In the previous seven cycles since 1959, housing starts have fallen, on average, as we have mentioned before 50.7% from peak-to-trough. Each time housing prices have fallen more than 25% from their most recent peak, a recession has followed, with only a contraction in 1960-67. It should be remembered that although the recession did not fully occur the stock market collapsed in September of 1968, in a delayed action. The pullback in housing starts still has another year to go and with the nature of loans made in the past three years that 50.7% figure is probably on the low side. It could be as high as 70% and that would cause a very deep recession. The fall in starts should start flattening out in November 2007, as the recession really takes hold. As far as starts and sales are concerned they are going to be adversely affected by cancellations, but even more by speculators and second homebuyers that made up 36% of sales for the last at least two years. Many of those homes have and will continue to hit the market on a long-term basis. Those sales and foreclosures cause downward pressure on the market. As we cited in the last issue homes in Naples, Fl are already off 25% to 35% and we have a long way to go.

Official statistics from government have homes at 3.1% nationwide. We are only interested in the 30 former hot areas where the big gains occurred. We are not interested in areas where homes never really appreciated. They won’t have problems. The national average does not affect the former hot areas, the problem areas. In addition this national number does not take into consideration the tremendous inventory overhang. We have a long way to go and it is going to be difficult.

Our lawmakers in the House and Senate have approved $38 billion in tax breaks and a Vietnam trade measure and voted to open a large section of the Gulf of Mexico to oil and gas drilling.

Provisions of the tax bill will be very costly. There is a tax break for songwriters, health benefits for former coal miners and who knows what else. Our Congress which ends shortly will go down in history as the worst ever along with our president. The tax bill passed the House 367-45, and it included drilling in the Gulf for oil. Included as well was a cancellation of a scheduled 5% cut in payments to doctors who treat elderly Medicare recipients and changes that would allow individuals to put more money into tax sheltered health savings accounts, a new type of medical insurance favored by many Republicans.

Halliburton breached the terms of its multibillion-dollar contract to provide US soldiers logistical support in Iraq when one of its subcontractors outsourced security work to Blackwater USA, according to new documents released by Rep. Henry Waxman (D-CA). The Army has refused to answer Waxman’s questions on the subject for two years. Halliburton has been accused of grossly inflating costs of its work. Halliburton just paid an $8 million fine for overcharging for work in the Balkans. Prior to the war Halliburton was on the verge of bankruptcy. This time Halliburton may get nailed for fraud. In a Congressional hearing Blackwater was ordered to provide documented proof to back up testimony and they told Congress to get lost. The neocon crooks cannot stop stealing.

Congress as you saw earlier cut taxes $38 billion again. Get this: Between the first quarter of 2001 and the second quarter of 2006 all assets of all levels of government grew by 16%, $2.4 trillion. During the same period liabilities grew by $2.6 trillion, or 40% to $7.9 trillion. There is no political effort or will to cut federal debt and our dependency on foreign borrowing.

When the plug gets pulled on this madness the debt implosion and financial collapse will happen too fast for the fed to stop it. The unwinding of leverage will be devastating as the Fed stands by and does little or nothing, because it will be out of their hands.

Neocons are falling like ten pins. Wire service reports that Philip Zelikow, Secretary of State Condoleezza Rice’s most senior adviser on Iraq, has tendered his resignation. It is too bad Condi doesn’t take the tip and leave as well. Her lies and deceit would probably fit well back at Chevron. She is part of a lunatic fascist group that blows up buildings with people in them to justify wars. The concept is then to police the earth and build corporatist fascist governments in all nations. Anyone who questions his or her motives is crushed. 

The impetus in the rally in housing stocks has been the investment by the foundation controlled by Bill Gates and Warren Buffett and the ravings of one Mad Man Cramer, who has an unspeakable financial sideshow on CNBC. If you remember Gates and Buffett prematurely went short the dollar with disastrous consequences. Cramer is not having his contract renewed even though his show has been financially successful for the station. If you go back to the late 1940s you’ll find that housing has never had a soft landing. In the 1950s and 1960s there was still a stigma attached to foreclosure and bankruptcy, just as there was for divorce and illegitimate children. That has all changed but the hard landings haven’t and few would hesitate for a second to walk away from a house payment they couldn’t make or to enter bankruptcy. As a consequence this time it is not going to be different. It is still cheaper to rent then to buy and housing inventory for sale is the highest in many years. For builders it is a free for all. Discounts of all kinds prevail, up to 20% to 30% of the value of the asking price. That, of course, distorts the value of home prices. If you sell a home for $300,000 and give discounts of $60,000, the house is worth $240,000. The lenders and Fannie Mae and Freddie Mac know this. We wonder if the buyers of ABS, Asset Back Securities, know this? We do know they know when loans start to fail only 3 or 6-months after purchase, we know they want their money back. Those loans end up with the original lender and some of them are going to end up bankrupt. The result is builders are lucky to break even on the homes they are selling. We know that builders have to plan a project 3 to 5 years ahead of construction; so many projects cannot be stopped in spite of the glut. Thus, you can expect overbuilding for another six months to a year. There is no way of stopping it. Be prepared for mega inventories for 2007 and 2008, even though many who have had their homes up for sale for a year or more and have reduced prices several times, will give up and remove their For Sale sign. Builders probably have walked away from many options for land and taken those losses already, but many still own lots of land – a good part of which is already worth 25% to 30% less than they paid for it. That land has not been marked-to-the-market on their books as yet so we do not want to hear how strong their asset base is. Land is far more difficult to sell than houses. These builders have projects in motion that have a year or more to go to completion from the infrastructure upward. Then the builder has carrying costs on land under development and land he owns at high prices he doesn’t dare develop. Some of that land that isn’t developed has a development time frame and local agencies fine or confiscate a bond if construction has not begun. The result is few starts, fewer profits, perhaps losses and a cut in the underlying asset value of the builder. Wall Street doesn’t like that so they sell the builders stock. That is why so many IF subscribers have already made 50% on their housing shorts with more to come in spite of political share purchases by the likes of Gates and Buffett. Many builders will again go bankrupt and just because they are listed on the NYSE doesn’t mean anything.

The collapse in the housing industry and the real estate, appraisal and lending industries, is just really getting underway. The next three years will be the gory part. There will be no soft landing no matter what you hear from the industry, high profile investors with money to burn, Wall Street and our lying government. Only be short building stocks. If you still have property for sale drop the price and get rid of it. If you live in one of the former hot areas you still have 25% to 40% on the downside to go.

America’s deindustrialization is expanding at a major clip. Services now make up some 90% of the economy as more jobs leave our shores everyday via offshoring and outsourcing. Services remind us of waiters shifting deck chairs on the Titanic.

Last week’s durable goods orders took a terrible plunge, the worst in six years. The same happened with factory orders. The Chicago PMI fell below 50 and that’s a harbinger of things to come. Sure services rose, but services do not produce anything. They produce nothing for export to help our balance of payments deficit. Very simply, the economy is headed into the toilet. Without trade tariffs we cannot compete and thus, we are headed toward economic trouble. The economy continues to slow in spite of a sea of money and credit - this because that money is being used for speculation. It is creating nothing but debt and more debt. The debate on how we can save our economy will only come after there is a realization that we are in a recession, unemployment that Washington cannot cover up is climbing and Americans cannot pay their debts. We cannot employ people to make things because our plants and factories are in the third world and our plant and equipment are run down and out of date. Due to our accumulation of debt, private, corporate and governmental we have become a poor nation. In fact, we live at the grace of foreigners who invest $3.5 billion a day into our economy to keep it from submerging. We are not rich like we were in the late 1950s. In order to return to growth and prosperity we have to allow our economy and financial system to be purged and until that is accomplished and trade tariffs are in place, we will continue to slide and ultimately be forced to face the inevitable.

The catalyst for change will come next year as America slides into recession. That is when serious debate will get underway. Americans are going to have to liquidate a great deal of household debt that has doubled over the last six years and they will have to save. As we pointed out earlier that middle and lower class Americans are cutting back on spending. Wait until you see the final figures in January for December for Wal-Mart and Pier One, etc. By June all Americans will know we are in a recession. What they won’t know is that it started almost 1-1/2 years earlier. Of course your government, Wall Street, CNBC and corporate America will be telling you there is no recession, it is only a slowdown. A year from now they’ll admit to a mild recession, and lie some more. In 2008, they will stand mute knowing they have been discovered for the liars that they are. That is when America will realize that the IF was right and that we are headed into depression. Probably during 2008 business will stop using the copious credit available and when that happens we have a year to get our house in order and go totally to gold bullion coins. In 2009, the Dow should be between 3,800 and 6,200. All of you should be out of the market now. In pension plans if you cannot buy gold and silver stocks and coins or gold mutual funds, go to money market funds, if not go to Treasury bond funds, if you cannot do any of those things you will be screwed.

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GOLD, SILVER, PLATINUM, PALLADIUM AND DIAMONDS

Yamada Technical Research says gold will surpass $730 next year on its way up to $3,000 within a decade. Gold is the purest play against the dollar says Louise Yamada. She is the former head of technical research at Citigroup. She gave the gold buy signal as we did in 2001. Gold will be an investment giant over the next three years.

            Oil producing countries have reduced their exposure to the dollar to the lowest level in two years and shifted oil income into euros, yens and pounds, according to new data from the BIS. Russia and OPEC countries cut dollar holdings from 67% to 65%. They increased holdings in euros from 20% to 22%. Qatar and Iran cut holdings by $2.4 billion and $4 billion respectively. The last time this happened in 2003 it pushed the euro to an all-time high against the dollar. Just 18-months ago, the exposure to the dollar of oil producing countries was above 70%.  The rise in oil prices since 2002 means oil producing countries have amassed a current account surplus of about $500 billion or 2-1/2 times the current account surplus of China. Overall, OPEC dollar deposits fell by $5.3 billion, while euro and yen-denominated deposits rose $2.8 billion and $3.8 billion respectively. Dollar sales by Russia were $5 billion and most of their $16 billion additional deposits were denominated in euros.

            Again Monday morning was not normal. In anticipation of the Beijing meeting on Friday and Saturday by US elitists they trashed the euro for 2.10 and the pound for .34 in Europe. The commercials last week in the COT covered more than 18,000 contracts and as yet lease rates have not revisited .02% or .04%, but that changes daily. There is a much smaller gold short on Tocom by the big 7 and even Goldman has been covering. This is all good news for gold. Overnight gold was off $5.00 and was trading at 5:00 a.m. at minus $2.00. After NY opened it moved up $2.00 and then faded back to even. Silver was minus $0.05 and came back to even. The ECB raised interest rates last week ¼% and that should have pushed the euro higher, but the US Treasury and Fed would have none of that. One good thing is that gold has rallied back but as yet the euro and pound haven’t.

            As the day closed the pound rallied to a plus .0032 to $1.9563 and the euro came back from a minus 2.10 to a minus .0148 to finish at $1.3222. The Canadian dollar rose .07 to 87.12, and surprisingly the dollar index fell .21 to 83.12. Just think where the index would be if the euro was just unchanged. The dollar is in serious trouble even with intervention. We may see very serious pressure after the Beijing meeting.

            Monday’s gold close was up $3.00 to $629.80 and silver rose $0.08 to $13.83. The February contract for gold was up $3.80 to $634.80, silver rose $0.13 to $14.03, copper rose $0.02 to $0.02 to $3.13 and the access market was up $0.20. We had a little help from Sir Alan Greenspan today, who said in the Tehran Times that one must keep a close eye on the dollar because if other oil exporters were to shift from dollars (they already are – read the BIS figures elsewhere in this issue), to euros as they invoice oil receipt charges, it improves the euro’s value as money. The Friday Tocom major shorts added 1,075 contracts to 127,486. Goldman made up 667 of those contracts. In silver 177 contracts were added to the long positions, putting that total at 842 contracts long. Monday’s XAU finished up 1.35 to 144.4 and the HUI gained 3.12 to 348.15.

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