In the housing market we are starting to see the signs of massive walk-a-ways from homes. There is already excess inventory and stressed owners are starting to hand homes back to banks, which will add to inventory and force prices down.
Just as an example, in 2004 about 65% of homebuyers in Amador, El Dorado, Nevada, Placer, Sacramento, Yolo and Yuba Counties in California used adjustable mortgages. In the fourth quarter of 2006, foreclosures doubled from its third quarter. That is 865 foreclosures and 3,071 notices of default. Most ARM borrowers owe more on their loans than their houses are worth; 20% of these ARMS used option ARMS.
Down south in Orange County, Ca., many of Orange County’s boldest lenders are struggling to stay in the black, and in some cases stay in business, as their customers miss mortgage payments in record numbers. Subprime mortgages made in 2006 show borrowers missing payments already at the highest rate since 2000. Subprime loans made in 2006 are on track to be the worst performing loans ever issued. This is the result of real estate salesmen, appraisers and lenders doing anything to move inventory and make sales. They don’t care about borrowers’ incomes. They just double their incomes out of hand and they could care less about terrible credit ratings. Now the revelation comes. Lenders are facing tighter underwriting standards and borrowers have lost their appetite for risky loans, which certainly is going to effect business. The wealth effect and the psychology are gone. The business has slowed considerably and figures show lending support positions, including mortgage brokers, dropped 13% for the 12 months ended December, or a total loss of 1,800 jobs in Orange County, Ca. alone.
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As we have said over and over offshoring and outsourcing has left millions unemployed in all levels of the economy and it’s getting worse. True unemployment is 13.5% not 4.7%. Even establishment economists are calling unemployment to be 8.5%. There are millions of young Americans who will never recoup the investment they made in a university education. Economists have totally discredited themselves by accepting government lies and by giving credence that free trade is free. It’s a rigged game operating to destroy the American economy. We are in a job depression just as we are in a recession and over the next few years as construction – both residential and commercial – slows down 60%, millions more jobs will be lost and more and more illegal aliens will be returning home. You won’t hear the truth from economists and analysts because they will lose their jobs. They have bought free trade lock, stock and barrel.
The creation of 1,054,000 jobs in five years is deplorable and what is worse is that the real figure is 500,000 or less than one-year’s legal and illegal immigration. That is why we have hammered on the fact almost all government statistics are bogus and you cannot believe a word mainline government, Wall Street, corporations, and CNBC have to say.
Despite propaganda from the Chairman of the Fed, Ben Bernanke, existing home sales saw their biggest plunge since 1990. The unwillingness of sellers to sell at what they consider bad prices has effectively stalled the fail in the market price. Sellers just do not understand that the game is over. As further price reductions take place in residential real estate, it will be further damaging to consumer confidence and therefore to aggregate demand. We have many major corporate entities in serious financial trouble, starting with Ford and GM. The message is this is your final chance to exit residential real estate and the stock market. You are living on borrowed time.
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The stock market is complacent as if nothing could ever go wrong. The VIX, the volatility index for the US markets is at 13-year lows and credit default insurance rates are at record lows. Goldilocks is among us.
The spending power of consumers will contract in 2007 for the first time since 2000, as mortgage equity withdrawals fall from 13% of discretionary household cash flow to 7%. Consumers’ account for 70% of GDP and this loss of buying power would bring spending down near the long-term mean of 64.5% and bring about further recession. While this transpires 2.2 million American will probably lose their homes. Over 2007 & 2008 some $2.7 trillion in adjustable rate mortgages have to be reset at higher payment levels. Inflation will stay over 10% and GDP could fall to zero; 2% or less is a recession. This is classic stagflation. These conditions will cut into corporate earnings and the stock market will fall. While this transpires war continues in the Middle East costing America whatever wealth it has left as it piles on endless debt. You can expect meat grinder wars similar to that of the 30 years war between 1618-48, when half of Germany’s population was decimated.
As contrarians we find the sentiment of the elitists at Davos to be frightening. They have no clue that a freight train is headed straight at them. Ninety-two percent of almost 2,000 executives polled were confident to very confident that things will go just fine in 2007. This is the highest percentage since the survey began ten years ago. Mind you, this is a reflection of executives from all over the world. Perhaps it is because via derivatives everyone believes they have their risks hedged. We supposedly have a hedged world. We would like to know who is hedging the writers of hedges. One major writer goes under and the entire system collapses. Derivatives are now close to $400 trillion and as a yardstick the world GDP is $42 trillion and the US GDP is $12 trillion of that total.
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GOLD, SILVER, PLATINUM, PALADIUM AND DIAMONDS
Monday saw gold get started in less than charming fashion as we suspected it would after last week’s commitment of traders report. As you remember, we saw a large increase in the commercial short position. Gold traded three hours before the Comex opening, down about $2.00. After the opening gold it traded down $3.00 and then traded off $2.00. At 11:00 a.m. EST gold was up $0.50, silver down $0.06 and copper was off $0.10. Base metals tend to follow silver and gold so we classify today’s attack on the base metals as a proxy attack on gold and silver. That is being done because attempts to suppress gold are becoming extremely expensive. They cannot drive oil down any further because if they do the Treasury market will get blasted, as oil producers look for money to keep their economies rolling.
Silver never really got going and gold was pressured on the end. Chances are we will have early weakness on Tuesday. Spot gold fell $2.00 to $642.60 and silver fell $0.12 to $13.14. The February contract in gold fell $1.50 to $643.20, silver fell $0.13 to $13.25 and copper fell $0.10 to $2.54. On Friday the big Tocom gold shorts covered 2,875 contracts to 93,192. Goldman covered 1,289 to end net short 29,035. We expect that after seeing last week’s COT report that those commercials will probably continue to short gold and silver all the way up, just like they did during the last rally. Goldman has yet to join the elitist-shorting group, but rest assured they will be on board along the way. We are facing a strong upward rally due to something that we do not know about yet. Silver shorts cut their net shorts by 393 contracts leaving them net short 3,864 contracts. For those of you who are a bit disappointed over the performance of gold and silver shares since May, the HUI is up 700% over the past six years.
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The ECB announced one central bank sold gold and another bought coins, for a net decrease in gold holdings of 36 million euros, or 2.32 tons. Last week it was 2.38 tons. That is far below the 9.6 tons a week needed to reach the 500 tons allowed for sale.
On Tuesday the Dow rose 33 to 12,523,S&P rose 74 Dow points and Nasdaq rose 48 Dow points. Oil went wild, up $2.96 to $56.97, gas rose $0.08 to $1.52 and natural gas rose $0.80 to $7.74. The euro rose .0007 to $1.2965, the pound was up .0013 to $1.9624, the Canadian dollar rose .16 to 84.73 and the dollar index fell .08 to 84.86. The 2-year Treasuries yielded 4.97% and the 10’s were 4.88%.
Gold and silver lease rate charts now show nice, more or less, parallel lines with rates based on maturity, the longer the maturity, the higher the rate. If you compare this with the contorted mess the prior manipulations made out of these charts, this is normal. We can still have a hit on gold and silver if they want to short them big time without a drop in lease rates as is the case with the cartel’s current modus operandi, a future sudden drop in lease rates would be a highly predictive event, which would indicate that a large hit is imminent, so it is important for us to spot this for predictive guidance.
Russian gold output is expected to fall 2.4% this year, the third consecutive year of lower open-pit placer deposits being depleted.
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