This Week in Barrons – 4-18-10:
There just might be a way out…the Invisible Bail-Out!
"The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest we become bankrupt. People must again learn to work, instead of living on public assistance." … Cicero, 55 BC
If small business isn't hiring, and houses are still foreclosing at record numbers, isn't this a time when people are being forced to "hunker down" and “tighten up”? For the large part, yes, but there's an interesting behavior happening. So many people have decided not to pay their mortgages and just wait until they get thrown out of their homes, that they are now flush with cash! Amazing stuff. People are spending more, because they've become squatters in their own homes.
Follow me here – because I don’t think that this has ever been tried before – and this may be the ‘Invisible Bail-Out’! Approximately 7.9 million homes are violently delinquent. With the first “help programs” – it turned out that over 50% of the re-worked mortgages failed anyway. So banks are beginning to get more aggressive with their “forgiveness” of principle programs – and this could be the making of the biggest bailout in history! A gentleman in Florida – recently bought a new vehicle because he stopped paying his mortgage over 12 months ago. The bank doesn't call him – no one has shown up to toss him out – he’s a squatter in a very nice home – WITH an extra $1,500 a month in his bank account. The FED has been secretly buying all those toxic loans from the banks – whether they are home mortgages, credit card debt, etc. It’s being called the: "Don't Pay, Don't Chase-Em" Plan. People are being encouraged to strategically default on their debt – that way they can still have shelter – but also have $10k to $20k more a year to spend on ‘stuff’. Of course it raises the question, "If people aren't paying, who is?" Well the answer of course is the FED at first, and then You and I in collective taxes and more inflation as they print more money to buy up the discarded debt.
I honestly don't know that this approach has ever been tried in the past, I cannot find evidence of it - urging people to strategically "walk away" and "start over", and the government will mop up the losses. It’s pretty common knowledge that at some point the U.S. was going to have to default on it's debt – it’s just getting mathematically impossible to pay it back. But what happens if we don't default on Government debt, and we just let everyone in the country default, then mop it all up, and then via use of a VAT tax, etc, on all the new consumer spending...try and spend down that debt? I don't know that this approach has ever been tried?
This is exactly why the Fed keeps telling us how they are going to keep monetary policy very cheap for an "extended period". This is why they left the door wide open to come back in and buy up more toxic assets. They’ve purchased a large portion of the already foreclosed mortgages, and as more and more people walk away, they'll re-institute the plan and start buying more toxic assets. I think the reason so many people are not being kicked out of their homes is because the banks get paid by the FED, and the FED knows if they force them out – and they have to go and buy another house, they won't have money to spend on goods and services – so temporarily they’re just being left alone.
Considering that just this week we found out foreclosures are up huge, breaking all the records again – 3 banks – Bank of America, J.P. Morgan and Wells Fargo could face up to $30B more in losses on home-equity loans - can you imagine the amount of money ALL of banking is losing over this? Now – expect better retail numbers because of this. But just "know" that this too is unsustainable – and unless the U.S. decides to give everyone a free home - squatters will have to get kicked out – and home inventories will continue to rise and come to market.
Now if you’re thinking of home bargains: Steve Forbes recommends these top cities – that could file for bankruptcy in the coming months:
- #10 Providence, RI (Year over Year - building permits down 83%, unemployment up 123%, median home prices down 17%)
- #9 Las Vegas, NV
- #8 Sacramento, CA
- #7 Orlando, FL
- #6 Los Angeles, CA
- #5 Phoenix, AZ
- #4 Jacksonville, FL
- #3 Riverside, CA
- #2 Tampa, St. Pete, FL
- #1 Miami, FL
Friday – save the day – was the day that the SEC launched a civil suit against Goldman Sachs, saying they used fraud during the subprime mortgage disaster. In an instant Goldman fell $24 to $155 – but then the world rushed in – lead by Jim Cramer – to defend and lift Goldman back up. In my opinion was Goldman doing anything fraudulent - of course they were, along with the ratings agencies, and the people that were shorting more silver than what exists, and the SEC itself who passed on prosecuting Bernie Madoff – 4 times. Could this have anything to do with the fact that the CFTC is on the hot seat because of the Silver and Gold manipulations that have been exposed? Could it have to do with the current financial legislation on the hill? All Yes → but does it support the ‘topping theory?’ I'm pretty convinced that this week will see the top of the market, and we roll over. I think Monday we could see a circling of the wagons as they do their best to try and shrug off this GS mess, but by mid week we'll have gotten Apple's earnings and that could spell the "last hurrah". We said weeks ago that 11,150 would be the top – and when the GS news hit and we ended Friday at 11,018 - our estimate may (in fact) hold.
The Goldman fraud news somewhat validates all the conspiracy theories that are out there – and immediately caused me to purchase the VXX at 19.81 and shorted the DIA’s at 110.94. This was a very low rish trade – considering the amount of air play this will get over the weekend.
Now we can’t over-react here – as they will spin this as positive as possible. They will make this look like it was just one or two people and NOT all of GS... so be careful here.
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Until next week – be safe.