The concept of entropy is one of the most useful terms for understanding just about everything. While it has its origins in natural law – thermodynamics, specifically – the concept holds true pretty much across all closed systems.
In the simplest of terms, every closed system will ultimately degrade toward a state of maximum entropy. I’ll use the current political system of the U.S. as a convenient example. When American democracy was first shoved out of the nest by the founding fathers, it was new, fresh, and energetic. It took the world’s breath away at its boldness and unlimited promise, and set the wheels turning on tangible change across much of the world.
Before the ink dried on the Constitution, however, the degradation began. From the beginning, the country’s political operations fell into the hands of a strictly limited number of parties, which quickly coalesced into just two. Since then, they have essentially shared power, with only minor differences in policies between the two. Simply, absent a disruptive external force, the closed political system quickly matured into an institutionalized “sameness” that all but assures no serious challenges – leading, ultimately, to the certainty it will degrade to only a shell of its former self.
It was, perhaps, because of his own understanding of natural law that Thomas Jefferson was heard to remark, “The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. It is its natural manure.”
That doesn’t mean I am advocating revolution, dear reader – just pointing out the fact that any closed system, no matter how well constructed, will degrade. To expect the United States of America to avoid this fate is to expect the impossible. Switching to a corporate example, I used to be a regular buyer of Toyota cars. They were well made, innovative, and suited my changing needs over the years. And I wasn’t alone – in 2007 they became the world’s largest automobile maker, with a global manufacturing and distribution system that made them appear dominant. Behind the scenes, though, entropy was at work.
In 2008, when the time had come to lease a new car, I reflexively headed over to the local dealer fully expecting to drive off with yet another Toyota, just as I had done several times over the previous decade or more. But as I walked around the showroom, it was impossible not to notice that the company had lost its edge. The cars on offer were not only more expensive than the competition, but even the newest models had that “so yesterday” look about them.
As I said at the onset, you can see entropy at work in virtually every closed system. Consider the U.S. dollar, which became the world’s de facto reserve currency as a result of Bretton Woods. What an amazing advantage for the United States – this unique ability to provide the world’s central banks with their primary reserve component! And to have all the world’s commodities dealt in dollars. In short, the dollar became the centerpiece of the global economic system.
It was, of course, damned to entropy, with Nixon’s ending the dollar’s gold backing just being part of the natural progression. And if he hadn’t done it, one of his successors would have – due to some “emergency” or as a “temporary” measure, or some other flimsy political cover. Regardless, the degradation of the currency gained speed and, systematically, it’s been all downhill since.
We the people are no longer content with a free-market system that embraces periodically burning down the house in order to rebuild stronger and better – a system which has been proven to create wealth, and lots of it. Instead, we are hell bent on adopting the closed economic system of a socialist model where everything and everyone is tightly controlled.
On that point, an article in today’s edition of the Wall Street Journal titled “No Exit in Sight for U.S. as Fannie, Freddie Flail” sheds light on the continuing degradation in the free market that used to underpin the nation’s hugely important housing sector… Fannie and Freddie, for their part, remain at the core of a housing-finance system that inflated a dangerous housing bubble. After prices collapsed, sending shock waves around the world, the federal government put America's housing-finance system on life support. It has yet to decide how that troubled system should be rebuilt.
On Dec. 24, Treasury said there would be no limit to the taxpayer money it was willing to deploy over the next three years to keep the two companies afloat, doing away with the previous limit of $200 billion per company. So far, the government has handed the two companies a total of about $111 billion.
The government is willing to tolerate such open-ended exposure for two reasons. First, it sees the companies as essential cogs in the fragile housing market. Fannie and Freddie buy mortgages originated by others, holding some as investments and repackaging others for sale to investors as securities. Together with the Federal Housing Administration, they fund nine in 10 American mortgages. Worries about potential insolvency would cripple their ability to fund home loans, which would hamstring the market.
Second, the companies are a convenient tool for the administration to use in its campaign to clean up the housing mess. "We're making decisions on [loan modifications] and other issues, without being guided solely by profitability, that no purely private bank ever could," Mr. Haldeman said in late January in a speech to the Detroit Economic Club.
Besides playing a key role in the loan-modification program, Fannie and Freddie have jump-started lending by state and local housing-finance agencies by helping to guarantee $24 billion in debt. They also are lending support to the apartment sector by becoming the main funders of loans to builders and buyers of apartment buildings.
By using Fannie and Freddie for such initiatives, the White House doesn't have to go to Congress for funding. The Treasury and White House can simply issue instructions to Fannie and Freddie via their federal regulator, the Federal Housing Finance Agency, or FHFA.
The government is "running Fannie and Freddie as an instrument of national economic policy, not as a business," says Daniel Mudd, who was forced out as Fannie Mae's chief executive in September 2008 when the government took control.
(Full story here.)
Can’t you just smell the entropy? The results are not just predictable, they are evident – just look around.
As investors, it is, I would contend, important to understand the notion of entropy – and to watch for it in your portfolio companies, in your bureaucracies, and, on a more personal level, your relationships and your health. On that last point, the human body is very much a closed system and so, as we all are too painfully aware, will degrade until it ceases to exist.
You can slow the degradation by taking care of yourself. But it’s also worth remembering that it’s a one-way slope, so enjoy yourself while you are fit and able to.
======================================
Provided by Casey's Daily Dispatch
Wednesday, February 10, 2010
Friday, February 5, 2010
CBO Warns of Never-Ending Budget Woes...
Just a few short days ago, the Congressional Budget Office (CBO) became the first official D.C. source to open its bomb bay doors and let loose on all of us. The CBO's projections: Instead of falling substantially from $1.4 trillion in 2009 (9.9 percent of GDP), the 2010 deficit would essentially hold steady at $1.35 trillion (9.2 percent of GDP).
The massive 2010 deficit would be followed by another $980 billion deficit in 2011 ... $650 billion in 2012 ... and $539 billion in 2013. Total red ink through 2020: $7,400,000,000,000!
As stunning as those figures are, long-term projections usually UNDERESTIMATE the deficit. Roughly 80 percent of the four-year deficit forecasts issued in the past three decades ultimately proved too optimistic, according to The New York Times.
Politicians love spending what isn't theirs. Why? Those forecasts rely on growth, revenue, and spending projections that don't pass the test of time. Politicians just can't help themselves — pandering, over-borrowing, and overspending is in their nature.
Just consider this: Two years ago, the CBO forecast the 2010 deficit would be $241 billion. Now the CBO is throwing that projection out the window and saying it'll be more than FIVE AND A HALF TIMES AS BIG!
Obama Unleashes Carpet-Bombing Campaign of Red Ink ...
But if you thought the CBO numbers were bad, you should read through the Obama administration's latest budget. It forecasts a whopping $1.6 trillion deficit this year — more than $200 billion above and beyond the CBO's numbers. That would come to 10.6 percent of GDP, the worst in modern time.
What about 2011? Another $1.3 trillion. And the years after that? More of the same. The White House Office of Management and Budget (OMB) is now expecting $8.5 trillion in red ink over the next decade, with the annual deficit NEVER falling below the 3 percent-of-GDP threshold considered fiscally responsible.
It gets worse ... Those projections assume relatively rosy growth — 3.8 percent next year, and more than 4 percent over the following three years. We've only seen a string of 4 percent+ growth readings twice in the past three decades. The projections also include assumptions about taxes and spending discipline that won't pass the test of time. One example: The OMB projects $250 billion in savings from a proposed three-year freeze on a significant chunk of domestic spending. Increases thereafter would be limited to the inflation rate.
I don't know about you, but I think the chance of that happening is somewhere between slim and none! Neither the Democrats nor the Republicans have shown any real spending discipline. There's no reason to assume they'll have a "Eureka!" moment in the middle of the decade. And I'm not even getting into the Social Security- and Medicare-related problems. We've promised trillions in benefits over the coming years that also threaten to blow our nation's balance sheet to smithereens.
Debt, Debt, Debt. And Did I Mention Debt?
U.S. public debt is expected to double in 10 years. Bottom line: A never-ending wave of budget bombs is headed our way in the coming years. That will drive the total U.S. public debt load inexorably higher — from about $9.3 trillion in 2010 to $18.6 trillion by 2020. And the cost of servicing all that debt? It's projected to more than QUADRUPLE from $188 billion to $840 billion!
I'm at a loss for words, folks. These figures are horrendous ... outrageous ... infuriating ... and terrifying all in one.
==================================================================================
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
The massive 2010 deficit would be followed by another $980 billion deficit in 2011 ... $650 billion in 2012 ... and $539 billion in 2013. Total red ink through 2020: $7,400,000,000,000!
As stunning as those figures are, long-term projections usually UNDERESTIMATE the deficit. Roughly 80 percent of the four-year deficit forecasts issued in the past three decades ultimately proved too optimistic, according to The New York Times.
Politicians love spending what isn't theirs. Why? Those forecasts rely on growth, revenue, and spending projections that don't pass the test of time. Politicians just can't help themselves — pandering, over-borrowing, and overspending is in their nature.
Just consider this: Two years ago, the CBO forecast the 2010 deficit would be $241 billion. Now the CBO is throwing that projection out the window and saying it'll be more than FIVE AND A HALF TIMES AS BIG!
Obama Unleashes Carpet-Bombing Campaign of Red Ink ...
But if you thought the CBO numbers were bad, you should read through the Obama administration's latest budget. It forecasts a whopping $1.6 trillion deficit this year — more than $200 billion above and beyond the CBO's numbers. That would come to 10.6 percent of GDP, the worst in modern time.
What about 2011? Another $1.3 trillion. And the years after that? More of the same. The White House Office of Management and Budget (OMB) is now expecting $8.5 trillion in red ink over the next decade, with the annual deficit NEVER falling below the 3 percent-of-GDP threshold considered fiscally responsible.
It gets worse ... Those projections assume relatively rosy growth — 3.8 percent next year, and more than 4 percent over the following three years. We've only seen a string of 4 percent+ growth readings twice in the past three decades. The projections also include assumptions about taxes and spending discipline that won't pass the test of time. One example: The OMB projects $250 billion in savings from a proposed three-year freeze on a significant chunk of domestic spending. Increases thereafter would be limited to the inflation rate.
I don't know about you, but I think the chance of that happening is somewhere between slim and none! Neither the Democrats nor the Republicans have shown any real spending discipline. There's no reason to assume they'll have a "Eureka!" moment in the middle of the decade. And I'm not even getting into the Social Security- and Medicare-related problems. We've promised trillions in benefits over the coming years that also threaten to blow our nation's balance sheet to smithereens.
Debt, Debt, Debt. And Did I Mention Debt?
U.S. public debt is expected to double in 10 years. Bottom line: A never-ending wave of budget bombs is headed our way in the coming years. That will drive the total U.S. public debt load inexorably higher — from about $9.3 trillion in 2010 to $18.6 trillion by 2020. And the cost of servicing all that debt? It's projected to more than QUADRUPLE from $188 billion to $840 billion!
I'm at a loss for words, folks. These figures are horrendous ... outrageous ... infuriating ... and terrifying all in one.
==================================================================================
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
Thursday, February 4, 2010
Bond Market Bubble - Just a Matter of Time
If there was ever a time to have a growth portfolio that gives you BOTH a powerful offense AND an impenetrable defense ... THIS IS IT!
Mere days after Obama released his 2011 budget estimates calling for the largest deficits of all time ...
Even as Washington is busy gearing up for its next record-shattering spending, borrowing and printing binge ...
The newest unemployment reports show an increase in job losses ... the Dow has plunged by over 200 points ... and the Nasdaq is down nearly 50 points. And adding to the frenzy, Moody’s Investors Services has warned that the greatest debt juggernaut in history is about to have some very serious, unintended consequences.
According to Moody’s, if Washington doesn’t slash these deficits — and fast — America’s triple-A credit rating is in grave jeopardy!This does not threaten short-term Treasuries maturing soon. But it does raise serious doubts about long-term bonds. Moreover, if the credit rating of the U.S. government bonds are suspect, imagine the disaster possible in junk bonds!
Last year, Wall Street pitchmen pawned off an all-time record of $147.7 billion-worth of junk bonds to investors ... and already this year, they’ve dumped $11.7 billion in more junk on investors in a single week. That’s another all-time record high — mostly in companies that were so close to death a few months ago.
The handwriting is clearly on the wall:
This bond market bubble is destined to burst just like the tech and housing bubbles before it. And when THIS bubble bursts, it will automatically drive long-term interest rates sky-high — pure poison for an economy in as delicate a condition as ours is now.
THIS, is the most important fundamental economic shift looming in the United States today.
The big question that remains — the one that economists can never seem to answer — is “WHEN will this fundamental shift hit the fan?
Article by Steven Weiss
Mere days after Obama released his 2011 budget estimates calling for the largest deficits of all time ...
Even as Washington is busy gearing up for its next record-shattering spending, borrowing and printing binge ...
The newest unemployment reports show an increase in job losses ... the Dow has plunged by over 200 points ... and the Nasdaq is down nearly 50 points. And adding to the frenzy, Moody’s Investors Services has warned that the greatest debt juggernaut in history is about to have some very serious, unintended consequences.
According to Moody’s, if Washington doesn’t slash these deficits — and fast — America’s triple-A credit rating is in grave jeopardy!This does not threaten short-term Treasuries maturing soon. But it does raise serious doubts about long-term bonds. Moreover, if the credit rating of the U.S. government bonds are suspect, imagine the disaster possible in junk bonds!
Last year, Wall Street pitchmen pawned off an all-time record of $147.7 billion-worth of junk bonds to investors ... and already this year, they’ve dumped $11.7 billion in more junk on investors in a single week. That’s another all-time record high — mostly in companies that were so close to death a few months ago.
The handwriting is clearly on the wall:
This bond market bubble is destined to burst just like the tech and housing bubbles before it. And when THIS bubble bursts, it will automatically drive long-term interest rates sky-high — pure poison for an economy in as delicate a condition as ours is now.
THIS, is the most important fundamental economic shift looming in the United States today.
The big question that remains — the one that economists can never seem to answer — is “WHEN will this fundamental shift hit the fan?
Article by Steven Weiss
Friday, January 29, 2010
Banks Can No Longer Sing "What a Friend We Have in Washington"
These days, the financial industry's locus of power can't be found in London. It's not in New York City. Frankfurt? Tokyo? Davos, Switzerland? Nope, nope, and nope.
The real decisions that impact the capital markets are being made in Washington. And they're sometimes being made by politicians who don't really have a clue about how the industry works, or what unintended consequences their actions may have. If that doesn't scare you, I don't know what will.
Look no further than last week's market carnage for proof of who's in charge. The market was continuing on its merry way — until Washington lobbed several curve balls at Wall Street.
The reaction was swift and severe: The overall market suffered its biggest hit in months, with financial stocks getting hammered particularly hard. Moreover, the "VIX" index of volatility surged 55 percent in a span of three days. We haven't seen a move that large, that quickly since 2007.
It's clear to me that the political tides are shifting for the financial industry — and not in a good way. This could have widespread implications for the markets I follow most closely, so I want to expand on some key points.
Bankers No Longer Free to Run Wild?
President Obama shocked the markets last week with a new plan designed to rein in the nation's banks. It would specifically bar banks from holding or investing in private equity and hedge funds that aren't related to customers they're serving. Banks also would have to shed so-called "proprietary trading" units that use their own capital to place bets on the market.
Combined, these moves could impact companies like JPMorgan. It runs a OneEquity Partners PE unit that makes $8 billion in investments. It could also hammer prop trading houses like Goldman Sachs and Morgan Stanley, which generate billions of dollars in revenue from such activities.
President Obama has shocked the markets with a plan to rein in the nation's banks.
In the bigger picture, as Martin noted earlier, this signals that the "Bailout Brigade" of Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke may be losing influence. The outrageous behavior of Wall Street firms and the banking industry — and Washington's coddling of them — have finally pushed average Americans over the edge.
They're sick of watching companies make stupid loans, arrange stupid deals, blow themselves up, take billions of dollars in taxpayer money, and then — in a move that defies all logic, morality, and sensitivity — turn around and pay themselves billions and billions in bonuses! So they're rising up in anger and trying to "vote the bums out."
Result: The policymakers in Washington are finally being forced to listen to the masses — and the bankers and their lobbyists are running scared. So are bank investors, who have grown accustomed to a steady diet of D.C. handouts.
FHA Tightening the Screws?
Change is also afoot in the housing and mortgage arenas. The Federal Housing Administration, or FHA, has been making overly lax loans for several quarters now — even as house prices fall and defaults rise. Its credit reserves are running at the lowest level in modern history, raising the risk of yet another massive bailout.
But in an about-face from the recent trend toward blindly marching off a cliff, this federally-backed mortgage lender is tightening the screws. It plans to soon implement higher down payment requirements for borrowers with lousy credit.
It's also jacking up the upfront premium borrowers have to pay into the program from 1.75 percent to 2.25 percent of the loan balance. Those premiums fund insurance that protects lenders for losses on FHA loans. Finally, FHA will ask Congress for authority to raise the monthly premiums that borrowers have to shell out along with their regular payments.
A few years ago, when the FHA program was a seldom-used option for mortgage borrowers, something like this would hardly matter. But FHA now guarantees roughly 3-in-10 of all mortgages being made. So its move could be significant.
At the same time, the administration isn't entirely cutting off the housing and mortgage industries — or borrowers, for that matter. Reports are now circulating that the Obama team will soon revamp either its $300 billion Hope for Homeowners (H4H) program or the larger Home Affordable Modification Program (HAMP). We may even see changes in both.
These programs are designed to reduce foreclosures through the use of loan modifications, or "mods." But they've failed to significantly — and permanently — stem the flood of home repossessions because they don't aggressively attack the "negative equity" problem.
Efforts are underway to reduce foreclosures through the use of loan modifications.
What do I mean? These days, borrowers who go to their lenders or the government for help typically get their interest rates cut, their loan terms extended, and/or their monthly payments lowered. But their lenders don't cut the amount of principal they owe.
That leaves borrowers owing, say, $450,000 on a house that was once worth $500,000 but now is worth just $300,000. The question isn't "Why WOULD you just mail the keys back to your lender?" in that situation. It's "Why WOULDN'T you?" Even if home prices immediately turn around and start rising at their historical rate of a few percentage points a year, it would take ages for you to build positive equity again.
I highlighted this as a critical flaw of the Obama plan almost a year ago in Money and Markets when I wrote: "Higher loan-to-value ratio mortgages have ALWAYS had higher default rates than lower LTV ones. Why? When borrowers have none of their money at risk — skin in the game, if you will — they have no vested interest in sticking with the property. They're giving up nothing by walking away.
"Sure, they'll take the lower payments they're going to be offered as part of the Obama modification plan. Sure, they'll stick around for a while. But if anything ... anything ... throws their financial situation off balance, a high percentage of them will resort to "jingle mail" — meaning, they'll pop their keys in an envelope and send it off to their lender"
Because neither H4H nor HAMP has lived up to expectations, the political pressure on the administration is reaching a tipping point. And if the administration responds by fixing that crucial "principal reduction" flaw, it would be a big deal. It would be a significant step toward lowering the foreclosure rate and helping out the housing market.
The Impact on You
So what does this all mean for you, especially if you're investing in financial stocks or bonds and related industries? You simply can't be as bullish on them as you were when Washington was their best friend.
Policy is no longer being written by a bunch of bank lobbyists, then rubberstamped by the Wall Street cronies in Congress and on the Obama administration's financial team. That's good news for the long-term health of the country ... but a potential chink in the armor for the markets, especially financial stocks.
At the same time, the nasty knee-jerk market reaction last week could scare policymakers right back into bailout mode. If stocks roll over ... if home sales continue to slow (as opposed to just suffer a post-tax-cut hangover for a month or two) ... and if mortgage credit tightens anew, the Bailout Brigade might be rolled right back out again.
What is certain is that volatility and confusion levels among investors will rise. So while it's not exactly time to go all-in short here, or dump all your "longs," it IS time to pare back your exposure, take some gains off the table, and let positions that get stopped out stay that way. Then we'll see how this all shakes out.
========================================
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
The real decisions that impact the capital markets are being made in Washington. And they're sometimes being made by politicians who don't really have a clue about how the industry works, or what unintended consequences their actions may have. If that doesn't scare you, I don't know what will.
Look no further than last week's market carnage for proof of who's in charge. The market was continuing on its merry way — until Washington lobbed several curve balls at Wall Street.
The reaction was swift and severe: The overall market suffered its biggest hit in months, with financial stocks getting hammered particularly hard. Moreover, the "VIX" index of volatility surged 55 percent in a span of three days. We haven't seen a move that large, that quickly since 2007.
It's clear to me that the political tides are shifting for the financial industry — and not in a good way. This could have widespread implications for the markets I follow most closely, so I want to expand on some key points.
Bankers No Longer Free to Run Wild?
President Obama shocked the markets last week with a new plan designed to rein in the nation's banks. It would specifically bar banks from holding or investing in private equity and hedge funds that aren't related to customers they're serving. Banks also would have to shed so-called "proprietary trading" units that use their own capital to place bets on the market.
Combined, these moves could impact companies like JPMorgan. It runs a OneEquity Partners PE unit that makes $8 billion in investments. It could also hammer prop trading houses like Goldman Sachs and Morgan Stanley, which generate billions of dollars in revenue from such activities.
President Obama has shocked the markets with a plan to rein in the nation's banks.
In the bigger picture, as Martin noted earlier, this signals that the "Bailout Brigade" of Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke may be losing influence. The outrageous behavior of Wall Street firms and the banking industry — and Washington's coddling of them — have finally pushed average Americans over the edge.
They're sick of watching companies make stupid loans, arrange stupid deals, blow themselves up, take billions of dollars in taxpayer money, and then — in a move that defies all logic, morality, and sensitivity — turn around and pay themselves billions and billions in bonuses! So they're rising up in anger and trying to "vote the bums out."
Result: The policymakers in Washington are finally being forced to listen to the masses — and the bankers and their lobbyists are running scared. So are bank investors, who have grown accustomed to a steady diet of D.C. handouts.
FHA Tightening the Screws?
Change is also afoot in the housing and mortgage arenas. The Federal Housing Administration, or FHA, has been making overly lax loans for several quarters now — even as house prices fall and defaults rise. Its credit reserves are running at the lowest level in modern history, raising the risk of yet another massive bailout.
But in an about-face from the recent trend toward blindly marching off a cliff, this federally-backed mortgage lender is tightening the screws. It plans to soon implement higher down payment requirements for borrowers with lousy credit.
It's also jacking up the upfront premium borrowers have to pay into the program from 1.75 percent to 2.25 percent of the loan balance. Those premiums fund insurance that protects lenders for losses on FHA loans. Finally, FHA will ask Congress for authority to raise the monthly premiums that borrowers have to shell out along with their regular payments.
A few years ago, when the FHA program was a seldom-used option for mortgage borrowers, something like this would hardly matter. But FHA now guarantees roughly 3-in-10 of all mortgages being made. So its move could be significant.
At the same time, the administration isn't entirely cutting off the housing and mortgage industries — or borrowers, for that matter. Reports are now circulating that the Obama team will soon revamp either its $300 billion Hope for Homeowners (H4H) program or the larger Home Affordable Modification Program (HAMP). We may even see changes in both.
These programs are designed to reduce foreclosures through the use of loan modifications, or "mods." But they've failed to significantly — and permanently — stem the flood of home repossessions because they don't aggressively attack the "negative equity" problem.
Efforts are underway to reduce foreclosures through the use of loan modifications.
What do I mean? These days, borrowers who go to their lenders or the government for help typically get their interest rates cut, their loan terms extended, and/or their monthly payments lowered. But their lenders don't cut the amount of principal they owe.
That leaves borrowers owing, say, $450,000 on a house that was once worth $500,000 but now is worth just $300,000. The question isn't "Why WOULD you just mail the keys back to your lender?" in that situation. It's "Why WOULDN'T you?" Even if home prices immediately turn around and start rising at their historical rate of a few percentage points a year, it would take ages for you to build positive equity again.
I highlighted this as a critical flaw of the Obama plan almost a year ago in Money and Markets when I wrote: "Higher loan-to-value ratio mortgages have ALWAYS had higher default rates than lower LTV ones. Why? When borrowers have none of their money at risk — skin in the game, if you will — they have no vested interest in sticking with the property. They're giving up nothing by walking away.
"Sure, they'll take the lower payments they're going to be offered as part of the Obama modification plan. Sure, they'll stick around for a while. But if anything ... anything ... throws their financial situation off balance, a high percentage of them will resort to "jingle mail" — meaning, they'll pop their keys in an envelope and send it off to their lender"
Because neither H4H nor HAMP has lived up to expectations, the political pressure on the administration is reaching a tipping point. And if the administration responds by fixing that crucial "principal reduction" flaw, it would be a big deal. It would be a significant step toward lowering the foreclosure rate and helping out the housing market.
The Impact on You
So what does this all mean for you, especially if you're investing in financial stocks or bonds and related industries? You simply can't be as bullish on them as you were when Washington was their best friend.
Policy is no longer being written by a bunch of bank lobbyists, then rubberstamped by the Wall Street cronies in Congress and on the Obama administration's financial team. That's good news for the long-term health of the country ... but a potential chink in the armor for the markets, especially financial stocks.
At the same time, the nasty knee-jerk market reaction last week could scare policymakers right back into bailout mode. If stocks roll over ... if home sales continue to slow (as opposed to just suffer a post-tax-cut hangover for a month or two) ... and if mortgage credit tightens anew, the Bailout Brigade might be rolled right back out again.
What is certain is that volatility and confusion levels among investors will rise. So while it's not exactly time to go all-in short here, or dump all your "longs," it IS time to pare back your exposure, take some gains off the table, and let positions that get stopped out stay that way. Then we'll see how this all shakes out.
========================================
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
Tuesday, January 5, 2010
The Price of Construction Materials Is About to Soar
Here is a great article I came across by Tom Dyson
If you want to know what's going on in the economy, you need to watch the price of lumber...
Housing is the most important asset class in America. When house prices fall, banks fail, consumers cut back, unemployment rises, and the economy collapses. But when house prices are strong, the economy rebounds.
In other words, the U.S. real estate market is the main pivot in the whole economic mess we're in right now. If you can figure out what's happening in real estate, you can figure out everything else.
Lumber and building materials are the best leading indicators of real estate.
Take the timeline of the current crisis as an example... The lumber price reacted before any other market: Lumber prices peaked in May 2004. The Bloomberg Homebuilders Index peaked in July 2005. The Case-Shiller U.S. Home Price Index peaked in July 2006. The credit crunch started in February 2007, when New Century Financial collapsed. And finally, the S&P 500 peaked in October 2007.
When the recovery comes, I expect it'll show up first in building materials, too...
So what's happening right now in the building materials markets?
Ro-Mac is a $100 million lumberyard near Orlando, Florida. Ro-Mac supplies central Florida's homebuilders and contractors with building materials like 2x4s, rebar concrete, and gypsum wallboards.
I received an e-mail from Ro-Mac's general manager, Don Magruder, last week. Don says several suppliers announced price hikes in December and he expects "a caravan" of further price increases in January.
"My feeling is that the month of December is the calm before the price storm of 2010," he writes. Don advises contractors and builders to be "wary" of entering long-term contracts.
He says supply is the reason prices are going to rise. Manufacturers of building materials have closed plants, fired workers, and sold their inventories. Many have gone out of business altogether. Don calls it "supply destruction." He says the moment demand picks up, there's going to be an instant shortage of materials.
My wife and I are taking advantage of the situation by doing extensive renovations to our home. We don't need new kitchen cabinets, but my wife and I have found such a good deal, we're thinking about having our entire kitchen remodeled. We're also considering a new roof and an upgrade for our air conditioning system. Last month, we had our yard landscaped front and back.
It's hard to say exactly how much we're saving. But given the low price of labor and materials, I bet we're getting at least a 30% discount.
If you're looking to get some work done on your house, now's a great time. But the easiest way to take advantage of this situation is to buy stock in forest-products companies like Weyerhaeuser and Rayonier. They benefit when building material prices rise.
Good investing,
Tom
If you want to know what's going on in the economy, you need to watch the price of lumber...
Housing is the most important asset class in America. When house prices fall, banks fail, consumers cut back, unemployment rises, and the economy collapses. But when house prices are strong, the economy rebounds.
In other words, the U.S. real estate market is the main pivot in the whole economic mess we're in right now. If you can figure out what's happening in real estate, you can figure out everything else.
Lumber and building materials are the best leading indicators of real estate.
Take the timeline of the current crisis as an example... The lumber price reacted before any other market: Lumber prices peaked in May 2004. The Bloomberg Homebuilders Index peaked in July 2005. The Case-Shiller U.S. Home Price Index peaked in July 2006. The credit crunch started in February 2007, when New Century Financial collapsed. And finally, the S&P 500 peaked in October 2007.
When the recovery comes, I expect it'll show up first in building materials, too...
So what's happening right now in the building materials markets?
Ro-Mac is a $100 million lumberyard near Orlando, Florida. Ro-Mac supplies central Florida's homebuilders and contractors with building materials like 2x4s, rebar concrete, and gypsum wallboards.
I received an e-mail from Ro-Mac's general manager, Don Magruder, last week. Don says several suppliers announced price hikes in December and he expects "a caravan" of further price increases in January.
"My feeling is that the month of December is the calm before the price storm of 2010," he writes. Don advises contractors and builders to be "wary" of entering long-term contracts.
He says supply is the reason prices are going to rise. Manufacturers of building materials have closed plants, fired workers, and sold their inventories. Many have gone out of business altogether. Don calls it "supply destruction." He says the moment demand picks up, there's going to be an instant shortage of materials.
My wife and I are taking advantage of the situation by doing extensive renovations to our home. We don't need new kitchen cabinets, but my wife and I have found such a good deal, we're thinking about having our entire kitchen remodeled. We're also considering a new roof and an upgrade for our air conditioning system. Last month, we had our yard landscaped front and back.
It's hard to say exactly how much we're saving. But given the low price of labor and materials, I bet we're getting at least a 30% discount.
If you're looking to get some work done on your house, now's a great time. But the easiest way to take advantage of this situation is to buy stock in forest-products companies like Weyerhaeuser and Rayonier. They benefit when building material prices rise.
Good investing,
Tom
Friday, July 10, 2009
Credit Losses Rising Anywhere and Everywhere
Remember when policymakers at the Federal Reserve told us in 2007 and 2008 that the credit problems were "contained" to the subprime mortgage sector? Or when then-Treasury Secretary Henry Paulson spouted the same line? Oops.
We've already established how those guys were dead wrong about home loans. Indeed, the delinquency rate on U.S. mortgages surged to a record 9.12 percent in the first quarter of this year. Late payments rose in ALL categories, including prime fixed-rate loans, the absolute "cream of the crop" in the mortgage world.
Now, it's clear they were dead wrong about the entire credit market! Credit losses and delinquencies are rising anywhere and everywhere, and I've got the numbers to prove it.
In the first quarter of this year, the credit card delinquency rate shot up to 6.6 percent ... a record high. RVs ... HELOCs ... Personal Loans — Borrowers Can't Pay Back Anything! Get a load of these hot-off-the-press figures from the American Bankers Association (ABA). In the first quarter of 2009 ...
•Home equity loan delinquencies increased from 3.03 percent in the fourth quarter of 2008 to 3.52 percent.
•Home equity line of credit delinquencies rose from 1.46 percent to 1.89 percent.
•Credit card delinquencies rose from 5.52 percent to 6.6 percent (measured on a "percentage of dollars outstanding" basis).
•Direct auto loan delinquencies increased from 2.03 percent to 3.01 percent.
•RV loan delinquencies increased from 1.38 percent to 1.52 percent.
•Mobile home loan delinquencies increased from 2.96 percent to 3.70 percent.
•Personal loan delinquencies increased from 2.88 percent to 3.47 percent.
The home equity loan delinquency rate is a record high. The home equity line of credit rate is a record high. The credit card delinquency rate is a record high. And so is the level of the aggregate consumer credit delinquency index that the ABA has been putting together since 1974!
What about CORPORATE credit quality? Any "green shoots" there? Nope.
-The default rate on junk bonds has almost quadrupled to 9.5 percent from 2.4 percent a year earlier, according to Fitch Ratings.
-A University of California economist just predicted that a whopping 20 percent of hotel development loans made in the U.S. may default over the next year and a half.
-Standard & Poor's just said it's planning to slash ratings on more than $235 billion worth of commercial mortgage-backed-securities. Loose underwriting, falling asset prices, slumping rents and rising vacancy rates are wreaking havoc on the entire commercial real estate sector.
What's the Problem? We Had the Biggest Credit Bubble of All Time, That's What!
Slumping rents and rising vacancy rates are wreaking havoc on the entire commercial real estate sector. Americans simply borrowed and spent way too much during the halcyon days of the early-to-mid 2000s. They were counting on ever-rising home values to bail them out from high-risk loans.
The lending industry actively egged them on, as did policymakers at the Fed, who kept interest rates too low for too long. The insanity spread to commercial real estate ... to corporate buyout loans ... to virtually every corner of the credit market!
Now, we're all dealing with the hugely negative consequences of this massive credit bubble. What a shame! I can only hope that borrowers, lenders, policymakers, and regulators behave more responsibly in the future.
In the meantime, I continue to suggest the following: Stay away from sectors vulnerable to deteriorating credit quality, tighter lending standards, falling home values, and falling commercial property prices. That includes banks, insurers, home builders, and REITs.
And what about all the talk out of Washington on how these companies are just fine, how the economy is recovering strongly, and how happy times are here again?
Plug your ears and lash yourself to the mast! These guys didn't get the mortgage crisis right. They didn't get the credit crisis right. And they sure as blazes aren't getting the economy right, either. Consider: Just a few weeks ago, politicians on Capitol Hill and policymakers at the Federal Reserve were tripping all over themselves to discuss the "green shoots" in the economy. Now, they're openly admitting they screwed it up.
Joe Biden spilled the beans when he announced that the administration had "misread the economy." Vice President Joe Biden said last weekend that the administration "misread the economy." Their hopelessly optimistic projection that unemployment would peak at 8 percent — has been thrown in the trash. The unemployment rate has instead climbed to 9.5 percent ... and double-digit levels are right around the corner.
Heck, you now have key officials, like Obama adviser Laura Tyson and House Democratic leader Steny Hoyer, talking about the possibility of a SECOND economic stimulus package. That's a tacit admission that the $787-billion package enacted in February is failing to get the job done.
Again, this should come as no surprise to you. Unlike the ivory tower economists in Washington, we live in the real world. We know how bad things are, and how serious the risk is that they'll get worse — MUCH worse. So we've been warning you constantly to avoid risk, and batten down the hatches for a worsening economic storm.
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
We've already established how those guys were dead wrong about home loans. Indeed, the delinquency rate on U.S. mortgages surged to a record 9.12 percent in the first quarter of this year. Late payments rose in ALL categories, including prime fixed-rate loans, the absolute "cream of the crop" in the mortgage world.
Now, it's clear they were dead wrong about the entire credit market! Credit losses and delinquencies are rising anywhere and everywhere, and I've got the numbers to prove it.
In the first quarter of this year, the credit card delinquency rate shot up to 6.6 percent ... a record high. RVs ... HELOCs ... Personal Loans — Borrowers Can't Pay Back Anything! Get a load of these hot-off-the-press figures from the American Bankers Association (ABA). In the first quarter of 2009 ...
•Home equity loan delinquencies increased from 3.03 percent in the fourth quarter of 2008 to 3.52 percent.
•Home equity line of credit delinquencies rose from 1.46 percent to 1.89 percent.
•Credit card delinquencies rose from 5.52 percent to 6.6 percent (measured on a "percentage of dollars outstanding" basis).
•Direct auto loan delinquencies increased from 2.03 percent to 3.01 percent.
•RV loan delinquencies increased from 1.38 percent to 1.52 percent.
•Mobile home loan delinquencies increased from 2.96 percent to 3.70 percent.
•Personal loan delinquencies increased from 2.88 percent to 3.47 percent.
The home equity loan delinquency rate is a record high. The home equity line of credit rate is a record high. The credit card delinquency rate is a record high. And so is the level of the aggregate consumer credit delinquency index that the ABA has been putting together since 1974!
What about CORPORATE credit quality? Any "green shoots" there? Nope.
-The default rate on junk bonds has almost quadrupled to 9.5 percent from 2.4 percent a year earlier, according to Fitch Ratings.
-A University of California economist just predicted that a whopping 20 percent of hotel development loans made in the U.S. may default over the next year and a half.
-Standard & Poor's just said it's planning to slash ratings on more than $235 billion worth of commercial mortgage-backed-securities. Loose underwriting, falling asset prices, slumping rents and rising vacancy rates are wreaking havoc on the entire commercial real estate sector.
What's the Problem? We Had the Biggest Credit Bubble of All Time, That's What!
Slumping rents and rising vacancy rates are wreaking havoc on the entire commercial real estate sector. Americans simply borrowed and spent way too much during the halcyon days of the early-to-mid 2000s. They were counting on ever-rising home values to bail them out from high-risk loans.
The lending industry actively egged them on, as did policymakers at the Fed, who kept interest rates too low for too long. The insanity spread to commercial real estate ... to corporate buyout loans ... to virtually every corner of the credit market!
Now, we're all dealing with the hugely negative consequences of this massive credit bubble. What a shame! I can only hope that borrowers, lenders, policymakers, and regulators behave more responsibly in the future.
In the meantime, I continue to suggest the following: Stay away from sectors vulnerable to deteriorating credit quality, tighter lending standards, falling home values, and falling commercial property prices. That includes banks, insurers, home builders, and REITs.
And what about all the talk out of Washington on how these companies are just fine, how the economy is recovering strongly, and how happy times are here again?
Plug your ears and lash yourself to the mast! These guys didn't get the mortgage crisis right. They didn't get the credit crisis right. And they sure as blazes aren't getting the economy right, either. Consider: Just a few weeks ago, politicians on Capitol Hill and policymakers at the Federal Reserve were tripping all over themselves to discuss the "green shoots" in the economy. Now, they're openly admitting they screwed it up.
Joe Biden spilled the beans when he announced that the administration had "misread the economy." Vice President Joe Biden said last weekend that the administration "misread the economy." Their hopelessly optimistic projection that unemployment would peak at 8 percent — has been thrown in the trash. The unemployment rate has instead climbed to 9.5 percent ... and double-digit levels are right around the corner.
Heck, you now have key officials, like Obama adviser Laura Tyson and House Democratic leader Steny Hoyer, talking about the possibility of a SECOND economic stimulus package. That's a tacit admission that the $787-billion package enacted in February is failing to get the job done.
Again, this should come as no surprise to you. Unlike the ivory tower economists in Washington, we live in the real world. We know how bad things are, and how serious the risk is that they'll get worse — MUCH worse. So we've been warning you constantly to avoid risk, and batten down the hatches for a worsening economic storm.
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
Wednesday, June 10, 2009
What the Dramatic Turn in the U.S. Saving Rate Could Mean to You
During the past few weeks of exciting "green shoot" news, a very important economic statistic has been ignored: The U.S. saving rate.
U.S. citizens have been saving less and less since the early 1980s. And the saving rate even turned negative during the height of the real estate bubble. But in April, the personal saving rate in the U.S. surged to 5.7 percent, a 15-year high. That represents a massive trend change and has important consequences for the future. But before I address them, I want to remind you of ...
The Formula for Prosperity
Let's start with an example of a very basic economic thought ...
By following the simple formula of "save and invest" over long periods, individuals —and nations — grow wealthy.
You can use the results of working at your job in two distinct ways: Either you consume, or you save. If you consume all the results of your work, the whole story ends immediately, no wealth is generated.
However, if you sock away some money, the savings are invested — either directly or indirectly by using an agent such as a bank. In other words, as long as you don't hide your savings in your mattress, the money is being put to work someplace else.
The goal of investing is to have more money in the future than you have now, so that you are able to consume more in the future than you can in the present. This is the very definition of wealth generation. And by following the simple formula of "save and invest" over long periods, even over generations, individuals — and nations — grow wealthy.
Bottom line: Saving is the precondition to wealth generation. There is no way to short cut or fade this economic law. And this formula does not work backwards, meaning that it is impossible to consume or to borrow one's way to prosperity.
Wealth Personal Saving Rate Plunges ...
During the second half of the 1990s, the U.S. saving rate started breaking down. That's because Alan Greenspan's stock market bubble kicked in, and people had the illusion of wealth generation without the need to continue saving.
In 2001 the saving rate hit the zero mark for the first time, and then got even worse! Reason: Greenspan's monetary policy started the biggest real estate bubble of all time, and people were further lured away from the concept of saving. They took on debt like never before. They relied upon rising stock and real estate prices to take care of their future prosperity.
To make matters worse, this absurd idea was massively promoted by the central bankers who never called the bubble for what it was. They even tried to rationalize it instead of issuing appropriate warnings.
The rest is history: The bubble burst and together with it the dreams of millions of people. And the worst financial and economic crisis since the 1930s started to evolve.
Thanks to the Current Crisis, It Seems as if Americans Have Finally Come to Their Senses!
Over the past few months the situation has changed dramatically. The wealth illusion, which was fostered by the Fed-induced dual bubbles, is finally gone.
The Baby Boomer Generation, some 78 million strong, has realized that planning on rising stock and real estate prices to meet their future needs has led to huge losses.
This wealth destruction has unveiled a massive gap in retirement provisions. All of a sudden many Baby Boomers have started to worry about how to finance their old age. They've suddenly realized that consumption and indebtedness are not the way to prosperity. Consequently, they've started to cut back spending and save more.
In fact, shortly after the recession started in late 2007, the personal saving rate surged from zero to 5 percent. A short pullback followed. But then what looks like a new and healthy uptrend developed.
The U.S., world capitol of the "buy now, pay later" attitude, is undergoing a huge shift. Saving is making a real comeback.
This change in attitude is in all likelihood just the beginning of a long-term trend that will be with us for many years to come. In fact, I expect a lasting return to the country's former saving rate of roughly 10 percent.
The Consequences, Both Good and Bad ...
To close the gap between their current assets and their retirement needs, Baby Boomers will have to save more and spend less. Saving is the precondition for a better future. And finally Americans are abandoning the track of more and more indebtedness, which unquestionably leads to decline and poverty.
So long term, a rising saving rate is very positive. It's laying the foundation for future growth and prosperity. In the shorter term though, this trend has rather unpleasant implications, particularly in the area of consumer demand for goods and services.
As I already mentioned, Baby Boomers are now facing retirement and don't have much time left to close the gap between their current assets and their retirement needs. So they will have to cut back their spending, which does not bode well for the economy or the stock market.
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
U.S. citizens have been saving less and less since the early 1980s. And the saving rate even turned negative during the height of the real estate bubble. But in April, the personal saving rate in the U.S. surged to 5.7 percent, a 15-year high. That represents a massive trend change and has important consequences for the future. But before I address them, I want to remind you of ...
The Formula for Prosperity
Let's start with an example of a very basic economic thought ...
By following the simple formula of "save and invest" over long periods, individuals —and nations — grow wealthy.
You can use the results of working at your job in two distinct ways: Either you consume, or you save. If you consume all the results of your work, the whole story ends immediately, no wealth is generated.
However, if you sock away some money, the savings are invested — either directly or indirectly by using an agent such as a bank. In other words, as long as you don't hide your savings in your mattress, the money is being put to work someplace else.
The goal of investing is to have more money in the future than you have now, so that you are able to consume more in the future than you can in the present. This is the very definition of wealth generation. And by following the simple formula of "save and invest" over long periods, even over generations, individuals — and nations — grow wealthy.
Bottom line: Saving is the precondition to wealth generation. There is no way to short cut or fade this economic law. And this formula does not work backwards, meaning that it is impossible to consume or to borrow one's way to prosperity.
Wealth Personal Saving Rate Plunges ...
During the second half of the 1990s, the U.S. saving rate started breaking down. That's because Alan Greenspan's stock market bubble kicked in, and people had the illusion of wealth generation without the need to continue saving.
In 2001 the saving rate hit the zero mark for the first time, and then got even worse! Reason: Greenspan's monetary policy started the biggest real estate bubble of all time, and people were further lured away from the concept of saving. They took on debt like never before. They relied upon rising stock and real estate prices to take care of their future prosperity.
To make matters worse, this absurd idea was massively promoted by the central bankers who never called the bubble for what it was. They even tried to rationalize it instead of issuing appropriate warnings.
The rest is history: The bubble burst and together with it the dreams of millions of people. And the worst financial and economic crisis since the 1930s started to evolve.
Thanks to the Current Crisis, It Seems as if Americans Have Finally Come to Their Senses!
Over the past few months the situation has changed dramatically. The wealth illusion, which was fostered by the Fed-induced dual bubbles, is finally gone.
The Baby Boomer Generation, some 78 million strong, has realized that planning on rising stock and real estate prices to meet their future needs has led to huge losses.
This wealth destruction has unveiled a massive gap in retirement provisions. All of a sudden many Baby Boomers have started to worry about how to finance their old age. They've suddenly realized that consumption and indebtedness are not the way to prosperity. Consequently, they've started to cut back spending and save more.
In fact, shortly after the recession started in late 2007, the personal saving rate surged from zero to 5 percent. A short pullback followed. But then what looks like a new and healthy uptrend developed.
The U.S., world capitol of the "buy now, pay later" attitude, is undergoing a huge shift. Saving is making a real comeback.
This change in attitude is in all likelihood just the beginning of a long-term trend that will be with us for many years to come. In fact, I expect a lasting return to the country's former saving rate of roughly 10 percent.
The Consequences, Both Good and Bad ...
To close the gap between their current assets and their retirement needs, Baby Boomers will have to save more and spend less. Saving is the precondition for a better future. And finally Americans are abandoning the track of more and more indebtedness, which unquestionably leads to decline and poverty.
So long term, a rising saving rate is very positive. It's laying the foundation for future growth and prosperity. In the shorter term though, this trend has rather unpleasant implications, particularly in the area of consumer demand for goods and services.
As I already mentioned, Baby Boomers are now facing retirement and don't have much time left to close the gap between their current assets and their retirement needs. So they will have to cut back their spending, which does not bode well for the economy or the stock market.
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
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