9% of all loans Nationwide Delinquent or in Foreclosure

Home loan troubles break records again



The source of trouble in the mortgage market has shifted from subprime loans made to borrowers with bad credit to homeowners who had solid credit but took out exotic loans with ballooning monthly payments.

The Mortgage Bankers Association said Friday that more than 4 million American homeowners with a mortgage — a record 9 percent — were either behind on their payments or in foreclosure at the end of June.

"The problem that policymakers and Wall Street once assured us was 'contained' to subprime mortgages has proven to be anything but," Mike Larson, a real estate analyst with Weiss Research, said in a research note.

As the economy falters and home prices keep falling, concern is building about a second wave of mortgage defaults flooding the market through 2010.

On Friday, the Labor Department said the nation's unemployment rate shot up to a five-year high of 6.1 percent in August.

A drop in income — whether through a lost job, divorce, death of a spouse, or health problems — is the No. 1 reason people fall beyond on their mortgages and lose their homes.

But mortgage defaults and foreclosures in many areas, especially California and Florida, can also be blamed on egregious lending practices and rampant speculation by homebuilders and small investors alike.

"We are unlikely to see a national turnaround until we see a turnaround in the two largest states," with the most outstanding home loans, said Jay Brinkmann, the Mortgage Bankers Association's chief economist.

The latest quarterly figures broke records for late payments, homes entering the foreclosure process and for the inventory of loans in foreclosure. The trade group's records go back to 1979.

The percentage of loans at least one month past due or in foreclosure was up from 8.1 percent in the January-March quarter, and up from 6.5 percent a year ago, using figures that were not adjusted for seasonal factors.

New foreclosures rose from the first quarter in 35 states and Washington, D.C. The biggest increases were in Nevada, Florida, California, Arizona, Michigan, Rhode Island, Indiana and Ohio.
New foreclosures actually declined in Texas, Massachusetts and Maryland. Both Maryland and Massachusetts recently passed laws to slow the foreclosure process and give borrowers more time to catch up on their payments.

Almost 500,000 homeowners, or about 1 percent, entered the foreclosure process in the second quarter.

But for the first time since the mortgage crisis started, delinquencies on subprime adjustable-rate loans declined. While more than one out of every five homeowners with a subprime ARM is still in default, that portion dipped 1 percentage point from the first quarter to 21 percent.

What's driving up the delinquency rate now is the number of homeowners with risky, adjustable-rate prime loans made with little or no proof of the borrowers' income or assets.

More than one out of 10 borrowers with a prime ARM is now delinquent or in foreclosure. That portion, 11.3 percent, was up from 9.7 percent in the first quarter, and is expected to rise as more homeowners see their monthly payments spike.

Many of these loans allowed the borrower to pay only the interest on the loan for a fixed period. Others gave the borrower the option to "pick-a-payment," adding any unpaid interest to the principal balance.

Defaults on these mortgages, which earned the nickname "liar loans" because borrowers often did not document their incomes, are costing Fannie Mae and Freddie Mac billions of dollars. The Treasury Department has even pledged to bail out the mortgage finance companies if necessary.

With home prices plummeting, particularly in California, Nevada, Arizona and Florida, many borrowers with these exotic loans now owe more on their homes than they are worth.

Worse still, these loans reset to higher monthly payments when borrowers reach maximum debt limits — typically around 10 to 25 percent more than the original loan.

Those resets can increase the borrower's monthly payment by more than $1,000 a month on average, Fitch Ratings said in a report this week.

And nearly half of these pay-option loans are expected to reset to higher monthly payments by the end of 2010, Fitch said.

Foreclosure Heat Maps

Las Vegas homes for $60 a Square Foot?

Since the beginning of the Las Vegas housing downturn back in 2006, I've told folks to expect Las Vegas home prices to revert back to 1999-2000 levels - an average of ~ $60-$65 a square foot. Early on, many laughed and thought it impossible. These days however, though we're not quite there yet, many are alarmed at how quickly my outlook is panning out to be future economic reality.


Allow me to share with you a few examples of what I'm talking about:


The first property I'd like to show you is:

Realtor.com listing Detail 9565 GONDOLIER ST, LAS VEGAS, NV 89178

Located in Mountains Edge, a Master-Planned Subdivision on the South side of town, this home offers a new buyer 5 Beds, 3 baths and 4,449 Sf of luxury for $379,900 - approx $85 a square foot.

Note: This home is currently bank owned - they swallowed $763,636 in unpaid debt on 7/15/2008. Thus, you can get this home for 51% off what the bank actually owes

The second property is:

Realtor.com listing Detail 6224 FOXHUNT ST, Las Vegas, NV 89130

Located in the "New-North" side of town (off No. I-215 and I95), this home offers 5 beds, 3 baths, and 4331 Sq Foot on .52 acres of land for $335,900- approx $77.5 a square foot.

Note: This home is also bank owned and they assumed $695,628 in unpaid debt on 1/28/2008. So, this home is being offered for 52% off what the bank assumed

The third property is:

Realtor.com listing Detail 9022 GREEK PALACE AV, LAS VEGAS, NV 89178

Once again located on the south side of town - in the Mountains Edge, Master Planned Community - this 5 bed 3 bath home of 4,264 Square Foot is being offered at $325K - $76 a Square foot

Note: This home is privately owned - the individual paid $640,717 to Ryland Homes back in March 2007. So, this home is actually being offered at a 49% discount from the 2007 purchase price.

The last property is:

Realtor.com listing Detail 9308 HARROW ROCK ST, LAS VEGAS, NV 89143

Located in the far North West side of the Valley, this home offers 9 Bedrooms, 4 baths and 6,087 Square foot of living space, situated on .21 acres - for $388,550 - $63 a Square Foot

Note: Once again, this home is bank owned and they assumed $641,860 of unpaid debt on 3/20/2008. Current price is 40% off what the bank assumed.





Closing:

Though the examples above are the exception and not the rule (yet), prices here are falling fast and I don't think it will be long before my ultimate price outlook comes to fruition.

Note: For personal integrity sake, and ease of sorting through thousands of listings, I chose newer, larger homes in desirable locations for my examples and could have showed better overall deals per SF, but due to bad locations and/or home conditions, that would not have honestly served my readers.

Feel free to look for yourself: Link to homes in Las Vegas > 4,000 SF (If you look at the link, note the first listing comes to $58 a SF, but it's in a crappy area; listing #3 is a great deal, but the home was built in 1984, etc)

Currently, there are over 28,000 for sale in the Valley and the median price is down > 30% YoY(thus far).

With foreclosures increasing by the day (I have them on both sides of my beautiful Toll Brothers rental property w/pool - and there are many more throughout this gated neighborhood) - I figure we're around 50-60% of the way to the ultimate bottom for Las Vegas house prices.

Bottom Line: $60-$65 SF median prices are nearly here...


BTW:

If/when any of my readers are interested in buying here in the Valley, I would highly recommend a fantastic realtor friend - a hard working man of integrity, who has more than gone out of his way in the past to help out my family when faced with a difficult housing predicament. I've used many realtors throughout the years and can unequivocally state "he's the best"

Give him a call - you won't be disappointed.

Gary Wittman
Realty One Group and a member of Foreclosure Express
Office: 702-743-5172
E-mail: wittmangary@yahoo.com



Best regards

Randy

Economicrot.blogspot.com

.

We Ain't seen nothin Yet

Since the end of the housing boom in 2005, I've been stating the housing correction in Las Vegas would be significant and we'd likely see a 50% haircut (peak to trough) in home prices. Thus far, odds are looking pretty good that I'll ultimately be correct (Maybe even too optimistic).



Four years of gains wiped out in just one.

Home prices across 20 major U.S. cities have dropped a record 15.3% in the past year and are now back to where they were in the summer of 2004, according to the Case-Shiller home price index released Tuesday by Standard & Poor's.

Las Vegas saw the biggest declines, with prices falling 26.8% in the past year.

With so many homes on the market and foreclosures rising, prices are likely to keep falling, said Patrick Newport, an economist with Global Insight

"We expect the 20-city Case-Shiller composite to fall another 15% to 20%, to a bottom at the end of 2009, translating to a peak-to-trough drop of 30% to 35%," wrote Michelle Meyer, an economist for Lehman Bros.

After accounting for 4.5% inflation over the past year, real home prices are down in every region in the nation.

Closing:

Thus far, the decline in bubble-region home prices has been quick, but I still feel we've got a long way to go. Significant banking/credit issues will soon to come to light again while unemployment numbers are due to increase significantly. Combine these issues with billions in Option Arm Resets, massive inflationary pressures and soon-to-be crucified equities markets and the result is a toxic Witch's Brew of economic misery that will continue to force massive downside price pressures across the nation.



Bottom Line: We ain't seen nothing yet!

Regards
Randy

US Economic Outlook 2008-11+

All is not what it seems, and our US economic troubles are far from over!

Note: If it's hard to see/read the briefing below, please click on this link and view the updated briefing in full-screen

| View | Upload your own

Best regards

Randy

Watch Out Below!

Very good Forbes article confirming much of what I've been saying: "We ain't anywhere near done yet."

Watch Out Below

Oil prices continue to surge to new records. Gold prices climb. Stocks retreat in the U.S., Europe and Asia. The dollar goes south. Housing prices continue to fall. Consumer confidence erodes. The banking crisis has not hit bottom. Fed action is not enough. Congressional intervention is necessary.

So says Thomas J. Barrack Jr., chairman and chief executive officer of Colony Capital, a California-based hedge fund, in his April letter to Colony partners.

It may come as a shock--but Croesus believes we are only a third of the way through the credit crisis, and investors should get ready to experience more pain. As Barrack put it to Croesus quite directly this week: "The denial is beyond belief--at every level."

No one wants to deal with the losses on Alt A mortgages, which are greater than subprime. Or the prime mortgages which in total dollar terms represent twice as many dollars as subprime. What about the regional banks wasted by lousy real estate loans? Then there's the unwillingness of European banks to lend to each other, or the vast amount of assets running from troubled institutions like UBS, not to mention the Swiss investors demanding delivery of gold bullion rather than gold certificates. Still, the recession deniers are everywhere.

Croesus has some advice for everyone. Buy yourself two recently published books that will explain how we got to this fragile place and what public policy steps have to be taken to make sure the financial system doesn't still implode--on a step-by-step basis.

Charles Morris' The Trillion Dollar Meltdown, Easy Money, High Rollers, and the Great Credit Crash explains in clear narrative style how the credit bubble developed and had to burst. We owe a debt to Morris for underscoring how the power of vastly deregulated financial markets--and the development of mortgage-backed securities markets was eventually going to lead to the "great unwinding" that is only partly over. For all of you who have been bewildered by reading about CMOs, CDOs, CLOs and the other toxic waste of 21st century finance, here's your handbook to comprehend the fallout.

Morris makes sense of the process by which the stock market crash of 1987 and the failure of hedge fund Long Term Capital, cured by the easy money policies of Alan Greenspan, led eventually to excess leverage and massive losses in the financial system. Listen up. Morris' prickly definition of the so-called "Greenspan put" explains the mystique that kept the markets from massively tumbling--"No matter what goes wrong, the Fed will rescue you by creating enough cheap money to buy you out of your troubles."

Morris calls all this folderol "the last gaspings of the raw-market Chicago school brand of financial capitalism that moved into the vacuum created by the 1970s collapse of the Keynesian liberal paradigm."

And fabled investor/speculator George Soros has neatly carried this theme forward in his brilliant analysis of the crisis, which he warns everyone and everywhere is deepening into a more serious matter. Soros' The New Paradigm for Financial Markets, The Credit Crisis of 2008 and What It Means is a clever explanation of why "financial markets are always wrong."

Soros made his fortune by understanding how to take advantage of how markets overshoot on the upside and then on the downside. He goes short when we're in bubble mode, bidding shares or commodities to unrealistic prices. And he buys when prices are unrealistically low. Investors, Soros proves, "base their decisions on incomplete, biased and misconceived interpretations of reality, not on knowledge."

Under the new paradigm, investors will have to base their decisions on less leverage. In fact, Soros, like others, is calling for the regulation of limits on the use of leverage by investment banks and hedge funds. Come the revolution, Croesus thinks this will only happen on a voluntary basis. But Soros is adamant that "credit creation has to be a regulated business. The financial industry was allowed to get far too profitable and far too big." Avoiding asset bubbles should be a priority, Soros suggests.

Croesus scoffs at this nonsense as Wall Street's political power and influence in Washington is too strong. Even if Obama gets in the White House, his hedge fund buddies will tell him the score. Don't mess with Wall Street.

Be clear, though. The asset bubble that is still bursting will be severe enough to cause a serious recession, Soros believes. He is negative about the economy and the stock market. He has more vision and understanding than your run of the mill Wall Street expert who thinks every capital raising is the turning point for the market to improve.

You may find Soros' public policy solutions to be anathema. But you can learn one invaluable investment lesson from this book. He proves that "reflexivity" is an intellectual insight that can be a framework for successful investing. All you have to know is when prices get too high (out of whack with reality) or when they get too low (out of whack with reality). Reflevity signaled Soros when to sell the conglomerates in the late 60s, when to sell the REITs in the 1980s--because they got up to crazy unrealistic levels. Soros knows how to take advantage of the crowd's wishful thinking. And let him be a philosophe about it. Why not.

This super bubble took 25 years to develop, Soros writes. It can't be over in one year. Expect home prices to drop another 20%. Expect credit contraction to continue. Expect new bubbles to develop like in the commodity area. Soros wants to bet gold, oil and other commodities will fall in price. It's just that his "reflexivity" button hasn't lit up.

Regards
Randy

UPDATED: US Economic Outlook 2008 -2011+ Briefing

Recently, as part of a broad based financial education class for younger folks (in their 20's-30's), I was asked to provide an economic outlook assessment/briefing to help these young adults gain a better understanding of the very complex problems the US economy is dealing with -- both current and future.

Other people will provide generic information w/regard to: balancing a checkbook, living within your means, using credit wisely, investment options, compounding interest, etc... My main objective is: try to make a very complex issue (economic problems/future forecasting) easy to follow, so that these young people can make wiser decisions based upon the knowledge they have gained.

With that said, I have yet to give the actual briefing (it's scheduled for early June), so I thought I'd take advantage of the available time and ask some of you smart folks to review and provide feedback w/regard to content, complexities, general flow/digestibility, accuracy, missing content, etc...

Please remember -- this briefing was tailored for folks who know little about the history of money, the broader economy, inflation or the many issues in play. Additionally, I plan to expound upon many of the points made in the briefing (when presenting it).

Would really appreciate your comments/feedback.

NOTE: briefing updated based on reader feedback and 207 reads today -- very much appreciated!

The following topic's were added/corrected:
- 20% annual growth = 4 year doubling of money supply
- Short history on Federal Reserve
- US Dollar as World's Reserve Currency
- Oil/OPEC issues (imbedded w/Dollar and Current/future outlook)

US Economic Outlook Briefing (Use full-screen mode for best results)


Thanks in advance!

Randy

Economic Troubles Affect the Vegas Strip

This non-economist writer has been forecasting the looming Las Vegas economic downturn since early 2006: Las Vegas—A House of Cards Bound to fall -- if you read the comments/feedback section to that post, you'll realize that some felt I belonged in a loony bin...

Quote 1:

"You're certainty about the fragility of Vegas in the face of a national economic downturn belies a level of profound ignorance to it's past. Stated in terms more suited to you, betting against Vegas is a sucker bet. "

Quote 2:

"Randy, the level of certainty you work yourself into regarding things you know absolutely nothing about is fun to watch, in the same way one watches "Jack Ass". Whether or not that is at cross purposes to your own best interest will be for you to decide."

Ouch! Yes, pretty harsh indeed... But I was un-fazed, because I knew this national economic downturn would be bigger than any seen in many decades, and that the final outcome would be very difficult for our non-diversified Las Vegas economy...

Well, it now looks as if I may be vindicated, as the tide is beginning to turn...

Take my recent (April 08) piece which listed some downturning indicators; illustrating that all is not well in Las Vegas: The Las Vegas Economic Downturn Has Started


And just today the the New York Times released an article that backs me up: Economic Troubles Affect the Vegas Strip

For decades, this gambling center seemed nearly immune to the economic swings of the rest of the country. But these days, the city built on excess is seeing a troubling sign: moderation.

Gambling revenue and hotel occupancy are down. Resorts are slashing room rates and offering coupons or free nights. Casino operators are firing hundreds of workers, and their stock prices have plummeted since October. Credit is drying up for hotel and condominium projects planned before the slowdown arrived.

Even the people still coming to Las Vegas are spending less. Julia Lee, 27, of Los Angeles said she normally brings $10,000 on her trips here to play blackjack. As Ms. Lee picked up show tickets the other night, she said she had brought less than half that on this trip. “My parents are in real estate, and we’re worried,” she said.

So are this city’s hoteliers, retailers, wedding chapel operators and anyone else who depends on the extravagance of gamblers and tourists. The spending declines are relatively modest, a few percentage points here and there. But Las Vegas has a huge inventory of new casinos and hotels due for completion in the next few years, and a long national recession could send the city reeling.

The Las Vegas outlook would be far worse if not for foreign visitors. They are taking advantage of the low dollar to savor the fare of celebrity chefs like Alex Stratta and to snap up goods that might cost twice as much in Europe.

To manage the slowdown, Las Vegas is revving up an overseas marketing campaign, and in the United States, it is pitching spontaneous Vegas escapes. “Do it without thinking!” says one television spot.

But representing only 13 percent of visitors, foreigners can take up only so much slack. Deutsche Bank recently started foreclosure on a $760 million construction loan for the Cosmopolitan Resort and Casino, a partly built project in the heart of the Las Vegas Strip.

Crown Las Vegas, a bullet-shaped hotel and casino resort that was supposed to become the tallest building in the city, was scrapped a few weeks ago for lack of financing.

One of the most prominent Las Vegas casino operators, Tropicana Entertainment, said Monday it would seek bankruptcy protection. The company, beset by financial difficulties, made cutbacks at a casino in Atlantic City that prompted New Jersey regulators to strip it of its license there; that set off a cascade of fresh financial problems.

Other multibillion-dollar Las Vegas projects are facing delays or have been put up for sale because of tightening credit and changing Wall Street perceptions about the city. The city’s resort properties already have 130,000 rooms, and Wall Street — which financed much of the recent boom — is worried that Las Vegas cannot absorb the 40,000 more that are on the drawing board or under construction.

“In this market, it is not good business to be confident,” said Jan L. Jones, a senior vice president at Harrah’s Entertainment and a former Las Vegas mayor. “I’ve never seen an economy like this nationally. Nobody knows how deep what nobody wants to call a recession will go.”

Historically, Las Vegas has been resistant to recessions, entering them later and exiting them sooner than the country at large. Gamblers, particularly high rollers, tend to play no matter which way the economic winds are blowing.

But executives here worry this recession could be different from the last two — in 1990-1 and 2001 — when consumer spending was propped up by easy credit. Now credit is drying up. And high gas and food prices, declining home values and rising unemployment are keeping many Americans closer to home.

More important, over the last two decades Las Vegas has shifted from a destination dominated by gambling to one with more appeal to middle-class shoppers, diners, golfers and others who can afford brief splurges. Whereas gambling represented 58 percent of revenue for Las Vegas Strip resorts in 1990, it represented only 41 percent of revenue in 2007, according to a Deutsche Bank report.

As gambling was legalized in more parts of the country in recent years, Las Vegas was forced to expand its own offerings to keep growing. It worked, but it made the city more susceptible to recessionary declines in disposable income.

“Las Vegas is now as vulnerable as other communities,” said J. Terrence Lanni, chairman of the board of MGM Mirage.

Hotel occupancy was down for January and February, the most recent figures, by 1.5 percent, despite average daily room rates 3.8 percent below the year before. Gambling revenue in the Las Vegas metropolitan area for the same period was down about 4 percent.

“It’s accelerating to the downside,” said Bill Lerner, a senior gambling analyst at Deutsche Bank who lives in Las Vegas. “Las Vegas’s economy is more reflective of the general economy than ever.”

Las Vegas visitors said in recent interviews that they were spending less than in the past.

Rita Keene, a retired insurance risk manager from Collinsville, Ill., said she has been coming to Las Vegas several times a year since 1978 and had never set gambling limits. This year she is betting no more than $300 a day at the slot machines, and she is not going to shows.

“We have investments, and you know what the stock market has been doing,” she said while putting quarters in a slot machine at the Orleans casino. “My husband and I have even talked about this maybe being our last time.”


Closing:

Allow me to repeat my 2006 closing post (from: Las Vegas -- A House of Cards) below:

"Once the LV layoffs begin, more homes will go into foreclosure, as people won’t be able to make their mortgage payments. Then businesses outside of the casino industry (local restaurants, retail, home improvements, beauty, health care, etc) will also begin to feel the pain. Eventually, a chain reaction of dominoes will begin to fall, and ultimately the number of outbound U-hauls will vastly exceed those inbound..."

Well, Nevada is already leading the nation in both foreclosures and price declines ( Nevada Tops in Foreclosures AND Price Declines! ), so as tourism continues to fall and the layoffs increase, I expect we'll see a far worse economy down the road...

Bottom Line:

The Las Vegas downturn has just started and we're merely seeing the opening salvo today.

Better reserve that U-haul now!!!

Regards

Randy

HERE COMES THE ALT-A CRISIS

Subprime resets were bad and wreaked havoc throughout global financial/credit markets. Could Alt-A be worse? I suggest you watch this really good explanation for the answer... Well worth your time

Mr Mortgage - HERE COMES THE ALT-A CRISIS

Nevada Tops in Foreclosures AND Price Declines!

Housing prices post record declines--Las Vegas, Miami and Phoenix all saw prices plummet by at least 20%. And so far, there is no sign of a bottom.

Home prices have posted another record decline, as most of the nation's largest markets suffered double-digit drops over last year, a survey released Tuesday shows.

The S&P Case/Shiller Home Price Index, which tracks 20 of the largest housing markets, showed prices plummeting by 12.7% in the 12 months ending February. That's the biggest fall since the index began tracking prices in 2000.

The 10-city Case/Shiller index is down 13.6% year-over-year, the biggest drop since its launch in 1987.

"There is no sign of a bottom in the numbers," S&P spokesman David M. Blitzer, said in a prepared statement. "Prices of single family homes continue to drop across the nation."

"This is huge," said Dean Baker, co-director of the Center for Economic and Policy Research. "Back a couple of years ago, people were saying, 'Housing prices are not like stocks; they change slowly,'" he said.

But the drop in home prices appears to be accelerating. Indeed, Baker said that at the rate prices are falling, as much as $6 trillion in home values could be wiped out from the top of the market in June, 2006, through the end of this year.

Prices in the Las Vegas metro area have plunged more than any other city, down 22.8% over the 12 months through February. Miami prices plummeted 21.7%. In Phoenix, they've fallen 20.8%.

The declines create a vicious cycle, according to Peter Schiff, the president of the investment firm Euro Pacific Capital. He was sounding alarms about the housing bubble more than two years ago.

As housing price losses extend, he said, the fall-off in demand for homes will deepen. And Schiff expects to see a national price decline of 30% - and by as much as 50% in the worst hit markets.

U.S. Foreclosure Filings Double in First Quarter, Led by Nevada

April 29 (Bloomberg) -- U.S. foreclosure filings more than doubled in the first quarter as payments rose for subprime adjustable mortgages and falling home prices left property owners unable to sell or refinance without losing money.

Almost 650,000 properties were in some stage of foreclosure during the quarter, or 1 in every 194 U.S. households, Irvine, California-based RealtyTrac Inc., a seller of foreclosure data, said today in a statement. The number was 112 percent above a year ago. Nevada, California and Arizona had the highest rates.

Home prices in 20 U.S. metropolitan areas fell 10.7 percent in January from a year earlier, the most on record, declining for the 13th straight month, according to the S&P/Case-Shiller home- price index. A record 18.6 million homes stood empty in the first quarter, the U.S. Census Bureau said yesterday.

Government attempts to slow the flood of defaults ``could be simply deferring another flood of foreclosures,'' Saccacio said in the statement. ``That could extend the length of time it takes the market to recover from this downward cycle.''

Nevada led the nation with the highest foreclosure rate in the first three months of the year. Filings rose 137 percent to 19,595 from the year-earlier period. One in every 54 households there was in default or foreclosure, said RealtyTrac, which counts default notices, auction notices and bank repossessions and has a database of more than 1 million properties.

Home prices sink at record clip; foreclosures keep mounting

Jody Hanson and her boyfriend Scott Harrison want to buy a two-story house with at least three bedrooms in Las Vegas for no more than $225,000. So far they have been out-bid on four foreclosed homes.

"There are just a ton of people here getting foreclosed upon," Hanson said, "so there are just so many deals waiting for you."

Half of all sales in Las Vegas are foreclosures, said Karen Wilson, a local Century 21 agent, though she said the glut of homes on the market has started to wane and transactions have picked up.

Nevada posted the country's worst foreclosure rate in the first quarter, RealtyTrac Inc. said Tuesday, with one in every 54 households receiving a foreclosure-related notice.

"Once the market starts in a given direction, the momentum will carry it down, even below the (historic) trend line, until something happens to change the overall psychology," said Jim Gaines, a research economist at Real Estate Center at Texas A&M University.

Bottom Line: We aren't anywhere near the bottom yet. I've already seen (very nice) bank-owned foreclosure selling for ~ 60% of their Peak prices (a 40% haircut) and with increasingly tight credit markets, waves of future mortgage resets (can you say EXPLODING ARMS), declining tourism/gaming revenues and a weakening job market, foreclosures will continue to increase and prices will keep on falling... Banks can't continue to hold their increasingly massive inventories and will eventually have to resort to fireside sales... I honestly expect to see 1999-2000 prices again ($65 a SF) -- within 24-36 months.


Note: Here's a late add video-- sent to me by a reader:

VIDEO: Angry owners vandalizing foreclosed homes in Las Vegas


All the best

Randy

San Francisco Federal Reserve Symposium

I'm reposting this article back towards the top of my Blog--for those of you who haven't yet read. If you have the time, take a look at the comment section also.

Last Thursday afternoon (April 10th) I had the opportunity to attend a three-hour Fed symposium at UNLV and meet three representatives of the Federal Reserve Bank of San Francisco. This symposium is held biannually and is geared towards providing Undergrad and Grad students with a better understanding of the operations of the Federal Reserve Banking system.

I’m a friend of someone who is enrolled in an executive MBA program and we often discuss current economic conditions and the Fed Reserve System, so when he became aware of this symposium, I was the first person he thought of and invited.

The symposium started with welcome introductions and was quickly followed by a 24-slide presentation/briefing from Karen “S” (Manager of Administrative Services, Banking Supervision and Regulation, FRBSF) on current banking conditions and trends.

Karen has worked for the Federal Reserve Bank of San Francisco for over 20 years and prior to that, worked for Barclays bank for 10yrs, so one would surmise she is well seasoned in her field.

Karen discussed the regulatory role of the Fed and several other regulatory agencies (FDIC, Office of Thrift Supervision, Comptroller of the Currency—Administrator of National Banks, etc) and then moved on to cover the Top-3 current Banking Risks:

1) Subprime & Residential Lending
a. Mortgage underwriting weak
b. Consumer Disclosures questionable
c. Property values continue to decline

2) Commercial Real Estate
a. Loan concentrations high
b. Properties unoccupied

3) Liquidity Risk
a. Non-core funding dependence increasing

Each of these areas was covered with slides/charts/graphs etc, but there were really only a few takeaways worth sharing:

1) National home prices have already dropped 9% (Peak-to-trough) thus far, but the briefing suggested we should expect to see a total drop of 20% by Spring 2009—Sub-prime resets, falling home values and tight credit conditions being the main factors (1 of every 4 subprime residential loans is in past due status)

2) National Foreclosure rates are at a 27 year high and expected to worsen

3) 12th District Bank Construction and Land Development Loan Concentrations at all-time highs (% of equity vs. Allowance for Loan and Lease Losses); much higher than even before or during the 90’s California RE collapse

4) Many bankers are “in denial” and not acknowledging problems; loans are being downgraded to “substandard” or worse; bank loss rates rising sharply

5) Bank Construction and Land Development loss rates likely to go much higher

6) Many issues on the radar screen for Banking Risks—Credit Risks, Compliance, Market/liquidity Risks, etc.

During her briefing, Karen heaped most of the blame for our current housing crisis on relaxation of underwriting standards, mortgage fraud, predatory practices, etc, but she spoke not one word about partial responsibility being tied to fed policies. After listening and twisting in my chair for some time, I finally asked: “You’ve placed much of the blame for our current housing predicament on all these factors, but you’ve not once addressed Fed policy and the fact that Greenspan held interest rates at a 40 year low for far too long… Don’t you think the Fed deserves part of the blame for this crisis?”

After a somewhat long pause came the words: “Well yes, Fed policy was partly to blame.”

Karen then searched for thoughts/words to make her answer seem less “Fed-negative” than it was, so she tried to refocus and babbled on for quite some time about how these ultra low rates and Fed policy provided the opportunity for millions to live the “American Dream of home ownership -- even if it was just for a short time. "

I was incredulous and couldn’t believe my own two ears. The whole time she spoke of this, I was thinking: Sure, inept Fed policy/easy money allowed MILLIONS to “taste the American Dream” -- but now MILLIONS will lose their homes, ruin their credit, ruin family relationships, lose jobs, etc, but she felt it was all worth while… "They tasted the Dream.”

Bottom Line: Her reply was absolutely ludicrous. But what else should a person expect to hear from a Fed employee who drinks the Kool-aid?


Next up was Renee “C”, a rather young, attractive Fed Research Analyst who presented a briefing on the Federal Open Market Committee (FOMC). Renee spoke with a bubbly/positive outlook on things, but seemed a bit naïve – she struck me as a regurgitator of data that has been heard/learned over time, but really incapable of independent thought or an understanding of the “Big-Picture”.

She did however appear to be very enamored/proud to be employed by the SF Fed -- a true Fed Soldier.

Renee discussed:

1) Her Group’s Role at the Fed
a. Public Information
b. Economic Research

2) US Monetary Policy Goals
a. Maximum sustainable output and employment
b. Stable prices

3) Tools of Monetary Policy
a. Open Market Operations
b. Discount Window
c. Term Auction Facility
d. Primary Dealer Credit Facility
e. Term Securities Lending Facility
f. Reserve Requirements

4) Monetary Policy Meetings
a. Eight times a year in Washington DC

5) Monetary Policy Decisions
a. National in scope
b. Forward looking
c. Tradeoffs of between short-term and long-term goals

6) Fed Policy Statements
a. A secondary policy instrument (first is the Federal Funds Rate)

7) Economists at the Fed—who they are/what they do
a. Fed is the largest employer of economists
b. Economists conduct and publish research
c. Produce economic briefings for FOMC members

Early on in the briefing, Renee put up a cartoon depicting Bernanke holding a balloon inscribed with the word "inflation" in one hand and a rope tied to a dollar sign tilting off a ledge in the other, and then asked if anyone can interpret what the cartoon is trying to say.

I stated the Fed is worried about inflation, which is rising, but can’t do much about it by cutting rates and therefore risks allowing the dollar, the world’s reserve currency, to fall off a cliff—and added: “He is in quite the pickle right now…” Renee politely giggled and said, that’s good, but I’m actually using the dollar to depict the US economy, and as for the balloon, inflation always needs to be positive, but not too high… It must be a delicate balance and the fed walks a fine line…

Later, when discussing Monetary Policy she stated that: “Monetary Policy Lags and needs time to take effect” which I agree with, but I stated “Inflationary Policy also lags.”

I don’t know if she really understood my point: Using the numerous new Fed Tools to inject while cutting rates is highly inflationary and we consumers are already feeling the first wave. With the many recent/deep cuts yet to take full effect, it’s only going to get much worse (while the dollar gets creamed)…

I also asked if Fed decisions are politically influenced. (e.g. reporting to the public that the glass is half full vs. half-empty). Renee was firm in stating that analyst research and the sharing/publishing of data is NOT politically motivated and she highly doubts that the FOMC public release is either.

My thoughts were: Move along now, nothing to see here… Continue drinking the kool-aid and all will be fine…


Yelena “T”, Ph.d. Economist of Russian decent, gave the last economic briefing. Yelena was pleasant, seemed to be very intelligent (far more so than the other two), but you could sense that she was only providing surface-level, somewhat optimistic forward looking data, and seemed to be holding back on what could be said to the audience.

Yelena discussed:

1) Current Economic Outlook
a. GDP is dropping faster than earlier Fed Predictions
b. Personal income is flat/dropping slightly
c. Consumption expenditures—a noticeable drop
d. Unemployment is increasing; employment fell for 3rd month
e. Weaker Dollar (Note: she stated a weaker dollar is good for US exports. I chimed in: “That’s good, but we’ve exported most of our manufacturing capacity and until we get it back we’re still going to continue running MASSIVE trade deficits.” Oil yesterday hit $112 and the Yuan broke 7 to the dollar and is gaining speed. Inflation can mainly be attributed to a weak dollar — she nodded/seemed to agree with all)
f. Real GDP Growth has been reduced by a decline in Real Residential Investment
g. Inflation is a source of concern (depicted charts of Core PCE, Total PCE and CPI rising above trend line: I wanted to state that her "understaed" numbers were all completely bogus, but it would have been inappropriate in this collegiate setting)
h. Mixed Signals for long-term inflation expectations

2) Federal Reserve Board of SF National Forecast
a. Little GDP growth in first half 2008, but likely improvement in 2nd half
b. Monthly GDP forecasts have fallen every month since Aug 07
c. Inflation should decline going forward due to slower economy
d. Housing inventories climbing; >2x higher than normal; downward price pressures

3) Potential Risks to their Forecast
a. Continued home price declines may impact construction and consumer spending more than anticipated
b. Continued tightening of lending standards may make housing situation worse
c. Jumbo mortgage rates remain high; increased spreads between 10yr Treasury rate and Mortgages rates -- even conforming mortgages
d. Increased Credit Market Stress

When the briefings were finished, the forum was open to questions. A few relatively easy questions were asked by audience members and were promptly answered.

I later, after much internal consternation, asked how we can sit here and discuss rate cuts, stimulus packages and Monetary Policy, yet fail to address our ailing US Dollar and it’s faltering status as the World’s Reserve Currency. I highlighted that back in 1971, US total monetary aggregate was merely $700 Billion, but now it’s > $14 Trillion and is growing by 18% annually.

I then stated numerous countries have already pulled or are discussing pulling their currency-dollar pegs (due to high domestic inflation rates—as they have to print money as fast as we do). I also opined that Treasury Secretary Paulson and Bernanke’s “Strong-Dollar policy” is preposterous/laughable. How can they continue to cut rates/inflate while the dollar falls to all time lows around the globe, yet “claim to support a strong dollar?” (Note: I was getting a little worked up by now)

I was told this “Dollar Exchange Rate” issue isn’t really taken into account when discussing Monetary Policy, but there are departments internal to the Fed that do study monetary exchange rates/etc. Additionally, I was told that monetary aggregates aren’t important or studied. (Internally, I laughed at the ignorance).

I had many, many more questions/concerns boiling inside of me, but at this point, I had already been the most vocal audience member of the day and had taken far too much of the forum’s time… It wasn't like I was getting intelligent answers anyway… So I bit my lip and said no more.

In closing, what more can I say -- except that I expected more from this symposium. Here were three Fed Bank employees with many years of economic experience, yet their answers seemed uninformed and absolutely baffled the informed mind. I guess that’s what Fed programming/propaganda does to a person. Drink the misinformation Kool-aid for too long and become part of the problem -- passing on ignorance as fact and supplying high school level, nonsensical answers to those with valid questions/concerns.

If these three folks actually represent a typical cross-section of Fed employment/knowledge base, then God help us all, because the misinformation/ignorance problem we have is much bigger than even I thought.

Best regards and until next time

Randy

Economicrot Homepage

How The Banks Bet Your Money UK & US

If you really want to understand the current Housing, Banking & Credit Crisis, this series is an Absolute Must Watch

A global credit crunch has put Britain's banks in a crisis that threatens the future of jobs and businesses and may even trigger a wholesale recession.

Private equity financier Jon Moulton delivers a stinging rebuke to the banks for causing this financial meltdown and explains why the British taxpayer will now pay the price.

America has been hit hard by the sub-prime crisis. The social cost of financial failure has been enormous. An epidemic of home repossessions has left thousands of houses abandoned and boarded-up: whole suburbs are falling into disrepair and dereliction.

Financial institutions in America and in Britain had poured billions into investments backed by these mortgages. As more and more people have defaulted on their mortgage repayments, financial markets have collapsed, causing a crisis that has rippled across the Atlantic, sending the City of London into turmoil and pulling the plug on one now infamous British bank.

The question is: will it stop there? This is a story about the destructive power of finance: what happens when banks are driven by short-termism; when bankers are rewarded with vast bonuses, free to operate under inadequate regulatory supervision, and with the complicity of a government too in awe of big business to step in.


Part 1



Part 2


Part 3


Part 4


Part 5

Las Vegas Preforeclosures Hit Record

Back in February 08, I told you that Las Vegas was #1 in foreclosures, and then showed you how we (unfortunately) captured 15 of the top 20 spots on the National Foreclosure List: Las Vegas Tops Foreclosure List.

Well, as I stated then and have been predicting all along, things aren't going to get any better anytime soon -- this was some bubble and we've got a long way to fall.

From the Las Vegas Review Journal Today: Bad news mounts in housing

The number of Clark County homes that entered preforeclosure status reached a record 6,152 in March, up 52 percent from February and more than double the 2,813 preforeclosures in the same month a year ago, Sacramento, Calif.-based Foreclosures.com reported.

The county has 15,937 preforeclosures through the first quarter of the year, or 3.11 percent of its 512,253 households, the online foreclosure source reported.

Nevada leads the nation with 2.42 percent of its households, or 18,087 homes, in preforeclosure through March, followed by Arizona (1.96 percent), Florida (1.87 percent) and California (1.05 percent).

Staggering foreclosure numbers are the result of a multitude of factors, including a meltdown in the mortgage lending industry, fraudulent appraisal values and overzealous speculators.

Real estate-owned, or bank-owned, homes in the county also rose substantially in March to 1,937, up from 1,640 the previous month and 1,763 in January. The three-month total is three times more than a year ago.

Jeanette Young said she's now faced with possible foreclosure on her home after losing her job at National Alliance Title, which closed in December.

President Bush's plan to give $600 tax rebates to help homeowners is a "joke," she said.

"I don't know anyone that has a mortgage that is $600, unless they've had the same loan for 10-plus years," she said. "Mine is $2,200 plus all the other bills associated with a home. I do not see any relief in sight for those of us who have lost our jobs, cannot find comparable income and now cannot make our house payments."


So, how is this foreclosure issue impacting the broader Nevada economy?

Nevada's January gambling revenue falls 4.8 pct

Nevada casinos won $1.06 billion from gamblers in January, a 4.8 percent decrease from the same month a year earlier, Nevada's Gaming Control Board said on Friday.


Hooters Hotel sees fourth-quarter decline

Hooters Hotel's management said the economic downturn late last year drove fourth-quarter revenue down as the property saw department wide declines.

Fourth-quarter net revenues declined 11.5 percent to $14.8 million from $16.8 million in 2006.
Casino revenues dropped 10.1 percent, food and beverage fell 12.1 percent, and hotel revenue fell 8.4 percent for the three months ended Dec. 31.

"The challenges presented by the current economy have eroded consumer confidence," said Mike Hessling, president of 155 East Tropicana, LLC, Hooters' parent company, during a conference call Tuesday. "It has caused certain customers to reduce their spending on leisure and entertainment."

States taxable sales plummet 5% in January '08

Nevada's funding problems worsened Friday when the state Department of Taxation announced that taxable sales for January plunged nearly 5 percent from the year before, the biggest drop of the state's current economic slowdown.

Every major component of the taxable sales base was down in January, from auto sales to restaurant purchases.

In a separate report issued Friday on Nevada's February unemployment rate, Bill Anderson, chief economist for the Nevada Department of Employment, Training & Rehabilitation, suggested that an upswing in the economy isn't expected immediately.

Governor Gibbons Dealing With Major Budget Cuts

Concerns are mounting that the $900 million state budget crisis could get worse. Thursday Governor Jim Gibbons was in town and he outlined how he intends to decide what to cut.

So far the conventional wisdom has been correct, it's going to get worse before it gets better. The governor said some departments will be spared from further cuts, while everyone had better get used to the same old, same old everywhere else.

K-12, public safety, corrections and juvenile justice. Should it stay or should it go? These are the decisions haunting Governor Gibbons. $900 million is looming and more programs want more money than ever before.

Nevada governor says budget shortfall is nearly $900 million

CARSON CITY, Nev. — Nevada Gov. Jim Gibbons said Monday that the state's budget shortfall could reach $900 million by mid-2009 and he'll work with legislators to find more ways of reducing spending beyond the 4.5 percent cutbacks he ordered in January.

After two closed-door meetings with both Democratic and Republican lawmakers, the GOP governor also told reporters that he hopes to avoid layoffs of state workers. However, there's still a possibility of additional budget cuts of up to 3 percent for some agencies next fiscal year.

The projected $900 million shortfall amounts to 13 percent of the nearly $7 billion state budget approved last year for the current two-year budget cycle, which runs through June 2009 - and if the revenue slump continues, the shortfall estimate will grow even larger.

City of Las Vegas Faces Historic Budget Deficit

The city of Las Vegas is in the red and facing one of the largest budget deficits in city history. The mayor and the council called an emergency meeting to come up with solutions.

The city finance director says the Las Vegas housing market and consumer spending are in a recession although overall the city is not in one yet. Still, it means huge cuts that will affect every department and Las Vegas residents waiting longer for services.

"Only an idiot would say that everything is going to be hunky dorey. It is not. We are just going to have to do what we can with the money that we have," said Mayor Oscar Goodman.


So, where does Las Vegas go from here?

For lack of better words than those I've already written, I'm going to repost some of my closing thoughts from a December 07 Las Vegas Housing Bubble Post, as they still apply

Las Vegas’s economy has been completely dependent on the discretionary spending of vacationers (Airlines, Hotels, Restaurants, Shows, Gambling, Drinking, Strip Clubs, etc) and the city lacks any real or substantial diversification. When tourism & discretionary spending finally start to decline (due to National negative savings rates, rising inflation and falling home values), gaming revenues will drop, hotel occupancy rates will fall, and thousands of layoffs will follow.

Those locals who find themselves unemployed will quickly find that they have very limited options, as the entire hotel & gaming industry will be feeling the same economic pains. The lack of industry diversification in the city will be a killer!

Currently, with housing values falling, the wealth effect is under strain and many people are having difficulty understanding what has happened to the housing market, while most are still holding on to the false hope it will recover somewhat quickly.

In the meantime, these folks have a mortgage that must get paid, all while coping with higher gas, food prices, tuition, insurance, energy bills, etc. Many are already strained to the max and the black hole of upcoming teaser rate mortgage resets will finally set them over the edge. (Note: refinancing will not be an option for those who have purchased within the last 3 years because they are already underwater; additionally many who have owned for decades used the cheap rates and housing boom to extract available equity--to live beyond their means; so they too cannot refinance).

This same issue is beginning to impact millions from across the nation!!!

Additionally, the home ATM machine that people used to draw money out of regularly has finally dried up, so they have ended up resorting back to the credit cards (the same ones they paid off with that home equity line of credit last year) just to make daily ends meet.

This is going to end horribly (on a national scale)!

BOTTOM LINE: When tourism starts to wane, due to people running out of discretionary cash, gaming/hotel industry layoffs will follow, cascading the impacts of the already doomed Valley housing market, as more locals will be unable to meet their monthly mortgage obligations.

Reduced spending levels, increasing layoffs, magnified home foreclosures and tightening credit conditions will cause a doubly painful domino effect on the Commercial real estate market and in due time, the impacts will be extremely painful to the entire economy. .. State Tax revenues will fall, budget cuts will follow and the increasing number of government layoffs will only exacerbate/compound the situation.

I think one of my readers summarized the situation best: “ Las Vegas lives off the margin. Good times, fat margins; lean times, no margin. LV has no plan B, there's nothing to take up the slack from a decrease in visitor volume. Even dollar rich foreigners aren't going to hold up employment that is based on a volume service industry and housing construction.”

Randy

GOLD -- How High?

Well, as expected, the Fed cut rates again today and Gold took off while the dollar fell.

Bernanke cut rates on December 11th, followed it up with a emergency cut last week, and then a new one today. Holy cow! Sure seems like someone is running scared, as cuts are becomming quite a common occurrence. I even believe we may see another emergency cut before March 18th. Stay tuned...

So, with all the recent rate cuts, what's happening w/regard to our economy and what are the expected consequences for gold?

Let me try to keep this simple and find a good starting point:

If you’ve been keeping an eye on the Gold and Silver Market over the last couple of years, you’re probably well aware of the fact that precious metals (PM) are exploding in price, but (like many) maybe you don’t really understand the PM market, or recognize the reasons why we’re seeing the rapid price increases.

Well, in an attempt to help you understand what is transpiring, I’ll provide a few of the reasons for the price explosion below:

• The US Housing bubble has finally burst and is expected to get much worse
• Our financial/banking system offloaded too much toxic paper (mortgage backed securities and derivatives of such) to foreigners and investors who have been burned badly & are not happy about it.
• Banking system write-downs have been massive thus far and more will follow
• Credit markets are locked up and mortgage lending standards have tightened dramatically; the negative consequences are expected to cross over to auto loans, credit cards, etc later this year
• Fed Chairman Bernanke and the PPT team (led by Treasury Secretary Paulson—previously CEO of Goldman Sachs and a Treasury “Plant”) have panicked and have sacrificed the dollar in an attempt to bail out our financial/banking systems -- By lowering rates 125 b.p. in just 8 days, at a time when the dollar is at its weakest point in history, should be proof enough of their priorities and loyalties.
• Deflation is on the horizon and therefore the Fed will make every attempt to INFLATE (print more money and inject it into the system—continuing to devalue our currency)
• Foreign dollar holders are working to diversify their holdings—among other things, in different currencies, commodities, energy & gold
• 43 of the world’s largest stock indexes, from around the globe, have officially entered “Bear” Territory in early 2008
• There is wide-scale pressure afloat to price oil in currencies other than the depreciating US Dollar
• OPEC nations are seriously discussing the need to de-peg their currencies from the dollar, as inflation internal to their domestic economies has been raging out of control
• Investors are fleeing volatile markets and are seeking security in gold

Now, I'm not saying that we won’t encounter a volatile ride w/gold, as we will most likely experience wide swings in the future--some up and some down (maybe even a down-swing back into the low $800's in the not so distant future), but overall I believe the mid-to-long term trend is Up, Up, Up!

Ok, if the long-term trend is up, just how high can the gold price go?

Well, based on the 1980 high of ~ $850, today's > $920 price is a new "nominal" dollar denominated high, but if you were to adjust for government published inflation figures, gold would need to be > $2,200oz to equate to the $850oz, 1980 price.

Additionally, as I've told you before, our governments published inflation stats have been understated for many years, and if the true rate of inflation were to be used in the calculation process (using the same metrics from the early 80’s – metrics that have changed dramatically since--to severely understate inflation), Gold would need to be priced ~ $5,000oz to equate the $850 purchasing power of 1980.

Looked at another way: Gold was $35 oz back in 1971 and soared to ~ $850 in 1980 ($850/35=24.2)—so it increased in price by a factor of 24. Now, if we were to select the bottom of the last Gold bear market in 2001 and multiply $250oz by the same factor of 24, the potential upside target of $6,000oz is not unrealistic—if the same stag-flationary environment were to return (which many predict will happen).

With all that now said, I believe the fundamentals of today's economy are much worse than those in the 70's, as back in the day we were a net exporting country, had a strong manufacturing base, had a positive national savings rate, and very little debt. Today foreigners are holding > $4.4 Trillion of our dollars, we have a $9+ Trillion dollar debt load, are running extensive trade deficits ever year, and have > $60 Trillion in un-funded future obligations.

Bottom line: I feel this Gold bull market is still in its early stages. When gold finally breaks the $1,200 mark, common investors will most likely wake up and the gold market will be flooded with new dollars. Eventually, the gold market will become a bubble itself and when that happens, it may be time to cash out.

Hold on to your hat because it's going to be a very interesting and wild ride…

Regards

Randy

Precarious Economic Conditions & Gold

The Dow Industrials and S&P 500 have dropped ~ 14% since the October 07 top. The S&P has started this year worse than ever, and the drastic plunge over the past three days is the sharpest since 2002.

We’re now six months into the greatest credit crunch of the modern era. Defaults on mortgages, have skyrocketed as individuals find it more advantageous to mail the house keys back to the lender rather than make sharply higher reset payments they can’t afford.

It’s not just the borrowers who are suffering. It’s also the banks, pension funds, life insurance companies and individual investors who bought toxic mortgages, repackaged as complex securities from Wall Street investment banks.

But the roller coaster ride of bank and financial system losses has merely just begun:

Insurer Of Bonds Loses Top Rating

Ambac Financial Group, the nation's second largest insurer of bonds, lost its precious AAA rating from Fitch Ratings on Friday over concerns that the company no longer had enough capital to guarantee billions of dollars in debt now imperiled by the subprime mortgage crisis.

The move to downgrade Ambac to a rating of AA could further roil financial markets, increasing pressure on Wall Street banks that hold this bad debt and making it even more costly for local governments to raise money for public projects.

This could spark a substantial sell-off by institutional investors such as pension funds that can only invest in top-rate securities, causing their value to drop. That in turn would prompt even more selling. As the securities become less valuable, Wall Street firms could be forced to write down billions of dollars on their balance sheets, restating how much their holdings of these securities are worth. The banks, which have already suffered staggering losses, have relied heavily on bond insurance to reduce their exposure to subprime mortgage debt and other complicated securities linked to these loans.

"Everyone thinks they're looking at the cliff over Armageddon," said Ed Rombach, senior derivatives analyst at Thomson Financial. "If you think the write-downs have been bad so far, the next write-downs could be twice as big."

MBIA Next?

Insurance company MBIA Inc. (MBI) Friday said it found the move by Mood's Investors Service to review the company's ratings for a potential downgrade, surprising. Moody's initiated a review of the Aaa financial strength ratings of MBIA Insurance Corp. and its affiliates as well as the Aa2 ranting of MBIA's latest Surplus Notes.

The rating agency also contemplates a downward revision of the Aa3 ratings of the Junior obligations of MBIA Insurance and the senior debt of MBIA Inc. MBIA stock is currently trading nearly 23% below the previous close.

End of the Line for Monolines

Just a few days ago Merrill Lynch stunned Wall Street by reporting a net quarterly loss of nearly $10 Billion. It was the worst quarter in company history. This much was well reported.

What didn't get nearly the attention was the largest reason for Merrill's loss. This involves a little known company called ACA Capital and a financial model on the verge of collapse.

Financial institutions that trade in mortgage-backed securities very often buy insurance, in the same way you buy insurance for your car, to protect themselves in the event of a default by the mortgage borrowers.

The problem is that a tidal wave of mortgage defaults are sweeping the nation, creating so many losses that small bond insurers like ACA are getting swamped. As it stands, ACA is expected to go under any day now.

Of course this means that when the bond insurer goes bankrupt all the bonds that it had insured are no longer protected, hence they are riskier. In the world of bonds, price and risk are directly and inversely proportional. Merrill's bonds go down in value the closer ACA gets to bankruptcy. Thus the huge losses.

These downgrades mean a lot more losses are in the works for financial institutions. If all the bond insurers were to be downgraded, that would mean $200 Billion in losses for whoever holds debt that is insured by the monolines. If the monolines all go bankrupt then the losses would be much more.

To put that into perspective, total losses from the entire subprime credit cruch since August that have rocked the financial world and garnered headlines so far have only amounted to a little over $100 Billion.

That's right. The damage from the credit crunch that has worried so many people could triple in the coming weeks.And for these struggling bond insurers, bad news can lead to more bad news. An entire financial model is on the verge of collapsing.

Enter the Plunge Protection Team

Created by Ronald Reagan back in 1988 through executive order 12631, the Working Group on Financial Markets, also known as the Plunge Protection Team (PPT) was created to respond to events in the financial markets surrounding October 19, 1987 ('Black Monday').

The Current PPT group is made up of:

Treasury Secretary Paulson (Chairman of the PPT)

Ben Bernanke (Chairman of the Board, Federal Reserve System)

Christopher Cox (Chairman of the Securities and Exchange Commission)

Walter Lukken (Chairman of the Commodity Futures Trading Commission)

These four PPT Kingpins, with inputs/suggestions from their numerous advisors, are currently operating in panic mode and are attempting to gin up new ways to thrust new money into the falling markets and US economy. The present situation has become so precarious they are now routinely advising President Bush and were actually the “brains” behind recent calls for tax rebates -- meant to pump up consumer spending. In the meantime (tax rebates will take time), they are using government funds to pump money into the futures markets--in an attempt to "fry" the shorts and make the impression that big money is buying up the falling market. The hope is: if other traders see this, they will start following the big money higher (probably futile).

President Bush acts on PPT Advice:

President Bush yesterday grabbed the headlines with his "economic stimulus" proposal -- it may be a "tax break," or a "rebate check" of $800 to $1600, and/or allow businesses to deduct half the cost of new equipment purchases. The stimulus will be "direct and rapid," "provide a shot in the arm," "lift our economy," and "help the economy create 500,000 more jobs 'more or less' than it otherwise would." (Article Below)

Bush: Economy Need a Shot in the Arm

President Bush proposed a series of short-term tax cuts Friday that he said would provide a boost for the struggling U.S. economy.

Speaking at the White House, the president did not give details of his plan but said it would include tax breaks for businesses and individuals worth at least 1 percent of the nation's gross domestic product, or roughly $140 billion to $150 billion.

"By passing an effective growth package quickly we can provide a shot in the arm to keep a fundamentally strong economy healthy," said the president.

He said that his advisers believe the economy can keep growing, but that the risk of a downturn has convinced him to back a stimulus package.

"There are also times when swift and temporary actions can help ensure that inevitable market adjustments do not undermine the health of the broader economy," Bush said. "This is such a moment."

Federal Open Market Committee Rate Decision Due on 30 January 08

What should we expect? I think, due to recent market weakness, a 50bp cut is an absolute certainty while a 75bp cut is looking more probable by the day. My thoughts are: if we don’t see some market improvements soon, we may well see an emergency rate cut before the 30th, followed by another on Jan 30 – a total cut of 75bp or better.

So, what does all this mean for gold

Consolidation kicks in

Gold bounced from a one-week low on Friday after this week's climb to a record above $900 an ounce, but the market could consolidate before charging higher, fund managers and analysts said.

All eyes were on a U.S. Federal Reserve meeting on interest rates Jan. 29-30 after Chairman Ben Bernanke told a congressional committee more rate cuts might be required as the economic outlook worsened.

"Gold is consolidating after touching recent highs," said Christoph Eibl, head of trading at Tiberius Asset Management, noting that there had been some investor selling of gold held in exchange-traded funds (ETFs).

"ETF investors ... are holders rather than traders, therefore the recent drop has some strength," he said.

Gold's drop from the record high was partly driven by selling from investors and funds to cover margin calls from losses in stock markets amid fears of a recession in the United States.

Gold's investment appeal was intact owing to flight-to-quality demand on the back of turmoil in financial markets as a result of a mortgage-related crisis and worries about higher inflation.

"External factors such as higher inflation expectations, broader economic concerns, geopolitical tensions and Fed rate easing are likely to drive prices higher," Barclays Capital said in a report.

The World Melts for Gold

Gold-bug fever is spreading.

From China to the Middle East, new ways to invest in gold are rapidly popping up in developing countries. It's transforming the market for one of mankind's most venerable ways to sock away wealth.

The door is opening to a new class of investors who previously wouldn't have had access to gold futures and other tools. Their rush to invest has helped fuel soaring prices -- gold crossed $900 an ounce for a time in the past week, and there are some calls for $1,000 -- while adding volatile new dynamics to the market.

The democratization of gold speculation outside traditional Western financial centers has the potential to magnify the already strong appeal of gold as a hedge against global recession, inflation or just general uncertainty.

Gold rush" grabs Chinese as prices hit new high

The appeal of gold as an alternative investment is increasing in China as its price hits new highs and is forecast to keep rising in the mid to long term.

Stimulated by expectations of U.S. interest rate cuts and soaring global oil prices, gold reached an all-time high earlier this month. Citibank estimated its price is expected to hit 1,000 U.S. dollars an ounce this year.

The strong upward trend has attracted individual Chinese investors such as Yao Yun. The chief financial officer of a Shanghai-based foreign company bought 50,000 yuan (6,849 U.S. dollars) in gold bars and the price has risen by 12 yuan per gram in just half a month.

"I believe the price will keep rising," he said. "The stock market is too volatile, and the real estate sector is subjected to macro-control. Investing in gold is a good choice at this time."

In Caishikou Department Store, a popular physical gold dealer in Beijing, more than 100 people lined up to purchase bullion for the Lunar Year of the Mouse on Nov. 22, the first trading day of the products. More than 200 kilograms of the gold bars were sold within 1.5 hours. Moreover, the total subscription amounted to two tons.

Li Xiang, a manager of the department store, said sales of gold products surged more than 50 percent to 2.38 billion yuan in 2007.

China Gold Association statistics revealed that gold investors nationwide have exceeded 1 million. The number doesn't include speculators of gold futures, which made a strong debut in Shanghaion Jan. 9.

On that day, China gold futures contracts surged to the daily 10 percent limit minutes after trading started at 9 a.m. on the Shanghai Futures Exchange (SFE). More than 6,000 clients traded on the market.

Experts believe the China gold futures market will grow into a leading global market as it was launched at a time when international gold prices have repeatedly been hitting new highs. Global prices jumped more than 30 percent throughout last year, representing the biggest increase since 1979.

Russia’s gold and forex reserves reach all-time high

Russia’s gold and foreign currency reserves have increased by $11.5 billion (2.5 percent) over the past three weeks, to $477.7 billion. This is the highest level since records began.

Bottom Line w/regard to Gold:

Expect to possibly see some more short-term consolidation, but with future (significant) rate cuts in store and growing worldwide demand increasing, the long-term trend will be up, up, up.

Summary of this article:

Major problems are on the horizon, markets are reeling and the mainstream is finally catching on to what we've been predicting for quite some time. The Plunge Protection Team however is working overtime and with an oversold equities market, I expect to see a short-term bounce, but it will fail to ultimately recover or impress.

Additionally, the Fed is certain to cut rates big-time in the coming weeks, and Congress will approve some sort of stimulus plan next week (probably too little too late), but once the Monoline downgrades (w/more to come) start the chain reaction of downgrade/markdown dominoes, we will begin to hear the fat lady sing.

As an aside, these new rate cuts and stimulus plans will most certainly cause the dollar to plummet to new all-time lows, and consumer inflation (already running at > 12%--see blue line on chart below) will soar, causing gold to take off on another tremendous up-leg.

I took the liberty of borrowing this Gold spot price chart below from Axstone.

SMILE IF YOU OWN GOLD!

Regards

Randy