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This is your final warning.
The tempest Mike Larson and I have been warning you about is here, and the time for protective action is now.
To see the storm, you no longer need the flat-screen window to the world that you get each day from CNBC or CNN. You don’t even require the time telescope we’ve been giving you in Money and Markets.
All you have to do is get up from your chair, go to your door, and walk outside in the daylight.
That’s where you’ll see the U.S. housing market — the source of most of America’s wealth — starting to crumble before your very eyes.
That’s where you’ll see large chunks of the U.S. mortgage market — the lifeblood of millions of Americans — being swept away by a flood of home foreclosures and mortgage company collapses …
In our recent no-punches-pulled web teleconference we told you about some of the recent casualties: American Home Mortgage of Long Island, bankrupt August 6th … Home Banc of Atlanta, bankrupt August 10th … and Aegis Mortgage of Houston, bankrupt August 13th. (Click here for the transcript.)
Now, according to Merrill Lynch, there’s another candidate for failure which is many times larger — Countrywide Financial.
The company has exhausted its $11.5 billion in credit lines. It has just received another $2 billion capital infusion from Bank of America. And it’s still not enough.
Indeed, one top Bank of America executive privately believes that up to ninety percent of the country’s Alt-A mortgages, a staple of Countrywide Financial’s business, will eventually default. If so, it will easily crush all the cash and credit of many Countrywides.
Why Do I Believe
Countrywide is
Doomed to Failure?
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Because Countrywide CEO Angelo Mozilo himself sees the industry and the economy going down for the count.
Just last week on CNBC, he admitted that the mortgage crisis striking America today is
“one of the greatest panics I’ve ever seen in 55 years in financial services.”
He acknowledged that the troubles in the industry are going to continue.
He even predicted that the housing downturn is so bad it’s likely to drag the economy into a recession.
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My follow-up comment, also on CNBC:
“Even without a recession,
“Even with plentiful credit,
“Even with all those supposedly ‘goldilocks’ conditions …
“We have the worst foreclosure surges and the worst situation. So the question is:
“When you get a scarcity of credit …
“When you get a decline in the economy and a bigger pinch on the consumer,
“Then what are you going to see in the housing market? Then what are going to see in the mortgage market?” (Click here to view the video clip.)
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Yesterday’s New York Times hints at some of the answers:
“The Median Price of American Homes Is Expected to Fall This Year For The First Time Since Federal Housing Agencies Began Keeping Statistics in 1950.
“Rather than being limited to the once-booming Northeast and California, price declines are also occurring in cities like Chicago, Minneapolis and Houston, where the increases of the last decade were modest by comparison …
“On an inflation-adjusted basis, the national median price is not likely to return to its 2007 peak for more than a decade.”
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This home price decline is what’s pulling the carpet out from under the mortgage market.
This is the key factor that’s driving home owners into foreclosure and mortgage lenders into bankruptcy.
What’s most amazing is that, despite abundant warning signs of trouble, virtually no one was expecting it. Yesterday’s New York Times puts it this way:
“This reversal is particularly striking because many government officials and housing-industry executives had said that a nationwide decline would never happen.“
Now, however, even economists with a natural inclination to deny or downplay the dangers are finally — but grudgingly — acknowledging what’s long been obvious to analysts without an ax to grind.
For example …
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Just go to CNBC’s website, and see for yourself how many times Mike Larson has challenged Pollyanna industry experts face to face, demonstrating they were dead wrong about home prices “never falling.”
Look at his interview …
? On March 27th, when he told viewers that bad mortgages were impacting a whopping 40% of home loan originations … that credit standards were tightening up fast … and that Americans must expect “slumping home prices for an extended period of time” (click here for video), or …
? On April 24th, when he debunked an analyst’s “subprime-is-not-a-terribly-significant-event” pitch … and again warned of lower housing prices (video), or …
? On the newswires of August 22, 2006, headlined “Weiss Research analyst Mike Larson predicts national price decline for residential real estate,” or …
? In the Washington Post, Associated Press, public radio, and of course, right here in Money and Markets, where he issued multiple warnings week after week.
Now those warnings are coming true — and fast. The lesson to be learned:
Blind Faith in Officialdom
Could Cost You a Fortune!
This is not just an academic debate among armchair economists. Nor is it just a financial market phenomenon far removed from your daily life.
Quite to the contrary, the housing and mortgage bust could have a larger and more direct impact on your wealth, your job, your neighborhood, your city and our economy than any other single event in your lifetime.
So don’t believe them when they say it’s not a big deal.
Don’t believe them when they say declines could “never happen.”
Don’t trust them when they talk about the “fundamental strength” of this or that real estate sector.
Most important,
Don’t Be Lulled Into Complacency
By the Myth That the “Almighty”
U.S. Federal Reserve Will
Magically Save The Day
The Fed will try to save the day. It will drop the Fed funds rate, pump in more money, pull a few new rabbits out of the hat, and periodically bring a loud chorus of cheers on Wall Street.
But they cannot succeed for three critical reasons:
Reason #1
The Mortgage Meltdown Is
Too Big … and Too Far Gone
It has already engulfed trillions of dollars in loans.
It has already spread to 20,000 cities and towns across America.
It has already bankrupted lenders of subprime mortgages, Alt-A mortgages, jumbo mortgages, even prime, conventional mortgages.
Nearly a trillion dollars in mortgages is resetting at higher rates … or soon will be.
And trillions more may need emergency care.
Reason #2
The Nation’s Mortgage Markets Are
Largely Outside of the Fed’s Control
When the Fed pumps money into the economy, it doesn’t bail out mortgage lenders that have taken wild risks.
Nor does it go to Wall Street firms up to their ears in mortgage-backed securities.
The money goes almost entirely to commercial bankers, most of whom are running away from the mortgage markets as fast as their legs will carry them.
Result: For the Fed to persuade bankers to take the money is hard enough. To get them to dump substantial sums down the drain in the mortgage market is next to impossible.
Reason #3
U.S. Markets Have Sprung a Hundred Leaks,
And U.S. Dollars Are Gushing Overseas
Many people think the Federal Reserve can just pump money into the U.S. economy, and that’s where it stays.
Not true. The U.S. markets are like a bucket with a hundred leaks: The more money the Fed pours in, the more money that’s likely to gush out — to Western Europe, China, and Japan.
International investors are being scared off by the dominos falling in the mortgage market. And they’re scared off even more by the Fed’s efforts to flood the U.S. market with increasingly worthless dollars.
Years ago, foreign money in the U.S. was a small factor. Today it’s the single largest funding source for our national debt, and for the mortgage bubble itself.
When that money rushes back to its home country, the dollar’s decline becomes a rout, and the rise in foreign currencies becomes an explosion.
What to Do ASAP
Step 1. Get a substantial chunk of your money to safety, including Treasury-only money funds. Favor those that have average maturities of 30-60 days such as MTB U.S. Treasury Money Market Fund (VSTXX) with an average maturity of 45 days or Weiss Treasury Only Money Market Fund (WEOXX) with an average maturity of 51 days.
Step 2. Consider buying some hedges.
If despite our recommendations to sell, you own investment real estate — or real estate stocks and bonds — consider SRS, an ETF that’s designed to go up 20 percent for every 10 percent decline in the Dow Jones U.S. Real Estate index.
Or if you own financial and other stocks, consider SKF, an ETF designed to go up 20 percent for every 10 percent decline in the Dow Jones U.S. Financial Index.
Step 3. Diversify your savings globally. A great vehicle: Currency ETFs where you can go for a total return that’s as much as ten times greater than what you can get on U.S. dollars. That’s what we’re going to be recommending on Wednesday. (Click here before tomorrow if you don’t want to miss it.)
Good luck and God bless!
Martin
About Money and Markets
For more information and archived issues, visit http://legacy.weissinc.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Adam Shafer, Andrea Baumwald, Kristen Adams, Maryellen Murphy, Red Morgan, Jennifer Newman-Amos, and Julie Trudeau.
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