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.

Resilency

The market is holding up well with bad news flooding the forefront of everyone's consciousness.  

I'm watching Putin in Russia warning that foes attempting to destabilize Russia will be suppressed, knowing he has his own agenda, being a former member of the KGB.  If he is trying to put this country under a police state, I think the economic situation will rule the day and minimize his control in doing this.  

Pension funds of corporations in the S&P 500 are underfunded.  They are being forced to decrease contributions and in some cases plan on closing the funds.  This is a clear sign of the long range affects that this current situation is having.  I happen to have a defined pensioned plan with General Dynamics, who bought GTE Government Systems where I worked for 13 years.  I can collect a monthly pension or lump sump when I'm 65.  This company seems to be healthy and thriving in this climate.  If it is there when I reach this age, great.  Otherwise, I'm not including it in any life planning.

More than 12 million home owners are under water; an estimate of $5 trillion in housing values lost.  In 2009, there is an estimate of another 25% reduction in housing prices, and it it to continue into 2010.  Even though low rates are being offered and people are saying what a great deal houses are now, consider offering 25% less for any house you may be serious about buying.  The 'present value' of houses is not being reflected yet.

Credit is continuing to be tight because the banks receiving the $700B bailout are buying U.S. Bonds and Treasury Bills.  Where is the management and pressure to force them to lend  the money as originally defined to the individual?  This is a sure sign that those at the top of government have no control in how the money is used.  Lowering the discount rate to 0-.25% is suppose to encourage them to move forward in this manner.  Time will tell.

Overall, the 'fall' is continuing all across the world.  Japan and Germany are pumping extra funding into the system.  The Belgium government collapsed after it failed in an attempt to bailout its financial group Fortis Bank.  If you look at the results of all of the actions, the truth is revealed.

As I have said repeatedly, if you can reduce your own personal debt, and be less tied to what is happening to the world financial system, you will be free to act in an abundant way when the bottoms are reached.

Cleaning Out The Financial Closet

The threads are surfacing more frequently now, reflecting the cracks in our financial foundation.  High profile New York figures like Bernard Madoff show us a great example of what is yet to come:  at least $50B in losses with his ponzi scheme.  France banks are exposed to at least $400M, Sweden $300M, Spain $3.1B, HSBC in Geneva at least $4.22B, hedge funds yet to be identified, and the beat goes on.  Contraction exposed this fraudulent setup.  And what blows my mind is that Madoff is a former chairman of the NASDAQ stock exchange.  A second example is Marc S. Dreier to the tune of hundreds of millions.  The ripple effect over the next few weeks, as the system continues to contract, will determine the extent of the tsunami.

Watch the dollar. As it goes down U.S. Treasuries become less appealing to foreign investors, and it leads to more inflation.  Bernanke is looking at reducing the discount rate again, to possibly zero.  This will affect the dollar in a huge way.  Again, what is the point of diminishing returns when the creditors say 'enough is enough' and no longer buy our bonds and treasuries?  I think it is closer than the horizon.  The best step each of us can take is keep paying down the personal debt.  That step gives us more freedom when the biggest tsunami we have ever experienced touches our shore.  I am not being pessimistic.  I think what is happening is for the highest good, especially now that the worms are coming out of the woodwork who used the expanded liquidity over the last decade or two to hide behind.  It does show a giant hole in the regulations are implemented.