Realtors attend worship service to pray for better market

DESTIN — More than 300 people with a keen interest in the Emerald Coast’s real estate market gathered Wednesday at Destiny Worship Center to ask for God’s blessing.

The Real Estate Prayer Luncheon was organized in hopes of breathing life and positive thinking into the area’s slumping housing market.

It was the first of what the organizers — co-owner of Crye Leike Coastal Realty Wanda Duke, former Destin City Councilman Mel Ponder and Destiny Worship Center Pastor Steve Vaggalis — hope will become a regular, uplifting event.

“The heartbeat of today’s economic community is on the backs of the real estate community,” Ponder told the crowd.

The event was an hour and a half of fellowship over lunch, scripture readings, prayer and testimonials. Those gathered had one goal — “changing the climate in the area.”

“We need to think positively and get everyone on the same page,” Duke said. “Positive things that come out of your mouth will end with positive results. If we lose hope, we lose everything.”

Rate Rise Pushes Housing, Economy to `Blood Bath'

June 20 (Bloomberg) -- The worst is yet to come for the U.S. housing market.

The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, the National Association of Realtors reported.

``It's a blood bath,'' said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., the manager of $668 billion in bond funds. ``We're talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.''

Confidence among U.S. homebuilders fell in June to the lowest since February 1991, according to the National Association of Home Builders/Wells Fargo index released this week. Housing starts declined in May for the first time in four months, the Commerce Department reported yesterday. New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession.

`Economic Recession'

``It's not just a housing recession anymore, it looks more and more like an economic recession,'' said Nouriel Roubini, a Clinton administration Treasury Department director and economic adviser who now runs Roubini Global Economics in New York.

Goldman Sachs Group Inc., the world's biggest securities firm, and Bear Stearns Cos., the largest underwriter of mortgage-backed securities in 2006, said last week that rising foreclosures reduced their earnings. Bear Stearns said profit fell 10 percent, and Goldman reported a 1 percent gain, the smallest in three quarters. Both firms are based in New York.

The investment banks, insurance companies, pension funds and asset-management firms that hold some of the U.S.'s $6 trillion of mortgage-backed securities have yet to suffer the full effect of subprime loans gone bad, said David Viniar, Goldman's chief financial officer. Subprime mortgages, given to people with bad or limited credit histories, account for about $800 billion of the market.

``I continue to believe that we haven't seen the bottom in the subprime market,'' Viniar said on a June 14 conference call with reporters. ``There will be more pain felt by people as that works through the system.''

He didn't return calls this week seeking additional comments.

Map: World Nations that Have Not Yet Adopted the Metric System

Sometimes a picture really is worth a thousand words.

Inflate or Die

"Inflate or Die" has been Richard Russel's mantra for many years and he as written about the concept extensively. He recently offered an update that was questionable in the sense that the results of this policy have brought on "unintended" results:

I'm an old-timer...

June 13, 2007 -- On June 7 the national debt of the US was $8.85 trillion. The annual interest on this debt is $406 billion or over one billion dollars each and every day of the year. The debt is increasing at the rate of $1.38 billion a day. Thus, we see the magic of compounding, but unfortunately what we're seeing is compounding in reverse.

With the above in mind, you have to ask yourself, "How in the world is the US going to finance its rising and compounding debt?" And the answer rings loud and clear -- it will be financed through inflation. I've said it for years, and I'll say it again -- it's a case of "inflate or die," and the US has no intention of dying. So we'll inflate, it's simply a matter of how rapidly we inflate and how successful the government and the Fed are in keeping the American people in the dark about what's happening to their money.

I'm an old-timer which means that I have a real-time perspective on what's happening to the purchasing power of the dollar. I remember bread at a dime a loaf, I remember full-course dinners at neighborhood restaurants for 90 cents, I remember new Ford cars for $450, I remember a double-scoop ice cream cone for a nickel. I've watched the purchasing power of the dollar going down the drain all my life. Now the process seems to be accelerating.

More recently, I've watched David M. Walker, our brave Comptroller of the United States, as he tours the nation and evidently will continue to tour until the 2008 elections. Walker is talking to anyone who will listen about the recklessness of borrowing money from foreign lenders to pay for running the US government and about the "demographic tsunami" that will arrive when the baby-boom generation begins to retire.

All the above is why I suggest that my subscribers accumulate gold. Furthermore, I've suggested that subscribers think of their gold holdings in terms of the number of ounces held. As for the price of gold, the price will take care of itself as the dollar slowly (I hope slowly) slides into the dusky realms of fiat-history.

There's no way of gauging how long this whole inflation process will continue or how long the dollar will be able to withstand the pressure of negative compounding. I've said for years that the Achilles Heel of the US is the dollar. Our "prosperity-on-loan" depends on the willingness of our overseas "friends" to accept US dollars. International finance is a cut-throat business. Nations tend to do what's best for them. All nations hold various quantities of dollars, and all dollar-holders must know that the US has no alternative but to continue on the path of systematic inflation.

Furthermore, the major developing nations, and I'm talking about Russia and China, want to be on an economic and political par with the US. To do this, Russia wants a convertible ruble, and China will want a convertible renminbi. As for the euro which is already convertible, it was created in Europe to compete with the dollar.

So far, most of the commerce of the world is done in dollars. But I don't know how long that's going to continue. In due time (when it suits them) Russia will make the ruble convertible and China will make the renminbi convertible -- but as I said, they will do it when they're ready and in their own good time.

I've held all along that the next war will not be a military war. It will not be a matter of the major powers fighting each other. The coming war for power and world leadership will be an economic war. It will be fought with competitive currencies and the movement of gold and the potential threat of nuclear bombs.

As for the bombs, they will only be a threat. World leaders know that no nation today can win a nuclear war. Nuclear bombs are for defense. If you have nuclear capabilities, you own the ultimate instrument of retaliation. Nuclear is the ultimate threat and therefore the ultimate defense. In classic Zen terms, it's "winning without fighting."

A full-page article in the June 12 Financial Times carries the headline, "Dragon Fleet. China aims to end the US Navy's long Pacific dominance." China is building its Navy as it moves to become the dominant power in the Pacific. At the same time, Russia wants to be the dominant power in Europe, and it wants all Europe to depend on Russian oil and gas. Both China and Russia want to "neutralize" the US. The years ahead should be exciting, dramatic and filled with danger.

The Reflation Attempt

A housing bubble that has now popped
Record foreclosures
GDP inching up at +0 .3% (and that is with hedonics and imputation added in)
70+ subprime lenders blowing up
Government liabilities growing faster than tax receipts
Interest on the national debt is soaring
Rising equity prices (for now) but benefits highly skewed to a small portion of the population
Massive consumer debts
Extreme speculation in assets worldwide

Michael Shedlock provides an excellent critique of this topic here (Must Read).

Fox News "Debate" on 2007 Housing Prices

The great thing about the YouTube generation is that morons and paid shills can be exposed quickly for their ridiculous and uninformed comments. As the U.S. Housing Crash accelerates, the pundits that are in support of a strong housing market are exposed for all to see. These "talking points" don't go away. If you say something stupid, the whole world can replay it until the end of time, thus exposing your corruption and/or ignorance. Hopefully the blogosphere will finally have an influence on the mainstream media.

Sub-Prime Resets = UGLY

The Resets are coming, The Resets are coming! In a higher interest rate environment, it won't be pretty.

Stripper Housing Bubble Stories

These stories are straight out of the "Twilight Zone". In fact, if you made a movie about them, you'd be accused of being too unrealistic. Do you get the feeling that these stories are only going to get worse?

She was 22 and tired of exotic dancing for a living. So Irene Thomas bet her future on real estate, hoping that becoming a landlord would be her first step toward exiting the stage.

With the help of Universal Mortgage Inc., a brokerage company in Brooklyn Park, Thomas signed the papers to buy a house early last year. And she kept signing. And signing.

In 90 days, with none of her money down, Thomas had $2.4 million in debt and 10 houses in her name, most in north Minneapolis. Nine belonged to officials of Universal, the same company that handled the transactions for her.

Less than 18 months later, Thomas was losing every property to foreclosure after the monthly payments weren't made. Her credit ruined, she now says she was duped by a group of real estate insiders who sold houses at inflated prices.

The practice is so commonplace that real estate experts say it is helping fuel the nation's foreclosure epidemic, which is destabilizing neighborhoods as home after home is lost to banks and other lenders.

Oh Well! It's a good thing that she's got a secure job to fall back on.

What's The Deal With Gold?

Inflation seems to be back in a meaningful way but Gold is languishing. Shouldn't Gold be going up? Over at Prieur du Plessis’s investment blog, an interesting thesis is presented:

Analyzing the 1971 to 1980 gold bull market, price data show that the first phase from 1971 to 1973 was largely on the back of a weakening dollar, whereas the period from 1974 to 1978 saw increased investment demand, with gold rising in all currencies.

It would appear that we are seeing similar action in the gold market in the current cycle. Although we are all quite familiar with the movements of the dollar gold price, the trend of gold expressed in other currencies receives far less publicity. The following graph and table clearly illustrate that, irrespective of its recent decline, bullion has been making solid headway since the middle of 2005 in most major (and minor) currencies.

These are good numbers, but what is their significance? Simply that the bull market in gold that commenced in 2001 goes beyond being only a reflection of dollar weakness. The fact that bullion is rising in all currencies probably points to two aspects, namely: (1) an increasing despondency with paper money, and (2) rising global investment demand for the yellow metal, including more than a modicum of interest from central banks starting to spread their US dollar foreign reserves around.

The final phase of the previous bull market (1979 and 1980) of course witnessed widespread speculative mania propelling gold all the way to a short-lived peak of $850, followed by a 21-year bear market (to eventually bottom at $250 in 2001).

Although the stage where “every man and his dog” start chasing bullion is probably still a while away, it will not surprise me to see the current bull market assuming “bubble” proportions at some stage and eventually “blowing off” – like bull market tops often do before reversing direction.

In my assessment bullion is experiencing a normal bull market reprise and is set to resume its upward path in due course, albeit in fits and starts. The exact nature of the tailwind pushing gold northwards (be it economic or socio-political) will probably only become apparent after the fact - as has so often been the case in the past.

ABN Fears World Housing Crash

Soaring borrowing costs could spark a housing slump on a 'global scale', investment bank ABN Amro has warned.

Families have taken on 'unsustainably large' mortgages, leaving them vulnerable to the sharp increases in bond yields and official interest rates seen in recent weeks, wrote economist Dominic White.

Britain is one of the most exposed markets thanks to rampant speculation over the past decade, though it is by no means alone.

Claims that shortfalls in the supply of new homes will lead to an inexorable rise in UK property prices in coming decades have 'as much credibility as Britney Spears' latest comeback,' he wrote.

'The decline in global interest rates has now been largely reversed,' White said. 'Rising real interest rates could result in greater economic volatility. I believe this leaves housing markets vulnerable to a correction on a global scale.'

Is Inflation Coming Back or Just Filling a Void?

Caroline Baum tackles the sudden market concern regarding inflation.

All of a sudden, inflation is back.

At least that's what one would be led to believe based on a resurgence of inflation articles, if not the re-emergence of That 70s Scourge itself.

It seems that global growth is turning up the heat on prices. Remember those billion Chinese and Indian workers being inducted into the industrial labor force, offering their services cheaply to any and all bidders? That excess capacity is now gone, based on what I read.

How about the forces of globalization, working to keep costs and prices down? A one-time event.

And what about the adoption of inflation targets by central banks around the world, more committed than ever to price stability? Central banks by and large are currently engaged in raising benchmark interest rates.

Sorry, that doesn't fit today's storyline either.

Wednesday's report on U.S. productivity and costs just added fuel to already glowing embers. In a quarter when real gross domestic product barely budged -- the economy grew 0.6 percent in the first quarter of 2007 -- output per hour worked slowed to 1 percent, half the previous quarter's pace. Unit labor costs, or the cost of producing one unit of output, rose 1.8 percent, a little less than the average for the last decade.

Which makes you wonder what all the Sturm und Drang was about.

`Wage' Inflation

When I read articles about labor costs pushing up prices, it feels as if I'm living in a time warp. Labor unions have reduced bargaining power when corporations can shut a manufacturing plant and shift production overseas. And unionized workers have come to realize that their interests are increasingly aligned with management: If the company goes belly- up, a prospective pay raise is a moot point.

Still the idea that wages drive prices and inflation is something that never dies.

"This kind of thinking is deeply ingrained at the Fed," Glassman says. "It's as if wage gains are carved in stone. That may have been true long ago. It's not true now. There are more price takers."

Inflation Deceleration

All the hoopla over inflation is happening at a time when various inflation measures have rolled over. The core consumer price index, which excludes food and energy, rose 2.3 percent in the year ended in April, down from a 2.9 percent peak in September. The Fed's preferred measure, the core personal consumption expenditures price index, rose 2 percent in the past 12 months, the smallest increase in more than a year, bringing the gauge into the top of the Fed's comfort zone.

That's clearly no comfort to the folks unloading stocks and bonds. Inflation may lag the business cycle, but they see a new cycle dawning. The U.S. slowdown is over, capital goods orders and manufacturing are picking up, and exports are benefiting from strong overseas demand. Inflation is sure to follow.

Don't uncork the champagne just yet.

"It's hard to get a U-turn in the economy without a corresponding rise in consumer demand," Carson says. "And consumer spending is showing incremental weakness."

Best Quotes of May 2007

Courtesy of John Rubino

Adrian Ash, Bullion Vault
A world run on two or three fiat currencies, issued and accepted by diktat...becomes only more likely every time that drug-lords in Moscow trade a kilo of crank. But as a store of wealth for the future, gold keeps winning out. Since the dream of a European single currency became flesh at the start of 2002, gold has averaged 10.3% year-on-year gains measured in Euros. It's risen more than 12% annually against Sterling. In terms of gold-priced devaluation, the Dollar and Yen are now neck-and-neck. Gold bullion has averaged 17.5% gains per year against both since the start of 2002.

Do business in Euros...but hold your wealth in gold? Under monetary union the trend looks pretty solid so far.

Cary Dorsch, Global Money Trends
Were it not for its "reserve currency" status, slowly turning into a post-World War II relic, the US dollar would have already collapsed by now.

Bill Fleckenstein, Fleckenstein Capital
I cannot shake this nagging feeling that the most important idea for folks to consider before the coming dislocation hits, whenever it hits, is that it will be necessary to have some liquidity, even if that liquidity is held in a crummy currency like the dollar. I am more convinced than ever that the amount of leverage being held at the institutional, hedge-fund, individual and corporate levels is, while not directly ascertainable, extremely high. In fact, I think the overall financial risks are far higher than I ever imagined they could be. Consequently, I no longer believe it's possible to determine in advance just what asset classes might be safe in a financial dislocation, as so many of them have become so intertwined, while at the same time we can't know how leveraged any of the underlying positions may be. Thus, when liquidation occurs one of these days, absurd developments may unfold that you might like to take advantage of. But one must have some flexibility -- liquidity -- to do that.

Kevin Duffy, Bearing Asset Management
The trouble with pyramid schemes is that they're not designed to go in reverse. Eventually, the number of willing dupes is exhausted. The same people who panicked late to get into the game are just as likely to panic when the music stops. The longer the music plays, the more leveraged and unstable the inverted credit pyramid becomes. As the late economist Hyman Minsky observed, "stability is unstable."

Michael Hampton
The US has created a 20th century living standard, the suburban lifestyle, which consumes oil with a voracious appetite. The US must put itself on a diet, and perform radical surgery on its energy consumption, its housing arrangements, and its transport infrastructure. If it fails to do so, the rest of the world will force a diet upon it.

Eric Hommelberg, GoldDrivers
What is important here is to keep "the big picture" in mind. We've had a long [gold] consolidation in 2003, we've had a long consolidation in 2005 and now we're facing a long consolidation in 2007 again.

Now why do you think the gold shares finally did manage to break out in 2003 and 2005? In other words, why do you think the HUI is trading now at 350 and not at 150 as in 2003?

The answer couldn't be more obvious. The HUI is trading at higher levels since 2003 due to the simple fact we're in a bull market for gold and its shares. We are witnessing a generational bull market in gold and the end is nowhere in sight. Please remember that bull markets like these tend to end in euphoria/mania and needless to say we are far away from sentiment like that yet! The last time the gold market was hit by euphoria/mania was in 1980 when people were queuing in lines for the banks in Toronto in order to buy gold. It was during that time that 5% of all invested money was in gold and gold shares (versus less than 0.5% these days). Now that was mania, and we are nowhere near such sentiment these days.

Paul Kasriel, Northern Trust
The "core" U.S. economy is doing fine. That is, if you exclude consumer spending, business capital goods spending and housing -- almost 85% of U.S. real GDP -- the outlook is rosy inasmuch as exports will surely surge because of the strong economic growth in the rest of the world.

Other than the fact that exports are only about 11-1/2% of real GDP, a record high, there are other problems with depending on the rest of the world to be America's economic locomotive. For starters, a lot of the economic growth in the rest of the world is being generated by the rest of the world's exports. U.S. consumer spending amounts to 29% of the rest of the world's GDP. With U.S. households and businesses starting to slow their spending, the export sectors of the rest of the world will slow. In other words, U.S. domestic demand in recent years has been the economic locomotive for the rest of the world. Now that the locomotive is stalling, is the caboose going to cause the locomotive to re-accelerate?

Paul Lamont, Lamont Trading Advisors
This is a speculative credit bubble right from the history books. As real estate investors have recently found out, when credit disappears so do price gains. Hedge funds will also find that leverage works just as well in reverse. Much like investors who bought stocks at speculative tops in 1929, 1966, and 2000; inflation-adjusted value will not be recovered for at least 20 years.

Henry C.K. Liu
Today, any one factor out of a host of interconnected factors, such as new regulation on hedge funds, or sharp changes in the yuan exchange rate against the dollar, or an imbalance between tradable assets and available credit, etc, could bring the current liquidity boom to a screeching halt and turn it into a liquidity bust.

Angelo Mozilo, CEO Countrywide Credit
The cause of the problem that we have today is decreasing values. We didn't have delinquencies and foreclosures when values were going up.

Doug Noland, PrudentBear
An argument can be made today that market forces are finally reining in subprime excesses. Yet I view this development in anything but positive light. Unfortunately, rather than correcting or self-regulating (in response to an 'overshoot'), it is much more a case of highly-adaptable Wall Street 'structured finance' simply abandoning subprime for greener pastures. Today, the insatiable appetite for yield is more readily satisfied by ('subprime') loans to support private-equity, leveraged buyouts and the global merger and acquisition mania.

Julian Phillips, Gold Forecaster
We have no hesitation in saying that the gold market has been subject to a decades-long campaign not only to discredit it, but to manipulate it completely. But a change is coming.

Brian Pretti, Contrary Investor
Let's get one thing straight -- the banks as businesses are about to fall off of the proverbial cliff.

Richard Reinhard, Growth Stocks Weekly
Since 1970, the world's money supply has grown at a rate 20 times that of industrial production. Correspondingly and not surprisingly, gold and oil have risen 20 fold over those 27 years. After Nixon's 1971 elimination of convertibility, there was no longer any constraint on the number of dollars that could be printed (other than a moral one).

The U.S. economy is now so leveraged through the banking system and the use of derivatives that the ratio of debt to Gross Domestic Product is at its highest level ever, close to 350% compared to the previous record peak of 290% in 1929. With the world's largest debtor hemorrhaging $200 billion per year in interest payments, the return to foreigners holding a currency dropping faster than the interest earned is negative. Such a situation is not sustainable. If the dollar breaks technical support it will see accelerated selling as holders seek relief -- a situation that will reverberate around the world.

Back in 1980 gold reached an historic high of $850 per ounce -- $2,200 per ounce in today's dollars adjusted for inflation. Typically these bull markets are in a 13- to 15-year cycle, and we are now only in the sixth year. And we are following a particularly long and painful bear market. These are still early days.

Stephen Roach, Morgan Stanley
On the surface, the world economy appears to be doing just fine. After four years of the strongest global growth since the early 1970s, the consensus forecast is for two more years of the same. The problems lie beneath the surface -- largely an outgrowth of profound saving imbalances stemming from the excesses of an asset-dependent US economy.

As always, the unintended consequences of these imbalances pose the greatest challenge to the global economy and world financial markets. The combination of Washington-led protectionism, a Chinese equity bubble, and Middle East dollar-concentration risk is especially worrisome in that regard.

In days of froth, it never pays to worry. But when the tide goes out, it could be a different matter altogether. That could be especially the case in the current climate. Watch out for a crack in the dollar, a related increase in real long-term US interest rates, a widening of credit spreads, and a pullback in global equities. Only then will the long-overdue rebalancing of global saving have begun in earnest.

Steve Saville, Speculative Investor
The supplies of most of the world's fiat currencies are now growing rapidly (the supplies of US dollars, euros, Australian dollars, Canadian dollars and British Pounds have expanded by 11%-14% over the past 12 months). Trying to pick the strongest of this group of currencies is therefore like trying to pick the smartest of a bunch of village idiots.

Over the short- or intermediate-term there is probably no way to accurately quantify the real performance of an investment; at least, none that we know of. Over the long-term, however, expressing prices in terms of gold works well. Therefore, IF an investment is in a secular bull market then it should be in a long-term upward trend relative to gold. The Dow Industrials Index's October-2002 low was NOT a major bottom in real terms. Thanks largely to the effects of inflation the Dow's nominal price is now comfortably above its Q1-2000 peak, but in gold terms the Dow is still well below its October-2002 LOW. Rather than a new bull market or a resumption of the 1980s-90s bull market in equities, what we've had since the October-2002 nominal bottom in the Dow is a bear market in the currency in which US equity prices are quoted.

John Succo, Minyanville
I asked a large broker firm to send over its smartest math person on Collateralized Debt Obligations (CDO) structuring. I wanted to know what I am missing: why is the market so sanguine in the face of deteriorating collateral values in the mortgage market? One of my firm's theses has been that, as the mortgage market deteriorates, investors holding CDO as an investment would realize losses and this would feed into other risky asset classes. Why aren't losses being seen when the market is clearly deteriorating? The team that came over was headed by a very smart gentleman. He was very good at math and very straightforward. Working for a broker I was prepared for some sugar coating. I didn't get any. The answer is simple and scary: conflict of interest.

He explained that due to the many layers of today's complicated credit products, the assumptions used to dictate the pricing and outcome of CDO are extremely subjective. The process is so subjective in fact that in order to make the market work an "impartial" pricing mechanism must exist that the entire market relies upon. Enter the credit agencies. They use their models, which are not sensitive to current or expected economic activity, but are based almost entirely on past and current default rates and cash flow to price the risk. This of course raises two issues.

First, it is questionable whether "recent" experienced losses over the last few years really represent the worst of the credit market (conservative). But even more importantly, it raises a huge conflict of interest: the credit agency's customers are the very issuers of the tranches they rate. The credit agencies, therefore, need to compete for business based at least in part on the ratings they are willing to give these tranches. As a result, they will only downgrade when forced to by experienced losses; not rising default rates, not a worsening economy, but only actual, experienced losses. Even more disturbing, they will be most reluctant to downgrade the riskiest tranches (the equity tranches) since those continue to be owned by the issuers even after the deal is sold.

So even though the mortgage market has deteriorated substantially, mark-to-market losses by those holding the CDO paper have generally not been realized simply because the rating agencies have not changed their ratings for all the above reasons. Accounting rules only require holders of the paper to mark prices according to the accepted model, not actual prices. Actual prices where traders can really buy and sell is substantially lower than where investors are marking their positions. The levels at which investors are carrying the paper is not reflecting underlying reality as the holders simply hold their collective breath and the rating agencies ignore a worsening environment.

I asked them what would force the rating agencies to change their ratings and the response was "it's just a matter of time if the market continues to deteriorate, for the agencies at some point will be forced by the cumulative losses to acquiesce." Because these losses have been compressed, any re-adjusting of ratings by these agencies are likely to result in a massive repricing of risk.

James Turk, GoldMoney
Because central banks can through their monetary policy control the buying power of their domestic currency, it is easy to accept the notion that they can control the value of all money, including gold. This notion, however, is incorrect because gold and national currencies are fundamentally different.

Central bank balance sheets show that national currencies are their liability, while gold they own is an asset. One does not have to be a chartered accountant to appreciate this difference. Central banks can control the value of their liabilities (i.e., their national currency) in various ways. But they cannot determine the value of gold, anymore than they can determine the value of a Picasso painting or any other tangible asset. Only the market can determine the usefulness of a tangible asset, and therefore its value.

Martin Weiss, Safe Money Report
Our dollar is now falling almost everywhere, even against currencies that, until recently, were among the weakest in the world. I have very mixed emotions about this decline. As an American who loves his country, I have dreaded this outcome since the first day I began helping Dad to prevent it four decades ago. And on this Memorial Day, I wish I could remember more battles for the dollar that were won than the battles that were lost.
But at the same time, as an investor, I have dreamed of an opportunity like this since the first day I opened a savings account. Most investors fantasize about the day when they can see great megatrends like these... make the right moves with the right investments... and come away with a king's ransom in profits.

Richard Williams, Summit Analytic Partners
Another issue with housing is the number of vacant homes hidden among middle class neighborhoods and even into the high-end homes. Brown lawns have become the calling card for empty homes where families handed the keys back to their banker or were evicted for non-payment. What is perhaps most sobering is the number of vacant homes, which is reported to be over 2.5m (or almost 3.25%) homes according to a recent story in Barrons. That number taken with the approximately 7m resetting ARMs holders makes for a formidable pool of selling pressure likely to hit the market at exactly the wrong time. Once a family realizes that it cannot stay in its home, the occupants often engage in a spree of destructive behavior, neglecting the upkeep and even damaging the property out of spite. The costs of maintaining a moderate subdivision worth of empty houses for things like taxes, landscaping and repairs falls to the city. Neighbors may even step in and mow the lawn so that their own homes are not taken down in value by the vacancies. Once a neighborhood is tainted by vacancies, the risks multiply that it will experience a downward spiral of the kind not seen since the mid-to-late 70s. Housing prices will likely take another hit as distressed families are forced to move, driving bids down and depressing comps that in turn exacerbate the vacancy problem in a growing number of cities across the nation.

Jim Willie CB, Golden Jackass
Increasingly feisty, if not hostile, sheiks in the hotbed of the Middle East have become the last remaining pillar of USDollar support. If any prominent economist thirty years ago had taken the podium at a professional conference or political assembly and put forth a plan for the USEconomy to rest upon two pillars of credit supply, one being a printing press, that person would be condemned as a charlatan, a quack, a lunatic, a bird brain, an incompetent counselor hellbent on destroying the financial structure of the land where the beacon of freedom used to shine. Well, that is exactly what has happened, except this time, the process of flooding the system with phony fiat false money is hailed as a boon to investors, a solution to home foreclosures, and a source of tremendous profit for US corporations.

Morgan Stanley Issues Triple Sell Warning On Equities

Morgan Stanley has advised clients to slash exposure to the stock market after its three key warning indicators began flashing a "Full House" sell signal for the first time since the dotcom bust.

Morgan Stanley warns the 'mid-cycle rally is over'

Teun Draaisma, chief of European equities strategist for the US investment bank, said the triple warning was a "very powerful" signal that had been triggered just five times since 1980.

"Interest rates are rising and reaching critical levels. This matters more than growth for equities, so we think the mid-cycle rally is over. Our model is forecasting a 14pc correction over the next six months, but it could be more serious," he said. Mr Draaisma said the MSCI index of 600 European and British equities had dropped by an average of 15.2pc over six months after each "Full House" signal, with falls of 25.2pc after September 1987 and 26.2pc after April 2002. "We prefer to be on the right side of these odds," he said.

The first of the three signals Morgan Stanley monitors is a "composite valuation indicator" that divides the price/earnings ratio on stocks by bond yields. It measures "median" share prices that capture the froth of the merger boom, rather than relying on a handful of big companies on the major indexes.

"If you look at all shares, the p/e ratio is at an all-time high of 20," he said.

The other two gauges measure fundamentals such as growth and inflation, as well as risk appetite. "Investors are taking far too much comfort from global liquidity. Markets always return to fundamental value, so people could be in for a rude awakening. This is the greater fool theory," he said. "The trigger may be rate rises by the Bank of Japan, or a widening of credit spreads. There are lots of little triggers."

Morgan Stanley is not predicting a recession, believing bond yields will fall during a correction and act as an "automatic stabiliser" for the world economy. Once the market shakes off the latest excesses, it's back to the races.

Right Now

It's A Low, Low, Low, Low-Rate World

The Mainstream Media gets it right again! Why do they even bother to try and make predictions about interest rates? The MSM has been notorious for marking the turning points in markets. Every time they try to make a call on the market or define a "new reality", their point gets shattered. This cover is one of my recent favourites from February 19, 2007.



In the U.S., 10-year bond yields dropped after the article was written but have been moving up steadily ever since. Over at the Big Picture, Barry Ritholz discusses some of the reasons for the rise in the yield and why they may be going higher:

1. Global Yields are higher: The WSJ Marketbeat notes that there are "higher yields around the globe. Major central banks, such as the European Central Bank and the Bank of England, are in the process of adjusting their target rates higher, and that’s boosted the yields in other markets. The 10-year British gilt yielded 5.17% as of [5.22.07], while the 10-year German bund was yielding 4.36%, both highs for the year, and bonds in Canada and Australia were also at yearly highs. The U.S. long had higher yields than many other nations, which helped keep capital flocking to the country, but that advantage has faded."

2. Overseas Economies are Robust: Ahead of the Tape columnist Justin Lahart notes that "Overseas economies have remained strong despite the U.S. slowdown. That has stoked inflation worries abroad, which in turn is helping to push interest rates higher and keep pressure on central banks."

3. Rate Cut expectations are dramatically lower: Fed Fund futures are only forecasting a 50/50 chance of a reate cut by year's end. As recently as March, the Fund Futures were anticipating at least three 25 basis interest-rate cuts from the Federal Reserve.

4. Fed Fund rates could be going higher: Bloomberg noted that "Options on Federal Fund futures at the Chicago Board of Trade indicate a 41 percent chance the central bank will lift its target rate for overnight loans between banks to 5.5 percent from the current 5.25 percent, according to data compiled by Bloomberg. A month ago, they showed no expectations for an increase."

5. Diversification Away From US Treasuries and Dollars: The Chinese are seeking ways to diversify their $1.2 trillion in foreign reserves; Middle Eastern Oil Countries are doing so also; Japan may soon follow. Most of these regions (Asia, Europe, Middle East) remain net purchasers of U.S. Treasurys, but at a somewhat slower rate. It doesn't require heavy selling to push yields higer, merely slowing the purchases of our massive debt sends yields upwards.

6. Political Blowback: As the G8 summit takes place, we might as well admit the elephant in the room that too few people have acknowledged: The US ain't very popular around the world these days. Some countries have used that opening to move away from the dollar as the world's reserve currency. Its a small smack at the US and its unpopular President. Of much greater concern than petty payback, it isn't too hard to imagine some point in the future where Oil or even Gold is priced in Euros - THATS a situation with grave consequences.

Making Less Than Dad Did

Thank Goodness the Government tells us that there's low inflation. Otherwise, young families would probably have to borrow tons of money just to keep up...Oh wait...

Report reveals that American men in their 30s earn less than their fathers did, as family income growth decelerates.

NEW YORK (CNNMoney.com) -- American men in their 30s are earning less than their father's generation did, challenging a long-held belief that each generation will be better off than the one that preceded it, according to a new study published Friday.

The report, the first in an ongoing 18-month study on economic mobility in the United States, also revealed that the income growth of the median American household is declining.

The study was produced by a handful of politically diverse think tanks including the Pew Charitable Trusts, the American Enterprise Institute, the Brookings Institute, the Heritage Foundation and the Urban Institute. It looked at income levels of American men in their 30s, which can be a good indicator of lifetime income.

Relying on Census Bureau figures, the study's authors found that after adjusting for inflation, men in their 30s in 2004 had a median income of about $35,000 per year, for a 12 percent drop compared with $40,000 per year for men in the same age group in 1974.

That stood in stark contrast to men in their 30s in 1994, who earned 5 percent more than their fathers did.
Similarly, American families, which experienced a 32 percent increase in income levels between 1964 and 1994, saw household income growth slow to 9 percent between 1974 and 2004, according to the report.

Fairy Dust Job Creation

Richard Benson reports on the blatant manipulation of job reports by the U.S. Government. If a bad job report comes in showing job losses, all you need to do is sprinkle some fairy dust on it and suddenly you have job gains. It's all about perception, never about the truth.

How the Government Creates Jobs

Our elected officials and Wall Street executives all have a vested interest in keeping the perception of a robust economy alive. The employment data announced each month is critical to this perception, but a thorough analysis of the data suggests something quite different that what we are told.

Since 9/11, 60 percent of job creation has related almost directly to the housing boom and consumer spending, generated from home equity extraction through mortgage refinance. Remember, the Federal Reserve cut interest rates to one percent and kicked off the greatest housing bubble of all time. The housing boom created an America with over 1,200,000 real estate agents, and hundreds of thousands of jobs in the mortgage and home construction industry.

On the surface, the job market looks sound and Wall Street bulls take every opportunity to reinforce this belief whenever low initial unemployment claims are announced. But common sense tells me there is something brewing below the surface and this housing bust will have an even bigger impact on our economy, than previously suggested, by reducing employment and consumer spending, in a big way.

The latest employment data from the payroll survey showed it added 88,000 workers. However, the household survey - a broader measure - showed a loss of almost 500,000 jobs. According to the household survey, over 360,000 workers simply dropped out of the labor force in April. So, if you want to believe the Wall Street touts, please go right ahead and put your rose-colored glasses back on and tune into that movie with the happy Hollywood ending. If, on the other hand, you think like me and believe there is an economic storm brewing, please read on.

Our government "prints up jobs out of thin air" the same way the Federal Reserve prints up money. To manufacture jobs, The Bureau of Labor Statistics uses their very own Net Birth/Death computer model (see CES Net Birth/Death Model for job creation at www.bls.gov). The idea behind the model is simple: Because small firms are always failing and starting up and it takes a few months for them to report on the payroll survey, an estimate is needed for the new jobs created. So, back when the economy was recovering, the Net Birth/Death Computer Model added jobs that had very likely been created. Their methodology goes like this:

- The Net Birth/Death model first creates jobs on a non-seasonally adjusted basis;

- The computer-generated jobs are then added to the jobs actually reported by the payroll survey for the month;

- The new total is then seasonally adjusted which creates the reported monthly unemployment number announced to the public. It's only much later that ongoing payroll surveys confirm or rebut the estimated job creation.

I realize the above may sound confusing, but it's actually meant to. This is economic propaganda created by our very own government! This false creation of jobs is not that much different from the over-stated earnings created by the executives at Enron that brought the company down.

You may now be wondering how many jobs in 2007 have simply been made up and reported by the computer model so far? Well, in February there were 118,000 jobs added; in March, there were 128,000; and in April, 317,000. That amounts to 563,000 in the last three months. Without the computer, the payroll survey would have shown a loss of jobs over the last three months.

Without the government's computer to estimate and create jobs, the payroll data for April would actually have shown a loss of 229,000 jobs, not a gain of 88,000. [88,000 - 317,000 = 229,000 Jobs Lost]. Except for the magic job-creating CES Net Birth/Death Model computer, the payroll survey and the household survey would be pointing in the same direction.

Where is employment going? American factories have shed thousands and thousands of jobs, and new factories (or existing ones) are moving to Asia where labor is cheaper. If you thought this trend was over, pick up the newspaper tomorrow and read about all of the big corporate mergers and private equity firms buying public companies. Yes, this buyout activity pushes stock prices up at first, but don't be fooled. These private equity deals and mergers usually mean that the buyer has only two things in mind: 1) to cut competition and raise prices; and 2) to slash the number of employees, gut healthcare benefits, and rob the pension plans. Is it simply my imagination or are mass layoffs and worker buyouts on the rise? I firmly believe that the stock market is up only because of easy money, stock buy-backs, and the leveraging away of our country's future.

The job picture does not look bright. The average homeowner can no longer refinance their mortgage and take additional cash out. Moreover, falling employment and wages may partially explain why consumer credit spiked up in March as incomes have not kept up with inflation and the credit card is being used to buy food and basics. Sluggish retail sales indicate the consumer is finally tapped out, and that does not bode well for corporate growth and hiring plans.

I'll leave it up to you to decide. Do you really believe the job losses last month of 468,000 in the broadly-based household employment survey, or do you believe the payroll survey computer model that created 317,000 jobs? Do you believe the economy is strong and getting stronger, or do your believe that the housing bust is for real. The fate of the dollar, and your stock market portfolio, is hanging in the balance!

Mortgage Slaves

Nation of mortgage slaves among Britain's young couples

Massive mortgages are turning a generation of young couples into wage slaves, it has been claimed.

A report warned that the spiralling price of housing means Britain is in danger of becoming the "grossly divided" society of have and have-nots not seen since Victorian times.

First-time buyers who manage to make it on to the property ladder and parents with young families are like "bonded labourers" tied to their jobs.

The bleak report by academics - called On The Treadmill - says "super-size" loans are pushing soaring numbers of parents to desert their children in order to work long hours.

Many are taking on second jobs to pay a mortgage which could be up to seven times' bigger than their salary.

The warning came as figures from the British Bankers' Association showed the average home loan is now a record-breaking £152,800 - compared with £50,000 in 1994.

With a £150,000 mortgage, the monthly repayments are about £1,100, or 75 per cent of the take-home pay of a worker on average earnings.

Many buyers in the South, however, have to borrow more than double this amount, with average asking prices of nearly £400,000 in the capital.

New mortgage levels could be forcing Britons in to a form of 'modern day slavery'

Dr John Bone, a sociology lecturer at Aberdeen, said: "They are like bonded labourers because they are so heavily indebted.

"For these young homeowners, the burden of mortgage debt will place great stress on those who have families.

"Both debt-harassed parents are forced to work increasingly long hours to meet the payments.

"Little time will be left for family life and little disposable income with which to enjoy it."

The problem is likely to get worse, with the size of the average mortgage increasing by nearly £12,500 over the past 12 months.

The preliminary findings from the universities' 18-month study of 18-to 40-year-olds says the cost of buying a home will create a "grossly divided society last seen in the 19th and early 20th century".

Those who do buy will be taking on levels of debt which would have been "inconceivable" to previous generations.
Meanwhile, those who cannot afford to buy will feel forced to delay getting married or having children because they want to own before making such an important commitment.

Without their own home, many will have to live with their parents, rent at vast expense or live in "studentstyle" house shares, even in their thirties.

A spokesman for the think-tank, the Relationships Foundation, said: "This report highlights a very difficult situation for many families.

"When taking on these huge mortgages, parents mustn't forget that a good home is more than just a large house. It involves time together as a family.