Housing Double Dip Has Arrived

Case Shiller index shows home prices have fallen to duble dip levels. Despite two rounds of Quantitative Easing, FED is unable to get the home prices go up again. Unemploymenr remains high. Someone should tell Bernanke that lenders will not lend at low rates if they see him printing money. The day Bernanke announced QE2 marked tha day of the US dollar for the time. Since then the dollar rallied, then went down, and then is going up again, while credit dependent sectors like housing continue their relentless march down.

“Data through March 2011, released today Case-Shiller Home Price Indices show that the U.S. National Home Price Index declined by 4.2% in the first quarter of 2011, after having fallen 3.6% in the fourth quarter of 2010. The National Index hit a new recession low with the first quarter’s data and posted an annual decline of 5.1% versus the first quarter of 2010. Nationally, home prices are back to their mid-2002 levels.”

This is bad news for the FED and for the banking industry in general. Debt based monetary system and fractional reserve banking creates money as debt. All of our money is interest bearing debt and in order to afford interest payments, we must create new debt faster and faster at an exponentially increasing rate. Banks and the government used housing as an engine of debt growth by encouring people (even sub-prime borrowers) to buy bigger and more expensive homes in order to inflate the money supply to avoid a deflationary crash. It has not worked. The music has stopped.

The great depression is coming. An entire nation cannot borrow for decades, inflate the money supply, prices and salaries with borrowed money and then hope that all will be fine when the pay back time arrives.

Double Dip Recession explained here.

Understand the Federal Reserve Bank

QE2 (Quantitative Easing 2) has ended and we are already discussing whether QE3 is needed or not. So far FED has been printing about 1 trillion a year and inflation has not materialized. Deflationary forces are too great. Bank credit is still deflating. Even though FED has printed almost 3 trillion, total debt which is 65 trillion dwarfs the base money supply. FED's printing did not fix unemployment, did not fix housing. Home prices have reached new lows and are still going down. The question is, can FED's printing press prevent another major crash like 2008?

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Housing Market Holds Economy Back

Latest news headline states: "Housing market stirs, but holds economy back".

"The housing recession – now entering its third year – has recently shown some signs of abating. But with economic growth still feeble in many parts of the country, analysts say any meaningful housing rebound is still years away"

http://www.msnbc.msn.com/id/41180293/

Home building is down. Job creation is not happening. Home prices are still on the decline. Further declines are expected. State and local governments are going towards bankruptcy. So, why do we need housing to fix all of our problems?

That is the ponzi scheme we are running. Home prices need to go up. Showing their homes as collateral, consumers need to borrow form their home equity and spend it to keep the consumer economy running. Wishful thinking. Even if it happens, it is a dead end that digs us deeper into debt!

How does it all work? Banks create money when we borrow:

http://www.tradingstocks.net/html/banks_create_money.html

This debt becomes our money supply. It has principal + interest to pay. Principal exists because we borrowed it. But interest is only created with further borrowing! When borrowing stops, there is not enough money to pay outstanding total debt! This is why banks are in trouble. This is why FED triples the base money supply and inflation is nowhere to be seen. This is why home prices are down, unemployment is up. The money to pay old salary levels does not exist. Employment numbers will get worse. A new recession will be declared well into the stock decline. An entire nation cannot borrow for decades, inflate the money supply and the prices with borrowed money, and then hope that all will be fine when the pay back time arrives!

We cannot borrow and recover. Borrowing is the cause of the problem. More borrowing will not solve it. I wish the Keynesians would understand common sense economics. Consumer economy is a myth. It is a way to put the American public to sleep while the multinational corporations pillage and plunder their wealth until there is nothing left.

From a banks perspective, lending to consumers is not ideal as well. Banks went all out to hand out consumer loans instead of business loans. Lending to small business has been declining. This is a trend of the past 30 years. It is not a new thing. The banks have been lending to the consumer instead of the businesses. These deflationary trends are part of the banks troubles now.

http://www.tradingstocks.net/html/signs_of_deflation.html

In the past, the banks used to hold their money mostly in US treasuries. That is why in past crisis they could remain solvent even if other assets lost their value. Their US debt would still be secure. Loans to consumers are backed by an asset such as an house. Today the banking industry is invested 95% in consumer loans and mortgages. This is why the banks were insolvent when the housing market collapsed and required a bank bailout.

The loans made to consumers are non-self liquidating. The consumer consumes. The consumer does not create value. Their ability to pay mainly depends on their job. Consumer loans are not put to use to create new value in the economy. On the other hand, loans to businesses are used to produce new value, to employ people, and to earn money so that the debt can be paid. These are self liquidating loans. And we have very little of them left now.

Banks see this as a deflationary collapse and they do not want to lend. Deflation occurs when total debt reaches it's growth limits and borrowing stops. Here is the private debt problem in the United States:

http://www.tradingstocks.net/html/inflation_deflation_credit_bub.html

Meanwhile home prices are still a bubble. We are still 20% above long term average prices according to Case Shiller index. We can fall much more. Housing collapse is a result of deflating money supply. With less money available, it becomes impossible to sustain current prices and salaries:

http://www.tradingstocks.net/html/housing_market_bubble_bust_cyc.html

If we end up with a Japanese style deflationary crash, housing market crash may continue for decades.

Bernanke is Printing Money But...

For the last few weeks, US dollar is up despite Bernanke's printing press. The US dollar bottom came the day Bernanke said he would print print print relentlessly. Treasury rates are sky rocketing and mortgage rates are up as well. So, what happened? Didn't Bernanke make it clear he wants lower mortgage rates to save the housing market?

The problems are too big to solve. This is a deflationary crash. US dollar rally is real. Bernanke is printing money and the dollar is going up. This is the problem Bernanke is facing. Credit can deflate faster than he can print! Money is not what Bernanke prints! Money is what we borrow. How often do you use cash to buy things? We use our checkbooks, our credit cards. They represent our bank account. And what are bank accounts? Bank accounts are not cash. They are only promises to pay from the bank to you. They are IOUs. There is no real cash backing them due to fractional reserve banking and this is part of our problem.

Bernanke's real job is to facilitate credit. The job of Federal Reserve Bank is not to just print money. It makes credit available. However, due to earlier optimism, we have already borrow for decades. Doing so we have created our money supply. Then we ran out of credit worthy borrowers. Now the banks expect us to pay back with interest. So, let us see where we are. Total money supply is X. It needs to be paid back with interest. So the debt is X+I. Without further borrowing, how will that happen? The aswer is, it won't. This is why Bernanke is printing the shortfall in money supply and inflation is not happening. However, this comes at a price. If creditors are afraid that Bernanke will keep printing, then they will refuse to lend money at low rates. This will be deflationary for credit markets. If you cannot borrow mortgage at low rates, you can't buy the same house. Prices will have to come down. This can kick off a deflationary downward spiral in housing and other credit dependent sectors of the economy. Bernanke is between two rocks.

Most of the world's debt is denominated in US dollars. Borrowers must find US dollars to pay. They will sell everything, stocks, bonds, houses, gold, oil... If they don't, their creditors will! Keep your dollars safe! Do not get into excessive debt. It will be worth it. At the bottom of the deflationary collapse, your dollars will buy more of everything.

Will Bernanke Save the Economy?

Economy is going down the drain, FED feels the need for more stimulus, but the market rallies. Does that sound irrational? Yes. People do this all the time. Look how throughout the 2007-2009 crash FED came up with more and more stimulus and how the market declined after brief rallies:

http://www.kondratieffwavecycle.com/stock-market/is-the-plunge-protection-team-manipulating-stocks/

Now deficit is more than a trillion. Unemployment is at record high levels. We are merely borrowing and spending to sustain our consumer economy illusion. Yet the traders are optimistic about the economy. Everybody bought the stocks, 93% of traders are bullish. They are all waiting for stocks to go ever higher so that they can sell to the greater fool. Just wait it out folks, one of these days those bulls will end up being the greater fool who bought at the top. Everybody knows FED will save the economy, can they all be right?

Stock market technical indicators once again are ringing the bells. Weekly and daily accumulation distribution index is showing big money is selling the rally, not buying it. Other technical indicators that we should mention are:

1. Mutual Funds Cash Holdings
2. Annual Dividend Yield and P/E Ratio
3. Daily Sentiment Index
4. American Association of Individual Investors (AAII) Poll
5. Bull-Bear Spread
6. Put/Call Ratios and
7. VIX
8. Intraday Trading Index (TRIN)
9.-13. Momentum Indicators: TICK, Closing Premium, Upward Gaps, Open TRIN, Volume

Excessive optimisim is visible accross the board. Democrats are about to loose (which the traders already know), Bernanke keeps promising Quantiative Easing 2 (QE2) which the traders also know. US dollar is wiped out and according to the press it is dead. Never mind, in early summer it was the Euro that was declared dead. Press was calling 1 to 1 parity for Euro/USD and some were calling European Union would break apart. Now, few months later we see the exactly opposite sentiment in currencies, gold and silver. People are bullish on everything except the US dollar.

They say you need to be in stocks or inflation will wipe out your money. Burned investors jumped into junk bonds and are about to get burned even worse on that side. Gold is supposed to go to 10,000 USD. Silver, commodities is supposed to skyrocket as well.

But there is one thing wrong in this picture. Stocks, bonds, oil, gold, everything is going up, but unemployment is still high. Real Estate prices, despite record stimulus and gigantic Fannie Mae, Freddie Mac losses, are in a decline. Salaries are not going up. GDP is up, but debt is up exponentially more.

We are spending borrowed money and propping up prices of speculative assets such as stocks, bonds, gold, silver and shorting the dollar. But the day of reckoning is near. US dollar will soon bottom. US dollar is the place to be. Debt is the problem and we have more of it now. Bernanke has alot more printing to do. Meanwhile, DOW priced in Gold is crashing, and nominal prices will soon follow.

Executive Compensation

Lately, excessive executive compensation is attracting attention. Various sources are reporting that executive compensation in the “new economy” is reaching levels unseen before. Avarage executive pay is hundreds of times of avarage employee pay. This is orders of magnitudes higher than how it used to be. Are we jealous? Yes. Should we stop this practice of excessive pay for the executives? Yes. But the reason we should do so is not based on our emotions of envy. It is based on the necessity that I will explain now.

Currently, a CEO’s success is evaluated based on the money his company earns during his service time. He comes into power, company makes billions, he takes his salary, bonus, cashes options and walks away. Next year the company may go bankrupt. But why would he care? We have seen this game play out time and again, especially in the financial sector where two years ago avarage employee bonus was 600,000 USD. And a NYC restaurant was boasting about wine sales to Wall Street types for 30,000 USD a bottle. Now some of those employees are laid off and their companies are on life support. What was the purpose of paying these people -who run their companies a ground- that much money? The CEO and employees who cashout a lifetime of pay check in a year do not have the incentive to make the right decisions for the long run. They cannot bite the bullet and say no to sin if they have to forfeit short term profits. The shareholders must reign in and force them to do so. For that to happen, the government needs to stop bailing out these companies so that share holders get punished for their utter lack of care over what company they invest in. Otherwise indifference will continue and the good and the bad will not be sorted out. We must let the free markets work without government intervention so that the truth shall prevail and we can follow the truth instead of the desire of our hearts.

Let us say the share holders woke up and want to do something. What can they do? They can do the following:

1. Cap executive salary at 4, 5 times the avarage employee salary.

2. Provide attractively priced stock options that will vest (regardless of whether the executive is still in the office or not) in the next 20 years as part of the total benefits.

This way executives can still get good pay over the long run if their companies perform well which makes their options worth more. And they will have some incentive to make long term decisions because their pay depends on it.

If the government wants to interfere with the markets, it should add the following:

1. Do not tax dividends.

2. Tax capital gains at a prohibitive rate such as 80%.

This will have the following effects:

1. Encourage the companies to pay dividends as a way to pay the shareholders.

2. Remove the hope of getting rich through speculation of higher and higher prices that cause bubbles.

It is not success to merely paint a positive picture to propell the stock price higher so that shareholders are happy and the executive can get his pay. Propelling prices based on hopes and wishes is a lie and it is almost criminal.

If a business is sucessful, it should be able to generate cash and pay dividends. Why should I have to sell my company to make money? I should be able to own it and make money through dividends.

Currently, the WALL Street is nothing more than a casino. Those who get out at the right time will run away with the money. Others who do not have time to study and time the market will be left behind as usual. Some compare this great recession to the deflationary crash of great depression. Pension plans, 401Ks, individual savings are all invested in stocks or risky bonds. A decline can wipe out huge amount of wealth that we think we have.

Many people’s retirement is at stake and it is sad to see few are aware that they are gambling it away. There are sharks who trade these markets at the 401k accounts’ expense and they will certainly benefit from this indifference and run away with the money. Executive pay plays a role in the true valuation of these companies and we need to fix it for an honest financial market.

Fractional Reserve Banking is the Cause of the Crash

The problem is not with democrats or republicans. They are both the same. Government intervention into the free markets in the form of FED, FDIC, Fannie, Freddie is the cause of our problems. So, why did the government create them? Let me explain the whole adventure shortly.

In the past economy seemed to be doing OK solely due to credit inflation that FED has fostered. FED made it easy to borrow. America borrowed and spent. When we borrow money, banks create new money and give it to us. They do not lend existing money. Here is how banks create money.

http://www.tradingstocks.net/html/banks_create_money.html

This new money expands the money supply. It makes it easy to earn. Our economy is now addicted to the ever expanding credit supply. People are happy to have a job, they do not save, consumer economy myth encourages them to spend, thus they do not care that there is inflation. When it is time to buy a home, they happy to promise their lifetime earnings to a bank who creates money out of thin air by making false promises that it never intends to keep. Slavery of the masses is another matter to be discussed in another post.

For decades, our total debt (not federal debt, but the debt people owe) increased faster than the GDP. For every unit of GDP increase, we had to borrow more and more every year. This is the system bankers have created to ensure that more and more of us are in debt. They created the FED so that in a time of inevitable bust like this, FED can save the banks while average Joe goes bankrupt and looses his home to the bank. Why does ordinary Joe is guaranteed to go bankrupt and loose his home to the bank?? Let me explain that too.

All of our money supply is bank credit. It is borrowed money. It needs to be paid back as principal + interest. The interest portion is not even created yet. Borrowing MUST increase exponentially so that principal+interest amount exists in the economy so that people can earn it and pay back what they owe. What happens when borrowing stops? Deflationary crash occurs. Debt problem:

http://www.tradingstocks.net/html/inflation_deflation_credit_bub.html

There is a limit to how much people can borrow. To make it last what did they do? They allowed people to deduct mortgage interest from income while calculating tax. That made mortgage more attractive. So people borrowed more and injected new money into the economy. This new money makes the current administration look good. In fact, they guarantee a future bankruptcy but who cares. As long as they get re-elected...

http://www.tradingstocks.net/html/housing_market_bubble_bust_cyc.html

Government talked about the American Dream and Affordable Housing. Now home prices are becoming affordable, but instead of celebrating, they are scared to death, they are trying to inflate prices again. They want the housing bubble back. Home prices are down, sales volume is down. After prime borrowers were exhausted, they changed the rules to allow sub-prime borrowers get big mortgages. No 20% down, liar loans were all to inflate total credit. Now sub-prime is exhausted and the crash has started. 8K tax credit won't work. Home prices must increase exponentially to sustain a recovery. People must borrow HUGE amounts to provide new money to the economy. Who is gonna do that??? Here is why FED's easy money policy does not work beyond some point: Jaguar Inflation

http://www.tradingstocks.net/html/jaguar_inflation.html

Where does that leave us? It leaves us at the top of the greatest bubble ever! What ever you do, make sure you do not take on more debt! Pay off existing debt! If you have existing savings in cash or cash equivalents such as short term US treasuries you should be fine for a few years. At the bottom of depression you may have to jump out of US dollars if FED freaks out and really prints money!

All of the prices, and salaries you see around you were based on inflated credit that happened over 50 years. It is based on a money supply that is almost entirely bank credit. People borrowed and borrowed and spent. The amount of money borrowed reached sky high. You earned in good times! Now, it is reversing course! Deflationary crash is here!

http://www.tradingstocks.net/html/prepare_for_market_crash.html

Even though at an individual level borrowing with interest may seem fair, at macro-economic level, interest based monetary system is guaranteed to fail. What is worse is that the bankers who run this country made sure that the government agreed to bail them out at tax payer expense.

The fix is to get the banks out of money creation business. Nationalize banks that fail. Abolish the FED. Let the treasury print it's own money. Entire America should not be a slave of bankers paying interest for the money that they create out of nothing.