As we told you in 2001, there is no turning back. There is absolutely no way the Fed, Washington and Wall Street can stop the recession and the direction in which the economy is headed. In fact, we don’t believe they can stop the economy from entering depression and that has been our view for seven years. The stock market rally over the past four years was created out copious cheap money and credit.
Now that it is obvious America is in recession, our politicians are calling for a stimulus package so that we can again spend our way out and create more debt. Under our corporatist fascist government business and especially the US Chamber of Commerce, that same group that wants amnesty for illegal aliens, so they can exploit their cheap labor, are pushing for lower corporate tax rates and a tax credit for business investment. Congress wants a mixture of monetary and fiscal policy. A small increase in government spending now, an interest rate cut late in January, plus tax cuts triggered if economic growth falls below a certain level.
We are just talking billions. It is not like they are talking big money. Just a $10 billion in stimulus, which is peanuts to the economy and won’t help much. Then again, those in Congress can prove their worth to their constituents by saying see we tried to help you. That is a far cry from the $500 to $700 billion a year flowing from real estate into consumption. The question is can Congress and the neocons even reach an agreement on such an infusion? Either way the Fed can always take the issuance of money and credit up to 25% or so. The Fed is always trigger-happy when it comes to extending money and credit. They have great excuses, a recession, a collapse in real estate and credit cheating banks that are on the edge of disaster. Who cares about inflation when saving the economy is at stake. Besides the Fed doesn’t dare allow deflation to get an upper hand. In addition we have only fallen ¼ to 1/3rd of where we are headed and the credit and banking crisis could last for years.
Keynesians and other Illuminists do not care to understand that the results of fueling apparent growth by the expansion of money and credit cannot bring real growth. Money and credit are mediums of exchange – they do not create economic growth. Excessive injections of money and credit into our economy can only create inflation. If that is so the Fed is doing the wrong thing. The Fed is increasing banking reserves and that is exactly what they did in the late 1920s. From 19021 to 1929, money stock increased 7.7%. Today it is up 17.5%. This can only lead to the destruction of the dollar.
Jonathan Pollard, an Israeli spy, who has spent 23 years in jail said, “I’m shocked and disgusted by the fact that his former Mossad handler Rafi Eitan is having dinner with President Bush. This is a man who should be in a jail cell at least until I get out, if not later. He was directly responsible for my abandonment, did everything he could to keep me in prison, and said he regretted not killing me when he had the opportunity to do so.” Pollard has referred to Eitan as an “un-indicted conspirator” who was one step away from being deemed a criminal in the US. “This is not a man you bring into the presence of the President of the United States.” ”This is a man you put on ice until my case is over. Only in Israel can this happen, in a country where the big shots can get away with attempted murder.” Our guess is that part of the reason for Bush’s appearance in Israel is to release Pollard, because no other Israelis were or have been punished for thousands of cases involving Israelis spying on the US. Israel gets what it wants from the Illuminists.
The Fed has just reported that credit card debt rose at an 11.3% annualized rate in November after rising at an 8.5% rate in October. By comparison, credit card debt rose at a rate between 2% and 4% from 2003 to 2005. The reason is homeowners are losing their ability to borrow against their homes. The ratio of homeowners’ equity to value stood at just 50.4% down from 54.2% at the end of 2005, and 57.3% at the end of 2001. The ratio almost certainly will cross below 50% for the first time in history when the fourth quarter data is reported. This is a remarkably rapid decline, especially since the soaring home prices of recent years translated dollar for dollar into additional equity. A large number of homeowners have little or no equity left in their homes. This cannot continue for long. Total outstanding credit debt is less than $940 billion; mortgage debt was increasing at a $730 billion annual rate in the third quarter. Thus millions of households will soon have little choice but to sharply curtail their consumption.
House prices in the aggregate index were dropping at an annual rate of 11.7% in the three months from July to October. It is expected that households will lose more than $2.2 trillion in housing wealth in 2008. In Las Vegas, house prices were falling at an 18.9% annual rate over the past three months. San Diego was falling at a 20.3% rate and Miami by 22%.
As we mentioned previously, the mortgage applications index is very distorted and unreliable. The subprime segment is under-represented and it doesn’t address switches from defunct subprime lenders to new lenders. Last week’s seasonally adjusted 32%, thus was misleading. The four-week average for the purchase index was 398. It was over 500 in 2005.
Goldman Sachs sees GDP contracting by 1% in the second and third quarters. They now see the Fed funds rate at 2.5% by the third quarter.
Goldman Sachs says the economy is probably slipping into recession. Credit default swaps on the Market CDX North American Investment Grade Index jumped 4.75 BPS to 101. The 30 European investment graded companies rose to 99.5 BPS. The global default rate on bonds will climb 5-fold by the end of the year.
Countrywide financial, the biggest US mortgage lender said foreclosures doubled to 1.44% from 0.7% yoy. Late payments advanced to 7.2% of unpaid balances from 4.6%.
MBIA the giant bond insurer hobbled by the collapse of the subprime market will cut its dividend 62% to raise $1 billion in a sale of notes to boost capital and preserve its AAA credit rating.
In New Hampshire, volunteers for Obama and Paul were kicked out of many polling places for not have proper credentials.
The trial of five executives in AIG group’s financial fraud case got underway on Monday, with the prosecutor saying AIG Illuminist, Maurice “Hank” Greenberg, set the scheme in motion in 2000. Of course, being a top Illuminist Greenberg was never charged.
US household budgets spend over 20% of their income on food, yet the BLS weighs food at home as only 7.96% of CPI. Food away from home is 5.98%. For the poor spending for food it is 23% of income
Lenders have already raised their consumer prices to reflect fee increases they must pay to Fannie Mae, the largest funder of home loans and Freddie Mac beginning in March. They are charging an additional 0.25% on the loan amount on all loans. Both companies fund conforming loans up to $417,000, so the maximum fee would be $1,042.50. Fannie starts on March 1st and Freddie on March 9th. They are also increasing fees on loans to borrowers with low to mid-range credit scores known as FICO. The new fees will apply to anyone with a FICO of under 680, if the loan is greater than 70% of the value of the home. That is on top of the 0.25% fee. This is risk based pricing to offset rising delinquencies. That means in order to avoid fees you would have to have a down of $75,000 on a $250,000 home Presently conforming loans are about 6% and jumbos are 7%. In order to bring costs down borrowers are taking down two loans. One for $417,000 and another for the remainder.
The new FICO based fees vary from 0.75% to 2% of the loan amount and are in addition to the 0.25% fee on all loans. Hence, the maximum combined fees for someone with a FICO of less than 620 would be $9,382.50 or 2.25% of $417,000.
There are those with FICO’s of 640 to 659 and borrowing 80% who could either pay 1.25% of the loan or pay an interest rate about 0.375 higher.
In addition, Fannie on January 15th will lower by 5% the total amount it is willing to fund against the value of a home in declining housing markets. A previous 100% would become 95% funding.
Both companies see continued declining prices and as a result credit losses are increasing. The new charges are in anticipation of further significant price declines. In conclusion, in spite of falling prices, houses are going to be more difficult to buy and that will add to the price deterioration.
What caused this result was that the fed told the lenders and the mortgage originators to make loans no matter how it was done. They allowed fraud to dominate their decisions. They knowingly made mortgages that borrowers could not afford and could not qualify for. Buyers were put in unsuitable mortgages - mortgages that brought the most profit to the lender. Investment banks did little, if no due diligence, on underlying assets, many of which were rife with fraud. Lenders and securitizers colluded with raters to create the AAA fraud on mortgages that were triple B and sold them to unsuspecting professional investors. Thus we see fraud from one end to the other and our government plans to do absolutely nothing about it.
Last week mortgage application volume was up 32.2%, but we explained earlier that the figure was misleading. Volume is still 13% less than it was four-weeks earlier. Refi volume increased to 53.9% and purchase volume rose 14.7%. Refi appls accounted for 57.7% of total applications, compared with 50.9% the prior week. The 30-year fixed rate mortgage was 5.73%, down from 6.05%; the 15s were 5.21%, down from 5.61% and the one-year ARMs were up to 6.04% from 6%.
People moving from other states to Florida has declined for the 3rd consecutive year from 268,000 in 2005 to 35,000 last year by far the most precipitous drop since records began in 1990. Home prices fell 20% last year and in some new developments they are off 35%.
California Governor Schwarzenegger wants to eliminate the $14 billion budget shortfall by cutting spending. The Democrats want to increase taxes; a big battle is looming in the golden State.
The Fed created $5 trillion of newly generated credit in a $14 trillion economy last year. If this continued injection of money and credit was halted, the economy would shrink by 1/3rd. Credit expanded 12% in 2007, as commercial and industrial loans grew 21%. The only conclusion to such profligacy is an inflationary depression. As a result the dollar fell 12% against the euro, 15% versus the Canadian dollar, 10% versus the Swiss franc, 8% against the pound and 7% versus the yen. Import prices as a result rose 11.4% and the PPI was up 7.2%. Official inflation was 4.3%, but our numbers show 11.6%. The question is how low will the dollar fall in 2008? It could be to 40 to 55 or to 60 to 65. One thing is for sure the world is awash in dollars and the dollar is going lower as gold and silver moves higher Wait until fourth and first quarter earnings come out and watch the Dow fall.
We supposedly brought democracy to Iraq: 2.3 million people have been displaced internally, 2.3 million have left and 1.3 million have been killed. What a horrible accomplishment.
In 8 years, President George Bush and his Illuminist neocons have taken us from a global leader to pauper status. Never in our history as a nation has a president done more to destroy our country.
A recent former Citigroup employee, who is a subscriber, says the slashing of ATM withdrawal limits is due to fraud, particularly in the NYC area. If Citi were trying to conserve cash they would have put some limits on the teller line. The limits only affect the ATM withdrawals. Our speculation was incorrect.