More On Housing...

"Home values are falling at an accelerating rate in many cities across the U.S"

As I parse through the Q4 GDP number released on Friday, the more I understand just how bogus it is.  A large part of the input data is based on "estimates" and "assumptions."  I would bet we'll see some downard revisions going forward. But one of the biggest components of the economy, especially over the last 10 years, has been homebuilding, home selling and any activity related to those two activities.  As readers know, I expect 2011 to be a bad year for home prices.  I think a lot of people will be in for a very rude surprise in this regard.

So I wanted to highlight this online Wall Street Journal article from today.  Here is the LINK.  This article reaffirms a previous post of mine this month that foreclosures, inventory and lack of credit-worthy buyers will force housing prices much lower for the foreseeable future:

Market conditions could get worse in the months ahead. Millions of homeowners are in some stage of foreclosure or are seriously delinquent on their mortgages, and millions more owe more than their homes are worth. Real-estate agents are bracing for an uptick in distressed properties hitting the market, including foreclosures being sold by banks and homes sold by owners via a short sale, in which banks agree to a sale for less than the amount owed.

The dynamic described in that quote is going to accelerate this year, as people continue to lose jobs, unemployment benefits expire and banks are forced to convert serious delinquencies into foreclosures. How can the Government prevent this?  By using Fannie Mae and Freddie Mac to monetize the delinquency and foreclosure problem.  This could happen but it is more likely that those two GSE's will be used to monetize the debt after the properties are transfered to the banks.  This of course will entail QE3, 4, etc. and, of course, much higher gold/silver prices.

The other issue which is harder to prove is the "shadow" seller.  The seller who wants to sell but decides to wait "for the market to come back" or can't sell for a price that takes out the mortgage on the house.  But this article reaffirms my point: 

Some sellers have opted to pull their homes from the market rather than lower their prices, either because they believe values will improve or because cutting the price would mean selling for less than the amount owed to the bank.

Anectdotally around the Denver area, I am starting to see more "for sale" signs pop up again (some of it early seasonal), more "price reduced" signs and a lot more "for rent" signs.  The latter being people who want to sell but can't or want "to wait for the market to come back."

The housing problem is causing a lot of pain in this country.  Unfortunately, I believe we are entering into an "acceleration" phase, as a larger percentage of homes decline in value to a level below the outstanding debt on the property.  I heard an ad from a large Denver mortgage broker last week advertising a 105% of value Fannie Mae refinancing product designed to allow homeowners to consolidate a 1st and 2nd mortgage into one. This is just one more indication of the Government "kicking the can down the road," as it means that the policy-makers are willling to use Taxpayer money to try and fix a problem that can only be fixed by the laws of supply and demand.



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Here's An Appropriate Piece Of Work In De Facto Memoriam Of The U.S.

I will be seeing this performed by the Colorado Symphony this evening:



Have a great weekend. 

More Orwellian "Spin" From The Nat'l Association Of Realtors

The "pending" home sales index was reported to be up 2.2% in December from a downwardly revised November reading.  If you calculate the increase from the original number reported, the gain is only 1.6%. Here's the report:  More NAR LIES.  If you assume they'll end up revising down the December reading, there was likely no gain.  If you assume that mortgage purchase applications filed on a weekly basis is an even better indicator, it is likely that "pending" home sales declined, especially given that the index is based on "contracts," not closings.  While I haven't paid attention to cancellations for awhile, that metric is likely running around at least 10%. 

The chief economist for the NAR cited a stronger economy, improving labor market and better "affordability" as the reasons for the gain, which I have shown was likely a decline.  He also cites "super low" default rates on mortgages.  This is either an intentional lie or complete ignorance.  Foreclosures were up 2% in 2010 from 2009 and that included the foreclosure moratorium by the banks in late 2010.  2011 is projected to have record foreclosures. Wonder what reality he lives in if he really believes that garbage coming from his vocal chords...Lawrence, the golden truth will set you free.

Now We See Why The FOMC Policy Vote Was Unanimous...

For all of the absurd agonizing over every syllable of the FOMC policy statement after every meeting, what initially stood out for me with a quick skim of the initial press release was that the vote on the policy decision was unanimous.  That's really all you needed to know about the 2-day circus called the FOMC meeting. My comment to colleagues was "the monetary hawks are dead."  I'm sure this aspect was why gold and silver moved up sharply after the release of the policy decision. 

But today the jobless claims number released was substantially higher than consensus expectation.  The reason claimed was weather-related administrative backlog in the southern States due to bad weather.  If that is indeed the case, then how come when the claims number was released last week and was much lower than expected, it was never even hinted that there was this claims processing bottleneck?  I suppose George Orwell would be able to explain if he were still alive...

And the durables goods orders number came in, not only substantially lower than expected by economists, but quite negative.  For sure, this number can be volatile and is influenced by the "lumpiness" of big ticket orders like civilian and military aircraft.  But this week the numbers showed weak demand for airplanes, vehicles, computers and machinery.  Basically widespread weakness for most industrial production-related durables. 

My point here is that true weakness in the economy has been covered up with statistical manipulation and media spin.  We are seeing this in the housing numbers already, despite the media spin being put on the latest housing reports.  Point in case is that the weekly mortgage purchase applications has been declining for several weeks now and is quite inconsistent with view of home sales being presented by the latest headline numbers.  The fact is that new home sales in 2010 were the lowest in 47 years.  The data on mortgage purchase applications so far this year is suggesting 2011 will be worse.

It's going to get ugly in many respects this year and the economic reality being felt by the majority of Americans will become impossible to cover-up by the media, politicians and business leaders.  Rest assured QE2 will become QE3 in good time and you will want to have as much of your wealth as possible moved into gold and silver before that event becomes a fact.  This latest manipulated price correction is one of the better entry points I've seen in the last 10 years...

A Warning On The Dollar From il Padrino...

"If the dollar collapses, every investment you own will be adversely affected -- your home, your stocks, your insurance policies, your bonds, your 401K -- everything that is denominated in dollars."  LINK

I've been watching the dollar all day today (well, I do everyday) and so far it has bounced 3 times at the 78 level since this afternoon.  This could get ugly for anyone who does not have a significant portion of their wealth in precious metals...

General Update, Featuring Gartman's Failure...

The ubiquitous Dennis Gartman, a self-aggrandized, self-appointed market expert.  Yet for those of us who really know the markets,  he is nothing more than a supreme buffoon - big hat, no cattle.  The numbers bear this out as, courtesy of my friend and colleague "Jesse," it was revealed that in 2010 he was outperformed by 82% of all mutual funds.  It's worse for the round, mound of absurdity from Virginia:  in 2009 over 98% of all funds outperformed this charlatan.  Here's the report:  LINK.  Once again my adage proves true:  those who can, do - those who can't, sell newsletters to the morons who buy them...

Housing:  Oops.  Per the Case-Shiller index of 20 large cities, housing prices have hit their lowest price level since the housing bust began.  Here's the report:  Look Out Below.  The factors driving housing prices lower will only intensify as 2011 unfolds:  foreclosures, joblessness, housing inventory build-up AND, in a historical contex and relative to renting, home prices are still way too high.  At some point prices will regress to long-term mean level and then overshoot below that level.  We have at least another 30-50% of downside in most areas...

Inflation:  I'm sure most of you understand that the price levels for everything we need to buy on a daily basis have risen quite a bit over the last year (especially gasoline over the last month - up almost 24% in the last month for me).  Here's an article from the Chicago Tribune sent to me by my friend/colleague Hal discussing the imminent price increases in the retail food distribution system (supermarkets, restaurants, Mickey D's): LINK. The only time you should put your head in the sand and ignore the news is when the Government or the Fed want to give you their version of reality...

And finally, an adverse effect of QE:  Commercial real estate lending is on the rise again.  Why this is, I don't know.  Denver is typically indicative of national trends and, while commercial space is still being built, the vacancy rate is going thru the roof.  I know this for a fact from some tenants and I know it anectdotally from seeing "for lease" signs flourishing at malls and office buildings all around the city.  Here's the report on money flowing back into CMBS:  LINK.  Interestingly, the money manager being cited is from PPM in Chicago.  I remember from my junk bonds days that we loved PPM as a client because they took rediculous risks in distressed securities and we could make a lot of money pumping garbage into them.  I guess if they want to "leg" into being commercial landlords, buying into this via senior lending positions is one way to go about it.  Or maybe they foresee the Chinese eventually moving a lot of their businesses over here LOL.  Whatever the dynamic is, it is clear that all the money the Fed is printing has to go somewhere besides into Treasury bonds.  We know the "smart" money - i.e. the sell-side of Wall Street - is using their QE largesse to Treasuries.  We also know this same constituency would be the ones unloading commercial paper into funds like PPM...

Can/Should/Will States File Bankruptcy?

This is going to get ugly.  Let me say up front that the biggest problem facing State over-spending and massive budget deficits is the public employee benefit entitlement programs in place.  And this is where it will get the ugliest.  I will also say honestly up front that it is my view, based on first-hand knowledge of the incredible scope and size of benefits awarded to State employees that this is where the budget scalpel needs to fall the hardest.  Just as one example:  the Superintendent of the Aurora Public School System in Colorado - only the 5th or 6th largest district in the State - earns $750,000/year in salary and benefits.  This includes both his military benefits AND his current compensation.  To say that this kind of pay for someone like this is absurd would be an understatement.  It's an egregious insult and non-punishable crime to the Taxpayers.  That example may seem extreme, but in general any tenured State/Federal employee can retire after 20 years and take another job AND collect all the benefits from their previous job.  I personally know some doing that.  The bottom line is that these kind of benefits/entitlements do not exist in the private sector other than for the over-priveledged upper management.

The average compensation, including benefits, for the public employees was over $108,000/yr. vs. just under $69,000/yr for that of private sector workers.  This was for 2008.  I'm sure the disparity is even wider now.  Here is the source article for this data:  LINK.  I don't know about anyone else, but I find this to be beyond absurd.  Unfortunately for the privately employed taxpayer, who can have his employment and benefits terminated when a Company needs to cut expenses, the Government rarely pares its expenses and the associated benefits of all workers are Constitutionally guaranteed in most States.

The only possible mechanism for changing the public employee compensation/benefit scheme would be to permit States to file bankruptcy, which is currently not allowed by law.  This article in the NY Times discusses the current status of this issue as it enters into the debate arena on Capitol Hill:  LINK. 

The fact of the matter is that most States are running big spending deficits - and some like California and Illionois are technically insolvent - and the cost of the public workforce is the largest expense burden.  Even in the rosiest economic scenarios, the current system is not sustainable and it will require some drastic expense-cutting measures.  Of course, unless the system can be restructured to enable the Federal Government to ramp up its money printing and monetize State deficit/debt burdens, the only viable alternative is to legislate the ability of States to file bankruptcy in order to extinguish and restructure their obligations.  This will require a lot of pain to be endured by those dependent on the State for cash flow.  Two of the biggest consituents of this are public employees and municipal bondholders.  The most equitable solution would to require substantial sacrifice by both.

Unfortunately, the likely path of legislation will create a mechanism which will shift the States' burdens onto the Federal Government.  The NY Times article linked above hints of this possibility. Ironically, the person in the article who represents the public employee special interest group uses the GM bailout as his model for Federal involvement.  But recall that GM was made a ward of the Taxpayer and, despite issuing stock in a quasi-privatization of sorts, is still dependent on Federal guarantees.  Most people do not realize this, but the Government subsidizes every lease issued to finance the purchase of GM vehicles.  In other words, the GM bailout is a horrific model to use in order to create a mechanism for reorganizing State insolvency because it would involve shifting State insolvency onto the Federal balance sheet - a mere rearrangement of the deck chairs on the Titanic.

The bottom line is that public employee compensation needs to brought into line with that of the private sector.  I fail to see any reason whatsoever as to why public sector workers are awarded such a rich premium to the private market for their labor services.  At the same time, those who have financed spending at the State level - i.e. muni bond investors - should also be required to take restructuring haircuts on their investments, which would be the free market solution for sloppy investment due diligence.  The path for this solution would be to allow States to file bankruptcy using the same model applied to corporations and private individuals.  After all, can anyone out there give me just one good reason why the above two constituents should be exempted from the discipline of the (relatively) free market to which the rest of us are exposed?

California Governor Declares Fiscal Emergency...

Thanks to "Bill" for giving me the heads up on this.  Not sure what that will accomplish other than maybe get the legislature to reduce any spending increases they are working on.  Here's the news report:  LINK

Fiscally California is doomed and eventually will require some kind of Federal Government/printed money bailout, as will several other States. They can raise taxes but that will accomplish little as it will further hasten the exodus of businesses and wealthy people who are legally domiciled in the State.  For proof of that dynamic check out this news story from Illinois, which just raised taxes:  LINK.  Credit to my friend and colleague Hal for that story.

I continue to be amazed the way this country focuses on the financial issues over in Europe, when several large States in this country are technically insolvent.  Someone asked me to comment on the notion that gold/silver are in a "bubble" now.  That idea is little more than laughably absurd.  There's a couple of good comments regarding that in the comment section of yesterday's post.  Needless to say, until this country - and the world - figures out a way to engineer a financial "do over" AND create the framework by which every State/country can not spend more than it earns (i.e. that mechanism would be a strict gold/silver standard), the Central Banks will continue their inexorable fiat money flood and that will ultimately - and eventually - fuel a precious metals bubble that will stagger everyone's concept of what a bubble is.  Until then, all that remains is for the final chess pieces to be played out before the world experiences a financial nuclear holocaust...

I'll be out Friday on s back-country snow-cat skip adventure in order to take full advantage of the 2 1/2 feet of fresh, untracked powder that awaits on Berthoud Pass!

Have a great weekend all - Avere una fantastica fine settimane a tutti

Jobless Claims - The Truth

Once again the Government manipulated jobless benefits statistic - and the number which is the headline number read and reacted to all over the world - is much lower than the "unadjusted" raw number.  The reported number was 404,000, which was a decline from the previous week's manipulated number and lower than the market consensus expectation.  HOWEVER, the actual unadjusted number of claims was 550,594.  So there it is.  The golden truth.  Here's the Dept of Labor press release:  LINK

Even more disturbing in that report - and a number which likely 98% of all market professionals and 99.9% of everyone else in this country who at least attempt to stay informed - is the fact that the total number people claiming jobless benefits under all of the programs jumped by over 401,000 from the previous week.  So nearly 1/2 a million more people either can't find work and qualify for a weekly welfare stipend, or just can't be bothered with looking for work since they do qualify for taxpayer largesse.   The total number of capable workers now feasting on part of your paycheck is 9,607,424.

The truth will set you free.

More Doom For The Housing Market

Note: My vision may be doomy and gloomy, but it is not seeded in pessimism and negativity - rather it is a product of realism and a desire to understand the truth.  The truth is our only hope for salvation.  After all, the truth is the agent of purification...

I find it amusing that everyone with whom I discuss the housing market seems to understand how bad the market is everywhere except in their own area.  I was chatting with someone a couple days ago about Denver area real estate who is expecting a bounce in the Denver market and remarked that Denver seemed to be in better shape than most big cities.  I agreed that Denver's economy is strong on a relative basis but then I pointed out to her that I saw a list published last week of the top-10 cities for the rate of foreclosures and Denver was 10th on that list.  Hmmm...and the foreclosure situation will get a LOT worse this year:  OOPS

That metric leads nicely into this blog post I came across this morning which describes one of the fundamental problems with the housing market - and one to which I have pointed for a couple years:   almost everyone who wanted to, or could, buy a house has already bought a house over the last 10 years and the pool of available homebuyers is drying up.  And to make matters worse, many of those buyers are now in some stage of mortgage default.  With foreclosures piling up and home-ownership rates declining, the pool of actual buyers is rapidly declining, especially relative to real inventory (real inventory = Govt/industry-reported inventory PLUS shadow inventory, where "shadow inventory" is defined as those who want to sell plus all the homes in default/foreclosure but not included in bank REO).  This blog post discusses the declining pool of homebuyers, LINK.  A post of mine earlier this month (or maybe late last month) better quantifies the shadow inventory metrics.

The mortgage bankers association's weekly mortgage application index was released today and showed further deterioration in the purchase index.  Clearly, with interest rates beginning to trend higher and the housing market in a seasonally "soft" period in terms of demand (I'm seeing "price reduced" signs on top of "for sale" signs all over Denver), you would think that anyone thinking about buying a home would want to lock in the current mortgage rates - and take advantage of "price reduced" deals - and that on a seasonally-adjusted basis, the purchase index would at worst be flat.  Historically, the behavioral statistics for the housing market show that buying activity spikes when interest rates start to rise.  We are not seeing this in the numbers this time.

Which leads me to my final point.  By now everyone knows that the latest numbers show that China (and Russia) unloaded some of their Treasury bond holdings in November (the data has a 2 month lag).  This is not good news for interest rates in this country if that becomes a trend, even if the Fed continues to fill in for the declining demand for - and  rapidly expanding supply of - Treasuries in order to make sure Treasury auctions get funded.  And there's no doubt in my mind that the Fed will do this.  Even after the Fed announced QE2, bond prices at the longer end of the curve (10-30 years) started to drop and interest rates rose.  Expect this trend to continue and expect mortgage finance rates to climb and expect even greater weakness in the housing market this year than is expected by most.

With Gold And Silver, Forget The Charts - You Have To Watch Physical "Off-take"

First, having made that headline assertion, the daily chart on gold is starting to look neutral/bullish and the daily chart on silver - if you are a chart-jockey - suggests a bit more downside.

Now, having said that, I believe - as do several others, so my view is far from unique - that we have seen a transition in the dynamic of the precious metals market in which the sheer global demand for physical gold/silver has largely taken over the ability of U.S.-Anglo banks to manipulate prices lower using paper gold (Comex/LBMA futures/forwards).  See this essay for clarification on Comex manipulation:  LINK

The original thesis for this idea, at least of which I am aware, was put forth by GATA over 10 years ago.  One of the best datapoints for monitoring global physical "off-take" is to watch the very visible  import premiums being paid in the eastern markets (India, China, Viet Nam).  The easiest way to keep track of this is to subscribe to the Midas report at http://www.lemetropolecafe.com/ to access "JB's" global market commentary.  This is from his report that will be in tonight's Midas:

AM $3.83, PM $6.53, with world gold at $1,364.14 and $1,358.16. Ample, and lavish, for legal imports...local Shanghai gold closed at a premium of $16.55 to world gold of $1,361.95...local Vietnam gold stood at a premium of $40.35 to world gold of $1,362.57

These observed premiums are very high right now, especially for China and Viet Nam, indicating the high probability that these markets are voraciously buying physical gold (and silver). 

This is not to say that we won't experience manipulated market corrections, like the one underway in which the gold cartel has engaged in massive short-covering at the expense of "hot money" speculators who piled into the paper market recently.  But in general I think we can expect to see the illegal manipulative activities of the western bullion banks - aided and abetted by the regulators who look the other way (CFTC/Gensler) - sharply curtailed by the power of eastern market forces...got gold?  Better get some while you can.

Friday Tunes

With the news just getting worse by the day (the real news, not that which is manipulated and cleansed for general public consumption), I thought I'd let everyone greet the weekend with this cover by Widespread Panic:



Have a great weekend!

Observations On The Government Spending Bubble, The Dollar and Government Lies

Here's a great chart I borrowed from:  HERE

The amount of debt represents the difference between Government revenues and Govt spending.  Does this chart show any signs of a Government that has the ability to reduce its spending deficit?  Now, the Fed balance sheet is growing multiple billions by the day, so the real spending deficit is even bigger than is represented by the above graphic.

I'm all for the tax cuts just passed, but it has to be offset by cuts in spending.  Not only will we NOT get cuts in spending, the budget grows by the day more quickly than pinocchio's nose.

Here is what the market thinks about the U.S. Government's ability to manage its finances:

(click on chart to enlarge)

For sure, we get some technical dead cat bounces along the way, and a reader always busts my stones when we get one (but is radio silent when the dollar resumes its descent lol), but Geither - in so many words with his China rhetoric yesterday - essentially told the world that the U.S. is going to print the dollar to much lower levels.  Bernanke is putting those words into action.  It's a serious Comedy of Errors.  Here's a great analysis of the U.S. dollar situation I sourced from King World News blog.  I agree with this view:  LINK

And what is even more humorous to me is that everyone in this country is discussing the dire multi-sovereign fiscal crisis going on in Europe.  The fact is that California alone is in worse shape than several countries over in Europe combined.  Then layer on top of that Illionois, NY, NJ, etc.  I don't have time to add up the numbers, but if you include the full present value of Federal entitlement liabilities, State pension unfunded-liabilities, State/municipal debt obligations and private debt in this country, we would all wonder why news about the situation in Europe is even in the news.  Besides, China has already said it will prevent a collapse in Europe.  I have not heard China make that proclamation about this country, nor will we after Geithner took his water pistol to a battle field of political rhetoric.  It was more pathetic than Poland's calvary trying to defend against Germany's tank and air attack.

Two of the biggest Government lies that grow and perpetuate on a monthly basis are the monthly employment and inflation reports.  For a great explanation of the golden truth about the real numbers, this interview with John Williams is a must-read:  Govt Lies

Those of us who have been investing in precious metals for at least the past decade have known all along that the Govt economic reports are bogus.  The analysis of this is now starting to seep into the mainstream media, to an extent.  Certainly not the most common sources of news like the night time local t.v. news broadcast or daily newspapers.  But it's getting a lot more exposure and acknowledgement in blogosphere. 

One more must-read.  This guy has become my favorite economic analyst and his writing style is superb:  Alisdair Macleod

One has to wonder how long it will be before the Obama people decide to curtail what is allowed to be posted on the internet....it gets more Orwellian by the day.  Protect yourself with gold and silver.

The Dragon Is Hungry For Gold - Demand Outpaces Supply In China

I have regarded recent reports of market "tightness" in gold/silver bullion with a bit of skepticism, because the dealer I use to accumulate bullion coins, Tulving, seems to be swimming in gold/silver eagles.  However in the past few days some large buyers of silver (like Sprott) have mentioned that they are experiencing some delivery delays for bars and are becoming a bit nervous about the existing above-ground availability. 

THEN, there is this: 

Premiums for gold bars jumped to their highest in two years on Tuesday as worries about inflation drove investors in China, the second-largest consumer of the precious metal after India, to bullion ahead of the Lunar New Year..."There's a sudden surge in demand. Demand from China is very good and they are paying very high premiums. Refiners can't meet the demand," said a dealer in Singapore.

Here's the article LINK

You can easily track the premiums being paid for gold in countries like India, China, Viet Nam and Turkey at http://www.lemetropolecafe.com/ in the nightly Midas report.  Based on the activity in the eastern hemisphere, plus the accelerating demand for silver eagles as reported by the U.S. Mint, I would suspect that at some point the "boy who cried wolf" shortages will actually become very real.

 I also suspect that, over a longer timeframe, the entities who utilize the "fractional" method of bullion banking - Comex, LBMA, Scotia, JPM, HSBC, etc - will find themselves in a bit of trouble when the eventual "call" on the metal they supposedly safekeep happens and we find out the cupboard is mostly bare.

And even further down the food chain, the investors who have placed their full faith in the "credit" of these banking entities will be quite shocked when the paper investments - like GLD and SLV - that use these banks as custodians start plummeting in price as the spot price of gold/silver does a rocket launch.

The only question in my mind that remains is how long it will take for this sequence of events to unfold.  It has taken a lot longer than I originally expected back in 2002 for a lot of this mess to become real, so I don't cast out timetables anymore.  I will say that a long-time, very perceptive friend of mine opined recently that our system won't totally cave in until the Comex defaults on the delivery of physical metal (changing the rule to enable cash settlement is a "de facto" default).  It is at this point that a very terrifying dollar crisis will grip our system.  It's anyone's best guess when this will happen...Do you know where your bullion is?

Wow My friend and colleague Jesse sent me this - I don't have link but you can probably google the title to get the source news article:

SINGAPORE, Jan 11, 2011 (Dow Jones Commodities News via Comtex) -- Demand for gold bullion from Australia's Perth Mint has been unrelenting since gold's price dropped below $1,400 an ounce, a senior Mint official said Tuesday.

"At the moment demand is such that we cannot meet all the enquiries that we are getting," said Nigel Moffatt, Treasurer of the Perth Mint, one of the world's largest gold refiners and distributors.

"Demand for our coins and medallions is strong, but the biggest demand is coming from banks and traders looking for kilo bars," he told Dow Jones Newswires.

One-kilogram bars are the most popular trading instrument in Asia's physical market

What The Heck? Is Bloomberg News Serious?

Take a look at this headline:

Wall Street Dumps Most Treasuries Since 2004 on Growth

You've got to be kidding me.  Wall Street has been "dumping" their Treasuries into the Fed, which has been printing money like a Weimar paper company for over 2 years now.  In fact, just last week, Wall Street unloaded over 1/2 of one of the most recent Treasury issues onto the Fed's balance sheet.

Here's the link to the Bloomberg fantasy report:  Dr. Mr. Fantasy

The golden Truth about rising Treasury yields (tanking prices) is 2-fold:  1)  Globally, investors are buying less Treauries because of the accelerating credit risk of the U.S. Government.  And the Fed/Treasury has a printing press, so outright default will not happen.  But when the Fed has to monetize new Treasury auctions like the one referenced above, that is a "de facto" default; 2) Accelerating inflation.  If you don't believe inflation is here, stay tuned.

It gets more surreal by the day, people...

“I, however, place economy among the first and most important republican virtues, and public debt as the greatest of the dangers to be feared.” - Thomas Jefferson

Whoops! Will China's Government Pay Heed To One Of Its Central Bankers?

Central banker urges China to cut U.S. debt holdings: report

China should further diversify its huge foreign exchange reserves away from U.S. government debt to reduce its risk exposure, a central bank official said in comments published on Monday.

Here's the news report from reuters:  LINK

One would have to guess that this comment out of China this evening is why the dollar is lower and gold/silver have popped higher from Friday's close.

Friday Funnies - Dorks:

Gold, Silver, Mining Stocks and Fiat Money

I'm getting a lot of fear-based inquiry about the price action in the precious metals sector this week. And for sure, both the financial bubble media and a lot of blogosphere are helping to fuel this fear. So I wanted to comment on the action.

To begin with, the BEST contrarian indicator out there - Dennis Gartman - confidently announced that he was contemplating shorting SLV. That's the single best indication that this correction may be closer to its end than its start.

Before I make case that this correction could end soon, let me just remind everyone that before the Central Banks ran out of gold to unload in order to manipulate the market, 200 day moving average (dma) corrections in gold,silver,HUI/XAU were not uncommon, especially after a big bull run like we have had since August. We could indeed be in the midst of one of those corrections, although that is not my view (we did set up our fund defensively during the last 2 weeks of December). I'm just saying that this is a volatile, highly manipulated market sector and, from a law of probability standpoint, the market is overdue for some downside volatility.

Having said that, the HUI has corrected down to its 50 dma and I believe that it's likely to hold there. But don't be surprised if we see some days with wild volatility and I've lived through periods where silver and the HUI blow through their 200 dma's to the downside and it feels like a market collapse.

Aside from the Gartman indicator, the physical demand from India, China and Japan on this price correction has accelerated. Historically, the relatively lower physical demand component made Comex paper-induced corrections a lot more savage. But now Central Banks globally have become very large net buyers of gold and the populations in these countries have also stepped up their accumulation, commensurate with their growing level of wealth. Here are some quotes from JB's Gold-jottings report, which can be accessed at www.lemetropolecafe.com: UBS reports “…demand really picked up in the $1380-1390 area. Our physical sales to India yesterday were the highest in 12 months - from a time when gold was trading around $1100;" Reuters adds confirmation: "There is renewed enthusiasm in market after markets crashed by $40 yesterday, I booked deals for 200 kgs from yesterday evening from $1,417 and below," said a dealer with a state-run bank in Mumbai.”

Another interesting data point I picked up on this morning is that yesterday's Comex open interest in gold/silver actually increased. This is a startling contradiction to the usual substantial decline in o/i on big down days. Given that both today and yesterday paper gold/silver went off a cliff exactly on the Comex open, the bullion banks are clearly aggressively attempting a COT open interest liquidation, which historically would take the market down 10-20% on average. But yesterday's o/i report suggests that much stronger hands have moved into the long side of the Comex paper market and are not so easily stopped out of their positions.

Again, I am not willing to say at this point that this price correction has run its course. However we have started to shift our fund into a more neutral posture with regard to our expectations. To be sure, historically these price corrections have been a lot more severe in depth and duration. But, for now, I am leaning toward a view that we are closer to the end of this pullback than historical norms would suggest. Thanks Dennis!

As for the "Fiat Money" part of my title, once again Alisdair Macleod has hit a home run with an extraordinarily well-written essay on the death of fiat money. Here's a snippet:

This is why we might call 2011 the year money starts to die. The central banks are beginning to lose control over bubbles one and two, and also bullion. The destruction of private sector savings has coincided with expanding budget deficits so the expansion of the money bubble will have to continue to contain the situation, because there is no alternative. (emphasis is mine)

And here's the link: Must Read

Must-Read Interview With David Stockman...

I always thought this guy was one of the best minds to go thru Washington, DC - except for his original Reaganomics ideas.  It's good see him back-peddaling on that.  Here's a salient quote from him about what a lie TARP was:

First of all, that's urban mythology. I don't think there was panic on Main Street in America. What there was was that the big pyramids of debt were crashing down on Wall Street and had we allowed nature to take its course, maybe the Goldman Sachs stock would have gone down to $10, but that's their problem and the problem of the financial speculators who owned the stock. Not a systematic problem for the economy.

Here's a link to the rest from clusterstock.com:  LINK

Geithner Lets Bank of America Off The Hook For 1 Cent On The Dollar

The potential liability of $127 billion in mortgages sold by Countrywide, which collapsed and then was bailed out by BAC in a smokey back room deal which involved the U.S. Treasury, was just settled in BAC's favor for 1 cent per dollar of potential Taxpayer liablity.  These were loans which were flipped into Fannie Mae, which is now owned by the Treasury/Taxpayer.  Here's the link:  LINK Mr. Ritholtz makes an interesting quote:  "My biggest complaint about the GSEs post government takeover is that they have been used as a back door bailout of the banks. This latest deal reconfirms that view."

Interestingly, this was a prediction I made back in 2002:  The Government would eventually take over FNM/FRE and use them monetize the mortgage/housing collapse.  We are there.  Make no mistake, there will be QE3, 4, 5 and the precious metals will eventually hit pricing levels, in U.S. dollars, which will shock people.

Please note for the record:  the media/blogosphere keeps referring to this deal as being between Bank of America and Fannie Mae.  Unequivocally, this deal is 100% between Tim Geithner as agent for the U.S. taxpayer and Bank of America.  Period.  This is because the Govt/Taxpayer owns FNM.

The more I ponder this deal, the more I believe there is a great case for fraudulent conveyance:  from BAC to the Govt AND from the Govt/Tim Geithner to the Taxpayer.  I hope someone pursues this.

This Is Bad News For Dollar Bulls: India To Stop Using The Dollar In Oil Trading With Iran

Here's the new report:  LINK

The Housing Market Could Get Annihilated In 2011...

Happy New Year everyone! Back in 2002 I made the prediction that housing values would eventually drop 70-80% from peak bubble valuations. Of course, back then I would have been horrified to know just how high prices were to get by 2007. At this point, in a lot of markets prices have dropped 10-20% on average so far, with 40-50% declines (or more at the high end) in the worst bubble States (Cali, FLA, Nevada, Arizona). The late and great Sir John Templeton, who was one of the pioneers of the modern mutual fund industry and a highly regarded investor, said in an interview sometime in 2002 that he would not touch U.S. real estate until it had fallen by 90% in value. I'm sticking with my call.

As to be expected, the mass financial media and most real estate market professionals (and of course a lot folks who have been well-trained by the Fed to "buy the dip" over the last 30 years) expect that the worst is over for the sector. Au contraire, mon frére (I guess I should say "al contrario, il mio amico - lol), there are several key forces at play, most of which go underreported, not reported, or are based on industry/Govt data which is highly manipulated.

Inventory - The biggest problem facing the housing market is the massive inventory sitting out there. Of course, the Nat'l Assoc. of Realtors reports the inventory of homes for sale to be around 3.7 million, or 9.5 month supply based on the existing rate of sales. Remember that rate of homes sales is still declining - existing home sales were down 28% for Nov '10 vs. '09 and new home sales were down 21% - so as we go forward, unless this rate picks up, the number of months it would take to clear the existing "for sale" inventory increases.

But there is a "shadow" inventory out there defined as pending REO (bank owned), pending foreclosed inventory and homes with mortgages in serious delinquency. Corelogic has defined this number to be around 2 million homes. Here's a great chart I borrowed from calculatedriskblog.com:

(click on chart to enlarge)

As you can see, if you include the homes that are likely to be foreclosed and assumed by the banks, a more realistic estimate of the housing inventor is close to 6 million.  And there are also a lot of people who are not in danger of defaulting on their mortgage, but who would sell if the market "bounces."  If you are skeptical of the forces of foreclosure, here's a news report from Reuters that came out last week describing the big jump in foreclosures during Q3:  LINK

So just based on the pure, good old fashioned law of supply/demand, there is going to have to be a major downward adjustment in the price of housing in order to clear this massive inventory overhanging the market.

Credit Markets - The biggest factor here is interest rates.  For several reasons, not the least of which is the rapidly expanding Government spending deficit and Treasury bond supply, interest rates will continue moving higher during 2011.  This factor alone, unless you have cash to buy a house, will make the current price level of housing unsustainable as the higher cost of a mortgage will reduce the overall amount someone can pay for a home by reducing the size of an affordable mortgage.  This is going to hammer the mid-priced housing segment. 

The other obvious factor here is the much tighter standards being enforced on mortgage lenders.  No more "liar" loans, pay-option ARMS and "sub-primers" qualifying for conventional GSE mortgages.  This factor not only eliminates a chunk of the population that had been buying homes during the bubble, but it too reduces that size of mortgage most people can assume. 

And finally, there is another tsunami of adjustable rate mortgage resets and refi's coming in 2011. Here's a chart to illustrate that is from Credit Suisse (edit in red is mine):

(click on chart to enlarge)

As you can see, the housing market price collapse that started in 2007 is highly correlated with the first wave of resets.  It took a few trillion of printed dollars from the Fed and the Treasury in order to stabilize the banking system and slow down the collapse in housing from this first wave.  Take a look at the size and composition of the second wave.  The beige bars are the nefarious pay-option ARMS, which were designed to let people opt not to pay most of their mortgage, with the unpaid portion added to outstanding mortgage balance.  It was this garbage that took down Countrywide, Washington Mutual and Wachovia.  The credit obligation from that abortion was largely transferred to the Treasury (i.e. the taxpayer).  Rest assured, the pay-option reset factor alone will make this next default wave even more nuclear than the last one.  (Also, I am skipping over all of the related collateral destruction the first time around, which includes the implosion of the big mortgage reinsurance companies, including AIG - who's garbage found a home with the U.S. Treasury).   This will devastate housing/real estate values.

There are several other factors which will further influence the declining value of housing and real estate.  The most prevalent being the general weak condition of the economy in the U.S.  And I am of the view that the economy will double dip this year (although massive QE/money printing may prevent this).   The reality is that the two major factors discussed above will be sufficient to cause what I believe will be a much larger than expected (by the media/Wall Street in general) decline in housing values during 2011.  I would not be surprised to see at least 10% in most markets.  While I have stopped putting a definitive timeframe on my economic/market predictions, I still believe that average prices in the housing market will get cut in half from here before this over.