Signs of the Economic Apocalypse, 10-1-07

From Signs of the Times:

Gold closed at 750.00 dollars an ounce Friday, up 1.5% from $738.90 at the close of the previous week. The dollar closed at 0.7009 euros Friday, down 1.3% from 0.7097 at the close of the previous Friday. That put the euro at 1.4268 dollars compared to 1.4091 the Friday before. Gold in euros would be 525.65 euros an ounce, up 0.2% from 524.38 for the week. Oil closed at 81.66 dollars a barrel Friday, virtually unchanged from $81.62 at the close of the week before. Oil in euros would be 57.23 euros a barrel, down 1.2% from 57.92 for the week. The gold/oil ratio closed at 9.18, up 1.4% from 9.05 at the end of the week before. In U.S. stocks, the Dow Jones Industrial Average closed at 13,895.63 Friday, up 0.5% from 13,820.19 for the week. The NASDAQ closed at 2,701.50 Friday, up 1.1% from 2,671.22 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.58%, down five basis points from 4.63 for the week.

Last week was the end of the third quarter of 2007, so let’s look at the quarterly and annual numbers. Gold in dollars rose 15.2% from $650.90 to $750.00 for the quarter and rose 17.4% from $638.80 for the year to date. The dollar fell 5.4% from 0.7384 euros to 0.7009 for the quarter and fell 4.7% from 0.7338 for the year. Gold in euros rose 9.4% from 480.65 to 525.65 euros an ounce for the quarter and rose 8.6% from 483.98 for the year. Oil in dollars rose 15.5% from $70.68 to $81.66 for the quarter and rose 33.8% from $61.05 for the year. Oil in euros rose 9.7% from € 52.19 to € 57.23 for the past quarter and rose 23.7% from € 46.25 for the year to date. The gold/oil ratio fell 0.3% from 9.21 to 9.18 for the quarter and fell 13.9% from 10.46 for the year. The Dow rose 3.6% from 13,408.62 to 13,895.63 for the quarter and rose 11.5% from 12,463.15 for 2007. The NASDAQ rose 3.8% from 2,603.23 to 2,701.50 for the third quarter and rose 11.8% from 2,415.29 for the year. The yield on the ten-year U.S. Treasury note fell 45 basis points from 5.03 to 4.58 for the quarter and fell 12 basis points from 4.70 for the year.

Here are some charts going back to the end of 2004:

The story of the third quarter of 2007 was the fall of the dollar to record lows and the rise in the price of gold and oil, not only in dollars but also in euros. Gold went up 15% in dollars (nearly $100 an ounce) and more than 9% in euros. Oil also went up over 15% in dollars and 9% in euros during the third quarter of 2007. In essence ALL currencies went down, the dollar just fell more than the others. Much of this can be attributed to the sub-prime meltdown in the United States and to the threat of expanded war in Western Asia.

Events in the third quarter have spooked even the institutional investors and the mainstream media who, until now, viewed the world economy through rose colored glasses. I would like to welcome our friends in the mainstream financial media to reality! Those of us who have been warning people for years about the danger of a dollar currency collapse about the unsustainable levels of debt in the United States and about the housing bubble now have a lot more company. The fact that fewer people are completely deluded about the situation in the world economy may offer some cause for hope, but the awakening may be too late to avoid the consequences.

The subprime meltdown was only the beginning of the process of sweating out bad debt and re-pricing downward housing and other markets. Unfortunately the process has just begun:

Defaults on Insured Mortgages Increase 30 Percent

By Hugh Son and Josh P. Hamilton

Sept. 28 (Bloomberg) -- More American homeowners are missing mortgage payments, pushing defaults on privately insured home loans up 30 percent last month from year-earlier levels, according to a trade group.

Borrowers more than 60 days behind rose to 58,441 in August, Washington-based Mortgage Insurance Companies of America said today on its Web site.

The report bolsters data that show the worst U.S. housing slump in 16 years may be getting deeper. Foreclosures set a record in the second quarter, according to the Mortgage Bankers Association, and last month lenders sent a record 108,716 notices of default, auction or repossession, RealtyTrac Inc. reported. Fannie Mae Chief Executive Officer Daniel Mudd said yesterday the weakness will last beyond 2008, increasing credit losses.

“These defaults are a lagging indicator, so they're probably going to get worse from here,” said Michael Darda, economist at Greenwich, Connecticut-based equity trading firm MKM Partners LP.

Mortgage insurers, which reimburse home lenders when borrowers don't pay, have stumbled in stock market trading as the record defaults increased claims. MGIC Investment Corp., the largest U.S. mortgage insurer, lost about half its value this year. PMI Group Inc., the second-largest, lost more than 30 percent. Third-ranked Radian Group Inc., the insurer whose acquisition by MGIC was scuttled, has fallen almost 60 percent.

MGIC fell 36 cents to $32.31 today in 4:05 p.m. New York Stock Exchange composite trading. PMI declined 18 cents to $32.70 and Radian climbed 24 cents to $23.28.

Risk and Reward

Lenders often require homeowners to buy private mortgage insurance if they contribute less than 20 percent in cash for a home purchase. The report said 197,169 U.S. borrowers used the coverage in August, 15 percent more than in July.

Insurers are selling more coverage as lenders seek to lower their risk and make loans attractive to investors. Policies sold to homeowners surged 66 percent to $23.8 billion last month over the year-earlier period, the mortgage insurance trade group said.

Delinquent policyholders who resumed paying on time rose by 11 percent from July to 33,811, results that “appear encouraging” to Michael Grasher, analyst at Piper Jaffray & Co. in Chicago.

“While we expect investors remain guarded on the group, numbers out this morning do not reflect a level of risk commensurate with existing valuations” of some mortgage insurers, Grasher said today in a research note.

The trade group's report draws data from six of the seven U.S. mortgage insurers, excluding Radian, which isn't an association member.

Unsold houses are piling up, reaching more than five million according to a recent estimate, driving prices down.

U.S. Homes Post Steepest Price Drop in 16 Years

Vinnee Tong

NEW YORK (AP) -- The decline in U.S. home prices accelerated nationwide in July, posting the steepest drop in 16 years, according to the S&P/Case-Shiller home price index released Tuesday.

Home prices have fallen by more every month since the beginning of the year.

An index of 10 U.S. cities fell 4.5 percent in July from a year ago. That was the biggest drop since July 1991.

S&P Index Committee Chairman David Blitzer said the severe declines may be done by the end of the year.

"Maybe the first stage is steep declines, and we're just about done with those," he said. "The second stage is not much gain, not much loss.

"The rest of the economy has to catch up to home prices."

Yale economist Robert Shiller, who helped create the indices, said in a statement, "The further deceleration in prices is still apparent across the majority of regions." Shiller is also MacroMarkets LLC's chief economist and perhaps is best known for predicting the dot-com bust.

A broader index of 20 cities fell 3.9 percent in July over last year, with 15 of 20 cities reporting that prices fell.

The five cities where prices are still rising -- Atlanta, Charlotte, N.C., Dallas, Portland and Seattle -- have reported growth is slowing in the past year. Atlanta and Dallas are close to moving into negative territory, S&P said.

Shiller, an economist at Yale University, told lawmakers in written comments last week that the loss of a boom mentality among consumers poses a "significant risk" of a recession within the next year.

His comments came a day after home buyers and other borrowers got some welcome news when the Federal Reserve cut a key interest rate by half a point to 4.75 percent. It was the Fed's first cut in four years.

The housing slowdown and decline in credit availability have triggered worries that the economy could go into a recession, spurring the Fed to act. Economists differ on whether the Fed will again cut rates during two meetings before year's end.

The only thing policy makers can do about it now is lower interest rates. Doing that, however, may destroy the value of the dollar. In the old days, before the collapse of the U.S. Empire, inflation could be exported to other countries, since the dollar was the world’s reserve currency. The thought was that the dollar was ultimately backed by the stability of the U.S. political and economic system and also by the U.S. military. Now the U.S. military is in shambles, and the political system is looking more and more like that of a banana republic. The only thing now keeping the dollar up at all is the fear by the rest of the world of what would happen if it collapses. At some point, not very far from where we are now, there may be a rush for the exits by those holding dollars.