Sustained Recovery?

The banks must be restrained, and the financial system reformed, and balance restored to the economy, before there can be any sustained recovery.  – Robert Reich

Growth in Household Debt Outstanding

US Dollar & Bonds are Toast

The massive redemptions in US based funds have pulled the hot money from international markets back to the US. As a result, the dollar has strengthened, but this can’t last for too long. As we have called for two years now, US treasury bonds are beyond junk, and printing of at least $2.6 trillion in “bail out” money is only adding fuel to the fire. Certainly, the deleveraging of the system is helping keep inflation low, but the credit quality of treasuries is “C.” As we belabor this point once again, it all points to the fundamentals: energy (clean energy in particular), water, food based commodities, and gold/silver.

It all points to physical gold

Now that all asset classes including:

• property
• equities, mutual funds
• bonds
• cash/currencies/money market funds
• commodities

have gotten hammered, and the US dollar has rallied due to mass redemptions of foreign investments, an optimal position is in physical gold and silver. The paper market of gold is 2.5 times the size of the physical market, and with the IMF and others selling off positions gold is getting hammered. This should only be for the short term, and the current US$745/ounce won’t last for too long. As the US dollar and Euro get hammered in the medium term, precious metals will very likely shine.

So much for mutual funds

Out of almost 2,100 diversified retail U.S. stock mutual funds that are open to new investors, just 17 have positive returns for both the past 12 months and year-to-date, according to investment researcher Morningstar, Inc.

IndyMac Chief Complains of ‘Panicked’ Market

Michael Perry [CEO of IndyMac] called the markets for mortgage securities “panicked and illiquid” in a letter to employees Thursday.

He said the lender has “very strong liquidity, a good amount of excess capital,” and added that “there are no realistic scenarios that I can foresee that would impair IndyMac’s viability.”

He goes on to say that IndyMac, a large Alt-A lender, will continue to “widen its pricing and tighten product and underwriting guidelines to ensure that a much greater percentage of our production qualifies for sale.”

Quote above from August 2, 2007, TheStreet.com (IndyMac stock closed at $21.05 on August 2, 2007).

Update on July 14, 2008: IndyMac was shut down by federal regulators over the weekend.

Foreign central banks own 60% of Fannie & Freddie Debt

I think that this will collapse the bond market regardless of whether they actually put it on the books. The implied guarantee is too well understood by the financial community. The government can always change its obligations on SS and Medicare. Those are not contractual.  They are legislative, and more importantly, they are not owed to Wall Street, its friends, and even more, to foreign central banks. FCBs hold 60% of the debt of Fannie and Freddie.  Wall Street expects the government to stand behind Fannie and Freddie, and it is beginning to believe, rightly I think, that this will break the finances of the US government. In fact they are already broken, and the point of recognition is here and now. I look for interest rates on US government securities to be much higher a year from now, perhaps unimaginably so.

Jetlag, Jul 12 2008, 05:35 AM

Mortgage delinquencies up 62%

Interesting article by Amy McAlister of HousingWire today:

Borrowers more than 60 days in arrears on their mortgages hit a record high 3.23 percent for the first three months of 2008, TransUnion said — that’s up 8 percent over the previous quarter’s 2.99 percent average, and is a staggering 61.5 percent higher than the first quarter 2007.

Gold headed dramatically higher

This deleveraging process has been a very unique one. Over the last decade, the Fed led many central banks around the world in an unprecedented expansion of money supply. While there is massive credit being withdrawn from the global system, the long-term effects of this money supply expansion has yet to filter through. Investors are running scared of stocks, real estate, and bonds (except Treasuries of course), and have shifted positions to commodities, government bonds, and other “safer” investments. This, along with Bernanke’s decision to drop rates, has led to a serious mispricing of risk and return among government and other bonds.  As investors realize that the US government is bankrupt and currency is nearly worthless, high yield rates are likely to skyrocket. Of course, gold will jump as well.

Level 3 assets jump at Merrill

In a quarterly filing today, Merrill Lynch & Co. dislosed that Level III assets had jumped to nearly $70 billion, an increase of 70% over the same quarter of 2007.  The firm also stated that more than $16 billion of this exposure is related to subprime.  Definitely a sign of things to come though relative to Goldman Sachs, Morgan Stanley, and Lehman, Merrill’s ratio of Level III assets/tangible equity looks good at 90%.  Goldman, Morgan, and Lehman are all above 200% which is where more of the estimated US$1 trillion in credit crunch losses will come from.