An UNCANNY Grasp of the Obvious...

The G-8 Ministers got together over the past several days, and get this - They say the world economy faces "headwinds" from the price of OIL and FOOD! WOW! Way to go out on a limb! Listen to this drivel:

``The world economy continues to face uncertainty and downside risks persist,''
the officials said in a statement after meeting today in Osaka, Japan.
``Elevated commodity prices, especially of oil and food, pose a serious
challenge.''

Now I ask you: Did these miscreants add ANYTHING of value to their countries or the world at large? Not a shred. The cost in energy, security, and provisioning to gather these jerks in spot to the tax payers of the world is just a never ending rip off of poor people. Just who are these worthless individuals? Members of their country's elite - with backgrounds for the most part in the Law and Classical Economics uniquely unsuited to be of the slightest help in Energy and Agriculture, the problem areas they themselves have identified - but there you have it. They are, in fact, quite qualified to "monitier the situation" and be "very concerned". Thank goodness! I fee much better knowing that these folks are monitering and concerned.

This is the very reason why NOTHING will get done before it is too late. We continue to employ superannuated jerkoffs with little capacity to imagine the possibilities - and an even greater reluctance to embrace the probable.

I remember a famous quote from the 9/11 inquries into who was to blame at the Federal Level for the security lapse: "This was a failure of imagination" - as is the response of the U.S. Federal Government to the certainty of the coming energy and food debacle.

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Iran just told the world to go scratch. Again.

The only country capable of really doing something about it is the U.S. Not Israel. Not Saudi Arabia. Nor China, India, Pakistan. The U.S., and much of the West, is in a uniquely bad spot here. We have some real dummies in the West that would rather have a Nuclear Armed Iran than take action. The only group more hypocritical than the Crazed Right in America is the Looney Left. Usualy led by establishment Hollywood, "stars" like Barbara Streisand, Warren Beatty, and Steven Spielberg et al, all of whom conduct PROFLIGATE energy lifestyles that absolutely require the continueance of the U.S. war machine!!! Hey Babs! Park the jet with pink cushioned toilet seat so that you can take a deuce comfortably and fly coach! 10,000 gallons in jet fuel just so you can have some privacy while you take a crap is out of bounds! If you did park the jet, among other things you could do, our politicos would not be under the kind of pressure that ends up with working class kids getting their legs blown off in Oil wars! Any questions?

The Looney Left is ok with their hero's ways, for reasons that remain unclear to me, but ARE ok with a mad man of Hitleresque proportions within reach of a nuclear weapon. Is it me, or is this freaking MADNESS? Or do the Hollywood types envision a series of concerts like Farm Aid... only this one will be called "Nuke Aid, to assist the poor victims of the Nuclear Blast. Now stay tuned MTV viewers and we'll tell you how all this affects Madonna's upcoming 50th birthday tour!"

You see, I think we could prevent Iran from getting a nuclear weapon and avoid a military confrontation with them. But that won't happen if the San Francisco mindset pervades our diplomacy. The only way diplomacy works is if the consequnces of its failure are too gruesome to consider.

The Law of Unintended Consequences applies to Liberals and Conservatives alike.

Back to housing later today...

Mentatt (at) yahoo (d0t) com

One of my readers sent these links:

From Freddy Mac's annual report:

At December 31, 2007, our total mortgage portfolio, which includes our retained portfolio and credit guarantee portfolio, was $2.1 trillion, while the total U.S. residential mortgage debt outstanding, which includes single-family and multifamily loans, was approximately $11.8 trillion.

From Fannie Mai's website, Fannie holds $3 trillion in mortgages.

Commercial Banks have $3.65 trillion of real estate backed loans on their books.

With $11.8 trillion, the remaining $3 trillion is held on the books of the investment banks as well as the CDO and CMO markets.

These entities comprise the the $11.8 trillion mortgage market (by face value).  

Let's suppose a $3 trillion dollar write down, 25% of the value of the mortgages outstanding. I would suppose that that would be more concentrated within the commercial and investment banks, as the GSE's (Fannie Mai and Freddie Mac) have higher lending standards and their average mortgagor more equity in their homes (again, I think... anybody have any data countering that best guess?).  The balance of write offs between the GSE and the others would have to be done on  best guess basis...  not that I think it REALLY matters.

Getting shot in the head with a .44 Magnum makes a bigger mess and a more dramatic presentation at the morgue than does a .38 Special... but the victim is just as dead.

Reports are coming in in which analysts are suggesting that a 50% decline in home values in much of the formerly hot markets is quite possible.  (That would make a 25% write down on the mortgage face value a very reasonable assumption). For the most part the only analysts I have any faith in is me, and our resident mad scientist, the good Dr. Lalani... but in this case the guys are using some of the very reasonable metrics regarding price to income that I would use.  And, as you know, I think those income assumptions are going to have to come down, HARD.  

More to come.

Mentatt (at) yahoo (d0t) com

Foreclosures Rise 48% in May

The evidence continues to pile up regarding the housing/mortgage lending crisis and its effects on the banking system.

Lehman Brothers, of ALL people, is out with a report about how bad it could get.

Foreclosures add to inventory and crowd out regular sales, Michelle Meyer and Ethan Harris, economists at Lehman Brothers Holdings Inc. in New York, wrote in a report yesterday. Foreclosures will account for 30 percent of national home sales this year as 1.2 million foreclosed single-family homes will eventually enter the market, they said. They estimate that foreclosed properties, which typically sell for about 20 percent less than other homes, will depress home prices by 6 percent.

30% ?  Really?  (And why is it you guys can see this now, but not when you were raking in bizzilions in trading ad underwriting fees for mortgage securities)  Does that include short sales (Deals made before the foreclosure process with the cooperation of the homeowner)?  Does that include technical defaults that the mortgage servicers have not foreclosed because there are no buyers in those markets (Detroit, Vegas, South Florida, etc...)?  NOPE!!!

The report has some particularly amusing anecdotes:

``The risk is that an adverse feedback loop will develop, in which problems in the housing market undercut the economy, causing even more stress in the housing and mortgage markets,'' Meyer and Harris wrote.

YA THINK?  Take out the first 4 words in the above quote, and then add a little color to the rest of their dry prose, shake, bake and outcomes the banking collapse.

BTW, Dearest readers, Thank you for some very helpful links to hard, telling, and informative data.  Please keep those coming (Now if I can just get folks to STOP sending me opinion/puff pieces designed to manipulate the unwashed).

More soon.  

Mentatt (at) yahoo (d0t) com

Fractional Reserve System

I was out meeting investors yesterday, and telling them my view of housing and the banking system.  I was somewhat stunned to realize that some of these very well educated, and very wealthy businessmen did not understand how money is created in the Fractional Reserve System that the U.S. employs.

(Please go to the previous link if you are in need of a refresher course.)

As I began to relay my concerns I was met with the same derision I faced in 2004 and 2005 when I had the poor taste to point out that Oil was going to $100+ and the housing market was going to sh-t the bed.  However, once I got through on the creation of money in our system, it seemed some light bulbs were indeed going off in their heads.

If energy costs stay at the these or higher levels, the housing crisis and trade deficit, which was terrible at $80 per barrel and $2.75 per gallon, will be demonstrably worse at $135 and $4.15 respectively.   If energy prices, and hence the trade deficit, continue higher my contention is that the system would begin to breakdown that much faster.

Banks create money by making loans.  Most loans made by commercial banks are backed by assets, or collateralized by Real Estate - and the value of Real Estate is in free fall at the moment. (Please don't confuse your anecdotal experience with the empirical evidence.  The inventory of unsold homes and excess commercial space is growing fast.)  

The incentive for homeowners to pay their mortgage falls with the any increase in the price of fuel to get to and from the home, and with any increase in unemployment.  Once the resale price falls below the mortgage on any household experiencing a serious illness, a divorce, or a job loss, that home is on the fast track to foreclosure.

In my $250 per barrel scenario, the number of homes this happens to will be in the $millions, with losses in the $trillions.  

A reader was kind enough to email me and point out that the 90% of the mortgage market going to the GSE's was recent business, not the overall portfolio.  Thanks, that is correct. 

2 things:  

1. The source I linked noted that Fannie Mai and Freddy Mac had gone from 40% to 80% of the market.  Clearly, when the portfolio they hold from when they were 40% of the market is just that - 40%.  The point is that the REST of the market place has conceded this business to the government.
2. It is the packaged CDO's that the banks and brokers are holding that are destroying their valuation in the market place.  If the GSE's were in fact holding 90% of the paper going back to 2002s, it would be the GSE's that would be in free fall.

The banks are, for the most part, trading under "Book Value".  The market is not dumb, and the market knows that these banks are leveraged 25 to 1 to VERY questionable "assets".  If these assets are mispriced/mismarked by just 4% THE BANKS ARE TECHNICALLY INSOLVENT.

I WILL BET ANY (ONE) PERSON READING MY RANTS A FAT STEAK THAT THE ASSETS ARE OVERSTATED BY 4%.

In point of opinion (rather than fact) my bet is that the asset values of the banks portfolios are over stated by 20 to 40% - or $2 Trillion to $4 Trillion.  Since the banks HAD equity of $1.1 Trillion at year end 2007, wrote down $350 Billion and raised $150 Billion... "Houston, we have a problem".

I think that is what you are seeing in the pricing of their stock values in the market, and I think you ain't seen nothing yet (provided the price of Oil does not collapse.  If Oil were to trade back to say $50, the banks and the home owners could very possibly get through this).  "Az nischt - iz nischt"  If not... then not!

More tomorrow....

Mentatt (at) yahoo (d0t) com

Socialism Doesn't Work

Part II in a series on the coming banking collapse

The Government Sponsored Entities: Fannie Mai, Fredy Mac are now 80% of the U.S. mortgage market.

With the decay of credit quality and the exodus of money from the mortgage industry that began last year, many of the biggest mortgage lenders have scaled back their businesses or shut down entirely.

Freddie Mac and its fellow GSE Fannie Mae are now financing more than 80 percent of all mortgages in the U.S., up from 40 percent a year ago.

Please keep in mind that the FHA guarantees another 10% of the mortgage market.  Got it?

That means the U.S. FEDERAL GOVERNMENT holds the paper on 90% of the U.S. 1 to 4 family home market.

If these mortgages were solid investments, wouldn't the FREE MARKET be in for more than 10%?

Check back later as I continue to make my case... That the U.S. banking system is likely to collapse if the energy crisis is not ameliorated somehow, and with it the U.S. $

Any INFORMED commentary or hard data would be welcome, my email is

Mentatt (at) yahoo (d0t) com

Nothing is certain... but...

There is no guarantee of anything.  Oil prices could go down, and oil supplies could go up.  Anything is possible - though I doubt this scenario in the extreme.

So let us play a little "What If", shall we?

"What If" my contention that Oil imports into the U.S. decline by 5 % to 15 % for the next 12 years until oil imports are only coming in from Canada, and; domestic production continues to decline at 2 % to 3% per year until there is NO MORE (I will be long dead when the NO MORE comes to pass, but I will be here during the worst of the impacts from the decline)?  What if...?

If so, this year will be better economically than next year, and next year will be better than the year after, and so on.... and I would think this process continues until the imports stop and many adjustments have been made.  So this year's crummy economy is going to be remembered fondly.

If so, the number of transaction in the Real Estate market will fall, continuously, for many years.  Every divorce, job loss, or illness will end up in a foreclosure or a tax sale - as the homeowner will not be able to SELL the home.  The effects on the banking industry and the U.S. $ is sure.  Neither survives and a new system and currency would need to be reconstituted. 

If so, the unemployment issuing from the Home Depot's, home builders, appliance retailers and manufacturers, to the landscape folks would overwhelm any government sponsored program.  Please reread the above paragraph again on job loss and foreclosure.

If so, the number of new cars sold would plummet to essentially Zero.  Auto supply, repair, maintenance, etc... is a HUGE portion of the U.S. economy.  The dislocations will be surreal.  The unemployment issuing from the sector would overwhelm any government sponsored program.  Please reread the paragraph above the previous paragraph yet again on job loss and foreclosure.

Retailers?  Dentists? Real Estate & Insurance Brokers? The Local Deli?  Just shake and repeat.

The number of homes that actually SELL will decline from now on.  For the most part, where ever you are now is where you are going to be.  At some point the banks will stop foreclosing, and that will be the end of the story.  $11 trillion or so in mortgage debt will have no value.

The collapse will come from the banking system, which creates money in our economy.  The political and social repercussions of such an outcome I will leave for you to imagine.

And if my "What If?" comes to pass,  I don't see how the mortgage market initiated banking collapse does not destroy the value of the U.S. $ COMPLETELY, and since ALL of the import/export data for oil supports the "What If", I think you have to take this seriously, really seriously.

So, for the next couple of posts, I am going to put up some numbers and link my sources, sort of like a "peer review".  PLEASE!  Find holes in my assertions!  If my analysis is incorrect, by all means - SHOW ME WHERE I ERRED - but please don't give me the usual Wall Street salesman's brushoff of "I just don't believe it".  BELIEF is not a legitimate analytical tool.

Back to you soon.

Mentatt (at) yahoo (d0t com  

"The Worst Is Behind Us" - Richard Fuld

Will Lehman Brothers Join Bear Stearns?  Maybe.  I doubt they survive in their present form, in any event.

Two month's ago, Lehman Brothers' career-man-CEO, Richard Fuld, threw his hat in the ring for author of "most ridiculous, bald faced attempt to manipulate and misinform" since Ben Bernake and Henry Paulson's "the decline in housing is contained" circle jerk of 2 years ago.

Well, DICK... if "The Worst Is Behind Us", why did Lehman need to raise another $6 BILLION in capital?  And, by the way, DICK, ...  have you noticed that Lehman has lost more than $6 BILLION in market capitalization in just a couple of days?  Actually, DICK, Lehman Brothers has lost over $13 BILLION in market capitalization in less than 5 weeks.

Still, DICK,  I am sure your board will be more than generous for your efforts in missing the housing crisis, the spike in oil, the collapse of the U.S. $ and blowing away tens of billions of dollars in shareholder value.  After all, the corporate board's of directors were MORE than generous when Stan O'Neal (Merrill Lynch) and Charles Prince (Citigroup) performed similarly.  After all, you guys deserve it - you did go to the right schools for part-time training 30 years ago.  That CERTAINLY qualifies you and makes you deserving of a 9 figure exit package.

Mentatt (at) yahoo (d0t) com