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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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