Our president has told us those outstanding contracts between private parties only function at the whim of our neocon leader. This brings into question all contractual agreements not only domestically, but it also affects foreigners doing business, with US entities. This is what our president has done with mortgage contracts. It has changed the contracts extending a terminated contract, let the borrower and the lender off the hook and allowed American taxpayers to pay for their losses
In addition, these mortgages, many of which have been sold to foreigners, have internationalized the problem. Foreigners now do not want to do business in the US and who can blame them. This toxic garbage has killed business worldwide. The foreign buys are supposed to get a rising return and now they won’t. We wonder what affect this is going to have on international business? Not only that how will if affect the sale and redemption of US Treasuries and Agency bonds, notes and bills? Foreigners and domestic buyers as well will have to deal with a new set of rules and new political risk. Even though lenders get off the hook they still have to pay the interest on their foreign loans as do hedge funds. How will they do that if rates are frozen? Then all those who wrote derivatives or bought them are stuck as well. We are talking billions of dollars in losses, just to bail out a bunch of crooks. Who is going to buy the $3 billion daily in securities next year that has to be bought by foreigners to keep the US from going under? If the foreigners do not buy, the Fed will have to buy and monetize Treasuries and Agencies every day – how inflationary. If Americans do not slow down buying foreign goods and the current account deficit doesn’t fall and soon, the US will in a couple of years have to default.
As we mentioned in the last issue the ECB injected a mind-addling, unfathomable, gigantic $501.50 billion into its banking system. The effort forced the 2-week Euribor down 50 BPS to 4.45%; this follows the previous $1 trillion the 20 major central banks have already thrown into the system since August 9th. Simultaneously the Fed, SNB, the Bank of England and the BOC put in another $50 billion and they will add more until they think the system is fixed, at least for the time being. This is incomprehensible and it is going to get lots worse. That $501.50 billion was offered at 70 BPS less than the commercial cost of short-term money. This sent a clear message that things are so grim in the money markets that it would do anything to unblock the system. Once you have gone nuclear, no one pays much attention to your conventional forces.
The BoE efforts got a dismal reply. Its one-month rate only fell 2 PBS to 4.95% and the 3-month rate only eased 4 BPS.
On thing you can depend on that we must warn you again on and that is there will be a profound central bank panic sooner or later, and a big bank, broker or hedge fund will go down or the US will officially enter a recession. When that happens everyone will be looking for answers and it will be too late.
Manipulating the Fed funds rate by injecting trillions of dollars into the economy is not the answer. Wednesday’s auction, the first of many, received $61.553 billion in bids for $20 billion. The bid to cover was 3.08 to 1, which was very strong; 2 to 1 would be normal. The funds offered rate was 4.65%. If we have to go three to five auctions you can be assured the problem is not going away. A second auction will occur Thursday. If one, or two or three more are needed you will know the Illuminati is still in trouble. That is auctions on January 14th and 28h. If more are needed watch out. Inflation is going go berserk.
Housing sales are still not what they seem to be. Disguised discounts in the form of free cars, free furniture, cash rebates, garages, upgraded kitchens, etc. are making it difficult to tell exactly how much buyers are paying for their homes. We reported on this market-distorting tactic two years ago and Fannie Mae and Freddie Mac have demanded reporting of such gifts by lenders. Fannie has warned lenders very vocally again to be bewaring of such practices that are distorting house prices. A builder can hide a discount that might lower the value of other homes it is trying to sell, while a buyer can put a cash rebate toward a down payment. The result is other buyers overpay for nearly homes and the lenders make riskier loans, or loans they otherwise wouldn’t make on the basis of artificially high values. Most discounts are 20%, and on a $400,000 home that is $80,000, or equivalent, that massively distorts prices especially on higher priced homes. This is one of the reasons higher priced homes haven’t come down in value as much as they should have. Lenders and third party buyers are getting screwed as well as Fannie and Freddie.
KB Homes sold a home in Parker near Denver for $196,000 and made a secret cash payment of $27,600 to the buyer or 15%. The lender and Fannie got screwed, as did other new buyers in the area.
Lennar Corp. offered vouchers for new buyers in Florida to be given new cars. .
In Tacoma, Washington new buyers were offered a $20,000 Harley Davidson for taking a $479,000 listed home. Others took the $20,000 cash.
These practices are widespread and they are fraud,
Home foreclosures rose 68% in November from a year earlier and they will continue to surge as ARMs leave subprime borrowers unable to meet higher payments if they are allowed a loan at all. There were 201,950 foreclosures. That is down 10% from October. Interest rates increased on more than $87 billion of subprime mortgages in the third quarter and another $84 billion settled in the fourth quarter. They will probably be 250,000 foreclosures in the first quarter of 2008.
Home sale prices in six Southern California counties tumbled 10% last month. Y-O-Y the sharpest yoy decline in at least 20 years. Sales volume fell 43% yoy. The median-priced home fell to $435,000, down 15% from a peak of $505,000 earlier in 2007.
Riverside County prices fell 16.5% yoy to $356,500. Orange County fell 6.5% you to $582,750 and L. A. County fell 3.5% to $499,000. In some neighborhoods prices are already off 20% says a realtor. He is expecting a net 30% drop. We see 40% or more.
On auto sales brochures a 5-year maintenance plan is included and buyers are told that over the last 5-years labor costs have increased by 40% and parts 35%. Someone should tell that to the BLS.
Wall street’s 3-year love affair with debt sold by the states and cities is over. Municipal bonds are headed toward the worst year since 1999. Securities firms reduced their holdings during the third quarter by the largest amount in 12 years. Citigroup and Goldman cut holdings 16% to $45 billion. Lower muni prices mean higher yields and costs for issuers.
Securities firms are putting less into munis after $62 billion plus of write-downs on subprime mortgages. Barclays estimates total losses of $200 billion. We have it much higher than that. Bond, insurance companies, pensions and hedge funds are getting hit hard as well. Falling tax revenue will slash state and local income $6.6 billion in 2008. Plus home prices have a lot further to fall. Wait until California defaults and that is where they are headed.
Almost half of the states have been under-funding their retirement pans for public workers and may have to choose in the years ahead between pension obligations and other public programs and that doesn’t figure in a future 50% or more drop in the DJIA or higher interest rates.
The 50 states have promised to pay $2.7 trillion in pension and retiree health benefits over the next 30 years. Some states, like New Jersey and West Virginia, are already cutting education and health programs to struggle with costs incurred decades ago. Not saving and investing enough has been aggravated by higher health costs. Once the market falls we are afraid that benefits could be cut 50%. If that occurs we can expect the federal government will cut Social Security by 50%.
GM is offering buyout and retirement incentives to 5,200 hourly workers of the UAW; 34,000 left last year via this route.
Bear Stearns has posited its first ever-quarterly loss of $1.9 billion due to subprime write-downs. That is a loss of $6.90 a share versus a gain of $4.00 a share yoy. The executive committee will not receive bonuses this year.
Our government intends to increase the size of the Army by 74,000. We will be interested to see where all these willing souls will come from.
43.4% of Americans expect a recession in the next year says a Reuters/Zogby pool, up from 40% a month earlier. They say the economic mood on Main Street is worse now than in 2001, the most recent recession and was unlikely to improve quickly, even if the Fed continued lowering interest rates and the housing market stabilized. Only 20% gave the US economic policy high marks, although 55% rated their own personal financial situation good or excellent.
The USDX, the Dollar Index, is a trade weighted geometric average of 6 currencies. They are, the euro 57.6%; the yen 13.6%; the pound 11.9%; the Canadian dollar 9.1%; the Swedish Krona 4.2% and the Swiss franc 3.6%.
Recently the dollar has rallied from a low not seen in over 20 years and we have been asked why has it rallied when the news is so bad? Central banks working in concert have via their own avenues and those of national banks have acted to strengthen the dollar. They do this via the foreign exchange markets. Governments and central banks have done this for centuries and believe it is their prerogative. This kind of operation is very short lived because of the enormous cost in such an operation in a market that trades $3.3 trillion daily.
Our president has approved of the most significant realignment of the Army since World War II. Personnel will be increased by 74,000. There will not be a reduction of two heavy brigades scheduled to return home from Germany. One will remain in Germany until 2012 and the other in Italy until 2013. That means we will continue to maintain 37,000 troops in Europe. This is an increase of 10,000 troops in Europe probably so they can invade Serbia in the process of taking Kosovo. There was heavy political pressure to not to diminish the eventual level of forces to be based at Ft. Carson, Co., Fort Stewart, Ga., and Fort Bliss, TX. which will receive two additional combat brigades. In addition, support brigades will be based at Schofield Barracks, Hawaii, Fort Leonard Wood, Mo., Ft. Hood, Texas, Ft. Lewis, Washington, and Fort Polk, La. The active duty Army end-strength is scheduled to reach 547,000 by then, as the fighting force will grow to 48 brigade combat teams from 33 in 2003.