Tuesday, August 11, 2009

More Analysis Showing That A Second, Bigger Credit Collapse is Coming

When I borrow material or data from another blog, I will normally try to do so only to incorporate that material into my own commentary/analysis in order to avoid "reinventing the wheel." But the Shenendoah blog posted analysis last night that stands on its own in the way that it reinforces my post from a few weeks ago explaining that a second, larger wave of real estate/mortagage failures is building up and will lead to a much larger financial dislocation than we experienced last year. Here's the link to my earlier post:

A Stage Two Collape is Coming

Here is an excerpt from the Shenendoah post:

This was highlighted in a very indirect manner by an article in today’s Sarasota Herald Tribune in what seemed like an innocent enough article in the Monday business section titled Specialist says foreclosure flood ahead . The article is fairly standard business section material where a real estate corporation is moving into the Sarasota area to exploit the flood about to happen. The shocking part is in the article itself, where a region already technically in an economic depression is about to take another major blow according to Troy Funk of Keller Williams Realty:

“The banks have been stalling the short-sale and foreclosure process and it’s a dam that can’t hold,” he said. “They have pretty much all said the same story: Get ready. Get ready. That next wave, it’s coming.” [emphasis mine]

Funk predicts that the number of distressed properties on the market will increase three-fold in short order. “The banks can’t hold onto all those properties and they are going to start flooding the market, we’ve been told.”

Here is a link to the post:

Look Out Below

The Shenendoah blog is updated roughly once a day and I recommend it as a regular stop for people looking for the truth (the author calls himself "John Galt," after the iconic capitalist hero in Ayn Rand's "Atlas Shrugged").

When you throw the ongoing commercial real estate collapse into the mix, it is the equivalent of tossing gasoline into a napalm fire. Watch for any signs the Fed/Treasury is going to attempt to monetize this whole mess.

My suggestion is that anyone who wants to prepare for what's coming needs to significantly reduce their US dollar-based investments (stocks, bonds, real estate) and move as much as you can into precious metals and related assets (stocks, investment funds). Stay away from ETFs which do not allow investors to verify bona fide custody of the gold/silver, like GLD, IAU and SLV. Those trusts are potential frauds.


  1. Dave, the past months have evidenced a correlation between many asset classes (including stocks, commodities, precious metals and foreign currencies) vs the USD. If your prediction of what's coming is correct, then why won't the USD (cash) be the place to be?

  2. Excellent question.

    The USD is down roughly 33% from its peak earlier this decade, and it's down 12% from its bear market rally peak earlier this year.

    The only way the Government can slow down the collapse of our system is to keep printing money, which silently devalues the USD.

    The "flight to safety" aspect of the USD is disappearing - I mean, the USD index traded up to the 120 area after the tech bubble collapsed -it could only muster a bear bounce up to 89 when we hit those decade lows in the Dow/SPX back in March.

    The problem is that even if the USD has the "veneer" of strength, the reality is that it is being devalued on a daily basis, and has been for a long time.

    When the real caca hits the fan, I believe there will be torrential rush out of all "assets" and into gold/silver and mining stocks. The behavior of gold/mining stocks after the 1929 collapse gives us a hint of what's to come.

    And here is a great illustration of the relative devaluation of the USD, as gold moves inversely to the dollar and look at what's happened to Dow/Gold:


  3. P.S. I believe the correlation effect among the various asset classes has a lot to do with the way the quantitative/black box hedge funds operate. This effect is magnified during low volumn periods like we've had this summer.

    There is also the manipulation factor with gold. At some point gold is going to break free from this correlation/manipulation and there will be a move higher in gold that will shock even the most ardent gold bugs.

  4. I don't think the Fed has to do a lot more than what they are doing already to prop up real estate; right now they are 'paying' banks (interest on reserves) to keep bad loans/bad real estate off the street.

    The discount window is still open, the RE collateral is still considered 'AAA' by the Fed which still has an unlimited amount of cash to lend @ 0%.

    The FDIC is doing something similar, keeping bad banks afloat and writing threatening letters demanding more capital rather than folding them.

    You are right, inevitably, the bad RE will have to be exposed to the light of day, particularly as the banks aren't giving new, good loans on offset the bad. Banks will continue to fail and the rate of railure will increase. I suspect the government - and the markets - can tolerate a long, ramp up in commercial bank failures for a very long time.

    At that point, Congress will simply create a new stimulus or bailout which will result in a 'New FDIC' within which to dump all the zombies with the package sold to Citi or Morgan- Stanley (paid for by the taxpayers, of course).

    If there is going to be a break, I suspect it will be outside the Fed/Treasury ambit, perhaps foreign exchamge or energy prices.

    I think gold is in a good, longer term buying opportunity since both the Fed and most other central banks are selling it and keeping the price below $1000, trying to stabilize the trade currencies.

    If you buy it ... you may be hanging on to it for a long, long time ...