Wednesday, February 9, 2011

Morning Update/ Market Thread 2/9 - Who Controls the Production of Your Money?

Good Morning,

Equity futures are lower this morning, the dollar is lower, bonds are higher, oil and gold are flat, while food commodities are mostly higher, wheat is putting in new highs.

The hypocritical Mortgage Banker’s Association released their rotten Purchase Applications Index, it fell 1.4% in the prior week with the Refinance Index falling 7.7%. Here’s Econopray:

The Spring home-buying season is off to a slow start according to the Mortgage Bankers Association whose index measuring the volume of purchase applications fell 1.4 percent in the February 4 week. A jump in rates, in reaction to a run of stronger-than-expected economic data, is holding down both purchasing activity and refinancing activity. The average rate on 30-year mortgages really jumped in the latest week, up 22 basis points to 5.13 percent. MBA's refinancing index fell 7.7 percent as, the report says, fewer homeowners with equity have any incentive to refinance. The economy is accelerating despite weakness in the housing market, one of the unique aspects of this recovery.

What is that saying about a blind squirrel? Well, the only nut Econoday is going to find with that analysis is the person writing it.

Their comments tell the entire story of this economy. The data is bad and getting worse, but the spin is on to try to justify why the economy is “growing.” “The economy is accelerating despite weakness…” even a blind man could figure out that what’s accelerating is the quantity of money and not the real economy. Yes, it’s unique all right – but not when viewed through the lens of history. Many idiots have managed to destroy their money, Bernanke is certainly not the first.

Again, these indices are near all-time historic lows and now we have rising interest rates… In an early, pre-debt saturation, cycle recovery the addition of stimulus works to add production and thus helps fuel the economy. As debt saturation is reached, however, adding stimulus works against the economy, destroying jobs and creating huge misallocations. The misread by most “experts” is that this “recovery” is for real. It is not, it is monetary only. Normally, rising interest rates would signal strength, but not in this case. Today, rising interest rates are signaling RISK due to completely unworkable math. And since individuals and government are completely saturated with debt, rising rates will promptly kill the housing market and any real economic progress. That’s why recent recoveries are “jobless.”

But if you don’t like the data, then just change it. And that is exactly what they have done with most of it, especially inflation and employment data.

Yesterday, Karl Denninger pointed out that the ten year (TNX) has risen 1.5% in the past 4 months, and that mortgage rates have risen a full percent. Fixed rate loans are generally tied to the ten year. The TNX rose from about 2.4% to 3.5% and then put in a consolidation pennant. I showed that pennant when it formed, well now it has clearly broken out. That formation is targeting roughly 4.5%, or about three-quarters of a percent higher than here:

That much of a gain in rates is deadly for the housing market. As Karl pointed out, a one percent rise in mortgage rates means that a person can finance 11% less house than one could at the lower rate. Another .75% rise in rates will translate into a 1.75% run in rates and will eventually translate into approximately a further 20% decline in home prices. This pushes more homeowners underwater, causes foreclosures to rise, and then pressures the banks even more, a negative spiral already in motion, this from this morning’s news:

30% of mortgages are underwater

NEW YORK (CNNMoney) -- Sometime, somehow, the foreclosure crisis will ease. But probably not anytime soon.

Home prices dropped 2.6% nationwide during the last three months of 2010, pushing more borrowers underwater, according to a quarterly real estate market survey from

Now 27% of homeowners with mortgages owe more than their homes are worth. That's up from 23.2% a quarter earlier.

That will surely lead to higher foreclosure rates soon. That's because being underwater is second only to unaffordable payments in leading to foreclosure, according to Zillow's chief economist, Stan Humphries.

And part of the rise in rates could be front-running this:

Fannie and Freddie phase-out plan due

NEW YORK (CNNMoney) -- The Obama administration will issue a proposal later this week recommending the gradual elimination of government-sponsored mortgage backers Fannie Mae and Freddie Mac, a White House official said Wednesday.

The highly-anticipated "white paper," which is expected to be released Friday, will include three different options for reducing the role government plays in the mortgage market, the official said.

While the paper would mark an important development in the debate over what to do with Fannie and Freddie, a final decision by Congress is not expected any time soon.

After being rescued by the government in 2008, Fannie and Freddie have presented a major conundrum for policymakers in Washington.

The problem is that phasing out the two publicly traded companies could raise borrowing costs for homeowners and jeopardize the fragile housing market.

At the same time, Fannie and Freddie represent a major liability for taxpayers, who are on the hook for about $150 billion in federal aid the two institutions have received.

The GSE’s are a complete mess and a disaster for our nation. Only on the hook for $150 billion is a complete lie. They hold trillions of bad debt that our government is NOT carrying on its books and which the government ultimately is responsible for. Should they begin accounting honestly, GSE debt would skyrocket our nation’s debt levels. Their debts are toxic and reside not only on America’s hidden balance sheet, but also in retirement plans and “investment” portfolios around the globe.

Ending the GSE’s is the right thing to do… However, doing so will be quite painful to the housing market. That pain will translate onto individual’s balance sheets, and then squarely hit the banks.

And here’s the problem with the way the Administration is handling this mess (on behalf of the banks, obviously)… Their untold method of handling the run off of this debt is to print more money. Many analysts see this as “monetizing the debt.”

Guess what? If they actually were monetizing the debt and making the debt go away, it would indeed be a good thing for the economy – with the caveat that doing so is only good when there is a transparent plan in place that keeps the quantity of money under control.

Clearing out the debts is exactly what must happen, but because the bankers are in control, they simply want to roll the debt to create ever increasing quantities of it. Clearing out the debts is not acceptable to them, but it keeps the people’s balance sheets saturated and terminally constrained – thus no REAL economic growth, no increase in real employment.

There is only one graceful way out of this mess, and that is along the lines of Freedom’s Vision. You must get outside of the banker’s debt money box and change WHO controls the production of money. Then real and meaningful solutions will suddenly appear abundant.

And just to make matters worse, the rise in interest rates is coming at the worst possible time for the masses of McMansion bag holders who financed with Option Arm loans. Right now we are at a trough in refinance activity, but beginning next month we begin to ramp up into a crescendo that will occur roughly this September, pressuring the financial system just as the vulnerable fall season arrives.

Only a debt imprisoned central banking simpleton would believe that piling more debt on top of debt would cure a debt saturated condition. But that is exactly what the world’s bankers and politicians would ask you to believe. Well, don’t be surprised when it fails, just as it is doing in Ireland right now:

It looks as though the Irish crisis is about to erupt again

While all eyes are on Merkel’s economically illiterate pact, the real crisis is taking another turn for the worse – in Ireland. We already reported of calculations – made by Karl Whelan in the Irish economy blog – that Ireland’s will need more money than envisaged to pull through until 2013. Yesterday, Alan Dukes, Anglo Irish Bank chairman and former finance minister, warned that Ireland will have to go to the IMF/EU for another €15bn -- on top of the €35bn already earmarked – merely to save the banking system, the Irish Independent reports. (We have not done the math on this, but it looks as though these two estimates may be separate, and thus possibly additive.) Duke also suggested €75bn would be needed to fund the existing NAMA operation and a so-called 'NAMA 2' to take more bad loans from the banks. His claims sparked a furious rejection from the finance department who said that the central bank had pinpointed a much lower figure.

His remarks come as the Anglo revealed the largest loss in Irish banking at €17.6bn last year. It also records central bank borrowings of €45bn, of which €28.1bn were borrowed under the Irish central bank's special liquidity facilities, according to Reuters. Dukes said that the default of an Irish bank or a sovereign default in Ireland would have serious repercussions for the euro zone."The ECB is now among the banks that would be adversely affected by such a default, as most of the Irish Government debt and government-guaranteed debt has ended up in the ECB and the Central Bank of Ireland as collateral via the Irish banks."

The Irish people still need to tell the bankers to pound sand and follow the example of Iceland. It’s coming for the banks regardless, don’t be surprised when they come at us offering their solution of gold backed money. Another false solution for sure, as they have ensured that they control the world’s supply of gold.