 Garbage Bonds & Bonfires
Jim Willie
CB
Jim Willie CB is the editor of the "Hat Trick
Letter"
Jul 6, 2007
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HOLIDAY
In keeping with the
Independence Day holiday, a preface is offered. The irony is
stiff as a board, as thick as a fog, as ugly as a pig. Citizens
in the Untied States have never seen such a broad, deep, palpable
threat to their liberty, this time from within, in terms of the
system and its leadership. Dependence, the opposite of the celebrated
theme, is running strong. The corporate agenda takes a one-day
holiday. Refer to waging war, deceiving the masses, selling out
the Middle Class, undermining the institutions, and rendering
any threat to systemic reform as anti-business or unpatriotic.
Any opportunity for a day off is a good thing, to be honest.
If you ask me, somehow this year the nation should skip the holiday.
It is one thing to commemorate the fallen soldiers on Memorial
Day. However, as national financial catastrophe approaches, sure
to shred liberty and compromise sovereignty, it makes sense to
skip any festival for independence. How about calling it the
Second Labor Day, since some workers toil twice as hard or long
for the same wage, and others earn half as much as they used
to for the same work. My preference would be to work toward independence
from the US Federal Reserve and the US Military, whose monetary
inflation and warmongering have enslaved 300 million Americans
by destroying the currency and decimating manufacturing base
respectively. (Decimate technically means kill every tenth person,
but here let's call it sparing every tenth company.) The bipolar
alternatives are inconceivable to a sleepy, distracted, materialistic,
hedonistic, betrayed, unhealthy, heavily medicated, poorly educated,
misinformed public: a fully free bond market backed by gold currency,
and an industrial dedication to research & development of
products outside of weaponry. Like my top10 ideas for a economic,
financial, political solution, not a single item of which stands
a chance of enactment, the bipolar path is an exercise in futility
and a waste of breath.
So let's celebrate a Dependence
Day and hope for a bolt of lightning to save the day from
our leaders, who regard the Constitution as a mere piece of paper,
who work in a hideous manner to conceal their path toward a totalitarian
state, the first stop being the North American Alliance, with
a new amero currency sure to set off massive unprecedented controversy
and retaliation on an international scale. The teetering dependence
is acute, the US needing oil from the Persian Gulf, Nigeria,
and Venezuela, offset by Europe needing Russian oil & natural
gas. The teetering dependence is acute, the US requiring $3 billion
per day in foreign capital, a continuing stream from China, constant
flows from the Persian Gulf. The bona fide trouble makers reside
in WashingtonDC and a suburban Virginia enclave, causing a rumpus
domestically and internationally. They have inflicted terror
for a long time.
In the meantime, amidst the
tumult & shouting, before the chaos & mayhem take firm
grip, invest in precious metals and energy. Maybe someday the
US public investment community can be convinced of the commodity
bull market virtues after a marketing promotion is launched,
pitching them as the next Beany Babies. Enough, gotta get serious.
Enjoy the holiday, as serfs need rest.
More than a few readers sent
emails questioning or disputing the 50% erosion to income since
2000. Some lower math in simple terms reveals the fraud and hidden
tax. For the last six years, the actual consumer price inflation
rate has varied between 7% and 11%. Trust the Shadow Govt Statistics
folks far more than any USGovt agency working an agenda. By taking
93% to the sixth power, one gets 64.7%, which means a 7% annual
erosion delivers a whopping 35.3% cut in real terms for a flat
income over six years time. Take 90% to the sixth power and get
53.1%, which translates a 10% annual erosion into a stunning
46.9% cut in real terms over six years time. We love compound
interest in returns, but overlook compound attrition arithmetic
when whittling away our wealth or purchasing power. The numbers
are far too alarming and depressing on lost income through inflation
since 1980. Let's not go there.
DOUBLE EDGED SWORD
The title of this article
shows full respect for junk bonds. The derogatory label of 'Garbage
Bubble Bonds' befits the mortgage bonds, which pale in value
by comparison to the respectable tainted paper sold as junk bonds
in high yielding securities by companies with a speckled past.
Junk bonds do not deserve any insult, since they almost always
offer true value behind the bond, just some laden risk and a
higher rewarding bond yield for investment return. Mortgage bonds
do not, having been born of a bubble intentionally and recklessly
created by Greenspan for the unexpressed purpose of covering
up his stock bubble bust in 2000. Why is this man revered?
For the last few years, a constant
reminder has banged around inside my head, that the housing crisis
& mortgage debacle represent a double edged sword, as the
households lose valuable home equity while the mortgage bonds
lose basic principal value. Kurt Richebächer stresses numerous
times in our conversations, that for every homeowner suffering
a loss is a bond holder suffering an equal loss. The $22 trillion
housing sector is matched by a comparable but lower number of
trillion$ in mortgages, perhaps half of which are secured in
mortgage bonds. The $750 billion in subprime mortgage bonds is
only the tip of the iceberg. Layer upon layer of other asset-backed
bonds are in trouble, each with larger size, each with probably
less loss, versus the previous layer of higher risk. The point
of the double edged sword is that for every loser on the home
equity property owner side, one can point to a loser on the mortgage
bond investor side. The argument extends to distress, market
troubles, and more.
Just as the mortgages have
begun to reset to higher adjusted rates (an average of 1.8% to
2.2% higher), the mortgage bonds must next be reset to lower
ratings than 'AAA' which stands as an insult to the intelligence
of a warm bodied investor with a pulse. Value is not based upon
assumptions in a flimsy model. The significantly higher monthly
mortgage payments coincide with the massive mortgage bond valuation
declines. Just as foreclosure auctions essentially go 'No Bid'
with 90% of the home inventory to move, the mortgage bonds have
gone 'No Bid' with those auctions in the public view. Bankers
and lenders face a tough decision. Soon the cost of portfolio
insurance will exceed the loss from their liquidation. Then mortgage
bonds will be sold in droves. Correspondingly, soon it might
dawn on millions of homeowners that their home equity might go
negative. Then marginal property owners will sell their homes
in droves. My forecast stands. This housing bear market will
be the worst, without any semblance of doubt or dispute when
it ends, since World War II and probably since the Great Depression.
It will be denied every step of the way, as losses mount for
homeowners and bond investors alike. The denial is intended to
prevent a housing stampede and bond meltdown.
For years the homestead, the
house property has been considered the ultimate inflation hedge
asset. Sure, price inflation wrecked havoc in the USEconomy,
but the nation of citizens had a home which was rising in value
to offset the undermine from inflation. Now the leaders point
to still substantial gains in home equity from the last six years
when the housing bubble was erected. In two to three years, they
will sing a different tune, since most of the gains from the
entire six years, nearly $10 trillion in additional home equity,
will evaporate. A strong claim. Just watch as it happens. Call
me crazy, send me nasty emails, but not a single forecast of
mine has been outlandish in hindsight. This devastation will
unleash the extraordinary economic recession, the unending bond
crisis, the USDollar global upheaval, and the political response.
In a matter of several months to a couple years, a growing sense
of chaos will take over the landscape. After chaos intensifies,
a totalitarian state is a certainty. The cry will be for order,
not growth or job preservation. The next painful phase will involve
inflationary recession, not stagflation. The powers mismanaging
matters of state and banks will hope for stagflation, and not
see it except in this falsified statistics.
The USEconomy has already handed
its manufacturing base to Asia. Banking officials and economic
counselors have leaned upon the residential real estate as foundation
for the entire consumption driven economy, against all sacrosanct
wisdom in full heretical style. The price to pay will be economic
decline, lost wages, a lower standard of living, and rising chaos.
People will lose their homes and lose their jobs. People unfortunately
will volunteer to forfeit their freedoms in order to maintain
order. They will eventually beg for order when the suburbs are
invaded. When? Something like by year 2010. What lies around
the corner is the end of the United States of America as we know
it. The objective of each citizen is to preserve wealth, even
to profit from the predictable decline, decay, degeneration,
which will affect every aspect of life. The homestead is officially
under siege, as are banks. Remember that 40% of all bank assets
are tied to mortgage portfolios or mortgage bonds. Japan went
underwater for a decade, due to heavy real estate commitment
and losses. Expect something similar with the United States.
My viewpoint is focused
upon the SCHEDULE of the decline, with a TIMETABLE of rate resets,
mortgage defaults, foreclosures, new inventory aggravation, mortgage
bond downgrades, heavy writeoffs, and more, which have been WRITTEN
in stone for the next two years.
Contagion is absolute. Even former FDIC head Bill Siedman acknowledges
the pathogenesis.
PRICE AFTER FAILED AUCTIONS
If an auction fails,
what is the value of items raised for sale which do not sell?
This is the key question asked after the failed auction by Merrill
Lynch and Bear Stearns. They tested the market, sought price
clarity, and received the worst of all possible news. NO VALUE.
The exercise is surely to be repeated in subsequent months. How
does a market respond? The process within more easy reach require
stocks to halt trading during disequilibrium imbalance, as sellers
mass, buyers vanish, and price is unclear. The stock reopens
a day or two later, after news sets the stage more clearly, usually
with a 20% to 50% price cut. Imagine that in the mortgage
bond arena, a 20% to 50% slice off principal value, depending
upon the type of bond, like subprime or Alt-A or a shade of anything
below sterling 'A' rating. The real fun will be with the
derivative leveraged paper, where the guys in propeller hats
set up 20:1 leverage, are stuck with cancerous assets behind
the paper, and value is without any question whatsoever negative.
Why? Because a 5% loss employing 20-fold leverage produces a
total wipeout of the original investment. A 20% loss, by the
way, using again the 20-fold leverage, produces a 400% loss,
meaning a total wipeout plus added losses by three times more.
The power of leverage cuts both ways, with profit and loss.
So what is the value of hundreds
of billion$ in mortgage bonds? Probably something on the order
of 20 to 30 cents at most on the dollar for low quality 'BBB'
mortgage bonds, typical of the subprimes, whose bonds now actually
offer in the neighborhood of 30% yields. That is a 70% to
80% loss on original investment on the collateralized bond.
Get ready to watch a skein of court lawsuits by investors against
Bear Stearns and a host of other Wall Street firms. They misrepresented
the asset behind the bond. Watch for a bold attempt by WS to
have new legislation to exempt them from bond related law suits.
Hedge funds have begun to fall like birds in a drought. Recent
news points to Horizon ABS and United Capital as blocking redemptions.
Lawsuits follow. Their investors are told they cannot get their
money out!!! Wall Street firms already have covenants written
into their bond issuances, limiting liability and investor rights
to make claims against fraudulent misrepresentation. This is
yet another sign of the times with clear large letters spelling
out the Mussolini Fascist Business Model, where government and
industry collude to pilfer pillage and profit. The USGovt is
endorsing limited liability by inaction from regulatory bodies.
The failed auctions might result
in unclear value to be determined. Watch the impact to balance
sheets and collateral posted for loans. This will become interesting,
much like watching a developing industrial fire, as chemical
caches explode unexpectedly. Creditors might act with draconian
harshness soon, refusing any longer to accept certain collateral,
and thus call in loans by the billion$. Formal statement of balance
sheets might assign at some time in the future no value on certain
collateralized bonds. They are priced by convenient goony models
dependent upon collusion by rating agencies. Failed auctions
expose the shenanigans and might disable these very models. Vast
writeoffs are certain on the mortgage bonds. The size of writeoffs
depends on the level of corruption permitted by the authorities.
So far they have given gigantic extensive latitude to distort
prices higher than true value.
With lower mortgage bond principal
comes higher bond yield. With higher bond yield comes higher
mortgage rates. With higher mortgage rates come lower home purchase
demand. With lower demand comes lower home prices. The dominoes
are falling in ultra-slow motion. With lower home values, less
spending results. With lower home values come more decisions
to sell properties. With more homes up for sale come an aggravation
to inventory strain. With colossal bond damage, related bond
and asset sales will ensue. The meltdown is underway. Bear
Stearns lit the fire. Wall Street in its infinite stupidity,
recklessness, and cliquish behavior endorsed the torching of
their colleague's bond basements.
THE USDOLLAR AND GOLD WILL
REACT TO THE CONTAGION AND CRISIS. SYSTEMIC PROBLEMS ALWAYS INFECT
THE US$ & GOLD. RECOGNITION COMES FROM BOND EXPERTS SUCH
AS PIMCO'S BILL GROSS, AND CONFIRMATION FROM OVERSIGHT GURUS
AT THE BANK FOR INTL SETTLEMENTS IN SWITZERLAND. THE CHINESE
ARE RESTLESS, HAVING SOLD A SCAD OF USTBONDS IN MAY, AND PROBABLY
JUNE ALSO. THEY PROBED FOR WEAKNESS AND SAW IT IN SPADES.
COERCION NEXT
So without a doubt
the USDollar is the weakest link, and the USTreasury Bonds are
the traded security behind the bloated black hole that best symbolizes
the current Administration and its economic stewardship. Don't
expect a Democrat Admin to be any better. They will merely shift
the furniture around, redirect the flows a bit, disallow certain
profitable procedures to perpetuate, change taxes here &
there, be pressured into continuing the foreign wars, and make
their own colossal errors. They will be dumbstruck by the
bonfires in the bond world and the wreckage in the housing world.
Republicans always seem to enable corporate profiteering with
impunity. See a dozen examples in the last six years. Democrats
always seem to attempt to help the little guy, but harm the system
in critical ways. See higher tax rates resulting in lower tax
revenue. See environmental obstacles, confusing regulations,
higher federal taxes & withholdings, resulting in lost jobs.
The nation is stymied, crippled, and heading to the cleaners.
My label has been 'The Receivership Economy' from dependence
upon bubbles, debt default, and Old Europe pulling the strings.
Without a doubt the USDollar
is the weakest link, as numerous holes must be plugged to in
the leaking dike. Gold and silver must be prevented from a zoom
rise in price, since they serve as warning signals. Crude oil
and natural gas must be prevented from a zoom rise in price,
since they directly strain the USDollar. The long-term interest
rates must be prevented from jumping higher. The stock market
indexes must be prevented from falling sharply, since the public
sees stocks as a visible signal of wealth. The USDollar must
be prevented from a sudden freefall. The entire Wall Street and
US Federal Reserve leadership is in the process of soiling their
skivvies. The best investment might be in Depends Adult Diapers.
These guys, leverage mechanics in financial engineering, destroyers
of economies, snake oil salesmen of cancer ridden asset bonds,
they are sweating bullets, pooping their pants, staring into
space, stunned by failed auctions and uncertain valuation, wondering
about leverage implications and debts called by creditors.
These are no longer exaggerations written in tabloids, but rather
front page news items.
Feeble denials by USFed Chairman
Bernanke and Treasury Secy Paulson have rendered each a marginalized
institution. Is that possible? No, but their commentary is of
marginal importance and substance anymore. They are the official
denial mouthpieces. A better viewpoint toward reality can be
found by the Bank for Intl Settlements out of Switzerland (the
central bank among central banks) and by the private citizen
Alan Greenspan. He can now speak freely about the wreckage he
permitted under his watch, and the sequential bonfires lined
up and now torched. Countless scandalous worthless doomed mortgage
bonds were dressed before vanity bureaus, prepped for sale, lipstick
on pigs. The BONFIRE OF THE VANITIES will provoke a sharp economic,
banking, and political response. Restrictions on hedge fund redemptions
might soon be matched by restrictions on mortgage bond sales,
especially their highly leveraged Collateralized Debt Obligation
derivatives employing 10-fold crazy leverage. Imagine heavy leverage
against a corroded base!
The weakest link in the above
list of assets to protect is the USDollar. The untold story
is that the strain on credit derivatives has put tremendous pressure
on the USDollar, which cannot hold. The sale and liquidation
of countless billion$ in credit derivatives will deliver a series
of unending blows to the USDollar, sure to crack before long.
With $120 trillion in notional value for credit derivatives,
figure with 30:1 leverage that $4 trillion in original equity
tied to margin investment is involved. The FOREX markets (foreign
exchange for currency trades) involves between $1 trillion and
$1.5 trillion in daily volume, less on holidays and more during
crises. We have a crisis building. The USDollar in my view cannot
be defended in the face of a credit derivative crisis. Look for
coercion next, in the form of threats to those wishing to liquidate
vast tranches of bonds. To expect no interweaving of military
activity with the coercion would be naïve. It is a certainty.
It has past precedent.
In my view, the credit derivative
events began with Fat Freddie Mac and Fatter Fannie Mae. They
are holders of the absolute worst quality of all mortgages and
related bonds. In fact, typically the worst quality loan portfolios
are packaged into bonds, as the best are kept for servicing and
higher reliability in returns without delinquencies and defaults.
Fannie & Freddie obviously went bust three years ago, without
a doubt suffering credit derivative meltdown, papered over by
the Paulson Crew. Their stocks will be delisted only after the
insiders and aristocrats evacuate the FNM and FRD from their
portfolios. If you need a good laugh, remember that FNM remains
in the S&P500 stock index. Bear Stearns is the visible GROUND
ZERO of the mortgage bond bonfire. However, Fannie & Freddie
are the hidden GROUND ZERO of the same bonfire. Wall Street maintains
mostly buy recommendations! Neither company (or whatever they
are, more like centrifuge sewer treatment plants) has been in
the news lately, despite the fact that Fannie Mae owns over $1.3
trillion in mortgage bonds and owns over $1 trillion in mortgage
portfolios. If you think the Bear Stearns bonds have empty value,
check Fat Freddie & Fatter Fannie. Well, you cannot, since
they are under wraps, otherwise known as RECEIVERSHIP, or controlled
audits and dribbled statements after the cleansing. The next
story soon told will be the CONNECTION of fires between the Bear
Stearns type of mortgage bonds and the impact to Fannie &
Freddie bonds. Translated: the fires are spreading, the contagion
is realized, the system is weakening.
CRUDE OIL AS CANARY
In the face of a weak
link USDollar, a fast eroding Petro-Dollar defacto standard enforced
by Persian Gulf principal players, one should expect the crude
oil price to hurtle higher. It is doing precisely that. Blame
had been put on the Nigerian situation, but that is but a false
facade and distorted assessment intentionally given. The links
have always been firm between the USDollar and crude oil. The
alchemists cannot control them, while at the same time keep their
controls in place on the vast price capping required throughout
the Western bond world on long-term interest rates.
The wizards of financial chemistry
have an even greater more powerful adversary in Mother Nature.
The depletion of the large elephant oil fields inflicts harm
on the supply side of the crude oil equation, thus putting extra
pressure on the USDollar to the downside. It could very well
be that the crude oil will signal the breakdown in the USDollar.
The crude oil market has become
a veritable clusterhump of mismanagement and grotesque disturbance
to the efficient mechanisms so urgently needed to provide adequate
supply. All kinds of inter-connected financial and derivative
models link crude oil price to the USDollar exchange rate. Depletion
interferes with the smooth operation of the price capping intricate
workings. Recall forecasts one year ago that crude oil would
test the $40 level? Now we hear of repeated questions on whether
the crude oil price has peaked. They will continue to confuse
matters, muddy the waters, and keep investors off balance enough
to hang onto their overpriced mainstream stocks in the S&P500.
The exodus into commodity stocks will resume in the second half.
They claim a USEconomic recovery will come. IT WILL NOT. Leading
Economic Indicators look really bad. Capital goods orders have
turned down, rendering the strong April figure as an outlier
blip.
GOLD AWAITS
In time, the push upward
in crude oil price will be matched by a push upward in the gold
price. The two are strongly correlated. A systemic bonfire has
been lit, the effects of which will undermine the confidence
in the US banking system, the US bond arena, and the USDollar
itself. To date, the authorities have succeeded in tossing a
wet blanket over the gold market. See the monumental official
gold bullion sales out of Europe. But they cannot break gold,
which has been successfully defended at the $650 mark. In time,
analyses will surface that the entire US banking system is at
risk, possibly to repeat the Japanese 1990 decade outcome.
The USDollar DX index has a
horrible looking chart. The US Federal Reserve auctions are not
being welcome or well bid. A deadly bear triangle is evident
in the USDollar DX index multi-year chart. Meanwhile, gold holds
its support levels with strength. Gold seems to lurk near the
bonfires, awaiting the exodus, as gold will offer more security.
The bond bubble is in the process of a grotesque grand grave
bust. Alternatives to the corrosive USTreasury Bonds are actively
being sought, pursued, and secured. Commodity investments
are the new rage among central bank investment funds. These are
analyzed more fully in the July Hat Trick Letter. The chart below
is HORRENDOUS. A breakdown is not far on the horizon. As the
10-year TNote yield relaxed a bit toward 5.0%, the USDollar did
not benefit. Next is a new down cycle.
The USDollar received some
assistance today, as the Euro Central Bank held back from another
interest rate hike, now at 4.0% still well below the 5.25% US
official stuck rate. The English raised by 25 basis points to
5.75% to surpass the US stuck rate. The euro flirts with 136,
even as the British sterling currency seems to prefer at least
a 200 exchange rate as a base. The USDollar is poised for round
after round of assaults. The bonfire will affect the crippled
buck, which stands as perhaps the weakest link, along with the
crude oil price. By the later months of 2007, the world will
be focused directly on the bonfires in the US bond arena, questioning
the entire US financial sector, its inflation directives, its
housing bubble bust, its absent manufacturing base of stability.
Gold over $700 by year end seems assured, but one is hard pressed
to exude confidence at this point. Take comfort in its resilience.
And by the way, watch gold but ride the silver vehicle, which
will outperform gold by a 2:1 ration, as usual. Central banks
dump gold, but nobody dumps silver. The powers scramble to meet
delivery in silver, in fact. Also the very large commercials
are in deep trouble on their short silver positions, unable to
cover at these lower silver prices.
Looming over the wreckage,
sure to worsen, is the hamstrung USFed and the compromised US
Dept of Treasury. They might prefer to be slow to recognize the
debacle, the rating agencies might prefer not to downgrade at
all, and the big banks & broker dealers might succeed in
containing their fire for many more weeks or months. Conditions
must worsen much more before the USFed takes drastic action.
A fly on the wall at panicky meetings behind the scenes has the
best spot of all. Envy the fly.
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Jim Willie CB
 Jim Willie CB is the editor of the "HAT
TRICK LETTER"
email: jimwilliecb@aol.com
Willie Archives
website:
Golden
Jackass
subscribe: Hat
Trick Letter
Jim Willie CB
is a statistical analyst in marketing research and retail forecasting.
He holds a PhD in Statistics. His career has stretched over 26
years. He aspires to thrive in the financial editor world, unencumbered
by the limitations of economic credentials. Visit his website
at www.GoldenJackass.com. For personal questions
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