Is the air getting thinner up here, or am I just having a "Deja vu" moment after a year of Lehman Brothers, Bear Stearns, Merrill Lynch, AIG, bailouts, GM, Chrysler, Fannie, Freddie, the mortgage crisis, gold spikes, Greece, Portugal, Derivative doldrums, dollar demise, Euro borrow, Volcanoes, sub prime, Fab Fabrice, Bernie madoff and who ever else "made off" !!
Should we feel good about the great earnings reports coming in this quarter, or feel nervous because those earnings may be thin air themselves as bailouts and new accounting rules fudge the real numbers? And what was the problem with those big investment banks....hhmmmm, oh yes, now I remember, the 3 $Trillion or so in poisoned mortgage derivatives those banks somehow do not show on their books any more? Hmmmm.......Now where oh where did those numbers get to.......must have misplaced them I guess.
Actually, since I have done quite well over the past 12 months, I'm feeling pretty good. Maybe I'll go to the black jack table again and try my luck, or maybe roulette this time. No, craps, now that's the ticket.......or maybe......well.......if I took my winnings and put it in the bank for awhile........hmmmm decisions, decisions!
Updated Dec 18th 2009 -The price of Gold is going up again, even though the talking heads (cnbc etc) are starting to tell us that King dollar is coming back. They must be only looking at their 3 month charts because they couldn't be more wrong about the dollar or about Gold (or other commodities for that matter) and here is why!
The elephant in the room is this: America is over $12 Trillion in debt and climbing. Check out the U.S. Debt Clock! If America does nothing to stop the bleeding, it will be $23 Trillion in Debt by the year 2020, more than 100% of GDP (that's only 10 years out). Now consider these 800 pound gorillas in the room trying to make space around the elephant:
1. The U.S. Fed is still propping up markets, and making massive asset purchases like mortgage backed securities while fully 25% of mortgages are underwater, and that number will increase through 2011 by all projections.
2. There are 2.4 $Trillion in ALT-A (Liar) Loans and sub-prime mortgages still out there and most don't reset until 2010 through 2015. If the Fed was not propping up this market including Fannie Mae and Freddie Mac, it would start another stampede for the exits. If they continue, then add that $2.4 Trillion to the debt numbers above. If they don't, just watch as millions more lose their homes.
3. As commercial real estate companies loans come due this year, they will run into a wall of re-financing problems as their lenders won't want to extend more credit, or will demand more security, or both. Only the strong will survive.
4. The banking industry expects up to 1,000 bank failures in 2010, because of the mortgage fiasco. Not last year, next year!
5. Many big financial institutions (remember all those who were "too big to fail") are still virtually ignoring the massive derivative debt on their books as they pay back those Government loans. (Yes, they leave them off of their books as if they didn't exist at all) They will have to be accounted for at some point. As that reckoning occurs, this problem all by itself will cause the dollar to drop.
6. The USA is still fighting two wars, on three fronts, after the President who launched both of those wars did not raise taxes to pay for them but, on the contrary, made two massive tax cuts in the middle of those two wars, something no other U.S. President had ever done throughout it's history.
7. The new health care bill will cost at least $1 Trillion dollars over 10 years.
8. Americans pay about 25% of the cost of Gasoline that the rest of the world pays.
9. The price of Gold is denominated in U.S. dollars.
The above really only addresses the American market, but the world of business has grown much larger. India and China are increasing their Gold reserves by huge amounts as they no longer trust the value of their U.S. dollar reserves. Brazil and Russia are doing the same. Russia has even added Canadian dollars to their reserves as the world tries to diversify around a falling U.S. buck.
These rising powers are also buying up commodities, oil, gas and mining companies. China has told all of it's 1.3 Billion citizens to also buy gold for their savings. India used to be the largest retail gold market (for it's dowry practices etc) but now China has taken over the number 1 spot.
Some market bulls believe Gold will top out somewhere between $2,000 and $5,000.
An inflation monster is coming and most of all the gold in the world is already above ground. That makes producing gold miners, expecially the juniors, takeover targets for the big dogs.
Housing! It was a great store of value. The largest investment for most average worker or small business owner, in their lifetime. An investment that was guaranteed to increase in value and many staked their futures on the simple premise that "they are not making any more land". House values climbed.
Over the past 40 years, whole neighborhoods were built almost over night in suburbs from California to Florida across the south and Midwest. Houses got bigger, more extravagant and much more expensive. From the 1970's through 2006, investors small and large either built or bought up surplus houses as stores of value. To a lesser extent, it occurred in Canada as well from Ontario to BC. For many boomers, it was their "piggy bank" where one could go, year after year, and re-mortgage to obtain more and more goods, cars, computers, college tuition, you name it. Some made fortunes in real estate. Those days are gone and they are not coming back any time soon. Almost no one expected such a spectacular housing crash.
Deutsche Bank reported Wednesday that the number of U.S. homeowners who's mortgages will be more than the value of their homes, will double to 48% in 2011 from 26% in March this year. The number of homes is a staggering 25 million!
If you bought a house in the past 4 years, it was equivalent to settling down on the beach when the tide is out. When the tide came in, these homes (read mortgages) were under water. So much for the piggy bank. It has been smashed to smithereens by the gluttons of wall street who have, for the most part, been saved by your tax dollars.
"Homeowners with the riskiest mortgages taken out during the housing boom have seen the greatest erosion in equity, in part because they were "affordability products" originated at the housing peak", Deutsche said. "They include sub prime loans, of which 69 percent will be underwater in 2011, up from 50 percent in March".
This also from the Bank: "Regions suffering the worst negative equity are areas in California, Florida, Arizona, Nevada, Ohio, Michigan, Illinois, Wisconsin, Massachusetts and West Virginia". "Las Vegas and parts of Florida and California will see 90 percent or more of their loans underwater by 2011", it added. This is in direct contrast to some of the more hopeful opinions coming out in the past few weeks but those are mostly from the housing industry trying to put some lipstick on this pig. Deutsche Bank hasn't pulled any punches in it's analysis. It is a complete knock out blow to many homeowners. There is one group, however, who stand to benefit from this catastrophe. It is generation Y.
in 2007, my son and his wife were planning their wedding for Sept 2008 and asked me what my opinion was for buying a home. I told them that they should wait until "at least" 2010 or 2011 before they should even start to look. I felt at that time, and I told them, that housing prices would come down from 30-50%, maybe more. They were astounded at this advice as they, like so many others, were of the opinion that you should get into the housing market as soon as possible as housing prices (they assumed) never fell. They argued that, if they wait, it will cost that much more to get into the market and they will have to save up a greater down payment. I asked them if "If you could reduce the cost of purchasing by 30-50%, isn't that a great down payment on your house? This generation is in the housing market drivers seat, and most don't even know it.
I am glad they took my advice, even though I wish I was wrong. The days of storing value in your home are gone for the foreseeable future. Housing, instead of being an investment, has been brought back to where it originated. It is simply shelter! If you or your children are going to invest in a house in the near future, then shop, shop, shop! shop for location (always the most important issue) shop for value, shop for price and shop for mortgage rates. Above all, don't expect any quick return. It may take 10 years to see stored value in any home bought this year.
Remember, "Look after the pennies, and the dollars will look after themselves"!
Actually, since I have done quite well over the past 12 months, I'm feeling pretty good. Maybe I'll go to the black jack table again and try my luck, or maybe roulette this time. No, craps, now that's the ticket.......or maybe......well.......if I took my winnings and put it in the bank for awhile........hmmmm decisions, decisions!
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