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Financial Skeptic Bulletin, February 2007

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February

And then for the rest of my miserable life I am going to be standing where the Federal Reserve building used to be (having been torn down by a betrayed, angry citizenry), yelling "I told you so, you stupid morons!"

Feb 15, 2006 Why your blood seems frozen in your veins

[Feb 11, 2007] G-7 Presses China on Yuan Flexibility

Paulson pressures China to support devaluation of dollar

"Over the last two days, we discussed ways to keep the global economy growing in a balanced way, including stimulating domestic demand in Japan and Europe and pressing for greater exchange-rate flexibility in China," U.S. Treasury Secretary Henry Paulson said.

[Feb 10, 2007] Financial Sense Storm Watch Update The Next Rogue Wave by James J. Puplava 12-15-2006

Watch the credit markets—especially subprime lenders.

Looking back over the last three decades, there have been at least a dozen such episodes that erupted in the wake of the various Fed tightening cycles. So far, real estate is falling, the economy is slowing, but we have had no major financial mishaps. But it is still early and the fallout from real estate has much further to run. Watch the credit markets—especially subprime lenders. And watch the U.S. dollar. I am assuming Hank Paulson and Ben Bernanke went to China for other reasons than "to see The Great Wall." I suspect their motive is to obtain Chinese cooperation in devaluing the dollar.

[Feb 9, 2007] How the Fed Lost Control of Money Supply  by Axel Merk

In this phase, we will see monetary contraction: money that has subsidized not only the real estate market, but also consumer spending, stocks, bonds and commodities may dissipate.

 Feb 6th 2007. (Merk Hard Currency Fund) The world is awash in money. This money has flown into all asset classes, from stocks to bonds, from real estate to commodities. In a world priced for perfection, should we enjoy the boom or prepare for a bust? Let us listen to Wall Street’s adage and “follow the money.”

After the tech bubble burst in 2000, policy makers in the U.S. and Asia set a train in motion they have now lost control over. In an effort to preserve U.S. consumer spending, the Federal Reserve (Fed) lowered interest rates; the Administration lowered taxes; and Asian policymakers kept their currencies artificially weak to subsidize exports to American consumers.

These policies have lead to one of the longest booms in consumer spending ever – U.S. consumer growth has not been negative since the early 1990s. However, it was credit expansion, rather than increased purchasing power, that has fueled the growth. Until about a year ago, consumers took advantage of abnormally low interest rates to print their own money by taking equity out of their homes. This source of money is drying up as home prices no longer rise and sub-prime lenders (those providing loans to financially weak consumers) are facing difficulties. More prudent homeowners have not yet been affected as they buy their home based on longer-term interest rates; until December these interest rates have stayed abnormally low. In recent weeks, these rates have ticked up significantly, and we may see the next and more severe round of pressure being exerted on the housing market. In this phase, we will see monetary contraction: money that has subsidized not only the real estate market, but also consumer spending, stocks, bonds and commodities may dissipate.

[Feb 9, 2007] Housing Crash Continues, Bubble Pops

The rogue wave can emerge from the subprime lending markets.
  1. When rates go from 5% to 7%, that's a 40% increase in the amount of interest a buyer has to pay. House prices must drop proportionately to compensate.
     
  2. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or an interest rate hike, he's bankrupt in the real world.
     
  3. It's worse than that. House prices do not even have to fall to cause big losses. The cost of selling a house is at least 5%. On a $600,000 house, that's $30,000 lost even if prices just stay flat. So a 5% decline in housing prices bankrupts all those with 10% equity or less.
     
  4. Surplus of speculators. Nationally, 25% of houses bought in 2005 were pure speculation, not houses to live in. It is now possible to buy a house with 103% financing. The extra 3% is to cover closing costs, so the speculator needs no money down. Even the National Association of House Builders admits that "Investor-driven price appreciation looms over some housing markets."
     
  5. Baby boomers retiring. There are 77 million Americans born between 1946-1964. One-third have zero retirement savings. The oldest are 61. The only cash they have is equity in a house, so they must sell.

[Feb 9, 2007] National Mortgage News - Mortgage Data

Top Subprime Lenders.  New bubble fall guys ?  30-50% haircut ?


 

[Feb 9, 2007] immobilienblasen / where is your stabilization Mr. Toll

With that kind of fundamentals/performance no wonder the builders are flying high again.......

[Feb 1, 2007] FRB FOMC Minutes - December 16, 1997 (retrospective post)

M2 and M3 grew rapidly in November. M3 at a rate substantially above the upper bound of its range. Total domestic nonfinancial debt has expanded in recent months at a pace somewhat below the middle of its range.

M2 and M3 grew rapidly in November. For the year through November, M2 expanded at a rate slightly above the upper bound of its range for the year and M3 at a rate substantially above the upper bound of its range. Total domestic non-financial debt has expanded in recent months at a pace somewhat below the middle of its range.

In October, the latest month for which data were available, sales of new homes were well maintained, and sales of existing homes rose. Housing starts increased somewhat in October and November from the already high level reached earlier in the year.

Consumer price inflation had remained at a low level in recent months, reflecting a variety of influences including a favorable labor cost environment, falling import prices, small increases in energy prices, and declining inflation expectations.

[Feb 1, 2007] FRB Press Release--FOMC statement--January 31, 2007

They want to protect dollar: "The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."

Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters. [ They are off the mark, aren't they ?]

Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures.

The Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

[Feb 1, 2007] immobilienblasen

My critical point is that asset prices are no longer entirely a function of the real economy: it can be just the reverse. The real economy is being driven by asset prices, which in turn are influenced by financial flows of non-historic origin, composition, and uncertain longevity.

...., [citing Pimco Bill Gross] my critical point is that asset prices are no longer entirely a function of the real economy: it can be just the reverse. The real economy is being driven by asset prices, which in turn are influenced by financial flows of non-historic origin, composition, and uncertain longevity.

What used to be an Economics 101 “CIG + exports-imports” analysis leading to predictions for interest rates and stock prices has turned into an Economics 2007 analysis of corporate buybacks, international reserve flows and hedge fund/private equity positioning seeking to front run or take advantage of the first two.

And it’s not simply a question of analyzing the animal spirits or “exuberance” of investors wherever they may be.

Corporations are buying back stock with their historically high profits not really because they’re enthusiastic about their own company’s value, but because they have little else to do with the money. Likewise, foreign central banks and petroreserve recyclers are turned on more by capping their own currencies or geopolitical considerations in the Middle East.

[Feb 1, 2007] immobilienblasen

Nationwide, almost 971,000 foreclosure filings were reported last year, 51 percent more than the 641,000 in 2005, according to the annual report.

Foreclosures increased 94 percent last year to 157,417 homes in California, as homeowners struggle with fast-rising home payments and a slow-selling market, according to ... ForeclosureS.com. Nationwide, almost 971,000 foreclosure filings were reported last year, 51 percent more than the 641,000 in 2005, according to the annual report. ( and the pace is accelerating....../ uund das tempo nimmt rapide zu)

......... He [Bill Gross] has been predicting bonds will rally this year as a weakening U.S. housing market prompts the Fed to cut rates.



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