Many banks are insolvent, yet are allowed to stay in business. Being allowed to keep two sets of books is obscuring their real estate loan problems. This is the shadow inventory you sometimes hear about. Those millions of homes “that exist, but they don’t.†They presently admit to owning some 1 million homes they cannot sell, which is almost 25% higher than last year. If you put everything together you could be looking at an 8-year supply. Making matters worse lenders are holding homes on the books at values 40% higher than what they are worth. This is very similar to what is going on in Spain presently. We’ll say this one more time. Most major banks and some middle tier and small institutions are broke and you are being lied to regarding their condition.
Distressed home sales make up about 50% of all sales and they are sold at rock bottom prices, which drives down the value of all homes. This condition could last another ten years. In California and Nevada such sales are some 70% of sales. This inventory will continue to suppress prices for some time to come, so do not even think about buying a home. Those lower foreclosure figures are a mirage caused by legal action against lenders. Those foreclosure numbers will grow higher soon, because these criminals are cutting a deal to pay fines, so no one goes to jail. Only in America. That foreclosure activity could come back slowly due to major changes in the industry.
As foreclosures pick up following a deal with the government the shadow inventory will build, banks will sell more homes, prices will fall further, losses to the banks will grow and the banks inadequate loan loss reserves will become evident. Then there are the ongoing lawsuits against the banks and their creation known as MERS, which has no further legal standing. We could see millions of mortgages being cancelled that is unless the crooks in Congress pass a forgiveness bill to relieve the banks of their fraud. The bottom line is many more banks are going under and some will be major banks.
As we predicted in June of 2005 that the housing market would crash we also predicted a 10 to 40 year fall and consolidation in housing. Most people can reflect on these past six years, but cannot perceive the future for housing. Market activity has fallen by almost 1/3rd, as housing prices fell ever lower. Although we do not see an increase in official interest rates we can easily see mortgages at 5-5/8% by the end of the year and 6-1/2% at the end of 2012. Lenders are going to have to demand 10% to 20% down. That will not only further decrease sales volume, but it will further depress prices. These rates may seem high, but inflation will be between 14% and 30% over that 1-1/2 to 2 year span.
Since 2006 house prices are down 32% and over the next year they will probably fall close to 40% from their highs. The Fed may have temporarily saved banking and Wall Street, but little has been done to solve the unemployment problem. If you have no job you cannot buy a house, not with real unemployment at 22%. As a result new home sales fell 28% in February, as their inventories rose to 8.9-month’s sales. Our question is with such a tremendous home inventory overhang, why are builders building more homes, some 550,000 a year. They have to be dumber than rocks. Existing houses for sale rise every day plus there are more than a million in the foreclosure crisis. House prices still have to hit bottom and that is probably 30% lower and probably 3 years away. It is hard to get real estate going with unemployment at 20% and forced part-time employment at 10 million workers. Deceptive government statistics can only hold back reality for so long. People are finally seeing the t ruth of what unemployment and under-employment really are. Labor deterioration is accompanied by gas and food inflation. People at work paying steeply higher prices are in no position to buy a home. Feeding the family comes first. As a result of forced Fed policies we also have a falling dollar that increases prices for imported goods.
If all this wasn’t bad enough municipalities and states are in serious financial trouble. Their working force makes up 15% of overall employment and 70% of costs. That means to cut costs you lay people off first. That increases unemployment and disqualifies future homebuyers and puts more underwater homes into foreclosure, which compounds lenders’ losses. Do not underestimate these layoffs, because they will have a strong negative affect on the overall economy. This year was really the beginning of these municipal and state layoffs. Looming in the shadows is the possibility of hundreds of municipal bankruptcies; 35 states are in the same position with no end in sight. Very few people really understand how serious the overall situation really is. These events take a terrible toll on consumer confidence. These were supposed to be lifetime jobs. What happens when pension checks stop due to bankruptcy? That has to slow the economy. 90% of state and local costs are for edu cation. That means more layoffs and doubling class sizes to 40 children. Children are learning very little in school and their success is held down by the quality of students. It will be pandemonium with giant class sizes and many of the best teachers will resign.
The government supplies 35% of wages. Food stamps are helping to feed 44 million Americans. Government wants to cut Social Security, which people have paid into, but is erroneously allowing thousands in under disability. Medicare is a shamble, and Medicare is worse. In spite of the current problems 75% of Americans do not support cuts to Medicare and Social Security. In spite of that, if Wall Street and banking want less benefits, that is what Americans will get. America is accelerating to a welfare state.
Corporate America is in a dilemma. They are facing higher costs for petroleum products and food. This affects profits, if not passed on, business will eventually have to pass these costs on. In that environment there can be little hiring and little if any job growth. If they hold back price increases when increases do come they’ll be very large.
Each day statements from the Fed get more bizarre. One of the latest ones is the Fed has to be accommodative because the central bank remains blow its targets for inflation and employment. Inflation is somewhat high and employment is dreadful.
In the meantime China is sitting on more than $3 trillion in foreign exchange. Reserves have gained almost $600 billion over the past nine months or 28%. That trade surplus is now falling. The first quarter is a good example, up just under $200 billion versus year-on-year of $13 billion.
Everyone seems to think things are just great in China. That is not the case at all. China has done what most other countries have done and that is excessively expand its employment of money and credit. We have spoken of this before, but as usual few were listening. Most experts seem to be blind to the market distortions caused by the excessive creation of money and credit. Sometimes China’s actions make us think that perhaps they are taking orders from Washington. Be as it may, if they are not, they have sure chosen the wrong model.
As a result China’s inflated growth was 9.7% in the first quarter. March exports rose almost 36% yoy, as imports grew 27.3%. Retail sales were up more than 17%. Residential real estate prices rose 26% yoy, as new home construction rose 20%. We hardly call this restraint, as March credit rose 16%. M2 rose 16.6%. Loans last year rose 140%. As a result food costs rose almost 12%. Inflation varies from province to province. In some it is officially 5% in others 15%, when in reality it is from 10% to 35%. This unrestrained monetary and fiscal policy is very in tune with what is being done in Washington, London and in parts of the EU. This has all been created to create faux prosperity. It shouldn’t be surprising that the Chinese are buying gold and silver in copious amounts, not only to dump dollars, but also to lighten up on their own domestic currency holdings. That is a double effect no one seems to talk about. What else would one expect when official inflation is 9% an d real inflation is double that. As long as this continues gold and silver purchases will boom, especially when government encourages their purchase. What China is experiencing now is that no matter how much they tighten it doesn’t do any good. China has run away inflation As inflation grows the purchase of commodities will grow as it has in the past, as China lends its $3 trillion getting little in return. The bottom line is that China as well as the US is at the heart of global hot money flows. We wonder how long it will be before China and other BRIC nations, which include Brazil, India, Russia and India, decide to finally pull the plug on the US dollar? Dollar reserves continue to fall as part of the foreign exchange holdings of all nations.
China like the US and a number of other nations are in a box and they can’t get out. On the other side if they shut off money and credit expansion they’ll lose control and have 30 million unemployed at their throats. Eventual destabilization has to become reality. China cannot handle that inflow of dollars and other currencies. Internally they also have wage inflation as well as price inflation, a very nasty, uncontrollable combination. As an aside, China may produce $200 billion to buy Japanese bonds to help Japan fund the reconstruction caused by their earthquakes. The wage price spiral lives in China and it is worsening. In varying degrees inflation is being exported worldwide by not only the US, but by China and many other nations. There is a distinct upward bias in inflation worldwide and it is gaining momentum. The era of cheap labor is behind us as inflation infects all economies. In the US March import prices rose almost 10% yoy with the producer price index u p almost 6%. Those numbers are growing monthly. The big question for inflation and corporate profits is will the cost increases be absorbed to keep their client base or will it in part or totally be passed on to the purchaser? Probably a combination of both, which means falling corporate profits worldwide. We believe the issuance of money and credit will increase to keep the world economy from collapsing and inflation will continue to grow, eventually ending in hyperinflation a few years hence. It is the only game governments know and you can be assured they play it again, as they have in the past. There is nothing transitory about what is going on inflation-wise, and policy makers all know this. All they are doing is kicking the can down the road to buy time, hoping hope against hope, somehow there will be a miracle. The only solution they have, like their predecessors, is to have another war. A 50% reduction in world population would suit them just fine. What we are seeing has been in the works for years by our master planners, who create these situations to maintain control. A combination of falling currencies versus gold and silver for the last 11 years by more than 20% should be a lesson for those who want to safely invest their wealth. As we have said for many years investing in gold and silver shares, coins and bullion is a lock. An un-losable bet that has been a reality for 11 years. Soon China and other dollar holders will almost totally back away from the US debt market, and that is already in process. The Fed is currently buying 83% of Treasury and Agency debt. How can anything be more inflationary? This process can continue for the next several years and those who believe they are smarter than everybody else will find out they are not. We are breathing down their necks via talk radio, the Internet and by purchasing gold and silver related assets. The closer we get the more mistakes they’ll make and the easier they will be to defe at. This is one game we are going to win and the elitists already know that.
At the moment foreigners and others are buying about 17% of Treasury and Agency bonds. The privately owned Federal Reserve is purchasing the remainder. That means billions of dollars are being created out of thin air daily. Although part of the inflation created by such moves is exported to foreign countries, much of that inflation is being distributed across the US economy. This massive monetization of dollars in turn puts ever-greater downward pressure on the dollar. Even America’s private sector, which for some time picked up some 30% of these bills, notes and bonds, has allowed their purchases to slow to a trickle. These actions, which the Fed was forced to embark upon 2-1/2 years ago, are still in force and once begun will be impossible to stop. There simply are no buyers unless fiscal costs are cut, taxes are raised and interest rates move higher. Who wants to buy a 10-year T-note yielding 3.50% when real inflation is 8.5%? That is a guaranteed loss of 5%, plus any fall in the value of the dollar. This dilemma has been obvious to bond buyer PIMCO, which no longer owns Treasury or Agency bonds.
Since August 15, 1971 the dollar has lost 98% of its purchasing power and now in each family there has to be two breadwinners, because one no longer suffices. Over those almost 40 years bondholders have been losers, which proves the point that without gold backing a world reserve currency cannot work. As a result sovereign nations are buying gold. China and Russia buy domestically produced gold as well as being buyers in the marketplace. A number of other nations have been buyers. Argentina, Mexico, Brazil, Iran, India and a host of smaller countries. China has been aggressively trying to get their citizens to buy gold and silver and it has worked in a big way. The population is not only dumping dollars, but due to high local inflation they are dumping their own domestic currency as well, something the government did not anticipate. China wants the yuan to be the next world’s reserve currency and they know the only way that can happen is to have gold backing. Whatever is chosen to be the world reserve currency it is obvious that it will have to be gold backed. China in anticipation wants to settle foreign transactions with the yuan not the US dollar by the end of the year. As China accumulates gold the US Treasury and the Fed will do everything possible to manipulate gold, silver and share prices lower. In that process the dollar slides lower versus other major currencies and gold and silver.
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