The talk of recovery pervades insider thinking. The major media worldwide plays the same refrain. This is a desperate attempt to befuddle the public with misdirected propaganda to preserve confidence in a system that is in a state of collapse. As CNBC leads the charge, loss of faith in the system grows with each passing day. In spite of control of the major media by elitists, talk radio and the Internet hammers away incessantly with the truth influencing more and more 24/7 worldwide. As a result of the success of the alternative media a good many investors realize we have a systemic credit crisis that has turned into a debt crisis as well. The residential real estate collapse is still collapsing with no end in sight. That has been joined by a commercial credit crisis, which has forced banks, Wall Street and corporate America to keep two sets of books – Europe and England as well. We called the beginning of the top of the residential real estate in the summer of 2005, warning our subscribers it was time to begin to move out of real estate and to personally rent. We were the first to make that call as a few others followed six months or more later. The failure of Bear Stearns was soon followed by Lehman Bros., and a crisis of confidence was underway.
The immediate move was to save the banks, Wall Street, insurance and elitist corporate America. A number of programs were initiated, some of which are still in place. During the crisis worldwide a number of people began to accumulate cash. Some cash in hand, some in money market funds and some in gold and silver related assets. During this period lenders called loans and an unprecedented de-leveraging took place that affected every investment. As a result today such cash and cash like holdings are more than 50% higher than they were five years ago. The system is under pressure, and was it not for government deficit spending of $1.6 trillion and the infusion annually of some $2 trillion by the Federal Reserve the system would have long ago collapsed into deflationary depression.
The Dow fell to 6550 in March of 2009 and then with the above spending rallied back to 11,200. During that one-year timeframe many investors left the market pouring into cash, money market funds and gold and silver related assets. There was certainly no incentive to buy bonds at zero interest rates and the market had again become too dangerous.
We are some 14 weeks away from congressional elections, which could be the most important in history. Will the electorate dump the duplicitous incumbents to try to regain control of their country and their freedom? We won’t know until we get there. If voters do not turn out these crooks we cringe to contemplate the future.
Talk today centers around a stillborn recovery that never quite held on long enough to materialize. Five quarters of 3% to 3-1/2% growth traded for $2.5 trillion. Money and credit was thrown at the system again, and again it didn’t work. Keynesianism at its finest.
The housing purchase subsidies are gone, and real estate sales and prices are again falling. Even with interest rates near 4-1/2% for a 30-year fixed rate mortgage there are few takers in the hottest sales period of the year. There are four million houses in inventory for sale or 1-1/2 years supply. That figure could be 5 to 6 million by yearend, as builders’ build 545,000 more unneeded homes. More than 25% of mortgages are in negative equity. Excess mortgage debt is $4 trillion and headed much higher. Government is so desperate that they have begun to take punitive action against those whose homes are under water, but they can still make the payments, but are bailing out. What a disincentive for anyone to buy a house. Will debtors prison be far behind?
There certainly have been strategic defaults, but not as many as government would have you believe. Twenty-five percent of all borrowers are stuck with negative equity, which we expect will worsen. That could mean a wealth loss of some $4 trillion. Obviously, homeowners are hoping for higher prices. If that does not happen you can expect more walk-away foreclosures. There are already four million homes for sale and many more could be on the way. Plus, more than 500,000 more new homes are being added to saleable inventory annually. Next year will be another bad year for builders. Some will fail and others will merge. Government is having ongoing meetings with three major builders in an effort to nationalize the industry, as they will do with banking. Government is doing the worst thing possible. It reminds us of Sovietization. The only thing government has going for it is that underwater homeowners usually do not default until they are down 62% from equity, but that could change. Interest rates at 4-5/8% for a 30-year fixed rate mortgage should keep them in their homes for now, but if interest rates rise that plus could become a negative. That leads us to believe that interest rates will stay that way for a long time. As a result the Fed must keep interest rates at zero for a long time to have millions of mortgages kept from falling into foreclosure.
At $15.3 trillion the world’s holdings of US dollar denominated assets in ten years rose from 60% of GDP to 108%. This in part has been caused by a never-ending current account deficit. This factor alone makes one wonder how the US dollar can be a strong international reserve currency.
In just six years from 2001 to 2006, mortgage debt grew to $14.5 trillion - a credit expansion unheard of in history. In the past almost two years government borrowings have grown 49% just slightly more than the 45% in 1934-35. The Keynesian game is the same, it is just the time frame is different.
Over a 20-year time frame total US credit rose from $13 to $52 trillion, or to 370% of GDP. A good part of these credit excesses have been exported to the rest of the world and they are increasing exponentially; almost 160% just in the last six years, or to $8.5 trillion.