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HOLIDAY
In keeping with
the Independence Day holiday, a preface is offered. The irony is stiff as a
board, as thick as a fog, as ugly as a pig. Citizens in the Untied States
have never seen such a broad, deep, palpable threat to their liberty, this
time from within, in terms of the system and its leadership. Dependence, the
opposite of the celebrated theme, is running strong. The corporate agenda
takes a one-day holiday. Refer to waging war, deceiving the masses, selling
out the Middle Class, undermining the institutions, and rendering any threat
to systemic reform as anti-business or unpatriotic. Any opportunity for a day
off is a good thing, to be honest. If you ask me, somehow this year the
nation should skip the holiday. It is one thing to commemorate the fallen
soldiers on Memorial Day. However, as national financial catastrophe
approaches, sure to shred liberty and compromise sovereignty, it makes sense
to skip any festival for independence. How about calling it the Second Labor Day, since some workers toil twice as hard or long
for the same wage, and others earn half as much as they used to for the same
work. My preference would be to work toward independence from the US Federal
Reserve and the US Military, whose monetary inflation and warmongering have
enslaved 300 million Americans by destroying the currency and decimating
manufacturing base respectively. (Decimate technically means kill every tenth
person, but here let’s call it sparing every tenth company.) The
bipolar alternatives are inconceivable to a sleepy, distracted,
materialistic, hedonistic, betrayed, unhealthy, heavily medicated, poorly
educated, misinformed public: a fully free bond market backed by gold
currency, and an industrial dedication to research & development of
products outside of weaponry. Like my top10 ideas for a
economic, financial, political solution, not a single item of which stands a
chance of enactment, the bipolar path is an exercise in futility and a waste
of breath.
So let’s
celebrate a Dependence Day
and hope for a bolt of lightning to save the day from our leaders, who regard
the Constitution as a mere piece of paper, who work in a hideous manner to
conceal their path toward a totalitarian state, the first stop being the
North American Alliance, with a new amero currency
sure to set off massive unprecedented controversy and retaliation on an
international scale. The teetering dependence is acute, the US needing oil from the Persian Gulf, Nigeria, and Venezuela,
offset by Europe needing Russian oil &
natural gas. The teetering dependence is acute, the US requiring $3 billion per day in foreign
capital, a continuing stream from China,
constant flows from the Persian
Gulf. The bona fide trouble makers reside in WashingtonDC
and a suburban Virginia
enclave, causing a rumpus domestically and internationally. They have
inflicted terror for a long time.
In the
meantime, amidst the tumult & shouting, before the chaos & mayhem
take firm grip, invest in precious metals and energy. Maybe someday the US public
investment community can be convinced of the commodity bull market virtues
after a marketing promotion is launched, pitching them as the next Beany Babies. Enough, gotta get serious. Enjoy the holiday, as serfs need rest.
More than a few
readers sent emails questioning or disputing the 50% erosion to income since
2000. Some lower math in simple terms reveals the fraud and hidden tax. For
the last six years, the actual consumer price inflation rate has varied
between 7% and 11%. Trust the Shadow Govt Statistics folks far more than any USGovt agency working an agenda. By taking 93% to the
sixth power, one gets 64.7%, which means a 7% annual erosion delivers a
whopping 35.3% cut in real terms for a flat income over six years time. Take
90% to the sixth power and get 53.1%, which translates a 10% annual erosion
into a stunning 46.9% cut in real terms over six years time. We love compound
interest in returns, but overlook compound attrition arithmetic when
whittling away our wealth or purchasing power. The numbers are far too
alarming and depressing on lost income through inflation since 1980. Let’s
not go there.
DOUBLE EDGED SWORD
The title of
this article shows full respect for junk bonds. The derogatory label of
‘Garbage Bubble Bonds’ befits the mortgage bonds, which pale in
value by comparison to the respectable tainted paper sold as junk bonds in
high yielding securities by companies with a speckled past. Junk bonds do not
deserve any insult, since they almost always offer true value behind the
bond, just some laden risk and a higher rewarding bond yield for investment
return. Mortgage bonds do not, having been born of a bubble intentionally and
recklessly created by Greenspan for the unexpressed purpose of covering up
his stock bubble bust in 2000. Why is this man revered?
For the last
few years, a constant reminder has banged around inside my head, that the
housing crisis & mortgage debacle represent a double edged sword, as the
households lose valuable home equity while the mortgage bonds lose basic
principal value. Kurt Richebächer stresses
numerous times in our conversations, that for every homeowner suffering a
loss is a bond
holder suffering an equal loss. The $22 trillion housing sector is matched by
a comparable but lower number of trillion$ in mortgages, perhaps half of
which are secured in mortgage bonds. The $750 billion in subprime
mortgage bonds is only the tip of the iceberg. Layer upon layer of other
asset-backed bonds are in trouble, each with larger size, each with probably
less loss, versus the previous layer of higher risk. The point of the double
edged sword is that for every loser on the home equity property owner side,
one can point to a loser on the mortgage bond investor side. The argument
extends to distress, market troubles, and more.
Just as the
mortgages have begun to reset to higher adjusted rates (an average of 1.8% to
2.2% higher), the mortgage bonds must next be reset to lower ratings than
‘AAA’ which stands as an insult to the intelligence of a warm
bodied investor with a pulse. Value is not based upon assumptions in a flimsy
model. The significantly higher monthly mortgage payments coincide with the
massive mortgage bond valuation declines. Just as foreclosure auctions
essentially go ‘No Bid’ with 90% of the home inventory to move,
the mortgage bonds have gone ‘No Bid’ with those auctions in the
public view. Bankers and lenders face a tough decision. Soon the cost of
portfolio insurance will exceed the loss from their liquidation. Then
mortgage bonds will be sold in droves. Correspondingly, soon it might dawn on
millions of homeowners that their home equity might go negative. Then
marginal property owners will sell their homes in droves. My forecast stands.
This housing bear market will be the worst, without any semblance of doubt or
dispute when it ends, since World War II and probably since the Great
Depression. It will be denied every step of the way, as losses mount for
homeowners and bond investors alike. The denial is intended to prevent a
housing stampede and bond meltdown.
For years the
homestead, the house property has been considered the ultimate inflation
hedge asset. Sure, price inflation wrecked havoc in the USEconomy,
but the nation of citizens had a home which was rising in value to offset the undermine from inflation. Now the leaders point to
still substantial gains in home equity from the last six years when the
housing bubble was erected. In two to three years, they will sing a different
tune, since most of the gains from the entire six years, nearly $10 trillion
in additional home equity, will evaporate. A strong claim. Just watch as it
happens. Call me crazy, send me nasty emails, but not a single forecast of
mine has been outlandish in hindsight. This devastation will unleash the
extraordinary economic recession, the unending bond crisis, the USDollar global upheaval, and the political response. In
a matter of several months to a couple years, a growing sense of chaos will
take over the landscape. After chaos intensifies, a totalitarian state is a
certainty. The cry will be for order, not growth or job preservation. The
next painful phase will involve inflationary recession, not stagflation. The
powers mismanaging matters of state and banks will hope for stagflation, and
not see it except in this falsified statistics.
The USEconomy has already handed its manufacturing base to Asia. Banking officials and economic counselors have leaned upon the residential real estate
as foundation for the entire consumption driven economy, against all
sacrosanct wisdom in full heretical style. The price to pay will be economic
decline, lost wages, a lower standard of living, and rising chaos. People
will lose their homes and lose their jobs. People unfortunately will
volunteer to forfeit their freedoms in order to maintain order. They will
eventually beg for order when the suburbs are invaded. When? Something like
by year 2010. What lies around the corner is the end of the United States of America
as we know it. The objective of each citizen is to preserve wealth, even to
profit from the predictable decline, decay, degeneration, which will affect
every aspect of life. The homestead is officially under siege, as are banks.
Remember that 40% of all bank assets are tied to mortgage portfolios or
mortgage bonds. Japan
went underwater for a decade, due to heavy real estate commitment and losses.
Expect something similar with the United States.
My viewpoint is focused upon the SCHEDULE of the decline, with a
TIMETABLE of rate resets, mortgage defaults, foreclosures, new inventory
aggravation, mortgage bond downgrades, heavy writeoffs,
and more, which have been WRITTEN in stone for the next two years. Contagion
is absolute. Even former FDIC head Bill Siedman
acknowledges the pathogenesis.
PRICE AFTER FAILED AUCTIONS
If an auction
fails, what is the value of items raised for sale which do not sell? This is
the key question asked after the failed auction by Merrill Lynch and Bear
Stearns. They tested the market, sought price clarity, and received the worst
of all possible news. NO VALUE. The exercise is surely to be repeated in
subsequent months. How does a market respond? The process within more easy
reach require stocks to halt trading during disequilibrium imbalance, as
sellers mass, buyers vanish, and price is unclear. The stock reopens a day or
two later, after news sets the stage more clearly, usually with a 20% to 50%
price cut. Imagine that in the
mortgage bond arena, a 20% to 50% slice off principal value, depending upon
the type of bond, like subprime or Alt-A or a shade
of anything below sterling ‘A’ rating. The real fun will be
with the derivative leveraged paper, where the guys in propeller hats set up
20:1 leverage, are stuck with cancerous assets behind the paper, and value is
without any question whatsoever negative. Why? Because a 5% loss employing
20-fold leverage produces a total wipeout of the
original investment. A 20% loss, by the way, using
again the 20-fold leverage, produces a 400% loss, meaning a total wipeout plus added losses by three times more. The power
of leverage cuts both ways, with profit and loss.
So what is the
value of hundreds of billion$ in mortgage bonds? Probably something on the
order of 20 to 30 cents at most on the dollar for low quality
‘BBB’ mortgage bonds, typical of the subprimes,
whose bonds now actually offer in the neighborhood
of 30% yields. That is a 70% to 80%
loss on original investment on the collateralized bond. Get ready to
watch a skein of court lawsuits by investors against Bear Stearns and a host
of other Wall Street firms. They misrepresented the asset behind the bond.
Watch for a bold attempt by WS to have new legislation to exempt them from
bond related law suits. Hedge funds have begun to fall like birds in a drought.
Recent news points to Horizon ABS and United Capital as blocking redemptions.
Lawsuits follow. Their investors are told they cannot get their money out!!! Wall
Street firms already have covenants written into their bond issuances,
limiting liability and investor rights to make claims against fraudulent
misrepresentation. This is yet another sign of the times with clear large
letters spelling out the Mussolini Fascist Business Model, where government
and industry collude to pilfer pillage and profit. The USGovt
is endorsing limited liability by inaction from regulatory bodies.
The failed
auctions might result in unclear value to be determined. Watch the impact to
balance sheets and collateral posted for loans. This will become interesting,
much like watching a developing industrial fire, as chemical caches explode
unexpectedly. Creditors might act with draconian harshness soon, refusing any
longer to accept certain collateral, and thus call in loans by the billion$. Formal
statement of balance sheets might assign at some time in the future no value
on certain collateralized bonds. They are priced by convenient goony models
dependent upon collusion by rating agencies. Failed auctions expose the
shenanigans and might disable these very models. Vast writeoffs
are certain on the mortgage bonds. The size of writeoffs
depends on the level of corruption permitted by the authorities. So far they
have given gigantic extensive latitude to distort prices higher than true
value.
With lower
mortgage bond principal comes higher bond yield. With higher bond yield comes
higher mortgage rates. With higher mortgage rates come
lower home purchase demand. With lower demand comes
lower home prices. The dominoes are falling in ultra-slow motion. With
lower home values, less spending results. With lower home values come more
decisions to sell properties. With more homes up for sale come
an aggravation to inventory strain. With colossal bond damage, related
bond and asset sales will ensue. The
meltdown is underway. Bear Stearns lit the fire. Wall Street in its
infinite stupidity, recklessness, and cliquish behavior
endorsed the torching of their colleague’s bond basements.
THE USDOLLAR
AND GOLD WILL REACT TO THE CONTAGION AND CRISIS. SYSTEMIC PROBLEMS ALWAYS
INFECT THE US$
& GOLD. RECOGNITION COMES FROM BOND EXPERTS SUCH AS PIMCO’S BILL
GROSS, AND CONFIRMATION FROM OVERSIGHT GURUS AT THE BANK FOR INTL SETTLEMENTS
IN SWITZERLAND.
THE CHINESE ARE RESTLESS, HAVING SOLD A SCAD OF USTBONDS IN MAY, AND PROBABLY
JUNE ALSO. THEY PROBED FOR WEAKNESS AND SAW IT IN SPADES.
COERCION NEXT
So without a
doubt the USDollar is the weakest link, and the USTreasury Bonds
are the traded security behind the bloated black hole that best symbolizes
the current Administration and its economic stewardship. Don’t expect a
Democrat Admin to be any better. They will merely shift the furniture around,
redirect the flows a bit, disallow certain profitable procedures to
perpetuate, change taxes here & there, be pressured into continuing the
foreign wars, and make their own colossal errors. They will be dumbstruck by the bonfires in the bond world and the
wreckage in the housing world. Republicans always seem to enable
corporate profiteering with impunity. See a dozen examples in the last six
years. Democrats always seem to attempt to help the little guy, but harm the
system in critical ways. See higher tax rates resulting in lower tax revenue.
See environmental obstacles, confusing regulations, higher federal taxes
& withholdings, resulting in lost jobs. The nation is stymied, crippled,
and heading to the cleaners. My label has been ‘The Receivership
Economy’ from dependence upon bubbles, debt default, and Old Europe
pulling the strings.
Without a doubt
the USDollar is the weakest link, as numerous holes
must be plugged to in the leaking dike. Gold and silver must be prevented
from a zoom rise in price, since they serve as warning signals. Crude oil and
natural gas must be prevented from a zoom rise in price, since they directly
strain the USDollar. The long-term interest rates
must be prevented from jumping higher. The stock market indexes must be
prevented from falling sharply, since the public sees stocks as a visible
signal of wealth. The USDollar must be prevented
from a sudden freefall. The entire Wall Street and US Federal Reserve
leadership is in the process of soiling their skivvies. The best investment
might be in Depends Adult Diapers. These
guys, leverage mechanics in financial engineering, destroyers of economies,
snake oil salesmen of cancer ridden asset bonds, they are sweating bullets,
pooping their pants, staring into space, stunned by failed auctions and
uncertain valuation, wondering about leverage implications and debts called
by creditors. These are no longer exaggerations written in tabloids, but
rather front page news items.
Feeble denials
by USFed Chairman Bernanke
and Treasury Secy Paulson have rendered each a
marginalized institution. Is that possible? No, but their commentary is of marginal
importance and substance anymore. They are the official denial mouthpieces. A
better viewpoint toward reality can be found by the Bank for Intl Settlements
out of Switzerland
(the central bank among central banks) and by the private citizen Alan Greenspan.
He can now speak freely about the wreckage he permitted under his watch, and
the sequential bonfires lined up and now torched. Countless scandalous
worthless doomed mortgage bonds were dressed before vanity bureaus, prepped
for sale, lipstick on pigs. The BONFIRE OF THE VANITIES will provoke a sharp
economic, banking, and political response. Restrictions on hedge fund
redemptions might soon be matched by restrictions on mortgage bond sales,
especially their highly leveraged Collateralized Debt Obligation derivatives
employing 10-fold crazy leverage. Imagine heavy leverage against a corroded
base!
The weakest
link in the above list of assets to protect is the USDollar.
The untold story is that the strain on
credit derivatives has put tremendous pressure on the USDollar,
which cannot hold. The sale and liquidation of countless billion$ in
credit derivatives will deliver a series of unending blows to the USDollar, sure to crack before long. With $120 trillion
in notional value for credit derivatives, figure with 30:1 leverage that $4
trillion in original equity tied to margin investment is involved. The FOREX
markets (foreign exchange for currency trades) involves between $1 trillion
and $1.5 trillion in daily volume, less on holidays and more during crises. We
have a crisis building. The USDollar in my view
cannot be defended in the face of a credit derivative crisis. Look for
coercion next, in the form of threats to those wishing to liquidate vast tranches of bonds. To expect no interweaving of military
activity with the coercion would be naïve. It is a certainty. It has
past precedent.
In my view, the
credit derivative events began with Fat Freddie Mac and Fatter Fannie Mae. They
are holders of the absolute worst quality of all mortgages and related bonds.
In fact, typically the worst quality loan portfolios are packaged into bonds,
as the best are kept for servicing and higher reliability in returns without
delinquencies and defaults. Fannie & Freddie obviously went bust three
years ago, without a doubt suffering credit derivative meltdown, papered over
by the Paulson Crew. Their stocks will be delisted
only after the insiders and aristocrats evacuate the FNM and FRD from their
portfolios. If you need a good laugh, remember that FNM remains in the S&P500
stock index. Bear Stearns is the visible GROUND ZERO of the mortgage bond
bonfire. However, Fannie & Freddie are the hidden GROUND ZERO of the same
bonfire. Wall Street maintains mostly buy recommendations! Neither company
(or whatever they are, more like centrifuge sewer treatment plants) has been
in the news lately, despite the fact that Fannie Mae owns over $1.3 trillion
in mortgage bonds and owns over $1 trillion in mortgage portfolios. If you
think the Bear Stearns bonds have empty value, check Fat Freddie & Fatter
Fannie. Well, you cannot, since they are under wraps, otherwise known as RECEIVERSHIP, or controlled audits and dribbled
statements after the cleansing. The next story soon told will be the
CONNECTION of fires between the Bear Stearns type of mortgage bonds and the
impact to Fannie & Freddie bonds. Translated: the fires are spreading,
the contagion is realized, the system is weakening.
CRUDE OIL AS CANARY
In the face of
a weak link USDollar, a fast eroding Petro-Dollar defacto standard
enforced by Persian Gulf principal players,
one should expect the crude oil price to hurtle higher. It is doing precisely
that. Blame had been put on the Nigerian situation, but that is but a false
facade and distorted assessment intentionally given. The links have always
been firm between the USDollar and crude oil. The
alchemists cannot control them, while at the same time keep their controls in
place on the vast price capping required throughout the Western bond world on
long-term interest rates.
The wizards of
financial chemistry have an even greater more powerful adversary in Mother
Nature. The depletion of the large elephant oil fields inflicts harm on the
supply side of the crude oil equation, thus putting extra pressure on the USDollar to the downside. It could very well be that the
crude oil will signal the breakdown in the USDollar.
The crude oil
market has become a veritable clusterhump of
mismanagement and grotesque disturbance to the efficient mechanisms so
urgently needed to provide adequate supply. All kinds of inter-connected
financial and derivative models link crude oil price to the USDollar exchange rate. Depletion interferes with the
smooth operation of the price capping intricate workings. Recall forecasts
one year ago that crude oil would test the $40 level? Now we hear of repeated
questions on whether the crude oil price has peaked. They will continue to
confuse matters, muddy the waters, and keep investors off balance enough to
hang onto their overpriced mainstream stocks in the S&P500. The exodus
into commodity stocks will resume in the second half. They claim a USEconomic recovery will come. IT WILL NOT. Leading
Economic Indicators look really bad. Capital goods orders have turned down,
rendering the strong April figure as an outlier blip.
GOLD AWAITS
In time, the
push upward in crude oil price will be matched by a push upward in the gold
price. The two are strongly correlated. A systemic bonfire has been lit, the
effects of which will undermine the confidence in the US banking system, the US bond
arena, and the USDollar itself. To date, the
authorities have succeeded in tossing a wet blanket over the gold market. See
the monumental official gold bullion sales out of Europe.
But they cannot break gold, which has been successfully defended at the $650
mark. In time, analyses will surface that the entire US banking
system is at risk, possibly to repeat the Japanese 1990 decade outcome.
The USDollar DX index has a horrible looking chart. The US
Federal Reserve auctions are not being welcome or well bid. A deadly bear
triangle is evident in the USDollar DX index
multi-year chart. Meanwhile, gold holds its support levels with strength.
Gold seems to lurk near the bonfires, awaiting the exodus, as gold will offer
more security. The bond bubble is in
the process of a grotesque grand grave bust. Alternatives to the corrosive USTreasury Bonds are actively being sought, pursued, and
secured. Commodity investments are the new rage among central bank
investment funds. These are analyzed more fully in the July Hat Trick Letter.
The chart below is HORRENDOUS. A breakdown is not far on the horizon. As the
10-year TNote yield relaxed a bit toward 5.0%, the USDollar did not benefit. Next is a new
down cycle.
The USDollar received some assistance today, as the Euro
Central Bank held back from another interest rate hike, now at 4.0% still
well below the 5.25% US
official stuck rate. The English raised by 25 basis points to 5.75% to
surpass the US
stuck rate. The euro flirts with 136, even as the
British sterling currency seems to prefer at least a 200 exchange rate as a
base. The USDollar is poised for round after round
of assaults. The bonfire will affect the crippled buck, which stands as
perhaps the weakest link, along with the crude oil price. By the later months
of 2007, the world will be focused directly on the bonfires in the US bond arena, questioning the entire US financial
sector, its inflation directives, its housing bubble bust, its absent
manufacturing base of stability. Gold over $700 by year end seems assured,
but one is hard pressed to exude confidence at this point. Take comfort in
its resilience. And by the way, watch gold but ride the silver vehicle, which
will outperform gold by a 2:1 ration, as usual. Central banks dump gold, but
nobody dumps silver. The powers scramble to meet delivery in silver, in fact.
Also the very large commercials are in deep trouble on their short silver
positions, unable to cover at these lower silver prices.
Looming over
the wreckage, sure to worsen, is the hamstrung USFed
and the compromised US Dept of Treasury. They might prefer to be slow to
recognize the debacle, the rating agencies might prefer not to downgrade at
all, and the big banks & broker dealers might succeed in containing their
fire for many more weeks or months. Conditions must worsen much more before
the USFed takes drastic action. A fly on the wall
at panicky meetings behind the scenes has the best spot of all. Envy the fly.
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By : Jim Willie CB
Home
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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
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