Final Warning!
by
Martin Weiss
This is
your final warning.
The
tempest Mike Larson and I have been warning you about is here, and the
time for protective action is now.
To see
the storm, you no longer need the flat-screen window to the world that
you get each day from CNBC or CNN. You don't even require the time
telescope we've been giving you in Money and Markets.
All you
have to do is get up from your chair, go to your door, and walk outside
in the daylight.
That's
where you'll see the U.S. housing market — the source of most of
America's wealth — starting to crumble before your very eyes.
That's
where you'll see large chunks of the U.S. mortgage market — the
lifeblood of millions of Americans — being swept away by a flood of home
foreclosures and mortgage company collapses …
In our
recent no-punches-pulled web teleconference we told you about some of
the recent casualties: American Home Mortgage of Long Island, bankrupt
August 6th … Home Banc of Atlanta, bankrupt August 10th … and Aegis
Mortgage of Houston, bankrupt August 13th. (Click
here for the transcript.)
Now,
according to Merrill Lynch, there's another candidate for failure which
is many times larger — Countrywide Financial.
The
company has exhausted its $11.5 billion in credit lines. It has just
received another $2 billion capital infusion from Bank of America. And
it's still not enough.
Indeed,
one top Bank of America executive privately believes that up to
ninety percent of the country's Alt-A mortgages, a staple of
Countrywide Financial's business, will eventually default. If so, it
will easily crush all the cash and credit of many Countrywides.
Why Do I Believe
Countrywide is
Doomed to Failure?
Because
Countrywide CEO Angelo Mozilo himself sees the industry and the economy
going down for the count.
Just last
week on CNBC, he admitted that the mortgage crisis striking America
today is
"one of the greatest panics I've ever seen in 55 years in financial
services."
He
acknowledged that the troubles in the industry are going to continue.
He even
predicted that the housing downturn is so bad it's likely to drag the
economy into a recession.
My
follow-up comment, also on CNBC:
"Even
without a recession,
"Even
with plentiful credit,
"Even
with all those supposedly 'goldilocks' conditions …
"We have
the worst foreclosure surges and the worst situation. So the question
is:
"When you
get a scarcity of credit …
"When you
get a decline in the economy and a bigger pinch on the consumer,
"Then
what are you going to see in the housing market? Then what
are going to see in the mortgage market?" (Click
here to view the video clip.)
Yesterday's New York Times hints at some of the answers:
"The Median Price of American Homes Is Expected to Fall This Year For
The First Time Since Federal Housing Agencies Began Keeping Statistics
in 1950.
"Rather
than being limited to the once-booming Northeast and California, price
declines are also occurring in cities like Chicago, Minneapolis and
Houston, where the increases of the last decade were modest by
comparison …
"On an
inflation-adjusted basis, the national median price is not likely to
return to its 2007 peak for more than a decade."
This home
price decline is what's pulling the carpet out from under the mortgage
market.
This is
the key factor that's driving home owners into foreclosure and mortgage
lenders into bankruptcy.
What's
most amazing is that, despite abundant warning signs of trouble,
virtually no one was expecting it. Yesterday's New York Times
puts it this way:
"This reversal is particularly striking because many
government officials and housing-industry executives had said that
a nationwide decline would never happen."
Now,
however, even economists with a natural inclination to deny or downplay
the dangers are finally — but grudgingly — acknowledging what's long
been obvious to analysts without an ax to grind.
For
example …
Just
go to CNBC's website, and see for yourself how many times Mike
Larson has challenged Pollyanna industry experts face to face,
demonstrating they were dead wrong about home prices "never falling."
Look at
his interview …
▪ On March 27th, when he told viewers that
bad mortgages were impacting a whopping 40% of home loan originations …
that credit standards were tightening up fast … and that Americans must
expect "slumping home prices for an extended period of time" (click
here for video), or …
▪ On
April 24th, when he debunked an analyst's
"subprime-is-not-a-terribly-significant-event" pitch … and again
warned of lower housing prices (video),
or …
▪ On
the
newswires of August 22, 2006, headlined "Weiss Research analyst Mike
Larson predicts national price decline for residential real estate," or
…
▪ In
the
Washington Post,
Associated Press,
public radio, and of course, right here in Money and Markets,
where he issued
multiple warnings week after week.
Now those
warnings are coming true — and fast. The lesson to be learned:
Blind Faith in Officialdom
Could Cost You a Fortune!
This is
not just an academic debate among armchair economists. Nor is it just a
financial market phenomenon far removed from your daily life.
Quite to
the contrary, the housing and mortgage bust could have a larger and more
direct impact on your wealth, your job, your neighborhood, your city and
our economy than any other single event in your lifetime.
So don't
believe them when they say it's not a big deal.
Don't
believe them when they say declines could "never happen."
Don't
trust them when they talk about the "fundamental strength" of this or
that real estate sector.
Most
important,
Don't Be Lulled Into Complacency
By the Myth That the "Almighty"
U.S. Federal Reserve Will
Magically Save The Day
The Fed
will try to save the day. It will drop the Fed funds rate, pump
in more money, pull a few new rabbits out of the hat, and periodically
bring a loud chorus of cheers on Wall Street.
But they
cannot succeed for three critical reasons:
Reason #1
The Mortgage Meltdown Is
Too Big … and Too Far Gone
It has
already engulfed trillions of dollars in loans.
It has
already spread to 20,000 cities and towns across America.
It has
already bankrupted lenders of subprime mortgages, Alt-A mortgages, jumbo
mortgages, even prime, conventional mortgages.
Nearly a
trillion dollars in mortgages is resetting at higher rates … or soon
will be.
And
trillions more may need emergency care.
Reason #2
The Nation's Mortgage Markets Are
Largely Outside of the Fed's Control
When the
Fed pumps money into the economy, it doesn't bail out mortgage lenders
that have taken wild risks.
Nor does
it go to Wall Street firms up to their ears in mortgage-backed
securities.
The money
goes almost entirely to commercial bankers, most of whom are running
away from the mortgage markets as fast as their legs will carry them.
Result:
For the Fed to persuade bankers to take the money is hard enough. To get
them to dump substantial sums down the drain in the mortgage market is
next to impossible.
Reason #3
U.S. Markets Have Sprung a Hundred Leaks,
And U.S. Dollars Are Gushing Overseas
Many
people think the Federal Reserve can just pump money into the U.S.
economy, and that's where it stays.
Not true.
The U.S. markets are like a bucket with a hundred leaks: The more money
the Fed pours in, the more money that's likely to gush out — to Western
Europe, China, and Japan.
International investors are being scared off by the dominos falling in
the mortgage market. And they're scared off even more by the Fed's
efforts to flood the U.S. market with increasingly worthless dollars.
Years
ago, foreign money in the U.S. was a small factor. Today it's the single
largest funding source for our national debt, and for the mortgage
bubble itself.
When that
money rushes back to its home country, the dollar's decline becomes a
rout, and the rise in foreign currencies becomes an explosion.
What to Do ASAP
Step 1. Get a substantial chunk of your money to
safety, including Treasury-only money funds. Favor those that have
average maturities of 30-60 days such as
MTB U.S. Treasury Money Market Fund (VSTXX) with an average maturity
of 45 days or
Weiss Treasury Only Money Market Fund (WEOXX) with an average
maturity of 51 days.
Step 2. Consider buying some hedges.
If
despite our recommendations to sell, you own investment real estate — or
real estate stocks and bonds — consider SRS, an ETF
that's designed to go up 20 percent for every 10 percent
decline in the Dow Jones U.S. Real Estate index.
Or if you
own financial and other stocks, consider SKF, an ETF
designed to go up 20 percent for every 10 percent decline in the Dow
Jones U.S. Financial Index.
Step 3. Diversify your savings globally. A great
vehicle: Currency ETFs where you can go for a total return that's as
much as ten times greater than what you can get on U.S. dollars. That's
what we're going to be recommending on Wednesday. (Click
here before tomorrow if you don't want to miss it.)
Good luck
and God bless!
Martin |
