Fannie Again, U.S. Debt

Here's an update regarding the property that needs a new septic system that we offered $179K versus Fannie's asking price of $150K. Yesterday, we saw this property with a price reduction to $134K. Here is an actual example of the inefficiency in this organization. There is no encouragement to perform, because whatever losses are incurred are covered by the federal treasury with no ceiling. I also read that FNM and FRE are estimated to cost $685B. The positive in this is the Republican who is expected to replace Barney Frank as chairman of the House Financial Services Committed said he will put these two organizations at the top of his priority list to address. I will be watching to see if it goes beyond words.

Another important subject that I emphasize repeatedly is our country's debt load. It is estimated to be 67% of Gross Domestic Product by 2013 if this congress does not act in any way to contain it. We are now spending 63% more than the tax payments we receive.

Concern about TARP and Citigroup repayment

There is growing evidence that our country is on a path of having to take a 'fall' because of what is going on with the way money is being managed.

The inspector general who oversees TARP estimates the total cost of Wall Street bailouts could eventually reach $23.7 trillion. And I thought we were only talking hundreds of billions. And look at the fact that the $200B savings that Geithner pointed out is going to be spent versus saving to apply toward this huge liability.

Then today I found out that Citigroup who is repaying $25B of their TARP loan is going to get a giant tax break of $38B. Companies are allowed to offset their losses against their gains, but in this situation, the government sale of 34% stake in Citi and Citi's share sales qualify as a change in ownership. What is totally disheartening is that the news reported the repayment and excluded what the 'government intentionally set up' that requires the IRS to allow it. This may be legal but is totally unethical. Wouldn't you repay your debts if you were going to receive an even bigger monetary gift by doing so? This kind of behavior crosses all lines of political parties. It doesn't matter who is in office. Money always affects the leaders' judgment by forcing action that always keeps it first versus looking out for the welfare and common good of the people. Yet at this time in our history, we have gotten the better of ourselves, because we have weakened our ability to maneuver due to the mountainous debt. Debt buries at all levels when it gets unmanageable. It appears to me that handwriting is on the wall and it is not in the distant future.

One final comment, I saw Time chose Bernanke as the person of the year. I can only laugh since as you know I think he should be replaced by allowing the banks to lead the way in telling the government what to do through intimidation of the financial system collapsing. I keep remembering what Thomas Jefferson said about the banks being too powerful. I would rather this system fail and we start over than imprison each of us, our children, our grandchildren, our great grandchildren, and future offspring indefinitely.

The Dollar

Yesterday, the dollar was at 78.63, the lowest since 1971 when President Nixon abandoned the gold standard. This creates losses for those who hold Treasury bills, like China. They have lost an estimated $90 billion so far this year. 

Today, the Federal Reserve Chairman emphasized the need to 'begin planning now for the restoration of fiscal balance.'  He is concerned that about our long-term situation.  Our actions or lack of actions will have a direct effect on the confidence of financial markets.  Also, our total debt has contributed to a spike in long term interest rates. I wonder if these words are meant to help raise the dollar. One would argue that everyone is in the same boat as us and so the dollar will be okay.  My thought is that China is not in the same boat and has the opportunity through investing in their infrastructure to have a strong financial foundation.  The strongest financially will have the most influence on the world.

Things Happen in Threes

North Korea has renounced that its truce. originally established in 1953 with South Korea. Within the past decade it also abandoned this truce in 2003 and 2006.  I'm observing that this is the third time, but also that about every three years, this intention occurs. Given that the leader is priming his son for the top spot, I think that he will take whatever steps he deems necessary to transfer that power to his son.  He does not seem to have any concern for the well-being of his people at the survival level, so he is unpredictable. 

Some tidbits:

*  The dollar has lost 96% of its value since 1913.  Keep an eye on it to gauge how we are doing creating and managing the escalating debt. The lower it goes, the less stable we appear to other countries who buy it.  Also Standard and Poor reaffirmed our AAA rating as a country. What else can they do? So goes the U.S. and the affect on the world will be devastating.

*  There were 616,000 foreclosures in the first three months of this year, a record high.  Fixed rate loans represented more than half, where in the past adjustable rate mortgages were in the lead.  

*  12% of the homeowners are behind or in foreclosure.

We are all in this together. The 'bump' that I referred to before has yet to arrive.  I call it a bump because it won't take much given the momentum of government spending.

It Is All In The Perspective

Today Standard and Poor issued a shot over the bough by saying that the outlook on Britain has gone from stable to negative because of massive borrowing to deal with the recession and bank crisis.  This is not a formal downgrade, but it might as well have been given the impact. The projected Britain government's net debt burden will rise close to 100% of economic output by 2013.  As of April 2009, it was 53.2%.  In my opinion, this is the orange flag that I have been waiting for given my concern about the U.S. increasing debt.

As of early May 2009, the U.S. debt is 80.1% Gross Domestic Product based on the current GDP.  The President's 2010 budget estimates indicates that debt will be 97% by 2010 and stabilize at 100% after that.  Looks like this country is going to finish the race before Britain with 100% debt.  Given that, how are we going to fair with Standard and Poor's rating?

Also, today, there was a statement that the offers for homes for sale in the Northeast are 20-30% less than the asking prices.  The bottom in the housing market has yet to show up with steep discounts like this.

For those who are active investors in this market, be very selective and fully conscious of buying and selling.  Remember, I am optimistic in the long run, but I think we are going to experience a giant bump in the investment road, sooner than later.  

Reality versus Illusion

We are hearing words that the financial system is 'healing' and the housing market has 'bottomed.'

Here are some facts:

*  The national median home price is $169k, falling 13.8% for the 1st quarter of this year, another 6.2% since 4th quarter of last year.  Half the sales were foreclosures and short sales. Both sell for about 20% less than traditional housing asking prices.  This process will continue.

*  Foreclosure notices rose 32% in 1st quarter of this year compared to 1st quarter last year, and the banks are active in moving the process along.

*  Bank of America, Citi, and J P Morgan Chase represent 60% of all unused credit lines. They cut $320B in lines during the 1st quarter of this year.  This is in addition to $408B in the 4th quarter of last year.  The outlook is that closing these lines is gaining momentum, which is really going to put the squeeze on the consumer in even meeting their basics needs, let alone their discretionary spending.

*  The government is borrowing almost $.50 for every dollar spent.  Imagine if we as individuals were leveraging like this.

*  Social Security and Medicare are running out of money faster than forecasted.

*  Recently, a group of General Motors executives sold all of their shares for around $1.60 and up.  Look at what the price is today.  That points to what is going on behind the scenes and as the current CEO keeps suggesting, bankruptcy seems closer than around the corner.  

It is important that we keep our attention on the details versus the words coming out of Washington.  As I have reiterated several times in my blogs, there has to be a level of U. S. debt that when reached will lower our AAA credit rating. I don't know what that number is, but we are moving vigorously in that direction. Invest accordingly and follow your own truth.

Total U.S. Debt Load

Whew, I'm glad October is over.  Just think, the start of the Great Depression when the market crashed on October 29, 1929, the October 1987 23% crash, and 2008's wild ride all occurred in October.

In the 1920s to 1985, our debt load (that is all debt; consumer, companies, government), was 155% to the GDP.  Today it is 355% to the GDP.  If you look at a chart, it's almost straight up for the last 10 years.  The total debt is estimated at $51 trillion.  To get it back to 155%, debt would have to contract either in being paid off or written off by about $25 trillion.  That is clearly beyond comprehension.  The estimates are that the banks have written off at least $800 billion of that from mortgage failures.

As you have noticed from this blog and the last, I am focused on the word 'debt' because the more it controls us, the less freedom we have.  When it becomes extreme collectively, like now, more people lose perspective and end their lives.  Also, those in power decide too quickly on multi-billion dollar deals with far reaching consequences without considering the impact of the fallout from their actions.  True reason at the bottom and top is infected with emotionalism. And that emotionalism is created from the perspective of all parties involved.  They see through the lens of how they view and think of themselves and project it on the collective.

Again, my optimism sees the lessons of this country  and the value of the experiences we are journeying through.  Self-understanding is the key to a better life where the material is only one aspect of life.  As Socrates said, "A life unexamined is not worth living."  Use this time in creating history to take a quantum leap in your self-understanding.

I welcome hearing your views.

The Unquantifiable Bailout

We are definitely living at a time of great change mirrored in the financial arena of the world.  The citizens of the U.S. are going to assume more debt, collectively, to rescue the financial sector due to dire consequences of what would happen if we don't.  When congressional leaders, the president, and the Fed got together last night and listened to what lies ahead, there was a stunned silence of 5-10 seconds.  When politicians have no words for that period of time, there is a landscape portrayed that none of them have experienced before.  The total liability is not measurable as this time, but 'hundreds of billions' means closer to two to three trillion.  I worked in the defense industry for 20 years and no contract met its original estimate, especially those funded for new design and technology.  We are dealing with the same here.  The ones deciding what to implement to save the U.S. financial system are having to be creative.  

This 'Plan' covers toxic mortgage-backed securities that banks hold.  The government would take these off their hands, hold them, and try to sell them again at a later date after they figure out the maze of who owes who. 

Today, the SEC put out a list of 799 financial companies that are excluded from the short selling list.  I think they should have excluded all companies like Britain did under pressure from us.  

Has anyone started talking about the bond insurers yet?  They are a new wrinkle in this financial fabric that is being sown.  Today ABK dropped 42% and it was on the excluded short sale list.   Our system has evolved to be so expansive and intricate that no one person or group understands the total ramifications of our actions.  Keep looking for the red flags like ABK.  There is a blind path here that takes a special dance.  We are only learning what the steps are.

We are only 11 days away from October, the month that has historically reflected major changes for the market.  What does October 2008 bring?