Real estate and equity price inflation have driven two-thirds of the increase in household net worth over the past ten years. They now are even more important today than ever. Since 1980, household leverage as a percentage of GDP has doubled, after remaining relatively constant in the prior quarter century. This leveraging of household real estate assets has been the method to continued net worth acceleration and GDP growth dependent household consumption patterns. If households stopped leveraging their balance sheets, both real estate and consumption would fall. This brings us to the current state of real estate and consumption. Will the contraction in lending in real estate due to the excess in the subprime area lead to a change of direction? The answer is yes.
The effort to save the American economy, which began in 2001, has finally come full circle and the Ponzi scheme is coming unraveled. The over extension of credit, outrageously low interest rates and loans to the totally unqualified have come home to roost. The subprime and ALT-A markets speak for themselves, as does the failure of 50 subprime lenders. There is nothing contained about the subprime problem and the worst is ahead of us. It will haunt the sector and the entire credit market for 2-1/2 more years. We haven’t even had downgrades in the CDOs as yet, spreads are just now widening in junk bonds and better quality mortgages are already being corrupted. As the downgrades come the downside will feed on itself because many institutional investors cannot hold paper of less than investment grade. The Fed may be responsible for a three year binge of money and credit creation of over 10%, but there is another 4% annualized that is created outside the Fed system. That means the Fed is no longer in total charge of the credit cycle. Private credit market operators will be running for the hills and they really controlled lending in the mortgage market. De-leveraging has begun. It will be extensive, especially in this sector. Hedge funds bought 60% of the ALT-A and subprime paper and they are leveraged to the eyeballs. The rest of the buyers have been pension funds, institutional investors, insurance companies, large investment banks and other carry-trade players. Subprime funding has all but disappeared already. That can be called nothing but credit contraction. All these professional investors have been caught offside and in addition the hedge funds are coming under fire from regulators in London of all places. These pros know the subprime problem will spread, so they have to be lightening up in their leveraged positions. This is not what the Fed and other central banks want. They will have to find a way to entice these speculators to reassume their former highly leveraged positions. The only way we can see that being done is by further increasing money and credit. This said the private credit markets have to be watched closely as well. Spreads have widened in CDOs and junk bonds, which has pushed yields higher. Another key will be de-leveraging in the emerging debt and equity markets. Charts show a possible head and shoulders forming. Unfortunately, the formation could take 1-1/2 years to complete. That said, we will have to look for net long term erosion and the widening of bond spreads. Another sector to watch is the foreign inflow of funds into US equities. You can add to that the Shanghai Stock Exchange Index, which is loaded with leveraged funds. The other main markets to watch are Russia, Mexico, Brazil and India. We believe when these markets turn down they will do so in unison. These markets are very overpriced being up 50% since last summer.
We do not believe de-leveraging is here with a bang. It will be reduced somewhat slowly. We will watch the spreads and the foreign markets and central bank M3’s to see where we are headed. Leverage is great going up and horrible coming down. We will see what develops.
In the fourth quarter of 2006 total credit market borrowings rose at an annualized rate of $3.567 trillion versus GDP of about $13 trillion. That means the real cash economy is about $9.5 trillion.
World bank president, Paul Wolfowitz has accepted full responsibility for the promotion of Shaka Reza who is his lover. He also gave her a raise that sent the bank’s staff into orbit. Reza was assigned to the State Department, where she was promoted to a senior position, which would normally be competitive, vetted and approved by the relevant sector board. The pay raise was more than double the amount allowed under staff rules. Wolfowitz is a liar.
Washington gets crazier with each passing day. The CIA and Pentagon would for the first time be required to access the national security implications of climate change under proposed legislation intended to elevate global warming to a national defense issue. As far as we are concerned global warming is a scam to effect more people control. The measure will probably unfortunately become law.
Walter F. Murphy, the McCormick Professor of Jurisprudence, Emeritus, at Princeton University, gave a televised speech that slammed President George W. Bush’s executive overreach has been added to the Transportation Security administration’s terrorist watch list. He is not allowed to fly in America and is under continual investigation by the neocons in our government. Now you know what a fascist police state is really like.
Murphy, a decorated Marine who served in Korea was a reservist. He was allowed to board a flight and his luggage disappeared in an act of vengeance by the administration. Can you imagine what would happen to us if they got their hands on us?
The USA Today/Gallup Poll shows G. W. Bush has a 62% failing grade or 38% approval. In the last two years in office only Richard Nixon and Harry Truman did worse. The average approval rating for presidents is 55%. Even Bill the pervert Clinton had 61% in his last one year in office.
Most Americans expect a recession within a year and they disapprove of President Bush’s handling of the economy even though unemployment is supposedly at a 5-year low. 71% of those earning less than $40,000 a year said they expect a recession versus 50% who make more than $100,000.
The reason for American disillusionment over the economy include the record discrepancy in income and wealth; pocketbook reality is at odds with government economic statistics; their living standards are declining so they are not being fooled by our enemies in Washington.