The Daily Reckoning February 22nd

Uncle Sam’s Fire Sale. Minimum Investment: $1 Billion

In my investment letter, Addison Wiggin’s Apogee Advisory, we spend a great deal of time, money and resources looking for new investment ideas that our subscribers can act on independently. Sometimes what we find instead is outrage.

For example, the federal government is about to dump millions of the foreclosed homes at fire-sale prices to hedge funds and private-equity firms with government connections. If you’re an individual investor who might like to get in on the action, forget it! You’re shut out of this deal.

Homeowners who might be interested in buying the foreclosure property next door? Out of luck. And retirees hoping for a return on their money more than 1.8% on a five-year CD find another avenue closed off.

Prior to the calamity of 2008, we might have thought the deal we’re profiling today unthinkable. But now we’re becoming as immune to new instances of blatant cronyism as American babies are to diphtheria.

If you’ve got the hammer for it, we may as well get down to brass tacks: As many as 10,000 properties might be unloaded in a single transaction during the first quarter of 2012 — thanks to a government program so new it doesn’t have a catchy name yet, only the working title “Enterprise/FHA REO Asset Disposition.”

Roger Arnold, chief economist for Pasadena, Calif.-based ALM Advisors, has a different name for it — “the largest transfer of wealth from the public to the private sector.”

As of last September, there were about 800,000 “real estate owned” or REO homes in the United States — homes repossessed and on the market. Close to one-third of these — 250,000 — sit on the books of Fannie Mae, Freddie Mac and the Federal Housing Administration. That is, 250,000 homes are owned by you and me, the US taxpayers.

But that number is about to explode: According to Ken Harney at the real estate industry publication Inman News, “The three agencies face a tsunami-sized shadow inventory that is now heading their way — a combined 1.4 million delinquent loans on their books, at least half of which, they estimate, will end up in foreclosure.”

So now we’re talking that 250,000 number suddenly ballooning to nearly a million. The early-warning waves of the tsunami started lapping at the shore in November, when foreclosure auctions reached a nine-month high. The final numbers might end up even higher: Late-stage delinquencies tallied by Lender Processing Services in January approach 2 million.

Thus, the hypothetical excuse for the fire sale: “Even with heroic efforts,” Harney says, “Fannie, Freddie and FHA won’t be able to handle that level of REO volume using their current systems of individual sales, directed at owner-occupants and small investors.”

Thus, “You and I will not be allowed to participate,” says Roger Arnold of the newprogram. “These [new] investors will come from the private-equity and fund community, Goldman Sachs and its derivatives, as well as foreign sovereign wealth funds that can bring a billion dollars or more to each transaction.

“The US taxpayer will get pennies on the dollar for these homes, and then be allowed to rent them back at market rates.”

The groundwork is being laid right now. During the first week of January, the Federal Reserve issued a white paper on housing: “A government-facilitated REO-to-rental program,” it said, “has the potential to help the housing market and improve loss recoveries on REO portfolios.” Three Fed governors put the word out in speeches the same week.

The big boys can smell the money and they are lining up to play.

Among the players that expect to profit big from this government-sponsored scam are the private firms that already manage properties for the government. The Department of Housing and Urban Development calls them “management and marketing contractors.” Their principal owners and officers tend to consist of former high-ranking officials with HUD, the Treasury, FHA and so on.

There are 20 of these “M&M” firms, according to a list on HUD’s website. On the theory that perhaps you could reclaim some of your tax dollars by investing in these firms — the same theory with which we suggested ITA, the defense and aerospace ETF — we examined whether any of them are publicly traded. None are. Sorry.

No, the only way you’ll be able to make any money off these insider deals will come long after the feast is over and you’re allowed a few crumbs. “Once the privatization has occurred,” one analyst observes, “and the properties are generating rental income for the investors, the initial investors will cash out by forming real estate investment trusts (REITs), real estate operating companies (REOCs) or limited partnerships that will be made available to retail investors.”

Alas, by then, the easy money will have been made…at your expense. Feels pretty good, doesn’t it?

That’s why, increasingly we find ourselves casting our gaze overseas, longing for returns in foreign lands in places where the governments are somewhat less corrupt and the playing field slopes somewhat less directly toward the pockets of crony-capitalists.

Regards,

Addison Wiggin,
for The Daily Reckoning

Uncle Sam’s Fire Sale. Minimum Investment: $1 Billion originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Opposing Trends in Debt and GDP Growth

$100 billion down…

$40 trillion left to go!

Hey, don’t hold us to those figures. But yesterday European sages cut another deal to stave off the truth. Instead of defaulting openly and honestly — as Greece has done over and over again ever since 1827 — the Greeks will be ‘rescued.’

Sayeth Lucas Papademos, the technocrat leading Greece through its vale of deceit:

“It’s no exaggeration to say that today is a historic day for the Greek economy.”

He’s right. It’s no exaggeration. It’s an outright lie!

What’s historic about the 15th rescue?

And as soon as the Greeks are fished out of the water, they’re to be given a shave and a haircut. No kidding. They’re supposed to shave off more public employees, more spending, and more benefits.

Already, one of 5 people is out of a job…with 2 out of 5 unemployed among young people. In November alone, 126,000 Greeks lost their jobs — the equivalent of 3.5 million job losses in the US, in a single month.

But the Greeks aren’t the only ones who are suffering. Their creditors are supposed to suffer a $100 billion haircut, too. Sounds like a default to us.

And what’s important about Greece’s 6th major default on its foreign debt? It defaulted for the first time in 1827. Since then, it’s made a habit of it.

The important thing, from our point of view, is that the Europeans are de-leveraging…getting rid of debt — at least a little, around the periphery of Europe.

Trouble is, there’s a whole lot more. And the level of debt, generally, is still increasing — thanks to the very same officials who just cut the latest Greek deal.

Here is where the numbers get a little unreliable. No, heck, they’re totally unreliable. But at least they give us a sense of the scale of the problem.

If you have debt equal to 100% of your income you can probably handle it. If the interest rate is 5%, you devote one twentieth of your revenue to debt service.

But if your debt goes to 200% of your income, the burden of the past begins to weigh on the future. You have to cut spending and investing, because so much of your income must be used to pay for things that have already been produced and consumed. Growth slows. The economy groans.

At 5% interest, you’d have to devote a full 10% of your income just to pay the interest. At 10%, you’re in real trouble…with one of every 5 dollars already spoken for, even before you get it.

The world produces about $50 trillion worth of output per year. Some countries — usually poor ones — have very little debt, for the simple reason that no one would lend them money. Others — such as the UK and the Netherlands — have total debt burdens over 500% of GDP. (Much of it is mortgage debt, which is a special case…since it may be considered an on-going expense, a substitute for rent.)

Even at 200% of GDP, debt doesn’t have to be a permanent and irreducible drag. If the economy grows faster than the debt, the burden becomes lighter over time. That is what happened in the US, for example, after WWII…and again, during the Clinton years.

The problem now — grosso modo — is that the growth is in the countries with little debt…and the debt is in the countries with little growth. In the US, for example, debt increases two to three times faster than GDP.

Most of the developed world is not so different from Greece. Some have more debt. Some have less. Overall, they have government debt equal to 100% of GDP. Household debt adds another 200% of GDP…or more; the typical developed country has total debt somewhere around 300% of GDP.

Total GDP is about $40 trillion. So in order to get total debt even down to 2 times GDP they need to wipe out $40 trillion of debt.

A long way to go…a tough row to hoe…

Austerity comes to the USA?

Not exactly. But The Wall Street Journal reports that taxes are set to go up:

First, the top marginal personal tax rate rises to 39.6% from 35% as the Bush tax cuts expire at the end of 2012.

Second, a limit on itemized deductions will add a further 1.2 percentage points to the top rate.

Third, a new 0.9% Medicare tax on incomes over $200,000 gets imposed ($250,000 for joint filers).

Fourth, the top 15% rate on long-term capital gains rises to 20%.

Fifth, dividends will once again be taxed at ordinary rates — 39.6% for the top income earners.

Sixth, a new 3.8% tax on investment income gets introduced for incomes over $200,000 ($250,000 for joint filers).

Seventh, the top estate tax rate goes from 35% to 55% (60% in some cases).

The estate tax exemption falls to $1 million from $5 million (the gift-tax exemption also drops to $1 million and the rate adjusts hither to 55%).

Unless action is taken, these tax increases will take some of the metal out of America’s already-anemic ‘recovery.’

And here’s something else that’s blocking the path to genuine recovery: Young people no longer start off in life with a clean slate. They’re heavily burdened with debt. They can’t spend. They can’t buy.

Bloomberg reports:

As outstanding student debt approaches $1 trillion, it’s one more reason record-low interest rates aren’t doing more to boost housing. The tighter lending standards that have emerged in the wake of the recession weigh particularly on younger, first-time home buyers, according to a Federal Reserve study sent to Congress on Jan. 4. These households tend to be younger, often have relatively new credit profiles, lower-than-average credit scores and fewer economic resources to make a large down payment, the report said.

“Potential first-time homebuyers have been disproportionately affected by the very tight conditions in mortgage markets,” Federal Reserve Chairman Ben S. Bernanke said at a homebuilders conference last week. “First-time homebuyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly.”

The Fed’s white paper said 9 percent of 29- to 34-year-olds got a first-time mortgage between 2009 and 2011, compared with 17 percent 10 years earlier. “These data suggest a large decline in mortgage borrowing by potential first-time homebuyers due to not only weaker housing demand, but also the effect of tighter credit conditions,” the Fed said.

Outstanding education debt surpassed credit-card debt last year for the first time, according to Mark Kantrowitz, publisher of FinAid.org, a student loan website. Recent college graduates carry an average debt load of more [than] $25,000 each, which can limit their ability to qualify for mortgages even if they’re fortunate enough to land a job in a market with an unemployment rate of 9 percent for 25 to 34 year-olds.

Calling it a “student-loan debt bomb,” the National Association of Consumer Bankruptcy Attorneys warned Feb. 7 about the effects of rising student debt on recent graduates, parents who cosigned their loans and older Americans who have gone back to school for job training.

“Just as the housing bubble created a mortgage debt overhang that absorbs the income of consumers and renders them unable to engage in consumer spending that sustains the economy, so too are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future,” John Rao, vice president of the NACBA, said on a conference call.

Normally, the housing ‘escalator’ works like this. Young people buy starter houses from older people. The older people move up to the family homes, buying the houses of people who are selling out so they can buy retirement houses. If the starter houses aren’t bought, the escalator stops. Young people can’t buy; so, older people can’t sell.

The other part of the story — not widely reported — is the enslavement of the young to the old. In effect, instead of families paying for their children’s education, they force the children to borrow the money from the government. Then, paying it back, the money is recycled to old people — through Social Security, Medicare, and so forth. Meanwhile, the government borrows trillions more to fund their giveaway programs. In the US, the total is over $15 trillion and rising — most of it destined to pay benefits for people over the age of 50.

And guess who’s supposed to pay for all this debt? The young, of course!

How long before they revolt?

Regards,

Bill Bonner
for The Daily Reckoning

Opposing Trends in Debt and GDP Growth originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Yen Weakens to 80!

Well, the crazy things that have been going on with Japanese yen (JPY) finally seem to be unwinding… For anyone new to class, the Japanese yen has been one of the best-performing currencies the past couple of years, and not for strong fundamentals… The economy has been in a funk for over two decades, interest rates have been zero for so long now — I don’t remember when they weren’t zero — an aging population and government debt up to their eyeballs, but still the yen rallied…

But that appears to be over, giving credence that the only reason yen was so strong for so long was that it was still considered to be a “safe haven” currency. Well, with the latest agreement in the eurozone, I’m sure a lot of those “safe haven” trades into yen are being unwound, from the looks of it, I should say. So for the first time since July of last year, yen is trading with an 80 handle…

The euro (EUR) remains above 1.32 this morning… but has found the waters quite rough as it attempts a run at 1.33, and just like a couple of weeks ago, when we saw the euro bounce around 1.32-1.33 and never really climb past 1.33, the markets will grow tired of this trade, and soon the euro will begin to slide again. That is, unless it can get some strong legs and move past 1.33. Personally, I would be happy to see the euro remain around 1.32, for now, and see where the baby steps of stabilization for the eurozone go from here…

In the 1980s here in St. Louis, the world-famous rock radio station, KSHE, used to run a TV ad that had a father break into air guitar when the Stones’ song “Brown Sugar” would come on, and the daughter would get all freaked out and say, “Mom… he’s doing it again.”

Well, I told you all that to set up… “Pfennig readers, China’s doing it again.” China announced last night that they had signed a new member to their club of countries that have currency swap agreements to remove dollars from the terms of trade. This time, China signed an agreement with Turkey. Yes, China is being coy with these smaller — in terms of world trade — countries, but that’s how they are going to spread their wings, and gain a wider distribution of their currency. And again, I sit here and tell you, dear reader, that China has plans to remove the dollar as the reserve currency of the world.

And maybe it won’t be the renminbi (CNY) that takes over… maybe the so-called reserve currency is a basket of major currencies. The point here, and I can’t emphasize this enough, is that to have the reserve currency title stripped from the dollar would be devastating to our economy… To you, me, our kids, our grandkids… Think about this, dear reader… after World War II, the pound sterling (GBP) could no longer be the reserve currency of the world. Because of the debts the U.K. built fighting the war, the U.S. became the financier of the world, and was the only country that had the ability to act as “settlement banks” and use dollars in the terms of trade…

Then gloom, despair and agony fell on the U.K. economy. So this is what the Chinese have in mind for us… and why are they doing this? They believe that the U.S. has broken their promise to the world to keep the dollar strong, which they can no longer do, given the debts, deficits, economy, scandals, unfunded liabilities and on and on…

OK, I’ve got to go on, because this is really depressing me this morning!

This morning, the euro was dealt a bit of a blow by a worse-than-expected manufacturing index report for this month… remember, these manufacturing index reports are called “PMI.” So the eurozone PMI came in at less than 50, at 49.7. In addition, remember that any number below 50 represents contraction of the manufacturing sector. I find this report to be interesting, given that there appears to be a strong economy in Germany. But even with Germany representing the largest economy of the eurozone, there are many more countries in the eurozone that are not experiencing economic strength.

In the U.K., the latest Bank of England (BOE) meeting minutes showed that two members voted for additional bond purchases greater than what was implemented. I’m surprised at how the markets slammed the pound after the printing of this report… Silly markets… fickle markets… It’s just two votes… But the real point here is that we have to keep our eye on the ball, as I’ve explained several times over the past few years, and that is that what happens in the U.K. ends up on our shores about six months later… The BOE implemented another round of QE last month, so the clock has started…

The Aussie dollar (AUD) is still gasping for air, after having the wind knocked out of it by the RBA meeting minutes… We talked about this yesterday, but for those that missed class yesterday, the RBA added some wording in their latest meeting minutes that surprised the markets. The RBA kept their foot in the door of more rate cuts. Of course, they didn’t say they would cut rates, they simply said they “had the scope to do so, should the economy weaken”…

So as I said yesterday, we saw this same type of trading after a RBA rumor about three months ago, and it took the A$ a few days to get its wind back. I think it may get its wind back when the markets get a drift of the latest Wage Cost Index for the fourth quarter, which printed stronger than expected!

As I look at the currency screens this morning, most of the currencies are moving in the wrong direction, but not by much, just an underlying bias to buy dollars this morning. And gold, which had a very strong performance yesterday, is off about $5 this morning, as it appears some profit taking has taken over.

The price of oil didn’t take a step back, though. The oil price is up another $1, to $105, and knocking on the door to $106… I stopped to fill up my gas tank this morning… and much as the way groceries, restaurants and so on are doing… I got less and paid the same… This way, most of us don’t really feel the inflation all around us, but it’s there… trust me. No wage inflation or home inflation, but everything else that touches our lives… and as long as everything else around us is going up in price or going down in the quantity at the same price (it’s the same thing), it would be OK to see some wage inflation, eh?

China also printed a weaker manufacturing index (PMI). The preliminary report from HSBC Holdings shows that China’s PMI was 49.7, again below 50. This is all a part of the “moderation” of the Chinese economy, folks… nothing to be really concerned about yet, so move along, these are not the droids you are looking for…

Well, it looks as if the U.S. isn’t the only country that didn’t experience a grand Christmas shopping season. Retail Sales in Canada too, came in much weaker than previous months… December Retail sales for Canada slipped 0.2%, following increases of 0.4% in November and 0.8% in October! So maybe everyone shopped early? December was the first drop in five months for Canada, and a look under the hood (pun intended) showed that motor vehicles were to blame for the drop. So let’s not write the Canadian economy off just yet…

One European currency, the krone, (NOK) that’s bucking the trend of following the euro today, and in my opinion, it’s about darn time! The Norwegian krone is rallying nicely this morning. You might recall me bemoaning the fact that the krone was following the euro, even though Norway had sterling fundamentals and should be held to a different standard. Well, maybe that’s happening, finally! The krone is the best-performing major currency this month!

After cutting rates in December, the Norwegian central bank, the Norges Bank, might just be sitting on its hands going forward, as speculation of another rate cut fades… All this fading speculation is really pushing the krone… I wonder how long this will last? Does it have legs? Is it on terra firma? I guess we’ll have to wait and see, but in my opinion, it should be OK! Of course, just because I say that, I need to make sure you understand that it’s just my opinion, and I could be wrong!

I saw a cartoon on Ed Steer’s excellent morning Gold & Silver Daily this morning… It shows the president holding a dollar bill that’s on fire, and he says, “Look, Green Energy!” If it weren’t so true, it might be funny, eh?

Not much in the way of data from the data cupboard this morning here in the U.S., just existing home sales for January… The thing to look for here is not the homes sold, but at what price? Did the median price decline as it has for a couple of years now? That’s what to look for…

Then there was this from The Economist:

“The European Union has lower government debt levels than America. Gross government debt in the 27 nations of the EU was 80% of the region’s GDP at the end of 2010; in America, gross federal debt at the end of 2010 was 94% of GDP. Furthermore, government debt is growing more slowly as a percentage of GDP in the EU than in America, because pretty much every nation in the EU is implementing austerity measures. The general government deficit in the EU-27 in 2010 was 6.6% of GDP. In America, the federal deficit in 2010 was 9% of GDP.”

I tell you this not as a “hey, they’re better than us” type of thing. This article caught my eye, because we’re going to hear over and over again during the election campaign that we are “becoming Europe” because of the debt. But if that were true, then we as a country would be cutting deficit spending, and implementing austerity measures… watch out for that!

To recap… Yen finally surrenders to intervention and reduction of safe-haven flows. China signs another member to their currency swap club. Oil climbs further. Gold has strong performance yesterday followed by some profit taking today. The A$ is still searching for some wind, after having it knocked out of it by the RBA minutes on Monday, and maybe, just maybe, Norway is breaking the trend to follow the euro…

Chuck Butler
for The Daily Reckoning

Yen Weakens to 80! originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.