Random Thoughts on Tense Markets

I am not sure if it is the weather (cold) or that the days are getting much shorter, but I find I am a bit on the edgy side. It could be DOW 10,000 plastered all over the place, rampant spinning of data, of just plain exhaustion at all things deflation/inflation debate related. As such, this post is an amalgam of various things, though they do share common ground in many ways.

Housing Still a Problem, and a Warning to the New Age Speculator

By now you have read the headlines that the newest (what iteration is this now?) mortgage modification plan of the U.S. Administration is looking to deliver up to 500,000 loan mods to help housing. Others have parsed the number, and real mods number less than 50,000 in all cases, or 1/10th the advertised amount. Still, advertising is all about packaging and a number like 500,000 is pretty big.

So what is the problem? You, the reader, are well aware of the major ones, but let's review just one that surely should have been thought about before the process got started (via OC Register) No Income, No Loan Modification:

Here’s a quote from John Courson, president of the Mortgage Bankers Association:

You can’t modify someone if they don’t have income or a job. We have to be realistic going forward. If we are going to play a numbers game, we are going to see a smaller percentage of borrowers in default able to be modified. It’s an unfortunate and difficult fact we are going to have to face.

Now I know this kind of out of the box reasoning is very difficult to understand, but indeed having no income and no job will limit any possible loan workout. Of course these things made no difference when the loans where made, but that was so yesterday.

Of course, some are trying to squeeze anything they can out of bad loans (why would they need to do this, being well capitalized and all?) and are looking to the past for a new future. Consider this item from Bloomberg, JPMorgan Pitches Interest-Only Mortgages to Boost Obama Plan:

Banks will push the Obama administration to expand its mortgage-modification program to allow interest-only periods on reworked loans, seeking to bring more homeowners into the initiative while recognizing concern that it may only postpone defaults, according to JPMorgan Chase & Co...

...The benefit of allowing interest-only periods as well would be “a significant pickup in terms of mods being done,” because the current methods often fail to allow loans to pass required tests on whether modifications serve lenders better than foreclosures, said JPMorgan’s Potolsky. The New York-based bank uses interest-only periods in many of the modifications it’s doing outside of the U.S. program, he said.

These games are getting old, but with the future holding so much promise, why not?

Promise in the housing market? Indeed there is, but here is my word of caution for the future (via Calculated Risk) House Buying Frenzy:

The real estate market has gone crazy. At the low end we've been seeing many offers per house for some time, and recently agents have been telling me there is almost no inventory. Jim the Realtor has been reporting on this in San Diego, see: Hot All Over and The “Euphoria Express”

And from Diana Olick at CNBC today: Lunacy in Las Vegas Housing (ht Larry)

Olick include an email from a real estate agent to a client "Katie":

- This market is crazy and many things are just not going to make any sense.
...
- Properties are selling in the blink of an eye.

- Properties are getting multiple offers within a few days of being on the market, the most offers I’ve heard a house had recently was 44 offers (I know, crazy).
...
- 40% of all transactions are cash purchases, which makes it harder for the buyers who are financing to get their offers accepted.

- We have 1/2 the inventory we had a year ago and 4 times as many buyers as we did a year ago.

Please note the bold face section.

Investors with real means are buying these homes with cash. Can they rent them out on a cash flow positive basis? I have no idea, and really I could not care less. These investors are taking a monster chance here though:

-By buying with cash they are not going to hurt anyone (read banks) but themselves, so there will be no help forthcoming should this go bad.

When it is the banks with their behinds on the line, the taxpayer is there to help. If aggressive personal investors lose their shirts, well helping them would be a moral hazard. Vegas is the gambling capital of the U.S., so this is indeed fitting.

Have no fear fellow taxpayer, we will all still pay for plenty of this, from later in the CNBC Diana Olick article:

Oh, and by the way, a fun factoid on Katie's Realtor: She bought her brand new home in 2005 for $240,000. According to the comps she runs daily, she says it's now worth between $90-110,000. So in January she decided to stop paying her mortgage. No financial hardship, she just figured she was throwing money away. The bank hasn't gotten to her yet, so she's just been living there for free. At some point, she knows, her bank will foreclose, but she's fine with that. She says she'll do far better financially renting for a while.

Love it!

A Question

By now the readers know that I am daily reader of The Automatic Earth which really offers insight and perspective that I feel is unique in all the blogosphere. It is with rare occasion that I have a fundamental difference of opinion with the author Ilargi, but I find myself there tonight.

To start, to consider my question you will need to review the latest article "Chris Martenson, Stoneleigh, and Mish Shedlock" because there is plenty of material there which needs to be reviewed.

My question that I submitted to Ilargi follows (as in the comments section over there):

Ilargi,

very thoughtful post. I had one question which I did not really find a clear answer to in Stoneleighs writings. You had written:
"My initial reaction was that Martenson is better at gathering data than at drawing conclusions from them. And that stands. Then Mike Mish Shedlock tackled the one hand issue (see below), and concluded: "Pretending that defaulted debts do not exist is itself the "Sound of one hand clapping". Which is what I said: assuming that a central bank and Treasury, of any country, can keep losses hidden forever, means not understanding the dynamics at play."

I have to admit, I guess I do not understand the dynamics at play. The banks have indeed covered over losses and still refuse to recognize them, one better, they are writing UP the value of these instruments as of late. For over a year they have hidden them, why not 2 years? Why not 3? With a fully compliant government admitting this is policy prescription number one, I think the dare would have been called by now. What would be the trigger event?

Sorry for the question, but this gamesmanship by the Banks/Government is really starting to wear me thin.

So my question boils down to this:

-The banks have covered up losses, refused to write down loans, and have explicit backing of the U.S. government to do so.

-This has been ongoing for over 1 year
-What would change this a year from now? 2 Years from now? 5 years from now?

I am sure I am missing something here, but I cannot pin down what it is. I will return to this item if there is follow up.

Golden Conspiracies, and Metal Out performance

Last night I had written a small link about possible gold bullion problems with physical delivery. Loyal reader Stagflationary Mark had plenty to say, much of which I agree with. Of course there was some I did not.

Mark argues, and I think correctly, that gold price conspiracy is a pretty weak line of argument. I would submit that suppression of gold overall is no conspiracy, but governmental policy. There are many instances of FED minutes where Alan Greenspan clearly is concerned with gold prices and what that means for fiat currencies. IMF and central bank gold sales (except for the UK) are often used to lower gold prices. If the only use for gold was high end electronic contacts and jewelry for India, why on earth would the FED be even the least bit interested in gold prices?

Mark offers this as well about inflationary hedges:

Once again, aluminum is the SAME price it was 5 years ago. If hyperinflation was just around the corner (as implied by the movement in gold's price), then why aren't more people willing to hoard aluminum? I certainly don't have a problem hoarding aluminum foil. I don't see much harm in locking in the price. In fact, the higher the price of gold goes, the better aluminum looks to me and the worse gold looks to me. I'm a cheapskate.

Aluminum was certainly a good thing to hoard in the 1970s. So why isn't it now? Why isn't aluminum pricing confirming the gold story? Why isn't toilet paper pricing confirming the gold story? Seriously. I'd really like to know. Aluminum is a VERY useful metal. While it is true that aluminum is VERY common (roughly 8% of the earth's crust), this was also true in the 1970s. The same can also be said of toilet paper. The stuff practically grows on trees.

Here I think we are talking about very different things.

In Mark's comments he cites Mish many times, and thus I am sure he is aware of the times that gold had done well during inflation, and poorly during inflation. Gold has done well during deflation, and poorly during deflation. Mish has laid this all out before.

Surely Aluminum and toilet paper are not corroborating the gold price rise in terms of a framed idea of hyperinflation. I would add that neither is platinum, or corn, or soybeans.

I have written extensively about the repudiation of U.S. financial engineering. When I started buying gold related assets in the early 2000's, it was due to an inflationary stance. After watching a cooked CPI basically kill off any real way to catch inflation via gold, I was a bit disenchanted. Then the credit bubble came. The housing bubble as well and the stock market blow off top in 2007. All through this I watched the gold (and silver) related buys rise higher, even as inflation was low or low historically.

Surely the rise in price of gold from 2002 until now is not based on inflationary expectations. If it is, then yes, things are wrong. Gold to me is a rock against which to hold against the massive issuance of money and credit. When it became clear the house flippers the world over would never be paying back any of their loans should house prices fall (I figured they had to) then the very meaning of money would fall into question. We saw that at the height of the crisis of late last year and into March this year, the very underpinnings of the banking system were called into question. In a twist, gold and silver were hammered in price during this time! Shows you what I know!

I think the questions still remain, and now that operators can be calm, gold becomes very appealing. We have been and are in deflation right now, and yet the dollar is lower and gold is higher. Another panic may be in the works and I think investment demand for gold serves this need for real assets. If money is not money (Think QE2), gold is always money and a great way to store portable value which will be accepted all over the world.

Of course you could do this with toilet paper, but getting 2 metric tons of toilet paper over a border may be an issue, while a few ounces of gold can fit in your wallet.

As always I could be wrong (very likely) and none of this is personal investment advice. Just my 2 cents as usual.

Comments

[Leftfield:]

The US is presently like the homeowner who is living rent-free while knowing the bank will foreclose eventually. Except, Washington and Wall St. may be hoping that a reckoning will not come for their policies, that pretend and extend may work.
Their hubris is so enormous that criminals are routinely key members there, and insane government policies continue to devastate Main St. So, the pattern of escalating debacles on Wall St. (now fully joined at the hip with Washington) since the 80's will probably have results that top recent events.
Not much evidence of integrity or sustainability in these interesting times.

Oct 15 07:10 AM

[manya05:]

Reaction to Point #2 (A Question). Your logic flow seems...well, quite logical. This would be exactly the path to the socialization of mortgage debt so that it "goes away" and we all move on with a healed real estate market AND banking sector. I have said from day one that the Obama administration was going to find a way of transferring the debt of those that find themselves in default (and on the verge of homelessness), to all those responsible enough either to not have an oversized mortgage, or those like me that do not own a house. The way to do is of course to collude with the banks so that debt is forgiven for some time, while the government inflates away the debt. Banks win, debtors win, those that have no mortgage trouble, were responsible, or do not own a house, we all pay. Same concept as with any insurance (spread the risk), this is insurance against risky financial behavior. Remember all that talk in the early days of this crisis about "moral hazard", you do not hear it anymore, moral hazard is upon us. The government is telling people to be irresponsible and not to worry that everyone will be saved.

On your third point (gold). You seem to be making the argument of many gold bugs, gold as insurance against economic armageddon. Why would you want to cross borders with pocketfuls of gold? In armageddon you could probably not cross borders without being searched, stripped of your gold, and shot by the border guards. So, even though I subscribe to your thesis of gold as insurance against armageddon, I would suggest that just as you do not spend half of your income buying health or life insurance, you should not have too much of your asset portfolio buying insurance against the collapse of capitalism, because even though you may need it, if that happens, you have bigger problems.

As to the reason why aluminum costs the same today as it did 40 years ago, while gold is way up, there is a simple explanation. Aluminum is produced mostly to be used (not stored), AND, it can be replaced (you can make airplanes or window frames out of composites). Gold has no such use, it is either jewelery or for storing value (and you can even argue that jewelery is also a wearable form of storing value). So, if gold's use is just to store value, what can compete with it? not much, all I can think of is collectible art (it is valuable for the same reason that gold is valuable, it is scarce...Picasso is dead, he ain't painting anymore...hard to find and mine...a Picasso is not born every day...and it has no other use). So, gold as a store of value, yes, gold as insurance against armageddon, not so much.

Oct 15 08:28 AM

[Economic Di...:]

Manya05,
Your take on point #2 is in line with my own thoughts

As far as point #3, I think I am just not going to write about gold anymore. Armageddon is not a collapsed currency that will not be honored on par as it has in the past, Armageddon is the total collapse of society. What is more likley, a US dollar that after over 30 years of abuse of all the rules of trade, currency manipulations, and financial engineering outsourced across the globe becomes devalued because of all this and hence loses its value (meaning your money buys less) or outright worldwide collapse of all things all over the globe? I guess this relates to point two in that if all the losses can be ignored forever, so can a dollar with no restraints.

Oct 15 08:40 AM