Gold and Energy Advisor
Gold and Energy Advisor's Real Wealth

Real Wealth #128  11/27/2007

Grim News in US Real Estate

The collapse of the mortgage market is nowhere near completion. One after another, financial firms keep announcing fresh new losses. The most recent was Swiss Reinsurance, with an $875 million write-down.


Meanwhile in the housing market, the news keeps getting worse. Homebuilder confidence is at record lows. And the builders—those that are still in business, anyway—have good reason to be depressed. October housing starts were down a stunning 49% year-on-year.


Also, the Census Bureau has reported that US home-vacancy rates are still at all-time records. Right now, 2.7 percent of US homes have nobody living in them. This is a jaw-dropping figure. Until last year, the all-time record was 1.9 percent.


Just to get back to 1.9 percent, the market needs to absorb 500,000 homes. And this is at a time when even credit-worthy buyers are having trouble getting mortgages.


The real estate collapse is far from over.


"The Big Thing Right Now is Panic"


Instead of recovering from this summer's sub-prime contagion, the financial markets are sinking deeper.

You might remember that German auto company Daimler sold off Chrysler this summer. Almost all the big Wall Street houses were involved as underwriters: J.P. Morgan Chase, Citigroup, Goldman Sachs, Morgan Stanley, and Bear Stearns. They raised billions in loans to help the deal go through.


That was back in August. They were supposed to sell these loans right away, but they're still sitting on some $4 billion in paper. Last week, they postponed its sale yet again.


Why? Because nobody wants to buy it!


The debt markets are still a complete mess. Treasuries are doing great, but everything else is toxic. As one analyst explained to the Wall Street Journal, "The big thing right now is panic."


The debt meltdown has now spread to our nation's biggest financial institutions. Goldman Sachs just downgraded its ratings on Citigroup—the biggest bank in the country—while predicting a $15 billion loss in just the next two quarters. J.P. Morgan Chase, the third-largest bank, got hit too. Other downgrades include big Wall Street names like Bear Stearns, Lehman Brothers, Merrill Lynch, and Morgan Stanley.


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When the sub-prime catastrophe hit us this summer, most commentators made soothing noises. Don't worry, they said. This will only affect one little corner of the mortgage market.


As I predicted, they were wrong. It's spreading through our markets everywhere.


Did You Shop on Black Friday?


The Friday after Thanksgiving kicks off the Christmas shopping season. It's become known as Black Friday—the day when a big burst of shopping finally pushes many retailers into the black, after losing money all year.


It's also become the predictive barometer for Christmas-season sales. If Black Friday goes well, retailers are happy. If not, they panic.


This year, they're happy—so far. But this is probably premature. For example, last year's Black Friday went well too. But many stores struggled in December, and never recovered.


Plus, it would have been surprising if sales weren't good. Retailers were offering huge discounts—I saw deals of 50 percent off, even on high-ticket items.


Obviously, retailers are desperate. Why are such antics necessary? Because consumers can't afford to buy anything otherwise! We're already drowning in debt—consumer credit levels are at an all-time high of $2.4 trillion. That's up by an amazing half-trillion dollar in less than five years.


Now everybody is wringing their hands, waiting anxiously to see how the season plays out. If consumers don't rack up huge new charges on their credit cards for the holidays, many retailers will be in serious trouble.


In a healthy economy, it wouldn't be like this. In a healthy economy, consumers would be expected to save part of what they earn. Our economy is the opposite. Consumers are already being crushed by their debt levels, but they're expected to go deeper into debt, to prop up the economy.


To me, our economy looks like it's in the closing stages of a spending-driven credit bubble. When consumers can't borrow any more, the spending will stop. And the retailers will come crashing down, along with many of the manufacturers that kept them supplied.


This isn't just a holiday problem, by the way. Our economy is like this all year long. Black Friday and the holiday shopping season just magnify the issue.


Fed Releases Troubling Forecast (But Won't Admit it's Troubling)


The Federal Reserve just released its economic forecast for the next 12 months. The consensus among Fed officials was a weak GDP growth rate—as low as 1.8 percent. The report made no comment on this number, though.


Why is it so bad? Because year-on-year inflation is currently running at 3.5 percent. So our currency is depreciating about twice as fast as our economy is growing.


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And that's if you accept the government's heavily manipulated inflation numbers. If you measure it properly instead—without the "GDP deflators" and "hedonic regressions" and "non-core adjustments" and all the other hocus-pocus that's meant to hide the truth—you wind up with a real inflation number of about 7 percent.


So in reality, our currency is falling almost four times as fast as the economy is growing.


Mainstream commentators have been scratching their heads, wondering why gold has been doing so well lately. But how more obvious could the answer be?


The dollar is tanking, so investors are fleeing to gold. Investors always flee to gold when currencies go south. When markets crash and currencies burn, that's when gold shines the brightest.


And that's why gold will be a great investment for the foreseeable future.


Incidentally, the weak Fed forecast is leading many to expect a further Fed rate cut. Lately, the markets have been pricing in about a quarter-point reduction. That's just more bad news for the dollar—and more upward pressure on gold's price.


I'm polishing off a few last loose ends on the next issue of the Gold & Energy Advisor this next issue is one of the most important issues I've ever written. In it I'll explain how the U.S. will soon be blackmailed by China to surrender Taiwan. This event will have a profound impact on the balance of power in the world, its financial markers and the value of the U.S. Dollar for the balance of the century if not the balance of the millennium.





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