January 30, 2009
Like most people, I occasionally find myself overwhelmed by the tasks involved with everyday life.
This week, I have been, to use the old adage, "working like a dog." Though, now that I think about it, I have a hard time imagining the origin of the term. Even in his youth, my now elderly companion General Beauregard Piddle didn't seem to take on anything more rigorous than climbing up on an unattended couch for a nice nap.
In any event, it's been one of "those" weeks. And so today, as I prepared to write this weekly missive, I found myself groaning, "Arrgh, I've got to write The Room," to my ever patient and entirely wonderful wife.
"But," she said, misunderstanding the nature of my apparent complaint, "I can't see how that's a problem. There's so much to write about."
"Exactly!" I said, "That's the problem!"
In actual fact, I almost always look forward to these weekly writings as a form of personal reflection and even entertainment... and as a usual way to keep myself in the flow of the passing parade.
But some weeks – most weeks, it seems of late – the sheer volume of important news that I should comment on, at least if I were trying to be a good correspondent, is so staggering in dimension, it is a real challenge to know where to begin.
So, instead, I start by writing about old dogs and wonderful wives. Go figure.
Okay, enough of that. Procrastination is almost never a good idea, unless it is on the part of legislators who, I always hope, procrastinate to the extent that they don't ever quite get around to doing anything. Unfortunately, with the mantra of the moment being "Yes, we can," that is probably a false hope.
Turnaround in Interest Rates?
A few weeks ago in these musings -- January 9, 2009, to be more exact -- I wrote the following in response to Bud Conrad's latest projections of a deficit that could go to $3 trillion in fiscal 2009...
First and foremost, the government's extreme funding demands will outstrip its ability to raise said funds, and certainly not at anywhere near current interest rates. While the whole dance around Treasury financings is very complex and to some extent rigged, you'll know the economy is approaching the wall when the size of the Treasury auctions – already running well above the norm – begins to spike, and the ratio of bids to the offering begins to fall.
Secondly, per above, Treasury rates will have to go up, and when they do, it will set off a vicious cycle. For a time, buyers may stick with 3-month Treasuries, even at zero interest rate, but buying 10- to 30-year Treasuries at anywhere near today's record-low yields will quickly be a non-starter.
Foreigners, who have been the biggest buyers of our debt in recent years, will stay away in droves. The latest data, out earlier this week, show signs that this is already beginning to happen.
As a result, rates will begin to ratchet steadily higher, exacerbating the record deficits. At some point, and I am guessing this will occur sometime around the middle of the year, the government will run out of ways of obfuscating both the severity and immediacy of the problem.
Well, this week we began to see a whiff of the situation just described. Here's the article from Bloomberg...
Jan. 29 (Bloomberg) -- Treasuries plunged as the government sold a record $30 billion of five-year notes at a higher yield than forecast, indicating weak demand.
The auction, which caps a week when the Treasury raised $78 billion in notes and bonds, may signal investors will have trouble absorbing the as-much-as $2.5 trillion in debt the U.S. is likely to issue this year to pay for a $1 trillion budget deficit and programs to spur the economy. The Federal Reserve's failure to provide a timetable for possible purchases of Treasuries yesterday also weighed on prices.
Note that Bloomberg still estimates the total deficit at $1 trillion. They are dead wrong... my money (literally) is on the number coming in much closer to Bud's stunning projection. And that means that interest rates will have to go higher... much higher.
It is for that reason that all four editors of The Casey Report
-- Doug Casey, Bud Conrad, Terry Coxon and yours truly -- are in agreement that positioning yourself to profit from rising interest rates should be the big money-making play for 2009 and beyond.
It's not too late to jump on board... and it's easy to do so, with the no-risk, three-month trial being offered for The Casey Report. Click here for details...
Bait for the Two-Legged Rat
I have often said that humans are like rats in that they are extremely ingenious when it comes to looking after their personal interests. Lock a rat in a metal box and it will almost be able to figure a way out. Almost. A human would actually have a shot at it.
In the debate about what went wrong with the economy and how to fix things, the topic of loose credit standards usually arises early in the discussion. And correctly so. Due to loose credit standards, people without the financial resources to own a home were practically carried across the threshold by predatory lenders.
Well, at least that's how the outraged political class and their adoring punditry see things.
According to that section of the jeering crowd, these lenders were so avaricious, greedy, and downright dastardly that they would actually hand the keys to a $500,000 house to an individual with not just poor but pitiful credit and with little or no money down. Bastards!
Of course, as a former banker (shudder), I have a somewhat different perspective.
Because no matter how devious or dastardly a lending institution might be, it wouldn't even contemplate making such loans if it didn't have a fairly well-reasoned plan in mind to actually get paid back... with interest.
Enter the government in the form of the Federal Housing Administration (FHA) and the quasi-state-owned (and now absolutely state-owned) Fannie Mae and Freddie Mac. Absent their guarantees, the private sector would never, but never, have made the loans just described. That's because...
(a) loan officers actually take professional pride and go to great lengths in assuring that the money they loan out comes back. In fact, failing to get loans paid back with even a sniff of regularity is quick cause for a pink slip followed by a solemn escort to the front door for the approving loan officer. And...
(b) foreclosing and all the attendant activities are difficult, time consuming, and costly. To wit, trying to get juice out of a rock gets you little more than dust.
As a result, within the acceptable tolerance range for any human endeavor, banks are historically careful in setting lending standards.
But add into the equation a rate-slashing Fed looking to stimulate things a bit, side by side with a bloated Uncle Sam looking to engage in some social engineering by putting people without the credit or means into a house, and the picture quickly changes. Why, even the FHA's own website does a good job of summing up the role they played in the pumping up the housing bubble. Some relevant excerpts...
The Federal Housing Administration, generally known as "FHA," is the largest government insurer of mortgages in the world, insuring over 35 million properties since its inception in 1934.
Unlike conventional loans, FHA-insured loans require small down payments. There is more flexibility in an FHA loan than conventional loans in calculating household income and payment ratios.
For lenders, our mortgage insurance protects lenders against loss if the homeowner defaults on his or her mortgage loan. While FHA-insured loans must meet certain requirements established by FHA to qualify for the insurance, lenders bear less risk because FHA will pay the lender if a homeowner defaults on his or her loan.
Currently, FHA has 4.8 million insured single-family mortgages.
For the record, there are about 55 million single-family mortgages in the U.S., so the FHA has over 10% covered.
- But the FHA is just one of Uncle Sam's kissing cousins. Others, including the aforementioned Fannie and Freddie, guarantee another 31 million mortgages between them. So, in total, U.S. taxpayers now stand behind about 65% of all home mortgages in the U.S. But it is worse than that, because ever since the credit crisis began, over 80% of all new mortgages generated have been "conforming" in order to go onto the books of a government agency.
Thanks to Uncle Sam's largess and no-risk lending guarantees – warmly applauded by the nation's banks and sundry money shoppes, to be sure – since 1992 there has been about a 50% increase in U.S. homeownership.
Is it any wonder, therefore, that until recently you could spot a loan officer by the wide smiles on their faces, as well as their ink-stained fingers, the result of producing prodigious quantities of freshly printed loan contracts?
The way it all worked was very simple. Uncle Sam shouts for all lenders to hear, "Bring me your poor, your unqualified, your liars, and your wannabe speculators, and I will buy up their loans, allowing you to make a quick profit for generating them, and then passing them like a hot potato into my portfolio."
Given the opportunity to make money by giving money away – not a real hard sale – the lenders rose to the occasion. A rat, sniffing out a crust of bread down an unguarded alleyway, would do much the same.
Likewise the masses, equally quick to discern the opportunity, can hardly be faulted for scrabbling to take the house, oftentimes along with a loan that put extra money in their pockets in the process.
No one was much concerned about paying for the homes; the lender's risk was assumed by the government and the unqualified buyer didn't have much of any money in the game, and besides, everyone was certain that house prices could only go in one direction, up. As for the government, well, the government doesn't really pay much if any attention to the money it spends, because it's not their money. It's yours – if you are a U.S. taxpayer, that is.
But you have never paid much attention to how the government spends your money, have you? No, like a former client of wily Mr. B. Madoff, you just assumed Uncle Sam was on top of his game.
Of course, as the smell of free cheese and wealth without end spread throughout the ether, more and more two-legged rats acted on what they perceived to be their self-interest, causing a steady influx of new buyers to stream into the alley of homeownership. Many of the early adopters, sensing that if one was good, two could only be better, began to double and even triple up.
And the next thing you know, you have a housing bubble of historic proportions.
But you know all this, so why am I repeating history? Well, because this week, I stopped in at a local sandwich shop and, to occupy myself with something other than looking out the window, took hold of a regional real estate guide that, as part of its editorial features, includes a table showing all of the lenders who do business in the area – 16 in all.
Among other information, the lenders' table displayed whether or not the various lending institutions offer "Mortgages to Buyers with Less Than 20% Down?"... and whether they "Offer Mortgages with Credit Scores Under 600?"
Even today, after all the news and global angst, 9 out of 16 still advertise that they offer loans to individuals with credit scores below 600, and four of them actively promote the fact that they'll go down to 580 – which is roughly the credit rating of an escaped felon on the run for credit card fraud. But such a loan, each of the listing institutions further qualifies, is available "Only w/FHA."
And 12 out of 16 will still give you a loan with less than 20% down... in fact, "w/FHA," the solid majority will still
provide a loan with less than 5% down, and one touted the availability of a 103% loan.
Alas, despite the understandable desire of lenders to earn yet more cheese by generating poor-quality mortgages for Uncle Sam, borrowers now believe real estate can only go down. Given the oversupply, they are largely right for the foreseeable future. On that basis, they whiff the downside, spot the trap that waits behind the front door of Home Sweet Home
, and scamper away.
The lesson in all of this, other than that once I get pounding away on the keyboard, I seem to have no off-switch, is that the real cause of the housing-led crisis was a failure to appreciate the similarities between humans and rats. Every government interference in the market, no matter how well intentioned, carries the seeds of dangerous unintended consequences. Just ask the twenty-something welfare mothers of the 1980s who, when offered monthly pay for each new offspring, quickly converted their wombs into baby factories.
I wish I could say that this lesson – that humans, like rats, will always figure out a way to pursue their self-interest, even if it requires chewing through a real or proverbial wall – has been understood, thanks to the crash.
But as evidenced by the following item, also just in from Bloomberg, it's clear that the lesson is far from learned... at least by certain rats...
Senate Republicans are highlighting a proposal to subsidize 4 percent mortgages as part of the economic stimulus plan to focus the package on the housing crisis, which the GOP argues is at the root of the problem.
GOP Policy Committee Chairman John Ensign (Nev.) said Wednesday that Republicans are considering pushing to add to the stimulus a provision that would have the government guarantee fixed, four-percent mortgage rates for up to two years.
Homebuyers would have to qualify to get the 4-percent rate, but Ensign said the average savings could reach $500 per month for households. It is unclear how expensive such a proposal would be, and Ensign said Senate Republicans are waiting on a cost estimate before deciding whether to formally offer the idea.
"It's important that we try to change the bill as much as we can," he said. "Because housing is what got us all into this problem in the first place, we should try to fix housing in the bill."
Fortunately, there is consolation to be had from the current trend towards more and bigger government. Namely, if you can fully understand what's going on and what's coming next, you have a rare opportunity to – in the words of a stock promoter who used to speak at conferences some years ago – get "stinky, filthy, sloppy rich."
We'll do our part to help you achieve that elevated position, in our various publications and at the upcoming Casey Research Crisis & Opportunity Summit
in Las Vegas, March 20 – 22.
Speaking of that event, even though we still haven't gotten around to widely marketing it, the Las Vegas Summit is now more than 2/3 sold out... with less than 100 seats remaining. You should make the effort to get there if you can... there isn't a better time to step away from your computer and everyday life and spend a couple of days in the active contemplation of what's coming next and how to profit. You will
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Looking past the rhetoric to the actions of those with their hands on the tiller of power this week, we find some items of interest.
- Higher-mileage, lower-emission standards on the way. It increasingly looks as though the enviro-alarmists within the Obama administration are willing to pursue a scorched-earth policy in order to advance their agenda. This week, they set the ball in motion to accelerate the date when car manufacturers have to dramatically reduce emissions and raise fuel mileage... and looked to set a precedent whereby individual states can set their own, even more rigorous, standards. In the best of times, these sort of dictates are often stupid and counterproductive. In the worst of times, they are also dangerous.
In my view, left alone, people and industries will fluidly adapt to changing conditions... even if that adaptation means some businesses will fail and others rise. Unfortunately, the government and far too many members of the voting public just don't see it that way. And so, as with the housing crisis, expect unintended consequences.
Not having to look very far for examples of this principle in action, it was reported this week that State Farm Insurance will be dropping 1.2 million customers and withdrawing from Florida's residential home insurance market after state regulators refused the company's request for a rate hike. According to Bloomberg...
The insurer cited risks from hurricanes and the rising costs of everyday claims from the state's homeowners in an e-mailed statement today. The surplus from State Farm's Florida unit fell by $201 million in the first three quarters of 2008, a period where no hurricanes hit the state.
- Stimulus or another brick in the wall? This just in from Washington Correspondent Donald Grove...
Mega-stimulus was the first item on the legislative agenda for the 111th Congress in both the House and Senate. The House passed HR.1, its 680-page $819 billion version of the stimulus bill, Wednesday, with every Republican voting against it. http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h1eh.txt.pdf
An $825 billion Senate version of the bill, S.1, is headed from the Senate Appropriations Committee to the Senate floor for a vote next week. TV ads designed to bring Republican senators on board say the senators have a choice to "support the president's plan or the failed policies of the past." Of course this thing is an abomination of unholy conception in the tradition of last October's bailout bill. I have implored my senators, Barbara Mikulski and Ben Cardin, to:
"Please vote 'NO!' on S.1, the $825 billion stimulus bill. It is precisely because this reckless, aimless, profligate spending bill represents a continuation of the ‘failed policies of the past' that it must be defeated."
Others may wish to do the same.
(Don isn't the only one encouraging a "no" vote on the stimulus bill. Check out this ad from the folks at CATO... http://cato.org/special/stimulus09/cato_stimulus.pdf
- Things that go bump. Recently I shared comments by Fitzroy McLean, former intelligence operative and co-editor of Without Borders, on the topic of the daily intelligence briefings that every U.S. president since Bill Clinton has received. To recap, this briefing contains info on a wide range of real and potential threats. The president is then asked to make a decision on how to act. Failure to do so carries with it the potential for a political blowback, should the threat assessment turn out to have been accurate. Thus, even though he was only in office a few days, President Obama approved a drone attack into Pakistan's sovereign territory, killing 20 or more locals, including a number of women and children.
Now, I can't say, because I don't know, whether the intelligence leading to the attack was sound, or whether the "collateral damage" was worth it. But it is important, in my view, to note that the new president has shown himself willing, like his predecessor, to ignore international law and risk further destabilizing an already unstable ally. Was the drone attack warranted? Or was President Obama simply continuing the new presidential tradition of covering his hindquarters by acting reflexively to things that go bump in the night?
- Speaking of Afghanistan. This week, we also heard Defense Secretary Robert Gates confirm that (a) there will be a build-up of more U.S. troops in that country, and (b) the whole notion about helping stabilize the country through development activities will likely be back-burnered in favor of just killing unfriendlies. In his own words, the DefSec testified...
"Afghanistan is the fourth or fifth poorest country in the world. If we set ourselves the objective of creating some sort of Central Asian Valhalla over there, we will lose, because nobody in the world has that kind of time, patience or money."
As is made clear in Counterinsurgency Warfare by David Galula (available at http://www.praeger.com), probably the best book ever written on the topic, you simply can't win a war against insurgents with blunt military force alone. Gates, who I am almost positive has read the book, knows this, so I find a certain tired resignation in his words. We send more troops to Afghanistan not because we expect to win, but because Obama said we would in his campaign.
Supporting my contention of the futility of the conflict is the fact that the Soviets were incredibly brutal in their attempt to pacify the country, going so far as to drop toys that would explode when handled, the idea being to blow the hands off the next generation of Mujahedeen. So, let me ask you – if we aren't willing to go to that sort of extreme, and beyond... and we have given up on the idea of winning Afghan hearts and minds through on-the-ground politicking and development... then what, exactly, is the endgame?
To get a better sense of the situation, watch this video, it details an eye-opening trip to the largest arms bazaar in the Khyber Pass. (Thanks to Dave M. for sending it along.)
The link is here: http://www.vbs.tv/full_screen.php?s=DGFE2305DC&sc=1363196
But if we pull out, won't a new gang of terrorists reestablish themselves and begin to train for the next 9/11? Could happen, but there are better ways of dealing with those threats than getting deeper and deeper into a country that history has correctly awarded the moniker as "graveyard of empires."
(While its lyrics refer to a different sort of road, this week I've been listening to Chris Rea's The Road to Hell, which seems fitting to a discussion of the Khyber Pass. You can listen to it here)
The above list of actions of the Obama administration is not in any way meant to be a complete tally of what's been going on. For example, according to the news, later today President Obama is expected to "issue executive orders to reinforce the rights of organized labor." And he has added to his new administration Harvard Professor David Cutler. According to Harvard's web site...
"Cutler, who specializes in health care and public economics, is a vocal proponent of increasing America's health care spending, arguing in his most recent book, "Your Money or Your Life: Strong Medicine for America's Health Care System," that such spending has been worthwhile despite its high costs."
To all of which I can only repeat, "stinky, filthy, sloppy rich."
For obvious reasons, there has been a lot of news on the gold front this week, with an increasing number of articles showing up in the mainstream financial media on the shift towards gold as a safe-harbor investment. Even famous hedge fund managers and other institutions are beginning to buy into the case for gold. And not just bullion, but gold stocks. This from Bloomberg this week...
Greenlight Capital Inc. founder David Einhorn is finally taking his grandfather's advice. The $5.1 billion hedge fund is buying gold for the first time amid the threat of inflation from increased government spending.
... Greenlight said in the letter that in addition to buying gold, it has added call options on gold and the Market Vectors Gold Miners exchange-traded fund to its other investments. Call options are the right to buy a security or commodity at a set price, within a set period of time. The owner of the call profits when the security rises above the set price.
Meanwhile, GLD, the largest gold bullion ETF, reported that its holdings reached an all-time high of 832.57 tonnes last week.
- Bye, Bye, Bobby. The freshly minted Zimbabwean $100 trillion note didn't last long. This week, that nation's befuddled kleptocracy finally threw in the towel on its own currency and is allowing the citizenry to use pretty much any form of currency they can get their hands on to trade among themselves. Without the power to print and no reserves of anything of value left, the end of the Mugabe administration can't be far off. In fact, I'll go on record saying that he'll be out of power within three months. Want to bet $100 trillion Zimbabwean dollars on it?
- Scapegoat Bank, MEMBER FDIC. Recently I discussed the idea of the government implementing a "bad bank," an idea that has come to life this week, with the FDIC raising its hand to manage same. Subscriber and correspondent Ian M. of Toronto sent in the following this week, which I thought was both interesting and relevant.
"I thought you might be interested in this link. http://en.wikipedia.org/wiki/scapegoat
The creation of a new organization to absorb all the bad debt and other financial misdeeds had its roots in ancient times. This is where the name scapegoat came from. I thought it was an interesting parallel, although in ancient times people actually stabbed a goat to death on the belief that all the ills would die with the goat. Unfortunately, there could be many goats hidden in the big banks."
And that, dear readers, is that for this week.
Juggling my responsibilities as managing editor of The Casey Report
, the next edition of which is due out on or about February 6, I started this week's edition of The Room
yesterday afternoon... and so I am finishing up earlier than usual, at about 11:15 am. While I can't say where the markets will end today, I can report that, at this moment, the DJIA is off about 84 points, oil is up modestly to $46.05, and gold is up to $920.
Given the sheer volume of bad news this week, with unemployment continuing to reach new highs, home sales continuing to collapse, and consumer confidence – and spending – in a steep slide, the stock market should have been crushed... but it wasn't. That it wasn't, I can only view as being due to base building in anticipation of Super Obama's magical plan... you know, the big New Deal "get it done" plan to end all plans.
And I am going...
Until next week, thank you for reading and being a subscriber to one or more Casey Research services.
Casey Research, LLC.
01-30-2009 1:11 PM
Filed under: Interest Rates, Subprime Loans, Gold, Housing Crisis, Casey Research, David Galland, Obama, Foreclosures, Mortgages, FHA, Afghanistan, Stimulus