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| A Disaster of Epic Proportions |
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Despite the fact we just went through one of
the warmest winters on record, it was nevertheless a winter
of discontent for many in the real estate market.
Inventories of unsold homes have been building
for several months, as interest from prospective buyers has
slowed to a crawl from the feverish pitch of the past few
years. And while springtime is historically a good time of
year to clean up the old house and stick a “For Sale”
sign on the front lawn, judging by the number of signs out
there around the country this year might very well break records
for the number of homes available and unsold.
Not helping the sales numbers are reports that
banking regulators, always fashionably late to every party,
are closely monitoring the mortgage loan industry. They are
expected to issue guidance in the next few months that may
restrict certain loan types; the types that can throw a homeowner
into foreclosure when the so-called “teaser” and
other inducement type rates expire.
I came across a mind-boggling statistic recently
in a Washington Post article by Kirstin Downey that I thought
I would share. It indicated that roughly two-thirds of all
people who purchased homes in the Washington area in 2005
used adjustable rate interest-only or option mortgages, up
from 2.2 percent in 2000.
Mortgage brokers are, not surprisingly, quite
concerned about any regulation that might disturb this most
surreal of relationships, not to mention their very profitable
gravy train ride. They argue that borrowers are taking out
these types of loans because it is the only way they can afford
to buy a home. One broker quoted in the story went as far
as to say that without these types of products homes could
not be purchased, and any action to remove them would in fact
precipitate a “disaster of epic proportions” in
the housing market.
A separate disaster in the making, one that
might precipitate the precipitating action above, is the action
in the US dollar the last few weeks. After rallying for all
of 2005, the greenback has struggled so far in 2006 with the
action pointing to a continued decline, having in the past
few days broken through key support levels at the 86-87 range
on the US Dollar Index. If the index were to break below 80,
it could very well freefall from there, bringing with it yet
another season of discontent-- a much chillier one than the
balmy conditions many are expecting.
Included amongst those who seem to be unconcerned
is our new US Federal Reserve chairman, Ben S. Bernanke. In
a letter to a California Congressman last month he stated
the following: "Although US trade deficits cannot continue
to widen forever, these deficits need not engender a precipitous
decline in the dollar, nor should such a decline, were it
to occur, necessarily disrupt financial markets, production
or employment."
Bernanke continues to use the "V"
word as well. No, not "V" as in "V for Vendetta"
the movie, which one would assume any response from him might
be limited to a resounding "no comment", but rather,
his favorite word in the English lexicon, "Vigilance".
In testimony before Congress last week, he continued with
his vigilant inflation fighting theme, even as the price of
gold and other barometers continue their march higher.
Despite Bernanke's assessment, there should
be no doubt that a dollar decline will have wide reaching
ramifications, not least of which will be the increase in
the cost of virtually everything Americans need to buy on
a daily basis. As America has outsourced massive amounts of
production to China and other low cost centers, very few of
the items Americans consume are actually manufactured in the
United States. A declining dollar by definition would result
in a proportional increase in price of the imported goods.
While these impending threats gather in the
not too far off distance, Americans remain oblivious to them,
having gotten so used to the Federal Reserve safety net and
bubble prosperity they have forgotten that real prosperity
is attained only through hard work, savings and investment
in real, income producing assets. That was the legacy left
behind by former US generations; one that has been set aside
and squandered the way Paris Hilton dating playboy heirs to
Greek shipping fortunes are accustomed to doing.
The home for instance, throughout all of time
the symbol of family and stability that most strived to own
free and clear, has been reduced to nothing more than a vehicle
of speculation by the so-called "flippers" as well
as ordinary Americans; individuals whose actions one might
argue are far removed from the great generation of Americans
that built this country into a superpower. The Federal Reserve,
enablers of this false prosperity by conditioning the populace
to embrace credit and run up debts like drunken sailors, is
revered by consumers that don't know any better, and cheered
on by Wall Street pundits who continue to profit the further
up the creek Americans paddle.
In due time the action in the various markets
that are of no concern will become a dire concern, and the
Federal Reserve as well as the mainstream pundits will be
exposed for the incompetents that they are. Regrettably by
the time that comes to pass, similar to the vindication of
the Arthur Andersen firm after it was reduced to nothing but
a puff of smoke, the damage will have already been done.
With gold over $600 and rising, silver over
$12 and rising and oil over $70 and rising the inevitable
standard of living adjustment between East and West may now
finally be under way. Millions of Chinese, now setting their
bicycles aside in favor of shiny new cars, are gaining strength
and momentum while saving and buying gold. Americans on the
other hand, with too many cars and debts, too happy and too
out of shape to compete, will in all likelihood need to hit
bottom before any renaissance could begin.
Perhaps a good start along the comeback trail
might be loading US bound cargo ships, which will surely contain
fewer and fewer consumer goods in a deteriorating US dollar
environment, with Chinese bicycles while in return Americans
send the Chinese their cars. With oil prices headed to the
stratosphere as the US dollar declines, Americans won't be
in a position to afford to drive them anyway.
Those thinking this may not be a fair deal need
only remember all the years Americans received real goods
from the Chinese in exchange for worthless IOU's. With that
reality as a backdrop, and given the great shape Americans
can get into utilizing their new methods of transportation,
the Chinese would actually be doing us a favor.
Contact information:
Christopher G. Galakoutis
CMI Ventures LLC
Norwalk, CT, USA
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© 2006 Christopher G. Galakoutis
Chris can be contacted at galako62904@yahoo.com
or through his colleagues at the Darien, CT office of Euro
Pacific Capital, http://europac.net
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