Signs of the Economic Apocalypse, 11-26-03

From Signs of the Times (sott.net):

Gold closed at 824.70 dollars an ounce Friday, up 4.8% from $787.00 at the close of the previous week. The dollar closed at 0.6740 euros Friday, down 1.2% from 0.6821 at the close of the previous Friday. That put the euro at 1.4838 dollars compared to 1.4662 the Friday before. Gold in euros would be 554.23, up 3.3% from 536.76 for the week. Oil closed at 98.18 dollars a barrel Friday, up 4.6% from 93.84 at the close of the week before. Oil in euros would be 66.17 euros a barrel, up 3.4% from 64.00 for the week. The gold/oil ratio closed at 8.40, up 0.1% from 8.39 at the end of the week before. In U.S. stocks, the Dow closed at 12,980.88, down 1.5% from 13,176.79 for the week. The NASDAQ closed at 2,596.60 Friday, down 1.6% from 2,637.24 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.00%, down 15 basis points from 4.15 for the week.

Gold and oil rose again and the dollar fell last week continuing trends that were interrupted last week in a classic short-lived “correction.” Right now with real estate and the dollar no one really knows where the bottom is, and with gold and oil, no one knows where the top is. One analyst even predicted a 90% drop in the value of the dollar:

Forecast: U.S. dollar could plunge 90 pct

Nov. 19, 2007

RHINEBECK, N.Y., Nov. 19 (UPI) -- A financial crisis will likely send the U.S. dollar into a free fall of as much as 90 percent and gold soaring to $2,000 an ounce, a trends researcher said.

"We are going to see economic times the likes of which no living person has seen," Trends Research Institute Director Gerald Celente said, forecasting a "Panic of 2008."

"The bigger they are, the harder they'll fall," he said in an interview with New York's Hudson Valley Business Journal.

Celente -- who forecast the subprime mortgage financial crisis and the dollar's decline a year ago and gold's current rise in May -- told the newspaper the subprime mortgage meltdown was just the first "small, high-risk segment of the market" to collapse.

Derivative dealers, hedge funds, buyout firms and other market players will also unravel, he said.

Massive corporate losses, such as those recently posted by Citigroup Inc. and General Motors Corp., will also be fairly common "for some time to come," he said.

He said he would not "be surprised if giants tumble to their deaths," Celente said.

The Panic of 2008 will lead to a lower U.S. standard of living, he said.

A result will be a drop in holiday spending a year from now, followed by a permanent end of the "retail holiday frenzy" that has driven the U.S. economy since the 1940s, he said.

The reason that pessimistic analysts are now being featured in mainstream articles is that there truly is little reason for economic optimism. There are many sectors that could easily worsen and worsen sharply. The U.S. housing market, for example, has only begun to unravel:

Mortgage Failures Could Create Nightmare

Joe Bel Bruno

November 24, 2007

NEW YORK (AP) -- When Domenico Colombo saw that his monthly mortgage payment was about to balloon by 30 percent, he had a clear picture of how bad it could get.

His payment was scheduled to surge by an extra $1,500 in December. With his daughter headed to college next fall and tuition to be paid, he feared ending up like so many neighbors in Ft. Lauderdale, Fla., who defaulted on their mortgages and whose homes are now in foreclosure and sporting "For Sale" signs.

Colombo did manage to renegotiate a new fixed interest rate loan with his bank, and now believes he'll be OK -- but the future is less certain for the rest of us.

In the months ahead, millions of other adjustable-rate mortgages like Colombo's will reset, giving them a higher interest rate as required by the loan agreements and leaving many homeowners unable to make their payments. Soaring mortgage default rates this year already have shaken major financial institutions and the fallout from more of them, some experts say, could spread from those already battered banks into the general economy.

The worst-case scenario is anyone's guess, but some believe it could become very bad.

"We haven't faced a downturn like this since the Depression," said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. He's not suggesting anything like those terrible times -- but, as an expert on the global credit crisis, he speaks with authority.

"Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth," he said. "It does keep me up at night."

Some 2 million homeowners hold $600 billion of subprime adjustable-rate mortgage loans, known as ARMs, that are due to reset at higher amounts during the next eight months. Subprime loans are those made to people with poor credit. Not all these mortgages are in trouble, but homeowners who default or fall behind on payments could cause an economic shock of a type never seen before.

Some of the nation's leading economic minds lay out a scenario that is frightening. Not only would the next wave of the mortgage crisis force people out of their homes, it might also spiral throughout the economy.

The already severe housing slump would be exacerbated by even more empty homes on the market, causing prices to plunge by up to 40 percent in once-hot real estate spots such as California, Nevada and Florida. Builders like Chicago's Neumann Homes, which filed for bankruptcy protection this month, could go under. The top 10 global banks, which repackage loans into exotic securities such as collateralized debt obligations, or CDOs, could suffer far greater write-offs than the $75 billion already taken this year.

Massive job losses would curtail consumer spending that makes up two-thirds of the economy. The Labor Department estimates almost 100,000 financial services jobs related to credit and lending in the U.S. have already been lost, from local bank loan officers to traders dealing in mortgage-backed securities. Thousands of Americans who work in the housing industry could find themselves on the dole. And there's no telling how that would affect car dealers, retailers and others dependent on consumer paychecks.

Based on historical models, zero growth in the U.S. gross domestic product would take the current unemployment rate to 6.4 percent. That would wipe out about 3 million jobs from the economy, according to the Washington-based Economic Policy Institute.

By comparison, in the last big downturn between 2001-03 some 2 million jobs were lost, according to the Labor Department. The dot-com bust early this decade decimated the technology sector, while the Sept. 11, 2001, terror attacks hurt the transportation and allied industries. Economists said the country was officially in recession from March to November of 2001, but the aftermath stretched to 2003.
There is increasing evidence that another downturn has begun.

Borrowers who took out loans in the first six months of this year are already falling behind on their payments faster than those who took out loans in 2006, according to a report from Arlington, Va.-based investment bank Friedman, Billings Ramsey. That's making it even harder for would-be buyers to get new mortgages -- a frightening prospect for home builders with projects going begging on the market, and for homeowners desperate to unload property to avoid defaulting on their loans.

Meanwhile, the number of U.S. homes in foreclosure is expected to keep soaring after more than doubling during the third quarter from a year earlier, to 446,726 homes nationwide, according to Irvine, Calif.-based RealtyTrac Inc. That's one foreclosure filing for every 196 households in the nation, a 34 percent jump from just three months earlier.

Such data suggests more Americans could lose their homes than ever before, and those in peril are people who never thought they'd welsh on a mortgage payment. They come from a broad swath -- teachers, pharmacists, and civil servants who were lured by enticing mortgage terms.

Some homebuyers gambled on interest-only loans. The mortgages, which allowed buyers to pay just interest at a low rate for two years, were too good to pass up. But with that initial term now expiring, many homeowners find they can't make the payments. The hopes that went along with those mortgages -- that they'd be able to refinance because the equity in their homes would appreciate -- have been dashed as home prices skidded across the country.

"It's been said a lot of people have been using their homes as ATM machines," said Thomas Lawler, a former official at mortgage lender Fannie Mae who is now a private housing and finance consultant. "The risk has a lot of tentacles."

This example illustrates the distress many homeowners are in or will find themselves in: A subprime adjustable-rate mortgage on a $400,000 home could have payments of about $2,200 a month, with borrowers paying 6.5 percent, interest only. When the teaser period expires, that payment becomes $4,000, with the homeowner paying 12 percent and now having to come up with principal as well as interest.

Minneapolis resident Chad Raskovich found himself in a such a situation. He hoped -- it turned out, in vain -- to gain more equity in his home and that a strong record of payments would enable him to secure a better loan later on.

"It's not just me, it's a lot of people I know. The housing market in the Twin Cities has dramatically changed for the worse in the years since I purchased my home. Now we're just looking for a solution," he said.

Colombo, who lives in the planned community of Weston just outside Ft. Lauderdale, said the reset on his home would have "destroyed' his financial situation. He went to Mortgage Repair Center, one of hundreds of debt counselors trying to bail out desperate homeowners, to work with his lender.

"But many people in my neighborhood didn't get help, and some have literally just walked away from their homes," said Colombo. "There are over 133,000 homes on the market in Broward-Miami-Dade counties, and some of them were actually abandoned. People in this situation don't like to talk about it, and end up getting hurt because they don't."

Many Americans are unaware that a borrower defaulting on a loan can have an impact on everyone else's well-being and that of the nation. After all, the amount of mortgages due to reset is just a fraction of the United States' $14 trillion economy.

But the series of plunges that Wall Street has suffered in past months prove that no one is immune when mortgages turn sour.

Today's financial system is interconnected: Mortgages are sold to investment firms, which then slice them up and package them as securities based on risk. Then hedge and pension funds buy up such investments.

When home prices kept rising, these were lucrative assets to own. But the ongoing collapse in housing prices has set off a chain reaction: Lenders are tightening their standards, borrowers are having a harder time refinancing loans and the securities that underpin them are in jeopardy.

This has resulted in more than $500 billion of potentially worthless paper on the balance sheets of the biggest global banks -- losses that could spill into the huge pension and mutual funds that also invest in these securities and that the average worker or investor expects to depend on.

There's more pain left for Wall Street: "We're nowhere close to the end of the collapse," said Mark Patterson, chairman and co-founder of MatlinPatterson Global Advisors, a hedge fund that specializes in distressed funds.

"I just assumed banks could stomach these kind of losses," said Wendy Talbot, an advertising executive when asked about the subprime crisis outside of a Charles Schwab branch in New York. "I guess you don't really pay attention to things until your forced to. ... You put out of your mind the worst things that can happen."

The subprime wreckage could dwarf the nation's last big banking crisis -- the failure of more than 1,000 savings and loans in the 1980s. The biggest difference is that problems with S&Ls were largely contained, and the government was able to rescue them through a $125 billion bailout.

But this situation is far more widespread, which some experts say makes it more difficult to rein in.

"What really makes this a doomsday scenario is where would you even start with a bailout?" housing consultant Lawler asked.

Sen. Charles Schumer, D-N.Y., a key member of Senate finance and banking committees, said borrowers are the ones who need relief. The playbook to bail out the economy would not be applied to the banks and mortgage originators, but money could be funneled through non-profit organizations to homeowners that need help, he said in an interview with The Associated Press.

"There is a worst-case scenario because housing is the linchpin of our economy, and more foreclosures make prices go down, that creates more foreclosures, and creates a vicious cycle," Schumer said. "You add that to the other weakness in the economy -- on one end is the home sector and the other is the financial sector -- and it could create a real problem."

He also believes Federal Reserve Chairman Ben Bernanke should do more to help the economy. Bernanke said in recent comments he has no direct plans to bail out the mortgage industry, but to instead offer relief through cheap interest rates and further liquidity injections into the banking system.

There's also been talk of letting government-backed lenders like Fannie Mae and Freddie Mac buy mortgages of as much as $1 million from lenders, pay the government a fee for guaranteeing them and then turn them into securities to be sold to investors. This would extend the government's support, and its exposure, to the mortgage market to help alleviate stress.

Either way, the impact of a fresh round of subprime losses remains of paramount concern to economists -- especially since there's little certainty about how it would ripple through the U.S. economy.

"We all know that more hits from these subprime loans are coming, but are having a devil of a time figuring out how it will happen or how to stop it," said Lawler, who was once chief economist for Fannie Mae.

"We've never been in this situation before."

How many times do we have to read that “we’ve never been in this situation before,” or “we are going to see economic times the likes of which no living person has seen,” before we get the picture?

Another phrase we have heard often recently is that we are seeing the worst housing numbers for 17 years. They are referring to the financial and housing crisis of 1990. Back then, U.S. banks were dangerously close to failure. What bailed the banking system out from under a lot of bad real commercial estate loans was the Gulf War of Bush I.

George H.W. Bush, while throroughly evil, was far more shrewd than his idiot son. Bush gave Saddam Hussein the green light to invade Kuwait, then turned around and called him Hitler. Bush then produced faked intelligence indicating that Iraq had massed forces on the Saudi border. This scared the daylights out of the Saudi rulers, who then, along with Japan and all other major industrial powers, bankrolled the war. Here is the important point: for the first time in their history, the oil-rich Saudi rulers had to BORROW billions of dollars to finance the war against Saddam Hussein. They never had to borrow money before. Of course, they borrowed it from U.S. banks. These banks were now able to show those loans as assets – and what better quality loans can you have then ones given to the Saudis? This prevented a collapse of the banking system. Not only that, but the United States actually made a PROFIT on the first Iraq War.

Contrast this with the second Iraq War. The United States has bankrupted itself running a losing war costing trillions. The U.S. government, being essentially bankrupt, has few resources to bail out its financial institutions, and even less to help its citizens weather the storm.

It may be that we are entering the end of a much larger cycle than mere business cycle. Could we be nearing the end of four centuries of capitalism? It is worth thinking large at this point in history. Ran Prieur does just that:

One of the repeating themes of this website is that top-down control is self-defeating, and top-down control with positive feedback is aggressively self-defeating. The elephant in the parlor, the giant control/feedback mechanism that no one sees, is the concept of "owning" something that you don't use. When someone owns something that they don't use, their attention is focused not on how to use it better, but on how to own more. If you've ever taken out a loan, the bank owned the money that you were using, and you were required to use it in such a way that the bank's realm of ownership increased. You probably live in a place that a bank or landlord owns, and you have to pay mortgage or rent, through which the owner gets richer and is able to own more. Interest and mortgage and rent are simply social customs that say, "Those who have less must give to those who have more, so that power can be concentrated and control can increase" until the whole thing becomes unstable and collapses.

The latest collapse phase has begun. The takers are now so rich, and the givers so poor, that the givers can no longer afford to pay the monthly tribute that our culture requires you to pay to merely occupy space. This appears in the physical world as more and more homeless people and abandoned houses. We have homeless people and abandoned houses because our culture is psychotic. In five or ten years, the situation will become so absurd and desperate that our individual habits of docility and submission will break down, and ordinary people will have a strange and radical thought that was completely obvious to all their ancestors from the first land animal until the first fence: the only person who "owns" a piece of land is the person who is actually occupying it. And since we all occupy land, we are all owners, and therefore we can factor out the whole concept of "owning," and just say, "we live on this land."

Right now this movement is still on the fringe. Here's a site, Homes not Jails, that advocates for squatting and "adverse possession," which is the last legal shred of the traditional custom that land belongs to whoever is able to respectfully live there.

Another way of looking at this is to ask the question, how many people can be evicted from their homes in foreclosure? Is there a ceiling, a certain percentage above which the system collapses, above which the exploited no longer give their consent to their exploitation? Will the system pull back before it reaches that point? Can it?