BETWEEN A ROCK AND A HARD PLACE
Before grappling with and trying to solve any problem, one must first accumulate and then examine the real facts. The sub-prime borrowers are definitely at risk of losing their homes, but they are NOT the ones who are in trouble since most of them did not put any money down in the first place. In addition, most if not all took at least some money out. If nothing else they received their last month and security deposits back from the rentals they left when purchasing their homes and that is assuming their initial mortgage was not for more than the purchase price. Quite a few were actually able to get a mortgage anywhere between 5% to 25% above their purchase price.
After a year or two of basically a free ride they come to the realization that they cannot possibly meet the new greatly increased monthly payments, due not only to the resetting of the ultra low teaser interest rates of their ARMís, but compounded by even larger increases in real estate taxes, home and especially hurricane insurance as well as increases in condo or home owners fees (quite often one to three years of common charges and membership fees were waived in order to close the sale in the first place). Upon the realization that they cannot possibly meet these increased costs, they STOP PAYING altogether. It then can take easily nine months to a year or more before foreclosure forces them out of their homes; the net effect being that they live rent FREE for as much as a year.
It is the mortgage holders (Banks, S&Lís, Insurance Companies and Mutual funds, etc,) and their guarantors who will end up taking the biggest beating. Not only do they get back their security (a house) that is now worth a lot less than the original outstanding mortgage which has since been increased by negative amortization refinancing but the house is quite often trashed and all the fixtures and appliances disappear in the process.
IT IS WHAT IT IS:
A BAILOUT OF THE FINANCIAL INSTITUTIONS
Any Government or Bank refinancing scheme, no matter what they call it, is not really a bail-out of the poor hapless homeowners at all, but is in reality a bailout of predominantly banks and financial institutions.† However, any so called homeownersí bailout is in reality only a delaying tactic for the benefit of the mortgagee so that they do not have to write off their losses and reposes homes in a falling real estate market. They can still collect at least some money and have their collateral maintained instead of being trashed by the homeowner (read occupant because they are not really the owners), while they wait and hope for a rebound in home prices. There is no way, short of a huge increase in salaries for these people, who were actually paid as well as sucked into buying overpriced homes that they could never have afforded in the first place, to ever pay off their mortgages. It would be impossible for them to keep their home without yearly 25% increases in home values in conjunction with falling interest rates which, in the long run is impossible. To maintain.
There are many others, even some prime borrowers that have invested their life savings, nevertheless they too, have all to often, over-extended themselves chasing the American dream of making easy money in real estate. Need I emphasize what will happen should even a mild recession develop and just one of the two wage earners needed to make their monthly payments loses their job? Or if Wall Streetís multi-million dollar bonuses drop back to reality at the same time as their real estate agent wives stop making their six figure commissions; how many multi-million dollar homes and condos of what were thought to be prime borrowers will suddenly come onto the market at ever deflating prices.
At the end of every bubble, it is always the irresponsible, reckless financial institutions that end up holding the bag. Unfortunately, itís the Government (read the Taxpayers) who are always forced to ride to their rescue, but it wonít be the hapless poor homeowners who we will be rescuing. In the 80's real estate debacle it was only the Savings and Loans that needed to be bailed out. This time around, the carnage will be much bigger as a bailout of the major banks will also be required to save them from their irrational and reckless lending spree which is now financing the buyout and takeover craze. If paying 25% premiums above a companyís all time high is not a craze, I guess I donít know what one is.
BETWEEN A ROCK AND A HARD PLACE
WE, meaning the FED, Bernanke, the US Economy and of course WE the people are caught between the proverbial ROCK AND A HARD PLACE. On one hand, we are facing an exploding bubble in real estate with every talking media head and Wall Street economist clamoring for lower interest rates while, on the other hand, we have the US Dollar falling to near record lows and teetering on the precipice of an out and out crash which will soon be screaming for higher interest rates in order to save our precious dollar. If we raise interest rates enough to save the dollar, the stock market takeover bubble and especially the Bond Markets will crash and I donít have to tell you what will happen to real estate and the stock market: A Depression is a virtual certainty. However, if we lower interest rates in an attempt to save the real estate market, inflation will explode, leading to the same inevitable conclusion as raising rates will have caused. And that, my friends, is the CONUNDRUM TO END ALL CONUNDRUMS and the perfect example of what it means to be caught BETWEEN A ROCK AND A HARD PLACE.
WHAT DO WE DO NOW?
I am sure glad that I am not Mr. Bernanke or any politician because no matter what they do, they will end up being wrong. The die has been cast by 20 years of mismanagement and the piper must always eventually be paid.
THE BIG HOOK
As for now, LET THE GOOD TIMES ROLL. The party is in full swing and as long as the champagne (Money) keeps flowing and the dollar kinda holds its own; enjoy the ride while you can. Whatever you do, DONT get in the way of that runaway freight train, like the perennial bears have been doing, some for as long, as would you believe, 20 years.
Although I too have been generally BEARISH over the last 7 years I have, unlike a lot of other bears, believed in what my charts and indicators were telling me and so I kept warning you and me that the last big hook was not yet in place. Keep your powder dry and buy gold into any weakness. †Whenever we are approaching a major turning point, Timing is everything; fundamentals mean nothing especially since we do not know what weight to apply to the various and often contradictory factors
I have been warning you all for years that the Bullish SENTIMENT figures never approached the extremes necessary to signal anything but short term tops. Now as the DJII breaks out to new all time highs on its way to past 13,000 these figures are more closely† correlated to market bottoms than they are to market and especially not the major top that everyone is looking for. As long as sentiment readings remain bearish and their bearishness increases as the market climbs its WALL OF WORRY, this Bull stock market is not yet over and itís far too dangerous to go short now. Although this Bull Market is living on BORROWED TIME, it has been doing so for 4 years: The longer it does, the bigger will be the eventual crash. But donít get impatient; if you get bearish too soon, you will get trampled by the on rushing BULL. TIMEING IS EVERYTHING. So hang on to your horses and keep your powder dry: There is nothing worse than being proven right but ending up broke.
SO WHAT TO DO NOW?
Actually for us, as individual investors, it has never been so easy. If you had jumped on GOLDĒS BULL TRAIN any time back in 2001 to 2003, you have more than tripled your money while waiting for that great shorting opportunity. But guess what, itís not too late. No matter what course of action the FED and the Government takes from here on in, it will be GOOD FOR GOLD. Just donít over leverage yourself, so as not to get bucked off that raging Bull and donít worry about the short term fluctuations and just continue to accumulate Gold on any and all pull-backs. As far as gold equities are concerned they are presently undervalued in relation to Gold Bullion especially the majors. Nevertheless, Gold is going higher, a lot higher and the worse conditions get or the better they get, depending on which side of the fence youíre on, it matters not: If times stay good and more and more Fiat money is created, the higher inflation will go and the higher GOLD will go. The world is awash in Fiat Money, which always translates into inflation, no matter how much governments play with the CPI figures.
When eventually the S..T Hits the Fan, what doesnít get wiped out by the eventual financial crisis, will rush to get into that last and only BULL MARKET in town; GOLD.
Remember, there are over 10,000 mutual funds that cannot go short and yet must still be fully invested. If the only raging Bull Market is Gold, where else can they put their money?
I keep receiving inquiries about Silver and their stocks - will they also go up? †They will and they may even out perform gold, at least in the beginning, but Iím not sure how bad itís going to get. However, why look a gift horse in the mouth? Gold is offering a minimum triple over the next three years. What more do you want? Can you make more than that in Silver or in Gold, Silver and Uranium junior mining stocks? †Of course you can, if youíre in the right stocks. But, if you play the juniors, you must diversify and if you diversify, you may have some very big winners which you will not know when to sell and you will have some losers. In the end, you will have made more money by sticking to and if you are that aggressive to want to play with juniors, leveraging your Bullion positions with a lot less aggravation and worry. If you still insist on rolling the dice, you will have to find somebody smarter than me to help you. I will not answer any inquiries about individual stock. So please donít ask.
Believe it or not, I am not a Doom and Gloomer. I am really an optimist, in that I believe that with Godís help we will come out of it all right: Sadder and hopefully much wiser. BUT GOLD is good even under the worst of conditions and if three (3) to ten (10) times your money is not good enough for you, then Iím sorry but that is the best I can do.
GOOD LUCK AND GOD BLESS†††††††††††††††††††††††††††††††††††††††††††††††††† April 22, 2007
Aubie Baltin, CFA, CTA, CFP, PhD