Use the above link to
subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise like a cantilever
during the ongoing panicky attempt to sustain an unsustainable system
burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by
heretical central bankers and charlatan economic advisors, whose interference
has irreversibly altered and damaged the world financial system. Analysis
features Gold, Crude Oil, USDollar, Treasury bonds,
and inter-market dynamics with the US
Economy and US
Federal Reserve monetary policy. A tad of relevant geopolitics is covered as
well. Articles in this series are promotional, an unabashed gesture to induce
readers to subscribe.
Collateralized
Debt Obligations are the CDO bonds under fire, soon to suffer huge losses,
subject of debt downgrades, object of failed
auctions. We are talking about hundreds of billion$ in bond losses. A vicious
circle has begun, sure to continue for a length of time ten times greater
than what is expected, like into 2010. Home
values are on the decline, the basis collateral for such asset-backed bonds,
some of which hold car loan portfolios also in trouble. Homeowner defaults
are on the decline, the basis income for such asset-backed bonds. The
foreclosure process will aggravate the already swollen supply of homes. Hedge
fund collapse will aggravate the already shaky supply of CDO & mortgage
bonds. This is a worst case scenario unfolding on a horrific scale.
Mortgage rates
will continue to be reset upward for two more years, a process not ended. The
Bear Stearns & Merrill Lynch failed bond auction kicked off the process, described
in an article last week. The
process continued this week with two blocks of debt downgrades by the sleep
debt ratings agencies, Standard & Poor and Moodys.
The next painful phase will feature huge portfolio writedowns,
reduced bond valuations on the balance sheets, in addition to forced bond
sales as billion$ in CDO and mortgage bonds are rendered no longer investment
grade. Imagine throwing gasoline on the fire This vicious circle can be
outlined loosely.
The backdrop
includes a USGovt with mindboggling federal deficits, aggravated by outsized
ongoing war costs. The honest annual deficit is of the order $1300 billion,
when all the costs and illicit borrowing is tallied, like the off-budget
items. My forecast made last year was that by 2007, it would be painfully
clear that the weakest national economy on the planet would be in the United States.
WE HAVE PRECISELY THAT. For three years, nitwit economic pundits and
heretical bank officials boasted that the USEconomy
was a viable legitimate ‘Asset Economy’ which was fueled by the engine of assets like housing. For three
years, the same incompetent policy makers were justifying the ‘Macro
Economy’ whose credit supply was fueled by
Asian and OPEC trade surpluses. Now both economic tenets have been smashed,
revealed as empty, each disguised Economic Mythology nonsense. The housing
crisis and mortgage debacle are in full swing, worsening each month.
The Asians
outside China
do not support USTreasury Bonds at all anymore. The
Persian Gulf nations are in the gradual
process of dismantling the tight US$ peg, the essence of the Petro-Dollar defacto standard. So as the USEconomy
and US
bond sector are under siege, the USDollar and USTBond are also under siege. Even with no monetary
action in a rate hike by the Euro Central Bank this week, the euro currency is pushing into record territory. The
British did hike rates, and the pound sterling is also in record territory. A USDollar crisis is unfolding.
New Dow index and S&P index highs only reflect preserved purchasing power
in stocks, compensating for the lower USDollar. Monetary
inflation is running at over 13% in US$ money supply, the real concept of
inflation, matched by crazy levels of money growth in Europe and England. We
are in Weimar
times! As distress broadens and depends, expect even higher money growth!
Here is a list
of events, which will continue to occur, continue to wreck havoc, and suffer
a repetitive process until official bailout, and probably past that eventual
certain event. This list will cycle over and over, in a vicious feedback loop
and continual pathogenesis. England
is subject to a similar vicious circle. The breakdown will succumb to
additional systemic weakness and debilitation. The strength of many factors
is growing, not lessening, sure to amplify the power of damaging forces. Talk of a housing recovery, sector
stability, lack of contagion, and assured containment will all be replaced by
questions of when the destructive process will end, how low will housing
prices go, how deep the bond losses will be, and what arenas might be spared.
This is a systemic contagion of absolute proportions, in the great housing
& bond bust. One could have written this script years ago, since the bust
is always inevitable.
All reference
below of bonds is to asset-backed bonds, both the dominant mortgage bonds
underlying and the packages of CDO bonds, which contain an assortment of
securities of various levels of credit quality. Each mortgage bond is rated
highest as ‘AAA’ or subprime at
‘BBB’ with shades in between. The CDO bonds include credit
default swaps (insurance for mortgage portfolios), swap options, interest
rate swaps (balance short-term & long-term yields), USTBond
futures contracts (hedge on rates generally), and so on. These powerful
factors are discussed and analyzed in the July issue of the Hat Trick Letter.
The order can be rearranged, since so much occurs simultaneously.
THE CYCLE OF REPEATING FACTORS:
1)
failed auctions and unsatisfactory public sales of asset-backed bonds
2)
debate on value in illiquid opaque markets, driven by models
3)
rating agency debt security downgrades
4)
forced sale of bonds which lose investment grade status
5)
huge writeoffs on balance sheets holding
bonds
6)
compensatory sales of other bonds to improve debt ratios
7)
downgrade of ‘AAA’ rated bonds from falling home
collateral assets
8)
available mortgage funds reduced from collateral sales
9)
continued bankruptcy of lending institutions
10) inevitable
bankruptcy of a major bank and many home builders
11) return
of bonds to broker dealer issuers for non-performance or fraud
12) lawsuits
against lenders for predatory practices, misrepresentation
13) Congressional
action to clarify liability from fraud and predatory practices
14) hedge
fund failure, credit disposition, liquidation of bonds
15) falling
housing prices, pressured by heavy unsold home inventory
16) mortgage
rates reset upward, ending initial bargains
17) rising
mortgage defaults, delinquencies, and foreclosures
18) bankers
return foreclosed properties to the market for sale
19) mortgage
bonds fail to perform on income from monthly payments
20) base
long-term interest rates rise from market conditions
21) tighter
lending standards, big pre-payment penalties inhibit refinances
22) stronger
homeowners decide to sell so as to avoid going underwater in equity
23) state
legislation to attempt to protect homeowners soon to lose homes
24) Congressional
threat of ratings agencies and bond issuers for liability
25) REPEAT
THE PROCESS
The housing
crisis and mortgage debacle has been forecasted in the Hat Trick Letter for
over a year, as a groundswell of unbridled credit explosion and irresponsible
economic & banking policy. The
Greenspan reaction to the 2000 tech/telecom stock bust was to create a
housing/mortgage bubble perhaps 20x larger. The
losers of the stock bust were much more tilted toward the general public,
hundreds of thousands of households, their pensions included. The losers of
the much larger double-sided bond bubble will be pension funds, insurance
firms, hedge funds, as well as the major players on Wall Street. The bankers,
brokers, and dealers are all at risk to suffer huge losses. CDO bonds issued
by Goldman Sachs have the highest rate of downgrade so far. All the big
banker broker dealers are at risk. They all have exposure.
The US Federal
Reserve will sooner or later (probably sooner) decide to bail out the large
Wall Street firms, since two of them serve as the functional arms of the
governing bodies which run the system. Refer to Goldman Sachs being the US
Dept of Treasury, and JPMorgan being the US Federal Reserve. The ultimate bailout will be far above a
$ trillion, to be sure. The effect on the USDollar
and USTBond will be magnified and profound, pushing
up gold & silver prices to where they belong. THE USFED CANNOT STAND BY,
SINCE THE VICIOUS CIRCLE WILL FEED UPON ITSELF IN REPEATED CYCLES, EACH MORE
POWERFUL, AND THEY KNOW IT !!! An unspeakable degree of capital
destruction has begun. Wealth generation from simple inflation has a downside
seen in progress.
The systemic
risk is slowly being recognized. Denials are increasing at a great pace,
regarding ‘contagion’ and ‘containment’ and ‘spillover’ and ‘recession’ and more. Historically,
such denials are a surefire indication of their
realistic threats and current felt risks, sure to occur.
THE DAMAGE TOLL
My hip pocket
estimate is an initial figure of $2
to 3 trillion in bond losses from CDO plus MBS bonds at a minimum. Match
that with $4 to 6 trillion in home equity losses at least. Included
in my estimate is the collateral
damage of another $1 trillion in losses to high grade mortgage bonds and
corporate bonds, since packaged in the same sewage as leveraged CDO
bonds. A housing valuation decline CANNOT happen without a corresponding
asset-backed bond decline of similar magnitude. Credit derivatives are
undermining the USDollar. The ruling elite
engineered a bond
bubble to trigger a housing boom, in an opportunistic fashion so as to rescue
the system from the 2000 tech/telecomm stock bust and recession. In the
process, the big brokerage banker brokers seized a chance to sell bonds and
earn huge fees, while grossly misrepresenting the quality of many of the
bonds. In many instances, junk bonds packaged as ‘AAA’ gems.
However, they forgot to avoid ownership of their own corrosive bonds, and
exposed themselves to hedge fund clients with outsized lines of insane
credit. SO THE RULING ELITE WILL EAT A $1 TRILLION PILL THEMSELVES
!!!
The Ruling Elite banker broker firms will beseech the USFed to bail them out, saving their hides, for the
greater good and benefit and integrity of the system. If
a bailout does not occur, three things might occur, all bad. 1) The USDollar
might plummet worse (ushering import price rise), 2) the USTBonds might falter
badly (higher long-term rates), and 3) gold
might jump quickly to $1000 (the monetary crisis barometer). Recall that
members of the Fed banking system are within the group of detrimentally
affected losers lined up for slaughter. The general non-voting public will
want a bailout themselves, BUT WILL NOT RECEIVE IT. ‘Helicopter
Ben’ is all talk in spreading cash to households. Public outrage will
be acute, loud, and replete with righteous indignation. The US Congress will
toss crumbs to the new serfs of the land. When all this occurs, when the
bailout occurs, the USDollar will plummet. The DX
index is already on the edge of the precipice, at the 30-year critical
support level. With a delayed reaction, gold & silver will soar !!!
The best
graphic of the current distress shows the corporate bond spreads widening,
some collateral damage. It also features the value of subprime
mortgages across a pool as having suffered a 50% loss. More loss is coming,
even to ‘AAA’ rated bond securities. Look for the ABX index to
head toward the 20 level, all in time, much like falling down the staircase
from the kitchen to the basement, with bounces of a human skull off the hard
wood. A floor of a USFed
sponsored guarantee will save them. Before all the damage is done, and the
dust clears, the USFed will guarantee $2 trillion
or more in mortgage bonds, which will trigger a direct impact on the USDollar, and possibly the USTreasury
Bonds. They will have many motives beyond rescue of buddy Wall Street firms. They will want to avoid contagion to the
prime mortgage arena, which could shut down all mortgage funds!!! And they denied contagion!
WEAKEST LINK
The canary in
the monetary mine continues to be crude oil, now over $73 with its brother
Brent over $76. The Petro-Dollar defacto standard might be the first victim in this
unfolding mess. If the USDollar is soon to suffer a
crushing blow, the financial meter in gold and the commercial meter in crude
oil would reflect it. Official central bank gold sales have obstructed the
gold price rally. Support from the Persian Gulf
nations is absent in this time of need. Perhaps
they are concerned about protection from the inflation ravage extended from
longstanding USDollar direct association in a vast
Protection Racket, enabling the Modern Pharoahs to
enhance their billionaire status. The Gulf Cooperation Council is lining
up to abandon the US$
peg to their national currencys. See the United
Arab Emirate comments by bank chief Al-Suweidi, who
is enlisting wider support of a
group abandonment of the US$ peg. Full coverage can be
found in the July Hat Trick Letter issue, due out late on the weekend of the
15th.
THE HAT TRICK LETTER PROFITS IN THE
CURRENT CRISIS.
From
subscribers and readers:
“My subscription is worth double what I pay. Once for the
economic analysis, and once for the education in wordsmithing!
I am coming to value the second one the most, as your alliteration and
parable-esque style keeps me smiling even as you
write about the walls
crashing down!”
(MichaelH
in Georgia)
“I want to congratulate you and thank you for your quick and
frankly stated revision on bonds [the 4.0% forecast]. That was my thinking
all along, but I must say that your writing was and continues to be a most
valuable input to my thinking in the first place. That type of integrity
makes me value your opinion all the more and is likely to keep me as a loyal
subscriber for years to come.”
(ScottD
in Pennsylvania)
“I am staggered by the depth and breadth of the information I
now have access to in your newsletter. Just one problem, I cannot put my
computer down. Reading your current reports and catching up on earlier
editions you make available in your ‘library’ is dominating my
mornings, afternoons and evenings!”
(DavidR
in England)
“I believe your wit and disgust at the state of affairs stand
untouched.”
(Charlie P in Virginia)
“I am currently subscribed to over 60 paid newsletters. Your
analysis is by far the most accurate every time. The most impressive
characteristic of your thought processes is your ability to think in
multi-factorial terms. You are one of the few remaining intellectuals with
such capacity intact.”
(Gabriel R in Mexico)
By : Jim Willie CB
Home
: Golden Jackass website
Subscribe: Hat Trick Letter
Jim Willie CB is the editor
of the “HAT TRICK LETTER”
Jim Willie CB is
a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics.
His career has stretched over 24 years. He aspires to thrive in the financial
editor world, unencumbered by the limitations of economic credentials. Visit
his free website to find articles from topflight authors at www.GoldenJackass.com . For personal
questions about subscriptions, contact
him at JimWillieCB@aol.com
|