Tag Archives: mortgage bubble

What Will Catch The Falling Housing Market Knife This Time?

“There’s so much inventory, and that influx is hitting across all price points, even studios.” – director of leasing at Douglas Elliman (NYC). NYC was one of the first markets hit hard in 2007-2008.

For awhile, any weakness in the NYC housing market was attributed exclusively to the high end. I am on record stating that price dynamic would spread to all price segments. It’s not rocket-science, it’s simple supply/demand/price economics. Studio rents in NYC dropped the most on record in February. This same dynamic is also beginning to happen in many of the other hottest cities across the country. To compound the spreading price weakness in the rental market, a record number of new units will hit the markets coast to coast over the next two years. It would be a mistake to assume that price weakness in the apartment market will not affect the home rental market. Again, the laws of supply, demand, price, income and substitution will once again invade the entire housing market and take sales volume and prices lower.

Eventually the housing market implosion that occurred in 2008 will repeat, only this time it will likely be worse. Why? Because the institutional money that soaked up most of the foreclosed inventory are either fully invested in the asset class or outright selling down their buy-to-rent portfolios. Where will the money come from to catch the falling housing knife again?

Interest rates were dropped from 5% in 2008 to zero percent. This created a reservoir of cheap capital with which to fund new homebuyers with marginal credit. The cheap money and reduced requirements to qualify for a Government-backed mortgage (FHA, FNM, FRE) transformed a subprime borrower in 2008 into a prime/conventional buyer by 2015. While it may not look exactly like the junk mortgages issued by the likes of Countrywide et al during the big housing bubble, most of the low-to-no-to-borrowed down payment agency mortgages issued to the average homebuyer look quite similar in terms of absolute debt to income and income to monthly payment ratios. Just like more than 50% of American households are unable to write a $500 emergency payment check, many of the new homeowners in the last 2-3 years are living on the edge of defaulting on either their car payment, their mortgage payment or both.

A fairly large proportion of the home “buyers” over the last couple of years have been mom and pop speculators looking to “get in” on flipping or buying and renting. A large percentage of that cohort has been using debt to finance their flips/investments. When the music stops, many of these buyers will be left without a buyer or renter. Again, this is similar to the dynamic that unfolded in the housing market leading up to the 2008 collapse.

The above analysis is an excerpt from the latest Short Seller’s Journal, released earlier today.  There’s a lot more information and analysis, most of it not found in your primary alternative media websites or in the mainstream media.  The issue also has two primary short ideas and a couple other ongoing short trades highlighted plus ideas for using options.  SSJ is a weekly, email-delivery based subscription service.  Subscribers also have the option of subscribing to the Mining Stock Journal for half-price.  To learn more, click here:   Short Seller’s Journal

The Apartment Glut Cometh – Adios Housing Market

Driving by the west-side border of downtown Denver (on I-25), I can count 9 cranes in air plus one semi-finished high-rise building.  What’s amusing about this is that there’s already an oversupply of rental apartments and condos as the 1-2 month free + free parking incentives reflect.   What will happen when all these new projects hit the market?

This is not unique to Denver.   I witnessed it first-hand in New York City over the holidays. Douglas Elliman, the high profile NYC real estate brokerage, issued a report which showed that NYC real estate prices plunged in Q4, with the median sales price dropping nearly 9% from Q3. Days on the market increased 14.6% and the number of sales dropped 3.7% I can recall from the demise of the big housing bubble that the impending housing bust started first in NYC.  I remember walking around NYC in late 2006 and seeing several apartment complexes under construction on which work had been abandoned. I would
suggest that the current bubble is already popping in several bubble areas per this canceled contract data: LINK.  I also am confident that the weakness that is developing in NYC will soon spread to the rest of the country.  – from the  Jan 15th Short Seller’s Journal

Miami was the leading indicator of the demise of the mid-2000’s housing bubble.  An apartment glut quickly appeared as speculators took almost free money and put deposits on apartments being built by reckless builders.  Builders always get reckless when other people’s money is cheap. Greenspan and Bernanke made sure there was plenty of cheap capital for developers.   Wolf Richter details the current apartment market implosion occurring in Miami – LINK – and coming to city near you soon.

Ditto for San Francisco/Bay Area, which was right behind Miami during the big housing bubble and is concomitantly blowing up with Miami.  The SF/Bay Area market was driven by big foreign money laundering and a massive private equity tech bubble in Palo Alto. The foreign money has dried up and the PE tech bubble is fading quickly.  It’s like the cheap money rug has been pulled out from under reckless speculators and developers.  Mark Hanson describes the situation here:  Adios SF Housing Market.

Even some of the industry associations are starting to report the truth -something we’ll NEVER get from the National Association of Realtors, as the National Multifamily Housing Council reported a week ago that, “weaker conditions are evident across all sectors of the apartment industry.”  Its sales volume index dropped for the second quarter in a row.

At the same time that a glut in apartment/condo buildings is appearing everywhere, the luxury high-end market is falling apart as well, the latter of which was also a leading feature of the demise of the big housing bubble. Douglas Elliman reported recently, “that prices in the Hamptons real estate market dropped nearly 30% in Q4, with sales volume down 14.5% But in the luxury end of the market – homes with an average price of $7 million – prices were down 42.6% in Q4. This is an all-out crash in housing in one of the most high-end areas of the country. This is exactly what began occurring in 2006/2007 in the Hamptons.

CNBC reported last week that “luxury home sales continued to slump in Q4.” It cited the
Hamptons but also Aspen and Beverly Hills. I reported in SSJ a few months ago that Aspen
was starting to go into a price freefall. Prices and volume started collapsing in the summer.
Apparently in Q4 sales volume fell another 25% and prices were down another 11%. Beverly Hills sales volume plummeted 33%, though prices were flat. Again, the affects of the bursting big mid-2000’s real estate bubble was first felt in these same markets.

Record low mortgage rates combined with the U.S. Government’s providing the easiest, most accessible borrowing terms and credit standards in the GSE program history has enabled the greatest misallocation of financial resources in history.  It’s been manifest in every asset class but is particularly prevalent in stocks and the housing market.  While it may be somewhat easy to unload stocks when they are dropping out of the sky, housing is a different matter.  It’s easy to sell a home when the buying frenzy is rampant.  But as the market begins to head south, the entire real estate becomes “offered with no bid,” meaning that everyone stuck with an “investment” is looking to dump and buyers scatter like cockroaches when the kitchen light is switched on.

The home construction market is over-ripe with short opportunities.  I have been focusing on the sector (plus retail and autos) in the Short Seller’s Journal.  Since August,  shorting the retailers has been a lay-up.

In the SSJ, I present in detail the ways in which the industry associations, Wall Street – with the help of mainstream media cheerleading – distort the facts about the housing and auto markets.    As the reality of what I described above sinks in to the market, the price path of least resistance for home builders, home construction suppliers and auto-related equities will be down.   The same is true for the companies that provide financing to these industries.

In every issue of the Short Seller’s Journal I provide what I believe somewhat unique market analysis and commentary along with dependable research sources to back-up my assertions.  I also typically provide at least 2 or 3 short ideas, accompanied by suggestions for using options (although I first and foremost recommend shorting stocks outright).  I also disclose when I’m trading an idea presented, including which options contract if applicable.   You can subscribe to the weekly newsletter with this link:  Short Seller’s Journal

You certainly do provide research and with that, Value. But also… YOU actually are there responding to emails which says a TON about you, your commitment to your products, company, and us….the subscribers. For that, I thank you.  – Subscriber, Larry

 

The Air Is Releasing From The Hope Bubble

The post-election run-up in stocks was fueled purely by “hope and change” energy.  Now that Trump has assumed the mantle, reality will hit like an icy shower.  The non-“alternative facts” about the economy continue to show contraction in real economic activity.   The retail sales report for December was an utter disaster, especially if you strip out gasoline and autos.

The price of gasoline rose in December, which raised the nominal level of gasoline sales but inflation-adjusted is another matter.  With autos, as it turns out based on measurable dealer inventories, a large portion of the auto “sales” were deliveries to dealers financed by “floor financing programs” and not actual sales to end-users.

I found a curious chart and commentary in today’s “Daily Shot.”  I love this report because the author wears rose-colored glasses and puts a positive spin on any and all U.S. data.  Today he had this graph:

This was presented as a positive. But let’s review the facts. It took $4 trillion in money printing – over $2 trillion of which went directly into the mortgage market – a few trillion in Government subsidies to the housing market including the bail-out of Fannie Mae and Freddie Mac, the artificial imposition of record low interest rates and the re-stimulation of the subprime mortgage market in the form of Government-backed FHA and VHA mortgages in order to move the single-family home turnover rate back up to the “long run average.” Think about that for a moment:  it took several trillion dollars of direct housing market stimulus to move the needle on the home turnover rate up just a couple percentage points to its “long run average.”

But what happens now?  Now that interest rates are rising, the printed money has worked its way through the system and mortgage default, delinquency and foreclosure rates are beginning rise again, what will happen to the line on that graph?  Of course, it will head south – quickly and likely below the low it hit in 2010 –  unless the Fed re-ups its money printing and the Government throws even more subsidies behind housing.  But all that is going to do is put people into homes who otherwise can’t afford them.

The Philly Fed business outlook index hit a 2-year high, however, the prices paid sub-index drove a large part of this at it soared to its highest level since Feb 2012. In addition, the “expectations” for prices received dropped. This would imply that gross and profit margins are expected to drop. In addition, the average workweek sub-index dropped.

Now, there’s two big caveats with this reports, and of course the mainstream media and even ZH did not bother to peruse the entire report from the Philly Fed website but SSJ did bother. First, the survey used to construct the index measures primarily future expectations. There’s clearly a high degree of “hope” associated with the Trump stock market rally. I expect a big reversal of this sentiment over the next three months. Second, the Philly Fed incorporated “new seasonal adjustment factors” into the report. This was disclosed in the actual report for January. As with all seasonal adjustment calculations, the Philly Fed does not disclose its methodology for calculating the adjustments but they are likely designed to overestimate seasonal factors and therefore overestimate the index level calculations. – From the latest Short Seller’s Journal

In the latest Short Seller’s Journal, I take apart the latest economic hopium-infused economic reports and provide several short-sell ideas to take advantage of facts, which will eventually emerge and take stocks lower.  The “air” leaking out of the Trump bubble and it will translate into many profit-making trades in the stock market from shorting stocks or buying puts.  The SSJ is a weekly report dedicated to helping subscribers make money on the historically overvalued stock market.  You can subscribe using this link:  Short Seller’s Journal.  It’s monthly with no minimum time commitment.

Dave Kranzler provides excellent and indepth research in making his case to go long or short with options to play if you choose.  I look forward to getting his mining journal and short sellers journal in my inbox which include new ideas as well as updates on
previous ideas as market conditions change. I agree with his overall outlook on the market as my gut tells me something is wrong and since I’m not a market analyst I rely on Dave’s
experience to help me decipher what is really happening though his journals as well as his articles and interviews which are easily found on youtube. Thanks Dave for all you do and the personal attention and dedication to your subscribers.  – subscriber “Keith”

 

Jim Cramer’s Christmas Gift To Short-Sellers

Wall Street’s best contrarian indicator has spoken. Jim Cramer issued a strong buy on the Dow last Wednesday. He references the “generals” that are “leading the charge” higher in the stock market.   He sees no end in sight to current move in market leaders. Those will prove, once again for Cramer, famous last words.   It will be more like Custard making his last stand.

Perhaps the most amusing section of his maniacal diatribe was his assertion that Goldman Sachs (GS) and JP Morgan (JPM) are “cheap” because of Trump. A colleague and I were, serendipitously discussing GS as a great short idea last week. Cramer is a bona fide lunatic who must relish the thought of leading the retail stock lemmings to slaughter. The financials have gone parabolic since the election and now the hedge funds who whisper sweet nothings into Cramer’s ear need an exit.   Please don’t give up your chair to the sound of CNBC’s Pied Piper.

The puts on JPM and GS are loaded with premium. I don’t want to recommend any specific put ideas.   If you have an interest in shorting shares, GS and JPM are among the best shorts in the Dow right now.

That was an excerpt from the latest issue of the Short Seller’s Journal.   Shorts are working again.   Four of the five short ideas in last week’s SSJ were down for the week (one was unchanged) – one retail idea was down 13.6% and the puts recommended were up 400%.  In fact, most of the short ideas since early August have been working, some better than others, with one them down nearly 40% since early August.

Beneath the facade of the Dow and the SPX, many stocks and sectors are down for year. For instance, the DJ Home Construction index is down 11.1% from its 52-week high early this year.  It’s 52% below its all-time high in July 2005.  The current SSJ presents an home construction-related stock that is technically and fundamentally set-up to fall off a cliff.  I also presented my for favorite homebuilder shorts along with put option ideas.

The SSJ is a weekly subscription-based newsletter.  It’s billed on monthly recurring basis with no required minimum subscription period.  Each issue is delivered to your email in-box and has at least 2 or 3 short ideas plus put option ideas.   New subscribers will receive a handful of the most recent issues plus a complimentary copy of the Mining Stock Journal.  SSJ subscribers can subscribe to the MSJ for half-price.  You can get more information and a subscription here:  Short Seller’s Journal subscription link.

A Bearish Signal From Housing Stocks

The yield on the 10-yr Treasury has blown out 109 basis points since July 3rd – 70 basis points since October 30th.   30yr fixed rate mortgage rates for 20% down payment buyers with a credit score of at least 720 are up 90 basis points since October 1st.

Interestingly, the Dow Jones Home Construction index has diverged from the S&P 500. While the DJUSHB index is up since election night, it has been lagging the S&P 500 since the beginning of the year:

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The graph above is a 1yr daily which compares the ROR on the SPX with that of the DJ Home Construction Index.  I use the DJUSHB because it has the heaviest weighting in homebuilders of any of the real estate indices. As you can see, the DJUSHB has been in a downtrend since late August, almost as if stock investors were anticipating the big spike in interest rates that started about 6 weeks later. You can see that, while the volume in the DJUSHB spiked on December 5th, it’s been declining steadily since then. The SPX volume spiked up on December 5th and has maintained roughly the same daily level since then. Note: volume often precedes price direction.

Here’s another interesting graphic sourced from the Mortgage Bankers Association:

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The data is through December 2nd, as mortgage application data lags by a week.  As you can see, mortgage application volume – both refinance and purchase – has been negative to highly negative in 9 of the last 12 weeks.

A report by Corelogic was released today that asserted that foreclosures had fallen to “bubble-era” lows.  This is not unexpected.  Historically low rates have enabled a lot mortgagees who were in trouble to defer their problems by refinancing.  Unfortunately, the Marketwatch author of the article did not do thorough research – also not unexpected.

As it turns out, mortgage delinquency rates are quickly rising:

Black Knight Financial Services, which provides data and analytics to the mortgage industry, released its Mortgage Monitor report for October. It reported that the 30+ day delinquency rate had risen “unexpectedly” by nearly 2%. The overall national delinquency rate is now up to 4.35%. It also reported a quarterly decline in purchase mortgage lending. The highest degree of slowing is among borrowers with 740+ credit scores. The 740+ segment has accounted for 2/3’s of all of the purchase volume – Short Seller’s Journal – December 11, 2016

Even more interesting, it was reported by RealtyTrac last week that home foreclosures in the U.S. increased 27% in October from September. It was the largest month to month percentage increase in foreclosures since August 2007. Foreclosures in Colorado soared
64%, which partially explains the rising inventory I’m seeing (with my own eyes). Foreclosure starts were up 25% from September, the biggest monthly increase since December 2008.

Finally, again just like the mid-2000’s housing bubble, NYC is showing definitive signs that its housing market is crumbling very quickly. Landlord rent concessions soared 24% in October, more than double the 10.4% concession rate in October 2015. Typical concessions include one free month or payment of broker fees at lease signing. Days to lease an apartment on average increased 15% over 2015 in October to 46 days. And inventory listings are up 23% year over year. Note: in the big housing bubble, NYC was one of the first markets to pop.  Short Seller’s Journal – November 13, 2016

Finally, I saw an idiotic article in some rag called “The Sovereign Daily Investor”   that was promoting the notion that another big boom in housing was about to occur because of a surge in buying by millennials.   Unfortunately, the dope who wrote this article forgot to find data that would verify proof of concept.  On the other hand, here’s actual data that applies heavily to the millennial demographic:

The Fed reported on Wednesday that household debt had hit a near-record $12.35 trillion led by new all-time highs in student loan debt ($1.28 trillion) and a new all-time high in auto loans ($1.14 trillion). 11% of aggregate student loan debt was 90+ days delinquent or in default at the end of Q3 2016. Fitch has projected that it expects the subprime auto loan default rate to hit 10% by the end of the year. At the time of the report, it was at 9%.  – Short Seller’s Journal – December 4, 2016.

The point here is that the millennial demographic is overburdened with student loan, auto loan and personal loan debt.  In addition, it’s becoming increasingly hard to find post-college full-time employment that pays enough to support the cost of home ownership, especially with the mortgage payments associated with a 3% down payment mortgage.   This is the dynamic that has fueled the rental market boom (and soon the rental housing bust).

Speaking of which, Blackstone, the largest player in the buy-to-rent game, quietly filed an IPO of its housing rental portfolio about a week ago.  If Blackstone thought there was more value to be squeezed out of its portfolio – i.e. that housing prices and rents had more upside – it would have waited longer to file.  I’m sure that Blackstone would love to get this IPO priced and its equity stake in this business unloaded on to the public before the market cracks.

The housing market data tends to be lagged and extremely massaged by the most widely followed housing data reporters – National Association of Realtors and the Government’s Census Bureau (existing and new home sales reports).  The reports from these two sources are highly unstable, subject to big revisions that go unnoticed and entirely unreliable.   But the fundamental statistics cited above will soon be filtering through the earnings reports of the companies in the DJ Home Construction Index.  I would suggest that the market has already sniffed this out, which explains why the DJUSHB is diverging from the S&P 500 negatively in both direction and volume.

The Short Seller’s Journal is a subscription-based, weekly publication.  I present in-depth detailed data, analysis and insight that is not presented by the mainstream financial media and often not found on alternative media websites.  I also present short-sell ideas, including recommendations for using options.   Despite the run-up in the broad market indices, there’s stocks everyday that blow-up.  Last Restoration Hardware plunged 18% after reporting its earnings.   You can subscribe to the Short Seller’s Journal by clicking on this link:  SSJ Subscription.   It’s monthly recurring and there is not a minimum number of months required.

Guest Appearance On Crush The Street: Central Banks Are Losing Control

Kenneth Ameduri invited me on to his Crush The Street podcast show last week.  We chatted about gold & silver, the FOMC and interest rates, the US Dollar vs the Japanese Yen, emerging markets (investing in Russia), and the reasons now is a great time to buy mining stocks.

That’s really what I think the game is that is going on: it’s to keep the share prices going up so that insiders can bail.

You can access Kenneth’s website here: Crush The Street.

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John Embry: The Next Big Financial Collapse Can Happen At Any Time

Every day that life goes by and there’s no disruption I consider that a bonus. – John Embry

We are currently sitting on the edge on another housing and commercial real estate market disaster. The financial system was never “fixed” or “reformed.” The banking sins which led up to the big housing bubble crash were merely erased with taxpayer funds and printed money. The laws passed were not designed to protect us from them but to better protect their ability to hide the continuation of the fraudulent banking activities that serve to transfer wealth from the general public to the elitists.

The Fed and U.S. Government have successfully succeeded in reflating the housing bubble. Housing prices have been fueled by low to no down payment Government sponsored mortgages and by the Fed’s near-zero interest rate policy. Go ahead raise rates, Janet, let’s see how quickly you explode the current housing bubble your people have blown.

The financial media heralded the announcement of Wells Fargo’s 3% down payment mortgage program like it was a new way to split to the atom. Lost in the hoopla was the fact that Wells Fargo’s program is just now catching up to the times. Fannie and Freddie have been sponsoring 3% down payment mortgages since early 2015. The Government agencies also signficantly reduced the required monthly “insurance” payment on low down payment mortgages. Same with the FHA, which has been doing 3.5% down mortgages since 2008. Th Government has become the new version of Angelo Mozilo’s Countrywide Mortgage company.

It’s nothing more than a reconfiguration of the exact same types of mortgages and the associated derivatives that took down the financial system in 2008. The “use your house as an ATM” programs have been reinstated. Need to pay for your wife’s full body plastic surgery makeover? Do a “cash out” refi and pay for that plus redo your kitchen and finish out your basesment. Leverage that “home equity” to the max.

After our conversation with John Embry about the silver market, the discussion wandered into the housing and mortgage market on an ad lib basis. Below is the Shadow of Truth’s bonus footage with John Embry about the forthcoming systemic debt collapse led by mortgage and auto leverage.

Billions Are Being Transferred From The Taxpayers To Wall Street

I stated in 2003 that the insider elitists would hold up the system with printed money  long enough to wipe every last crumb of middle class wealth off the “table” and into their pockets.  If you don’t have enough cash laying around to buy your own Federal-level “elected” official, you are middle class.

It’s easy for Wall Street to get their share of the crumbs being swept off the table because it’s managed to infiltrate and control every nook and cranny of Capitol Hill.  Hillary Clinton is a Democrat? Really?  Then how come she and Bill greedily take millions from Goldman Sachs alone in “speaking” fees.  Quite frankly, ex-Presidents OR potential Presidential candidates should be barred from accepting paid appearances from any corporate or corporate-sponsored entity, but especially from Wall Street.

I want to call your attention to an investigative article by Wall Street On Parade titled “The U.S. Government [really, The Taxpayer] Is Quietly Paying Billions To Wall St. Banks.”   In the past for years, 2011 – 2015, Freddie Mac alone paid out nearly $12 billion in derivatives counter-party payouts.   These payouts resulted from losses interest rate swaps, 90% of which are owned by Wall Street banks. That money from Freddie Mac is actually Taxpayer money because the Government still owns FRE and FNM.  LINK

But it’s even more profound than the WSOP lays out.

Interest rates are held artificially low by the Fed/Treasury, which enable FNM/FRE to underwrite mortgages for people who otherwise would not be able to afford the mortgage. The Too Big To Fail banks make money off of this is several ways.  They source the mortgages and take a fee, they flip the mortgage to FNM/FRE and take a fee, they securitize the FNM/FRE mortgages and sell the mortgage pools to institutional investors and take a  fee and they sell interest rate swaps to FNM/FRE and take a fee.  When interest rates don’t go up because the Fed is holding them down, FNM/FRE lose money on the swaps and…Wall Street gets the money from the loss.

A close friend of mine was curious about how the housing market might play out, because – after I described what’s happening and why the mid-price homes in Denver are hot right now (while the over $800k housing inventory piles up like trash at the local dump) – I explained that the same mortgage bubble that fueled the big housing bubble has been reinflated.  The only difference is that FNM/FRE are now the underwriters of sub-prime mortgages that are disguised to look like conventional mortgages.  But they’re far from “conventional.”  If someone puts down 3% – or, more likely borrows the 3% – they are underwater on the value of their home after all closing costs are factored in.  These de facto LTV mortgages well in excess of 100%.   That’s what Countrywide and Wash Mutual were underwriting, only this time it’s well-disguised and backed by YOU, the Taxpayer.

The same dynamic has already occurred with auto loans and student debt.  Auto loans are starting to blow up, as are student loans.  These 3% (FHA) and 3.5% (FNM/FRE) and 0% (USDA and VHA) down payment mortgages are next.   We’re already seeing this occur in energy-heavy areas like Houston.   What’s going to happen to the Central States Teamster pension beneficiaries who need their pension payout to make a mortgage payment after their payout is cut 60%?  That’s close to half a million people, many of whom use that payout to fund monthly mortgage payments.

There’s another gigantic bail-out coming.  And Wall Street will get to keep all the $10’s of billions in Taxpayer money that was funneled to it while it was underwriting the current housing, auto sales and student loan bubble.

My friend then asked me what I thought be would be the event that collapses the U.S. house of cards.   The fact is, no one knows but it will likely be derivatives-related just like in 2008.   No one saw the de facto AIG/Goldman collapse.  Note:  the Martins reference AIG blowing up but Goldman Sachs blew up too.  The only difference between AIG and Goldman was that Henry Paulson, ex-Goldman CEO who was Treasury Secretary, was in a position to direct Taxpayer money toward a bail-out Goldman, while AIG and Lehman were left for dead.  Note also:  AIG was taken over by the Government because it enabled the Government to “dis-arm” – with the help of the Fed – all of the derivative bombs that would have completely incinerated Goldman Sachs.

The only way to protect yourself from what’s coming is to get your money out of the banking system.  The Fed’s inexorable suppression of the price of gold/silver is openly giving everyone a chance to convert as much paper monopoly money as possible into physical gold and silver at artificially low prices.

A Mining Stock Journal subscriber told me over the weekend that he was contemplating a 100% cash-out refi on on his house, which has a lot of equity in it, and buying gold and silver.  He asked me if I thought it was a good idea.  I said that as long as he was okay sending the keys to the bank and walking away when this thing blows – because I know of a lot of people who are going to do just that – that he would be an idiot if he didn’t do it.

This is exactly what Wall Street is doing with the Government’s blessing.   If you can’t beat ’em, join ’em…

The Federal Reserve’s Salvation Army School Of Economics

When gold finally breaks out of the Banks’ grip you won’t be able to chart its moves fast enough. It is being smothered by a blanket of undeliverable derivatives, and the realization and reckoning of this overhang will be nothing short of spectacular, a sort of 2008 in reverse.  -“Jesse” of Jesse’s Cafe Americain in an email exchange

I wasn’t going to write a general New Year’s post but Bill “Midas” Murphy emailed me wondering why I was quiet.  The truth is I was spending this morning hunting down a new pair of tennis shoes because New Balance redesigned the model I’ve been using for the past three years and it no longer works for me.  It’s very distressing.

I’m not getting excited about the metals until gold really starts to move – as in shoots up into the mid-1000’s.  China/India/Russia combined imported over 3,000 tonnes in 2015.  Global production was likely around 2400-2500 tonnes. How are the sellers of this gold making deliveries?  Hemingway said that you broke slowly then suddenly.  The same dynamic will apply to the initial spike up in gold. Gold is being inexorably held down by fraudulent paper derivatives.

I believe the inability of the banks to fulfill the $800 gold prophecies of Wall Street and newsletter charlatans is because the elitists are slowly losing control of their ability to cap gold with paper. I also am confident that we will wake up one day this year and discover that the price of gold has suddenly spiked up a lot higher.  Slowly, then suddenly.  People not on that ride will be left in bewilderment, wondering “what happened?”

I don’t see how the global financial system will get even halfway through 2016 without a major destructive earthquake.  Oil alone has to be causing derivatives problems that, for now, are being contained and hidden from sight.

I assume you saw the big drop in auto sales for December yesterday.  The number was way below Wall St. estimates.  Wall St estimates in general are substantially above where economic data will start coming in this year, telling us that expectations “baked into the cake” are way too high.

Housing is going to follow auto sales down the rabbit hole to hell.  Over the last three years the banks have been stuffing middle America with subprime quality mortgage, auto and student loan debt. The mortgage products used to inflate the primary housing bubble have been reconstituted, repackaged, re-branded and re-stuffed into a large body of homebuyers who will not be able to afford them before long.

In fact, a significant portion of the mortgage market that was filled by Countrywide and Wash Mutual back in the primary housing bubble is now being filled by Fannie Mae, Freddie Mac and the FHA – i.e. the Taxpayer – with their 0-3% down payment mortgages being made available to people with sub-600 credit scores and, in many cases, to people with no credit scores or income accountability.  Old wine, new bottle. At some point the space into which this junk can be stuffed runs out.  It has likely already run out.

I’ve asserted since 2003 – when I started to get my mind around what was happening in this country to our financial, economic and political system – that eventually the U.S. would incite a world war.  One of the primary motivations would be to cover up what the Fed/Govt has done not only with the U.S. gold, but also with the foreign custodial gold.  Let’s face it, the ONLY reason the Fed did not honor Germany’s repatriation request is because the Fed did not have the gold in its possession to send it back.  What’s so hard to figure out about that?  At some point I expect to see the NATO bond fractured. When that happens and Germany splits from U.S. and gravitates toward Russia, it will demand the return of its gold. What then? That is how wars start.

Perhaps the greatest show on earth is watching these buffoons that society has labelled “Federal Reserve Officials” attempt to make a mockery of our collective intelligence threatening us with higher interest rates and extolling the virtues of the economic recovery.   What recovery?  Every single non-Government economic report is showing that economic activity has dropped down to or below the level of economic activity that was occurring during the 2008-2009 time period.  Some metrics are worse.

How about the Baltic Dry Index?   It’s at an all-time low.  Everyone wants to blame that on China.  But guess what?  Europe and the U.S. are China’s #1 and #2 export destinations.  The only reason the Baltic Dry Index has plunged like this is because import orders from the EU and the U.S. have plunged.  Put the BDI in the context of the collapsing price of oil, and it represents two primary metrics of global economic activity, the U.S. economy being the 2nd largest economic engine of the world.  Fed Reserve official John Williams looks like an absolute idiot when he asserts that the U.S. economy is “in very good shape.”  Where do they get these people – The Salvation Army School of Economics?

It’s hard to not get really depressed when you see and understand the truth.  And the problem is, once you see the truth, you can’t un-see it.  My resolve is to have as much fun as I can, while I can.  This gigantic Ponzi-bubble otherwise known as the United States could pop at any time and there will be nothing to prevent that inevitability. Then it will be impossible to have any fun.

“The Big Short:” 2008 Repackaged Into 2016

History, with all her volumes vast, hath but one page.  – Lord Byron

“The Big Short” is a must-see movie.  Adapted from the Michael Lewis’ non-fiction book, “The Big Short: Inside the Doomsday Machine,” it brings to life Walls Street’s fraud-infused world of credit default swaps (CDS) and collateralized debt obligations (CDOs, which were at the center of the collapse of the housing market and the financial system in 2008.

Now that Ben Bernanke has “successfully” saved our system from its demise (sarcasm intended), it’s easy to bury the past and disremember the degree of fraudulence and criminality that had engulfed mortgage and housing markets.   It still blows my mind and angers me to think that people like Angelo Mozilo not only never went to jail, but they were never properly investigated for their role in fomenting the biggest fraud – up to that point in time – in history.

The movie brought back a lot memories for me.  I used to pour through the financials and the footnotes to the financials of several of the mortgage companies and banks that underwrote the bulk of the fraudulent mortgage securities.  I had concluded that all of the big banks plus Countrywide, if forced to mark their mortgage holdings to market or sell them at market, were technically insolvent.   They were all sitting on the ticking time bombs of home equity loans, CDO inventories and the wrong side of credit default swaps (in the movie we meet the people who bet against the mortgage and housing markets by taking the other side of the credit default swaps sold to them by Wall Street).

I remember sending my analysis of JP Morgan, Bank of America and Washington Mutual to several business publication editors and journalists, including Al Lewis (one-time editor of the Denver Post business section,  nationally syndicated journalist and multiple appearances on cable financial news networks), the Wall Street Journal, Bloomberg News and many other publications.  My work, which proved to be correct, was completely ignored.

Ironically, the big housing bubble was not the first appearance of massive mortgage fraud in this country.   When I was a junk bond trader in the 1990’s, there was a mortgage company called Cityscape.   The company had a 12 3/4% coupon junk bond outstanding and I just so happened to be the housing sector trader.   I started examining Cityscape’s financials and business model when the bonds began trading at a discount to par (it’s usually a sign something is wrong when a high coupon, senior secured bond begins to trade at a  high double-digit yield to maturity).    I remember uncovering the same type of fraud with Cityscape that became accepted standard business practice with Countrywide, Wash Mutual, Merrill, Lehman, etc.

Unfortunately, underpinning what has been craftily marketed to the public as a housing “recovery” is nothing more than an “echo” housing bubble inflated by an “echo” mortgage bubble.  The blatant disregard for the assessment of credit worthiness, and the financial fraud embedded in the mortgage underwriting process, that occurred during the big bubble years was never fully cleaned up – it was merely covered up.

The term “subprime” has been erased from the mortgage credit assessment lexicon and, instead, replaced with terms like “3% down payment borrower.”  The U.S. Government, via Fannie Mae, Freddie Mac and the FHA is now guaranteeing mortgages with effective negative equity in them at closing.  Buyers can use borrowed cash and/or seller non-cash “give-backs” in lieu of a bona fide down payment.  There are now private funds which underwrite even riskier mortgages, which now include interest-only and adjustable rate options.

Just like the first time around, many of these mortgages end up in “collateralized” investment trusts.  Now they are called “bespoke opportunity tranches” instead of CDO’s. Not only that, several big brokerage firms, like Merrill Lynch, underwrite mortgages which use the margin equity in the homebuyer’s stock account as the down payment.  Imagine what will happen to these mortgages when the stock market finally cracks.

The homebuilders themselves are offering 0% down payment financing as part of the incentive package being used to entice buyers.   Many of these mortgages will be sold off to Wall Street, which will repackage them into higher yielding investment trusts and derivatives cesspools.  The criminal banks will re-market them with fat commissions to yield-starved pension funds and high net worth stool pigeons.

Those who do not remember the past are condemned to repeat it  –  George Santayana.

Wash, rinse, repeat.  Just like the big housing/mortgage bubble, the current echo bubble is sitting on top of a foundation of financial dynamite.  The fuses have been lit.  It’s not a question of “if” but of “when” the bombs will detonate.

Perhaps one of the finest directorial features of “The Big Short” was watching the players who made huge bets against Wall Street as they waited in a state of torture for the mortgage market to collapse while Wall Street’s web of fraud, market manipulation and propaganda was used to hold up the mortgage market.   Sound familiar?  The movie skillfully weaves in the fact that Wall Street fraudulently mis-marks the securities it creates in order to fleece investors on both sides of a trade AND to keep its own balance sheets fraudulently marked too high.

I witnessed this dynamic first-hand in 1990’s. If you think Congressional reform “fixed” this problem, you better review what is happening currently in the junk bond market.   Bonds marked in the 90’s are all of a sudden trading in the 20’s.  This occurrence will not be confined to the triple-C and single-B segments of the corporate bond market.   At some point in the near future this will be a standard feature in the mortgage bond market – just like in 2008.   And as the rug is pulled out from under the mortgage market…