-23 FOMC meeting. Here’s an except from the Fed’s statement:

“The Committee agreed that it would continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. Members discussed the importance of maintaining flexibility to expand the asset purchase programs should the economic outlook deteriorate or to scale back the programs should economic and financial conditions improve more than anticipated.”

In other words, the Fed is planning to continue its quantitative easing (QE) program (monetisation) which pumps liquidity into the system and puts more downward pressure on the dollar. Bernanke is trying to inflate-away the problems in housing, but with little success. In fact, according to Robert Shiller, who created the index for measuring house prices in 20 major cities, the Fed may have generated another bubble. This is from the UK Telegraph:

“The S&P Case-Shiller index… showed that house prices were up 1 percent from the previous month, following a 1.2 percent increase in July. However, August’s prices were still down 11.3 percent year-on-year, highlighting the continued problems in the market as a whole. Professor Shiller, who is credited with calling both the late 1990′s tech market bubble and the bubble that led to the US property market crash three years ago, pointed to price increases in areas including San Francisco and Minneapolis, which have seen double-digit gains in the last four months. He said that if these rises are viewed on an annualised basis they could be seen as “bubble territory.’” (UK Telegraph)

Housing prices will continue to tumble through 2010 no matter what the Fed does. In fact, on Wednesday the Commerce Dept reported that sales of new one-family houses in September dropped to a rate of 402,000, down 3.8 percent from August. That’s 7.8 percent below 2008, well below economists worst predictions. The news sent stocks plummeting.

The sense that the economy is returning to normal, is an illusion nurtured by the financial media. This week’s dismal consumer confidence data, shows that the public “isn’t buying it”. And, neither are investors, who continue to avoid equities despite a seven-month, 68 percent rally in global stocks. According to Bloomberg, “Almost 40 percent of investors and analysts in the latest quarterly survey… say they are still hunkering down. U.S. investors are even more cautious, with more than 50 percent saying they are in a defensive crouch.” The mood is grim. The public has lost faith in the media, in the Fed, and in public institutions. The “cheery predictions” are no longer having any effect. No doubt, this will make it even harder to stabilize the teetering housing market.

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.

WARNING SIGNALS FLASHING!

“August New Orders for Durable Goods Remained in Great Depression Territory…

Economic and Liquidity Crises Remain Ongoing
No Recovery in New Orders or Housing
Fed Pushes Monetary Base to Record High

From the series peak in 2006, the current order level is down by 28.6%, within great depression territory per SGS definition of a greater than 25% peak-to-trough decline in economic activity…”

BLS Revision Nightmare: March 2009 Payrolls Overstated by 824,000
Birth-Death Model Falsely Boosting Jobs Reporting in Recession Environment
Monthly Jobs Loss of 263,000 (Payroll Survey) versus Monthly Employment Decline of – 710,000 (Household Survey)

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS
FLASH UPDATES – September 25 and October 2, 2009

“The Recession is Over” talk has become Chic among the Trendy Big Media Talking Heads.

The Fundamentals, Technicals, and Interventionals for the Equities Markets, and certain key Commodities, tell a different story.

Let’s consider certain of these Realities, and how we might best protect and profit.

Given that U.S. Consumer/Taxpayers, and, often, Mortgage holders, are 70% of the U.S. Economy, their present and prospective Economic Condition is quite relevant to future Economic and Markets’ Performance. This Sector has relied on and still to a large degree does still rely on credit, But:

“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…

Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).

“There has been nothing like this in the USA since the 1930s,” he said. “The rapid destruction of money balances is madness.” ”

US credit shrinks at Great Depression rate prompting fears of double-dip recession
Ambrose Evans-Pritchard, International Business Editor, 14 Sep 2009

And from a Deepcaster reader:

“Evans-Pritchard suggests that the Fed has been forced to stop wholesale money creation [out of thin air] because of pressure from China, which fears dollar devaluation on account of its huge dollar holdings. Why don’t I believe that the Fed has slowed down its ‘quantitative easing’?

It’s because the US government is still spending far in excess of revenues, and where does it get the money to make up the difference except from selling bonds?

And who believes that foreigners and domestic buyers continue to be so stupid that they are buying those bonds in the required quantity? Since the Treasury has abdicated from printing its own money [Lincoln’s and JFK’s greenbacks], the Fed has to create money [out of thin air] to buy the bonds.

I think the Fed is still doing it, only more secretly, thus giving rise to the probably-false rumor that M3 is shrinking, or at least is rising at a slower pace. I am confident that increasing tons of electronic US$s are in central bank and banker hands, even if Main Street, USA, is hurting for lack of credit.

The risk of a double-dip Depressions is very real. Nevertheless, the assumption that it will be accompanied by price deflation may be misplaced. A double-dip Depression in an INFLATIONARY price environment seems as likely.”

This Astute Deepcaster Reader has got it right.

But a key consideration is that the Inflation we are Now (still!) experiencing is Hidden by the gimmicking of Official Statistics.

Shadowstats.com calculates the numbers the old-fashioned way they were calculated before the era of “Political Statistics” began in earnest in the 1980’s and 1990’s. An apparent goal of this distortion of key Statistical Realities is to hide Unpleasant Facts (e.g. the dramatic reduction in $U.S. Dollar purchasing power) from Investors world-wide.

Indeed, it is essential for Investors today to get the Real Numbers versus the gimmicked Official Statistics.

Consider, for example, the Official Statistics versus the Real Statistics courtesy of Shadowstats.com

Official Numbers	vs.	Real Numbers
Annual Consumer Price Inflation reported September 16, 2009
-3%		5.5% (annualized September Rate)
U.S. Unemployment reported October 2, 2009
9.8%		21.4%
U.S. GDP Annual Growth/Decline reported September 30, 2009
-3.9%		-6%

So we are facing the worst of both Worlds – living with the deflation-like consequences of an increasingly slowing and deleveraging economy, but in a fundamentally price-inflationary environment. In other words we are facing a Hyperinflationary Depression and it is hard to see how it can be avoided given the following overview courtesy of Ambrose Evans-Pritchard.

“Private credit is contracting on both sides of the Atlantic. The M3 money data is flashing early warning signals of a deflation crisis next year in nearly half the world economy. Emergency schemes that have propped up spending are being withdrawn, gently or otherwise…

Unemployment benefits have masked social hardship unto now but these are starting to expire with cliff-edge effects. The jobless army in Spain will be reduced to E100 a week; in Estonia to E15…

Car sales were up 28 percent in August, but only by stealing from the future…

Weaker US data is starting to trickle in. Shipments of capital goods fell by 1.9 percent in August. New house sales are stuck near 430,000 — down 70 percent from their peak — despite an $8,000 tax credit for first-time buyers. It expires in November.

We are moving into a phase when most OECD states must retrench to head off debt-compound traps.

Britain faces the broad sword; Spain has told ministries to slash 8pc of discretionary spending; the IMF says Japan risks a funding crisis.

If you look at the sheer scale of global stimulus this year, what shocks is how little has been achieved. China’s exports were down 23 percent in August; Japan’s were down 36 percent; industrial production has dropped by 23 percent in Japan, 18 percent in Italy, 17 percent in Germany, 13 percent in France and Russia, and 11 percent in the US.

Call this a “V-shaped” recovery if you want. Markets are pricing in economic growth that is not occurring.

The overwhelming fact is that private spending has slumped in the deficit countries of the Anglosphere, Club Med, and East Europe but has not risen enough in the surplus countries (East Asia and Germany) to compensate. Excess capacity remains near post-war highs across the world…

Fed chairman Ben Bernanke spoke in April 2008 of “a return to growth in the second half of this year”, and again in July 2008 that growth would “pick up gradually over the next two years.”

He could have thought such a thing only if he was ignoring the money data. Key aggregates had been in free-fall for months.

I cited monetarists in July 2008 warning that the lifeblood of the Western credit was “draining away.” For whatever reason (the lockhold of New Keynesian ideology?) the Fed missed the signal…

But you ignore the data at your peril.

Draw your own conclusion. Western central banks will have to “monetize” deficits on a huge scale to stave off debt deflation. The longer they think otherwise, the worse it will be.”

Huge monetizing still needed to avert debt deflation
Ambrose Evans-Pritchard, The Telegraph, London
Saturday, September 26, 2009

Indeed! … Central Banks will have to Monetize Debts on a huge Scale to Stave off Crises!

But one critical “Hooker” is that it is now Apparent that certain Leading Central Banks — primarily The Fed – have for years already been monetizing debt covertly.

This Monetization is Part and Parcel of their Overall Scheme of Overt and Covert Markets Intervention and Manipulation.

But in conducting this increased monetization The private for-profit Fed (doubtless with cooperation from its Cartel* of key Central Bankers and Favored Financial Institutions) appears to have cleverly used the Monetization as yet another tool to continue to manipulate the Markets, especially Equities, to their Fed-desired levels.

*We encourage those who doubt the scope and power of Overt and Covert Interventions by a Fed-led Cartel of Key Central Bankers and Favored Financial Institutions to read Deepcaster’s December, 2008 Letter containing a summary overview of Intervention entitled “A Strategy for Profiting from the Cartel’s Dark Interventions & Evolving Techniques” and Deepcaster’s July, 2009 Letter entitled “A Strategy For Profiting From The Cartel’s Dark Interventions & Evolving Techniques – II” in the “Latest Letter” Cache at http://www.deepcaster.com. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at www.gata.org for information on precious metals price manipulation. Virtually all of the evidence for Intervention has been gleaned from publicly available records. Deepcaster’s profitable recommendations displayed at www.deepcaster.com have been facilitated by attention to these “Interventionals.”

It is not too much of an oversimplification to say that throughout the Summer, 2009 the Fundamentals and, often, key Technicals, signaled that the Equities Markets should take a dive.

Yet The Cartel Intervenors have kept Equities headed up, riding on massive sugary injections of liquidity and Intervention. Indeed there is a remarkable correlation between the rallying performance of the Equities Markets since March, 2009 and The overt implementation of the Fed’s monetization, which also began in earnest in mid-March, 2009. (The evidence indicates that Covert Monetization has been going on for years.)

Recall that “quantitative easing” just means Fed monetization of U.S. Treasury Debt – the private for-profit Fed prints (keystrokes) money out of thin air to buy U.S. debt thus keeping interest rates lower than they would otherwise be. But while very negative long-term financial and economic systemic consequences flow from this monetization, in the short-term the consequences can appear beneficial. Witness the Equities Markets Rally.

To be numerate about it, consider the Key correlation between the post mid-March, 2009 Equities Market Rally and Monetization. Since the beginning of the overt Quantitative Easing (March, 2009) the value of Total Securities Held Outright on the Fed’s Balance Sheet (the public Balance Sheet, that is, — even Congress has not been able to coax The Fed to reveal its private balance sheet) has increased by $917 billon – from $580 billion to about $1.5 Trillion as we write.

In the same period the S&P increased from 720ish to over 1025 as we write.

How has this monetization likely become reflected in the S&P?

The Fed’s Primary Dealers (read Goldman Sachs, J.P. Morgan Chase et. al.) “rent” U.S. government securities and then collateralize them. They use the proceeds to make the Equities Markets indices rise (since Mid-March, 2009) in spite of Fundamentals and Technicals which, sans Interventions, would dictate otherwise.

Thus it appears the Fed is using Monetization as yet another Tool – in addition to TOMO’s, POMO’s, the TARP, and the TALF etc. (see Deepcaster July, 2009 letter in the ‘Latest Letter’ cache at www.deepcaster.com for more details) – to manipulate the Markets.

Of course, this chicanery is lethally detrimental to the U.S. Dollar in the long run and to the financial system and economy as a whole. It is Moral Hazard in spades.

In particular, it is injurious to holders of the U.S. Dollar-denominated assets such as investors world-wide, and U.S. dollar-reliant retirees. The purchasing power of their Dollars continues to diminish, as Rep. Ron Paul has pointed out, but is somewhat masked by the gimmicking of Official Statistics. (see below)

On the other hand, those who are aware of the Cartel Manipulation “Game” can use the knowledge to their advantage in profiting and in protecting wealth.

The Strategy – Guidelines for Identifying Opportunities for Profit and Protection

1. 1. Get the Real Data. As many Investors suspect, Crucial Official Government and Agency Economic and Financial Data are of highly questionable validity. The Data set forth above from shadowstats.com is a good starting point.Educate yourself about the realities of the marketplace using Alternative Data Sources such as Deepcaster, Gold Anti-Trust Committee (www.gata.org), and shadowstats.com. Gathering and staying attuned to authentic information regarding the marketplace can save one much financial grief as well as position one for profit.
2. 2. Take Account of both Overt and Covert Cartel Intervention. Many of these same investors who suspect Official Statistics also rightly suspect that the private-for-profit U.S. Federal Reserve in conjunction with certain other Central Banks and Favored Financial Institutions overtly and covertly manipulate Major Markets. But they might not be aware that covert Market Interventions and Data Manipulation are likely far more pervasive than generally believed, as detailed in Deepcaster’s articles mentioned above.As well, such investors may not have thought systematically about how one copes with and profits from such Intervention and Data Manipulation.

   Consider one example of Cartel Intervention: the Traditional and Legitimate Safe Haven from inflation, deflation, and risk, is Gold. Yet, Gold has, during the recent periods of extreme financial market turmoil, been taken down in price from its highs of over $1000/oz down to around the mid-$700 level (e.g. in 2008) when it should have skyrocketed.

   For example, in early March, 2008 Gold was over $1000/oz. when the Bear Stearns Crisis revealed the fragility of the Financial System. Gold should surely have skyrocketed then. Instead, it was brutally taken down. Were its price not manipulated, Deepcaster’s view is that its price would be over $3,000.00 per ounce today.

   Deepcaster and others, including the Gold AntiTrust Action Committee, have offered considerable evidence that the Cartel* of Central Bankers and Favored Financial Institutions are the culprits behind these dramatic and devastating Takedowns. See Deepcaster’s Alert of 12/25/07 “A Strategy for Profiting from Cartel Intervention in Gold, Silver, Crude Oil and Other Tangible Assets Markets” in the Alerts Cache at www.deepcaster.com, which inter alia provides a Strategy for insulating oneself from Cartel Takedowns and building a Core Position in Gold and Silver.

   But there is a Profitable Refuge from Market Intervention and Data Manipulation. That Profitable Refuge lies in the Strategy described in the aforementioned Alert, certain characteristics of which we outline here:

3. 3. Recognize that the “Buy and Hold” strategy rarely succeeds anymore. The Eminence Grise of Newsletter writers, Harry Schultz perhaps put it the best when he stated that “buy and hold no longer works anymore, even with Gold.” Recent Market Developments should suffice to demonstrate this principle!
4. 4. Track the Covert Interventionals as well as the Technicals and Fundamentals and Overt Interventionals. Tracking the Footprints, as it were, of the Covert Interventionals (e.g. the Repo and TSLF Pools) daily can often, but not always, give one excellent clues about The Cartel’s next likely Interventional Move – - such clues are essential to preserving wealth and making profits. Deepcaster’s tracking of The Interventionals, for example, allowed him to recommend five short positions going into September, 2008, (i.e. before the Market Crash) all of which he has subsequently recommended be profitably liquidated. Deepcaster’s recent article “Cartel Angst Equals Investor Advantage” (9/18/2009 can be found in the ‘Articles by Deepcaster’ cache at http://www.deepcaster.com) lays out a specific strategy for use in investing and trading in the heavily manipulated Gold and Silver Market.
5. 5. Perhaps most important, be prepared to go both long and short Major Market Sectors – - long near the bottoms of Interim Takedowns and short near Sector Tops. The Interventionals are essential to helping identify these tops and bottoms. In Deepcaster’s view, it will be increasingly difficult to achieve a net profit for one’s portfolio if one is unwilling and/or unable to “go short” as well as “long”.The Blossoming of the 200% and 300% (and other) leveraged ‘short’ and ‘long’ ETF’s described above provide a superb opportunity to go short and long with ease, but not, as we explain in recent articles, without risk.
6. 6. Be aware of and Active in the overall Geopolitical Landscape in order to gain an adequate understanding of how that Landscape might affect the present and future direction of the Markets. It is essential that one understand the motivations of the major players in the market and the resources at their disposal.For example, a Major Motivation of the U.S. Federal Reserve and other key Central Banks is the protection and enhancement of the legitimacy of their Treasury Securities and Fiat Currencies as Measures and Stores of Value. Therefore, one can understand that one of their Major Goals will be to attempt de-legitimize Gold, Silver and the Strategic Commodities, including especially Crude Oil, as Stores and Measures of Value. With this in mind, the periodic takedowns of Gold and Silver prices and, since July, 2008, of Crude Oil, become understandable. Moreover, such an insight applied daily to the market can result in a tremendous edge in understanding market performance, present and future.

   As well, regarding the assets at The Cartel’s disposal, if one tracks the Repurchase Agreement and TSLF Pools regularly, as Deepcaster does, and is aware of the other Interventional tools that The Cartel has at its disposal, then one gains a considerable edge.

7. 7. Finally, Hard Assets Partisans have the opportunity to become involved in Political Action to diminish the power of The Cartel. It is truly outrageous that the average unsuspecting citizen, and prospective retiree, can and does put his hard won assets in Tangible Assets and/or Retirement Accounts only to have those assets effectively de-valued by Cartel Takedowns, U.S. Dollar Devaluation and other Cartel actions. This is extremely injurious to many average citizens in many countries who are saving for the rainy day or retirement and have their retirement and/or reserves effectively taken from them. In order to help prevent this and similar outrages, we recommend taking three steps:a) Become involved in the movement to Audit and then abolish the private-for-profit U.S. Federal Reserve as Deepcaster, former Presidential candidate Rep. Ron Paul, and legendary investor Jim Rogers, all have advocated. The ‘Audit The Fed’ Bill is H.R. 1207 (and has over 280 co-sponsors in the House) and S604 in the Senate; and The Abolish The Fed Bill is H.R. 2755. www.carryingcapacity.org is a nonprofit organization which actively supports these bills.

   b) Join the Gold AntiTrust Action Committee, which works to eliminate the manipulation of the Gold and Silver markets (www.gata.org). GATA is a nonprofit organization, which makes a great contribution by gathering evidence regarding the suppression of prices of Gold, Silver and other commodities.

   c) Work to defeat The Cartel ‘End Game.’ Deepcaster has laid out the evidence regarding the Ominous Cartel “End Game” in “Coping with Power Moves in the Cartel’s ‘End Game’ “ (04/24/2009) in the ‘Articles by Deepcaster’ cache at http://www.deepcaster.com. Clearly The Cartel is sacrificing the U.S. Dollar to prop up Favored International Financial Institutions and to maintain its power. But this sacrifice cannot continue forever. See Deepcaster’s July 2008 Letter in the ‘Latest Letter’ Archives at http://www.deepcaster.com.

 

Conclusion:

If this aforementioned Strategy is employed effectively, it can result both in an increasing Core Position in Gold and Silver, and in considerable profit along the way.

Additional insights and details regarding this Strategy, which are essential to profiting from The Cartel’s Policies, are laid out in Deepcaster’s article of 3/06/09 entitled “Investor Advantage: Revisiting The Cartel’s ‘End Game’ ” in the ‘Articles by Deepcaster’ cache at www.deepcaster.com.

Protection and profit require Proactivity and attention to the Interventionals, Fundamentals and Technicals, not “Buy and Hold.” We reiterate, “Buying and Holding” for the long term rarely succeeds anymore as current market conditions attest. The one exception to this is physical Gold and Silver acquired near the Interim bottoms of Cartel Takedowns and intended to be held for the long term as a part of one’s Core position.

Indeed, the Key Point of the Strategy for Protection and Profit is careful attention not only to the Fundamentals and Technicals but also to the Interventionals. These Overt and Covert Cartel-generated Interventions have the power to move markets as those who study the matter can attest.

Thus, the Key to Profit and Protection is a Strategy: Successful Investors must become Long-Term Position Traders, with their trading choices informed by the Interventionals, as well as the Fundamentals and Technicals. Moreover engaging in the Actions suggested above can help prevent The Cartel’s obtaining Superpower status, and aid in achieving wealth protection and profits as well.

“The only thing more certain than Death and Taxes is that when anyone from the Federal Reserve speaks or writes, it is with the specific purpose of misguiding the public.”

John Pugsley, Chairman, The Sovereign Society

Best Regards,
Deepcaster

Clock ticking on first-time homebuyer tax credit

As days tick off the calendar, the life span of the much-ballyhooed tax credit for first-time homebuyers is drawing to an end — unless Congress decides to extend it.

There have been more than a dozen bills introduced in Congress to prolong the life of the tax credit past the Nov. 30 deadline, and on Thursday Senate Majority Leader Harry Reid endorsed the idea of extending the credit for an additional six months. The housing market has been devastated in Reid’s home state of Nevada.

This week, the White House said its economic team is evaluating the credit’s impact on home sales and will make a recommendation to President Barack Obama.

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Washington on the Economy: The Big Con

By Al Walsh

Obama, Geithner, Bernanke and the rest of the Washington cast of characters are basking in the afterglow of the G-20 summit and parading around the country:  patting themselves on the back for “saving civilization” and pronouncing that “the Recession is over”.

Yeah?  Really?      Let’s reconsider that.

The derivatives mess that was key to bringing the whole house-of-cards down is still with us.   One recent article valued it at over one quadrillion dollars.  We can’t know for sure, because it’s unregulated and no one’s talking.

The banks are still insolvent.  Creative accounting, with the government’s blessing, hides the extent of the rot.  Many experts say that more bank bailouts are coming.

The bank bailout created a whole new debt element that Main Street is expected to pick up the tab for.  One article predicted that the interest alone on the debt could amount to more than our total Gross Domestic Product.

Unemployment is awful and getting worse.  The true figures are much worse than the intentionally deceptive government data says.  The last estimate I saw was 16%+ nationally.  While Obama beats his chest and crows, fresh layoffs are being announced; such as Eli Lilly’s announcement of 5,500 more layoffs over the next two years.  I suppose that when we’ve finally all lost our jobs, the statistics will look great because there won’t be anyone left to get laid off.

The housing market has stabilized a bit, but there are more mortgage resets coming that will drag it down further.  Commercial real estate just continues to decline.

Consumers are expected to pick up demand and buy us out of the recession – but how?  They’re up to their necks in debt, out of work, and broke.  Adding insult to injury, the very banks who created this mess are gouging them with new banking & credit card fees.

There’s good reason why Gold & Silver are rising in value; despite government’s best covert efforts to hold them down.  The dollar’s been trashed, and is becoming a laughing-stock globally.   I just laugh when the Fed ”suits” keep talking about a “strong dollar policy”.  I’m starting to feel like a ”banana republic” citizen.

Wall Street pundits cheer whenever the stock markets show an uptick.  Keep in mind that the vast majority of market trading is institutional; by the very people who have the biggest vested interest in fooling the rest of us.  Gee, there couldn’t be any market-rigging going on, could there?  Nah, we only have free and open markets here in America (and if you believe that I’ve got the proverbial bridge to sell you).  I’m reminded of the time last year or the year before when Goldman Sachs was publicly recommending that investors sell their Gold (while secretly buying it for their own account).

I won’t even get into the growing “anti-business”, socialist tendencies of our government for decades that have done so much damage.  We voted these successive administrations in, and we deserve what we get.

Apparently Obama thinks that he can talk us out of recession by spreading rosy messages.  Mr. President, even if you could pull the wool over America’s eyes - they have few assets left to do anything with.

For decades, the Fed has been pulling our economic “butts out of the fire” of each bubble by pumping out even more money and creating new bubbles.  I think they’ve finally run their string.  Now we have a long way to go to dig ourselves out; the hard way.

I respectfully disagree with you President Obama, and consider it insulting that you think we’re so ignorant as to buy into your big con.

By the way, I sure would like to see that audit of the Fed which has been getting kicked around in Congress.  Actually, I’d like to see the Fed be audited, and then disbanded.  They’ve screwed up our economy and stolen from the pockets of the citizens long enough.  It’s time to put U.S. monetary policy into the hands of a true government agency; and out of the hands of self-serving bankers. While we’re at it, how about an audit of the Gold reserves.  Why all the secrecy?  What do you have to hide?  What have you “gentlemen” been up to for decades that you don’t want America to know?

I love America and don’t want to see the country endure any more pain, but I have to “call ‘em as I see ‘em”, and the fundamentals just don’t add up to the same story as the ‘Washington speak”.

Protect yourselves the best you can fellow citizens.  It’s going to be a long and bumpy ride.

Borrowing from the immortal words of Dennis Miller:   “It’s just my opinion.  I could be wrong.”

Of course, according to former President Carter, I’m just being a “racist” for daring to disagree with President Obama.  I actually feel sorry for the President that he has to endure this buffoon speaking in his name.  There seems to be no end to the silliness.  If only it wasn’t so expensive.

Mortgage market bound by major U.S. role

In the go-go years of the U.S. housing boom, virtually anybody could get a few hundred thousand dollars to buy a home, and private lenders flooded the market, aggressively pursuing borrowers no matter their means or financial history.

Now the pendulum has swung to the other extreme. Only one lender of consequence remains: the federal government, which undertook one of its earliest and most dramatic rescues of the financial crisis by seizing control a year ago of the two largest mortgage finance companies in the world, Fannie Mae and Freddie Mac.

While this made it possible for many borrowers to keep getting loans and helped protect the housing market from further damage, the government’s newly dominant role — nearly 90 percent of all new home loans are funded or guaranteed by taxpayers — has far-reaching consequences for prospective home buyers and taxpayers.

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Cash for Clunkers -and- Bernanke “Saving the World”

More economic wisdom from Chris Gaffney and Chuck Butler…

Should be a busy week ahead, and I would expect for most of the data out of the US to continue to confirm a government led recovery is underway here in the US.  In particular, the consumer spending and durable goods orders should show a nice uptick on the back of the cash for clunker program.  But Chuck sent me a note over the weekend which questions the ‘success’ of this program.  Is it really what the US economy needed?  Here are Chuck’s thoughts from San Francisco:
 

“I was sitting here thinking about something that had flashed across the TV screen here in my room, and that is the “Cash for Clunkers” program… I blasted this program two weeks ago, and now that it’s finally done with and $3 Billion was spent to artificially boost auto sales, I will put my final thought on this… Of course I already talked about the obvious things wrong with this program. But here’s my final thought, and that is… I believe the program is going to end up hurting the most vulnerable consumers in the U.S. Middle Class buyers, traded in their “paid for” cars, and leveraged up to buy a new car, when they probably shouldn’t have done so, given the rot on the economy’s vine.

So… Once again, I’m reminded of the words that President Reagan said were the scariest words that could be spoken… “I’m from the government, and I’m here to help”…

The reason I’m all over this program today like a cheap suit, is that this weekend, I heard that Big Ben Bernanke made a claim at the Jackson Hole boondoggle, that “we saved the world”… Oh, Come on Big Ben, isn’t that just a bit dramatic? Does this statement have anything to do with the fact that you are up for re-appointment in January, and you would love to have that thought of you “saving the world” on the minds of the administration?

So… In the end, we’ll see if “he saved the world”…”

I’m with Chuck on this one.  It seems the US government is intent on getting consumers to go back to their borrow and spend habits.  This is what created the bubbles, and the administration seems intent on creating another bubble economy.  US consumers have made some historic cut backs on the amount of debt they are amassing (whether or not these cutbacks are by choice).  The US government should not be encouraging these consumers to go back to their previous ways, but should instead be trying to use the funds to educate and train consumers and to encourage new and innovative companies.  Use this downturn to correct some of the bad habits which we had gotten into.  Yes, it will be painful, but breaking an addiction is always hard and painful.  US consumers need to break our addiction to easy credit and massive debt.  This recession/depression has given consumers a much needed wake up call, hopefully the administration won’t be able to push consumers back into their old habits.

I went running with my wife and her friends over the weekend (trying to take it easy on the back) and got into a discussion about the US economy.  One of my wife’s friends had heard an interview on MSNBC in which an economist stated we were in a classic V shaped recovery.  I let her know that I think the economist was one letter off, and that instead we will see the recovery shaped more like a W.  The green shoots and recovery we are seeing right now will die out as government stimulus slows.  High unemployment, a long slow housing recovery, commercial real estate woes, and rising personal bankruptcies will force the economy into another dramatic downturn.  Central banks who have ‘juiced’ their economies with unlimited credit will have to decide whether to continue juicing, or pull back from the table.

Nouriel Roubini wrote a commentary in today’s Financial Times which agrees with my thoughts.  Roubini said the chance of a double dip recession is increasing because of risks related to ending global monetary and fiscal stimulus.  He believes the global economy still has further to fall, and will bottom out sometime during the second half of 2009.  While some economies such as China, Germany, Australia, and France will likely recover; others such as the US and UK will double dip with another leg down.  “There are risks associated with exit strategies from the massive monetary and fiscal easing,” Roubini wrote.  “Policy makers are damned if they do and damned if they don’t.”

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.

Currencies… Housing… Commercial R.E…. CIT… Europe… Green Shoots… and more

Chris Gaffney…

The dollar and yen got sold but all other currencies rallied, and investors also turned back toward gold pushing the metal above $950 for the first time in over a month.

So what caused all of this confidence?  First, the housing data released Friday morning in the US showed a slight pick up in both building permits and housing starts.  While the housing markets have a long way to go, the data have given investors an indication that construction may have found a bottom.  Not to throw cold water on investors confidence in the building numbers, but while the residential market may be bottoming out, the commercial market continues to tumble.  I spoke to a good friend over the weekend who is a commercial real estate developer down in Memphis.  He told me that his development pipeline has completely dried up, and even the brokerage side of his business has slowed.  The only part of his business which has picked up is the marketing of foreclosed properties.  He has shifted his concentration to helping banks and lenders ‘work out’ of commercial projects which they have taken back onto their books.  The economy has kept most companies from opening new stores, and many continue to shut down under performing ones.  My good friend tells me most of the people he talks to don’t believe the commercial real estate market will turn around until the end of next year.   Not good news for the banks who are still reeling from the residential real estate bust.

But I digress.  Investors weren’t focused on the commercial real estate market on Friday, they were just happy to see a possible bottom in the residential sector.  Their confidence was boosted further after rumors spread that CIT would likely be saved from bankruptcy.  Sunday these rumors were confirmed as it was reported that the CIT Group board had reached an agreement with bondholders that should keep the struggling business lender out of bankruptcy court.  According to the Wall Street Journal, the deal won’t permanently fix the company, but it buys time for the lender to restructure itself. 

We have blasted the administration in the past for the way they are handling the economy, so to be fair I will have to give them kudos for the way they handled the CIT meltdown.  Instead of throwing good money after bad (the taxpayers have already given CIT $2.23 billion of TARP funds), Geitner and Bernanke passed on an AIG type bailout, and even stayed away from arranging a Merrill Lynch style ‘shotgun wedding’.  Instead, they did exactly what they should have done and let the markets rescue CIT.  It is still yet to be seen if the restructuring will ultimately work, but it is good to see the private capital markets are being left to their own accord, without intervention by the Fed.  (Yes, I know the Fed is still involved, but not AS involved as they could have been!!)

The Euro climbed on Friday on some good economic reports.  It was reported early Friday that Europe posted a trade surplus for a second month in a row.  May’s trade surplus rose to 800 million euros as exports fell less than imports.  The data add to evidence that commerce with the rest of the world will likely pull the Euro region out of the recession.  Another report showed German producer prices fell at the fastest rate in more than 40 years last month as energy costs declined and demand weakened.  The June decline of 4.6% from a year earlier was the biggest drop since December 1968.  Lower producer prices are a good for the European economy where industrial production rose for the first time in nine months in May and manufacturing orders in Germany increased the most in two years. 

The rally by the Swiss franc was dampened by intervention as the Swiss National Bank sold the currency to halt its rise.  The sales, which occurred over the past few weeks, were the SNB’s first solo currency market interventions since 1992.  While they have been able to beat back the currency markets for now, the SNB doesn’t have deep enough pockets to fight a long protracted war against the currency market.  As Chuck has pointed out several times in the past, intervention can move the market in the short term, but it takes a very large amount of reserves and an iron willed effort to fight the longer term trend.  The Swiss franc will likely keep pace with the Euro, as both gain vs. a falling US$.

As investors regained their confidence, the higher yielding currencies of Australia and New Zealand advanced.  Both currencies moved up over 1.5% vs. the US$ and hit the highest levels in two weeks vs. the Japanese yen.  The Canadian dollar also rallied, completing its first five-day increase since May.  A run up in crude oil helped strengthen the loonie by over 4% vs. the greenback last week.    

Chuck is waking up in Vancouver this morning, his favorite city located north of St. Louis.  While he spent most of the day yesterday traveling, he was able to send me the following from David Rosenberg, who is usually pretty good with his thoughts….

“It is the second anniversary of the credit crunch and after all of the fiscal and monetary policy initiatives, the best we get are “green shoots” and now that story is getting stale. Go back two years and you will see that the Fed Funds rate was 5.25%, Today it is zero. The fiscal deficit was 2% of GDP two years ago. Today it is 13%. Mortgage rates were 6.5%. Today they are 4.7%. Homeowner affordability with all the government measures is 70% stronger today than it was then too. The Fed’s balance sheet then was $850 Billion. Today it is bloated at $2 Trillion. The government has tried just about everything. Or has it? What if we were to tell you that the one policy tool that is unchanged since the summer of 2007 is… The U.S. dollar? It is exactly the save level now, on any trade-weighted measure, as it was back then. The greenback is struggling at the 50-day moving average, and this could well be the next policy shoe to drop… “

David makes an excellent point.  In spite of all of the negative numbers with regard to the US economy, the value of the dollar is basically unchanged over the past two years.  This is bound to change, as US policy makers will have to let the dollar fall in order in the face of rising inflation and skittish foreign investors.  As we have repeatedly pointed out, the administration has three choices with regard to the tremendous debt load which has been built up in recent years.  1) They can increase revenues (yes, they are increasing taxes, but these increased taxes are already spent on the new health care program). 2) They can decrease expenditures (big government is back, expenditures aren’t going to fall anytime soon!).  3) They can let the dollar fall in order to pay back the debt with cheaper dollars (the most likely scenario!!).

As always, we encourage you to protect yourself from the eventual drop in the value of the dollar by diversifying your investments into other currencies and gold or silver.

Housing Market Update

Quick notes by Chuck Butler on the Housing Market…

Robert Shiller was talking about Home prices in the NY Times, and this just kind of hit me like a V-8 slap… “Even if there is a quick end to the recession, the housing market’s poor performance may linger. After the last home price boom, which ended about the time of the 1990-91 recession, home prices did not start moving upward, even incrementally, until 1997.”

We’re also looking at $2.4 trillion worth of Alt-A mortgages that will need to be refinanced or reset. The peak in those resets won’t happen until January 2013.

Hmmm… That’s not anything that anyone selling a house wants to hear! But anyone that wants to buy, well… That’s not as devastating to hear!