Mission

A Peak Under The Hood will be dedicated to providing unique insights into macro topics happening around the world and how these topics may affect financial markets. We will try to provide an entertaining, but informative blog, on subjects ranging from Real Estate, Mortgage Markets, Commodities, Major Stock Indexes, Bonds, and Select Trading Ideas. Our site will contain original posts, charts and also include opinions from outside investors and reporters who furnish original thoughts. We will attempt to dig deeper than what can be found on major network financial news outlets and it is our hope that you will continue to visit the site as we provide intelligent analysis that may be counter intuitive to mainstream ideas.

Thursday, March 31, 2011

Radioactive Milk Coming to a Store near You?

Radiation is being found on the west coast in milk.  This shows how quick radiation is on the mooooooo-ve.  Coming soon to a store near you:  Skim, 1%, 2%, Whole and Nuclear Green.

 

For those who still drink milk, you may be the 1st to enjoy a very mild shock of Iodine-131 in your morning sugary-O's.  Humans are the only mammals that drink milk after infancy, but hey, we are also the only mammals that play 'Angry Birds.' 

FDA Says radioactive milk is still super safe
Radioactive iodine-131 was found in a March 25 milk sample from Spokane that is more than 5,000 times lower than risk levels set by the FDA, according to the agencies. Iodine-131 was found in a March 28 milk sample in California, the state Department of Public Health said. The reading also is below risk levels, Mike Sicilia, a spokesman, said yesterday.
I really have a hard time with the 'acceptable' amount of radiation in food items.  I understand that I probably take on more radiation when I sport the grape smugglers on the beach in Cabo than I do by chugging a gallon or radioactive Banana Quick, but still, it is the principle of NOT WANTING TO DRINK ANY UNNECISSARY RADIATON.  Maybe I am the only one that feels this way.

Let the Spin-Doctoring Begin...

Japan has just experienced the single worst event to happen to their country since WWII.  The radiation problem from the melt down is already a massive problem and it looks to be a much bigger deal going forward.



But, like all issues, I am sure we will be told that there is nothing to worry about.

It's only cancer... Drink up. 
While any exposure “raises the risk of getting cancer,” the levels reported in Spokane pose “very, very, very low health consequences” Helfand said in a telephone interview from Springfield, Massachusetts.
I suppose this gives me a good reason to start drinking beer with dinner.

Cheers

Tuesday, March 29, 2011

Fed Speak... Gotta Know The Enemy

I you are like me you wish they would release a QE ETF. 

That would be a sure thing in the market today...

Instead, the Feds just announce QEII and make EVERYTHING a sure thing!

The S&P is up 10.5% since QEII.  QEII is about as awesome to the S&P as crack cocaine is to the ghetto! 

The real question about QEII is:  Will there be QEIII?

That is a question for the wizards of the FOMC:

Below are a list of wizards, some of whom believe in magic and others that just wear a funny hat for the paycheck.  By listening closely to the wizard speak we can determine weather or not there will be another round of QE:

NY FED CHIEF DUDLEY:

Fed Wizard Speak consistent:  'Dual Mandate' of maximum sustainable employment and low stable inflation.
Stance on Stimulus post QEII:  Keep the presses running mang, but be ready to turn them off... maybe (not really.... just don't make me look bad on your blog)!
Dudley's views 
He (Dudley) predicted "job growth will increase considerably more rapidly in the coming months," but he said that is something to be welcomed, not feared.
"A substantial pickup is sorely needed," he said. "Even if we were to generate growth of 300,000 jobs per month, we would still likely have considerable slack in the labor market at the end of 2012."
Echoing Fed Chairman Ben Bernanke, Dudley said "the economic outlook has improved considerably in the past six months," but added "we are still very far away from achieving our dual mandate of maximum sustainable employment and price stability."
"Faster progress toward these objectives would be very welcome," Dudley said.
Dudley is a wild card-- he goes with the flow, but he has consistently been in favor of more stimulus.  Trying to achieve low employment with low inflation is asinine when you are devaluing your currency as part of your agenda and your currency dictates the price of everything in the world.  Consumers are freaking out after the recent rise in prices-- what do the Feds expect when they reach 2.0% inflation? 

CHICAGO FED EVANS:

Fed Wizard Speak consistent: I am unsatisfied with everything! 
Stance on Stimulus post QEII:  QEIII, QEIV, QEV, QEVI... ect.
Evans Views
Despite clear signs of progress, I am not yet satisfied with the pace of improvement,” Evans said in his speech. “Unemployment will remain uncomfortably high for too long relative to our employment objective. So accommodative monetary policy continues to be warranted to address this part” of the Fed’s congressional mandate, he said 
Evans is hooked on the QE--He may be more gone than Ben Wizzie, but I am certain he is not ready to pull the punch bowl.  Count Evans in for QEIII... and QEIV for that matter. 

PHILLY FED PLOSSER:

Fed Wizard Speak consistent: Raise Rates! 
Stance on Stimulus post QEII:  Should have never happened.
PLOSSERS PLAN (see PDF of Speach titled EXIT)
If this forecast is broadly accurate, then monetary policy will have to reverse course in the not-too-distant future and begin to remove the massive amount of accommodation it has supplied to the economy. Failure to do so in a timely manner could have serious consequences for inflation and economic stability in the future. To avoid this outcome, the Fed must confront at least two challenges. The first is selecting the appropriate time to begin unwinding the accommodation. The second is how to use the available tools to move monetary policy toward a more neutral stance over time
I like Plosser.  Guy is consistently against any more easing.  The problem is that Plosser is the diamond in the rough of voting FOMC members... so really, he is the rough in the diamond.  While he is one voice, that is really all he has.

Other Fed members tend to be pretty high on the QE right now-- Kocherlakota, Yellen, and of course the Master Wizard Ben Wizze.  Kevin Warsh was a Hawk, but he stepped down in Feb:  Warsh is OUT.

Why step down? Maybe he didn't like the QE peer pressure from the rest of the wizards.  Maybe he knows someting we don't know-- Like Cypress Hill said, "When the Shit Goes Down, You Better be Ready."  I would guess that a young dude like Warsh didn't want to be tied to the unravelling that will follow the departure of QEWHATERVER. 

KNOW YOUR ENEMY

Consumer reports are hitting and they are painting a grim picture.
  • Michigan Consumer Sentiment Fell to 67.5 in March from 74.2 in January
  • Consumer Confidence fell to 63.4 in March from 72 in February.
KEY POINTS: * The Conference Board, an industry group, said its index of consumer attitudes fell to 63.4 in March from a revised 72.0 in February. The median of forecasts from analysts polled by Reuters was for a reading of 65.0. Forecasts ranged from 55.0 to 72.0. * The expectations index slipped to 81.1 from 97.5, while consumers' expectations for inflation in the coming 12 months hit its highest level since October 2008. * The present situation index rose to 36.9 from 33.8. Consumers' labor market assessment worsened. The "jobs hard to get" index rose to 44.6 percent from 44.4 percent the month before, while the "jobs plentiful" index slipped to 4.4 percent from 4.9 percent.
It looks like high gas and food prices are not as awesome as one expected. 

Is this painting a picture of what the future holds for the consumer?  High prices and no jobs?

Do the Feds know the real enemy they are fighting? 

Their real enemy is the consumer, not gas prices or food prices and not deflation.  Spending picked up in Q4 2010 due to prices being rock bottom and consumers balance sheets finally looking a little better due to lower prices.  Now the tables have turned:  Prices are rising and the consumer is running out of sweet sweet fiat dollars.  Disposable income is falling and spending is slowing... Disposable income down

The consumer has the ability to screw up the whole QEFOREVER plan if they stop spending, and/or run out of money for ipads and plasma TVs.  While the wizards try to create inflation, they fail to see that they are not actually fighting deflation, but instead fighting the one they are trying to entice to spend-- you and I consumer.  Why would they try to raise prices when they know that they can not raise wages due to unemployment.  People can only spend money if they have money... without wage increases, higher prices mean no more money for discretionary spending at Build-A-Bear and Applebee's.

It is not different this time-- higher prices, whether CPI or not, will lead to a consumer spending halt.  It happened in 2008 and it will happen again.

To combat, Feds stimulize more-- on prime time press conferences this time around!   

I say that the Feds do not know their real enemy.

Well, Gotta know the enemy...

Will the next round of stimulus keep pushing the S&P higher? 

Not if it comes with $5 gas and $13 applesauce...

Sunday, March 27, 2011

Video On China Ghost Towns: Field of Dreams Theory: 'Build it and they will Come."

China continues to grow rapidly, though through government sponsored construction projects. 

China is living on the Field of Dream Theory of 'Build it and they will Come.'

'They' being buyers.  'It' being massive skyscrapers only elitist speculators can afford.

China has 2 major problems:
  • Oversupply and continuous building based on 'expectations' of future growth, and;
  • No organic owner-occupant buyers due to rampant over valuation due to speculation
When China's bubble bursts, they may have buyers, but the prices will have to fall to near zero for the majority of working Chinese to afford to occupy these new housing units.  When will this happen?

It is happening now-- slowly, but surely.

China lending down and rates rising.  Money supply continues to rise but at a much slower rate than previous.  This should continue as China raises rates and reserve requirements to try and fight off food and energy inflation.

Grab the Popcorn:

Here is a great, yet lengthy, video on China's property bubble.  It is well worth your time today.



Housing prices are indeed out of control in China...

Massive price increases with no income growth
According to a survey by the Taiwan Real Estate Research Center released last month, housing prices in Taipei city have soared 73 percent over the past five years, but average household income has risen by only 1.2 percent.
Everything is sunshine and cookies however..for now, that is...

Build it and They Will Come... if they don't come, build more and GDP will follow.

If nothing else, the fire sale that follows the bust will be amazing!

Thursday, March 24, 2011

Is Bernanke Going to Announce a Fragrance Line?

Coming in June 2011, Ben Wizzie's new cologne: 
Que De Stimulus Trois?

I guess when you control the S&P 500 with your words and live large like a Gangsta Rapper, you need to have press conferences to explain all the double speak from the quarterly pow-wows with your wizard buddies, so the common folk and the lepers know which commodity index funds to buy.

That or you just think you are that special and want more face time to ensure a killer Fox News TV deal when you can't run the printing presses anymore.

Either way, I think this story is ridiculous:  
Bernanke to Hold Press Conferences 4 times a Year for Skeptical Public
Federal Reserve Chairman Ben S. Bernanke will hold press conferences after policy meetings four times per year in one of his biggest efforts to improve the central bank’s connections with a skeptical public.
“The introduction of regular press briefings is intended to further enhance the clarity and timeliness of the Federal Reserve’s monetary policy communication,” the central bank said in its statement. “The Federal Reserve will continue to review its communications practices in the interest of ensuring accountability and increasing public understanding.” 
Is it only me that thinks Bernanke has gone Hollywood?  Essentially this gives the Feds four more times a year to stir the pot and rile the markets. 

Maybe instead of pimping his ability to raise the S&P he will give us recommendations on stocks to buy in the wake of the next stimulus package:  "Thanks for your time-- and by the way, a strong position on GDX is recommended going forward-- We plan on really killing the dollar this month and the international uprising from the cost increases for food and energy should really help gold prices surge."

The meetings this year will be held on April 27th, June 22nd and Nov 2nd.

That June 22nd meeting should be perfect timing to announce Que De Stimulus Trois.

In November:  "Sorry for the $7 gas-- If you would have listened to us in April and bought GDX you could have trippled your investment and gas prices wouldn't be an issue."

Don't fight the Fed... Especially not if he takes the Two and 1/2 Men spot on prime time!

Wednesday, March 23, 2011

Uninteneded Consequences: BAC and Housing QE Programs

Sometimes the outcome of an event is not what was expected at all

A man with a shaky marriage goes on a crazy trip with his buddies to Atlantic City.  During the trip he gets hammered at a questionable strip club and goes into the champagne room with some dame named Sky.  After a $300 lap dance, sky whispers something about a 'special' room where they can 'play a little longer.'  The man gives Sky another $600 and enters the room with a smile...

Flash forward 5 weeks.  The guy is home with his family, but he has developed a rash and a cough.  His wife has as well.  He knows what the problem is, but lives in denial.  His wife however, is skeptical and will be going to the MD.  She will soon find out that she has a VD that is only curable by spinach that is laced with radiation in the afterlife. 

As the man walks in his kitchen that morning, scratching his crotch, he looks over the dining room to his two kids munching down on sugary-o's as they get ready for school.  His wife leaves the house without saying good-bye.

Later that same evening the man will have to live with the unintended consequences of his actions in Atlantic City.  When his wife come home he will be confronted and his whole world will collapse...

Unintended consequences happen all the time after big decisions-- whether good or bad-- they dramatically affect the future.  In the example above, the risks of cheating on one's wife are obvious, but only if caught.  If one does not see any risk of being caught, the perceived consequence of the action has no negative result.

BAC STILL CRAP FROM COUNTRYWIDE = No Dividend Increase from the US Gov't.

Bank of America is still a load of crap.  While all the other big banks have hiked dividends in the sunshine and cookies glow of a QE induced speculative stock market bubble, BAC got shot down.  BAC was asking for the dividend increase more than any bank, but they were told no.
BofA had hoped to be in a second wave of banks raising dividends in the second half of this year, but unlike some of its major rivals, it is still struggling to be consistently profitable.

The largest U.S. bank by assets said on Wednesday it still hopes to increase its dividend in the second half and intends to submit a revised proposal to the Fed.

The news highlights the split between the largest U.S. banks. While some are aggressively boosting dividends, others are still coping with loan losses and looking to post consistent profits as they recover from the financial crisis.
This was the unintended consequence of BAC buying Countrywide in 2008, paying way too much for the dying mortgage company and failing to audit the books and see the losses from the sea of questionable mortgage loans. 

Bank of America should not be paying a dividend (though if Citi can, does it really matter?).  BAC is still holding more mortgage trash on their books than any other bank and due to this, their name is trash as well due to the MERS foreclosure disasters.  As the housing market shoots down for a double-dip (unintended consequence of housing QE in 09/10), BAC will have to take on more and more losses.  Is BAC insolvent due to loan losses?  Probably.  If not today, it very well could be if the housing market continues to deteriorate in a rapid fashion (Ben Wizzie may play his 7th Ace on the housing market, however, in my opinion, to avoid this-- in what fashion?  That is for wizards to decide.).

Holding BAC is questionable in today's market-- They seem to be the junk of the big banks.  On the flip side, as Citi goes forward with it's 10:1 share split, BAC may take over the volume trade that Citi has had the joy of holding since the financial crisis.  This may help BAC later this year, but in the short term BAC looks to keep deteriorating due to the dividend news and overall sentiment from stress test results.  I personally would rather stab myself in the scissors than buy BAC at these levels.  If we dip into the single digits, however, I would put my feet into the water.     

BAC continues to pay the price for the Countrywide disaster vs the other big banks.  Note that none of these banks have been a good buy over the last 12 months, nor do they look to be in the near future. 

HOUSING QE WILL BE LOOKED AT AS THE 'ULTIMATE FAIL.'

While Wall Street sucks in the exhaust fumes of the printing presses of QE2, the housing market is reeling fast and falling into a double-dip. 

New home sales dip in Feb to a 50 Year Low.  No way new homes can compete with foreclosures-- they will fall further.
The median price of a new home dropped nearly 14 percent to $202,100, the lowest since December 2003. The median is now 30 percent higher than the median price of resold homes - twice the markup typical in healthy housing markets.
Existing Home sales are trapped in a spiral of loss due to rampant foreclosure problems. 
NAR said the median home price dropped 5.2 percent in February from a year earlier to $156,100, the lowest since April 2002, in a sign of the relentless downward pressure on prices from a market flooded with foreclosure sales. "If the price declines persist, even with the job market recovery, that could hamper recovery in the housing market,"
WHY IS HOUSING MORE DEPRESSED THAN LINDSAY LOHAN'S CAREER? 
Easy--Housing is failing in the shadow of no housing QE.  The Housing QE (tax credits for the most part) pushed ALL The demand forward in 2009 and 2010 and now that there is no QE left, there are no home sales.  Call a realtor and ask them if they can show you houses-- thier schedule will be WIDE open. 

All of this despite lower interest rates than during Feds MBS trillion dollar+ purchases and home- buyer tax credits.


The real question about housing QE is 'what next?'  Do the feds allow the housing market to crash... again, or do they release another round of stimulus. 

I say stimulus.  The Feds own the housing market-- literally.  They have a blank check with Fannie and Freddie and they own a good portion of the MBS written over the last few years.  They have a vested interest in propping up the housing market.

I really don't think it will matter though.  Housing is supply and demand.  Housing interventions piled buyers into a 2 year period instead of allowing the buyers to slowly enter into the market.  On top of that, tax credit recipients have to repay the credit if they move in the first few years.  These buyers are 100% out of the game.  Price declines make it impossible for step-up buyers to sell and underwriting guidelines make it near impossible for anyone with self-employed income or any credit dings to be approved for a loan.

To top it off, new Dodd-Frank laws are threatening to shrink the mortgage market with excessive capital requirements and restricted compensation.  This will drive medium and small mortgage players, who provide many niche finance options, out of the game.  Essentially, the goal of the government seems to be to drive all mortgages to the big banks.  Sadly, all the big banks are terrible mortgage lenders-- You may know this if you tried to buy or refinance, obtaining a loan from Chase, Wells, BAC or Citi in the last few years.  You probably enjoyed your last prostate exam more than your lending experience. 

If all mortgages are driven to the banks, expect underwriting to get tighter and fundings to become less and less common.  

Housing QE will be the ultimate fail when the dust settles.  It did NOTHING for the housing market.  Can the Feds ever unwind the MBS purchases and will the tax credits ever be justifiable?  No... No to both.  Taxpayers will be paying for the housing bust for years-- just another case of QE failure.  The losses for the housing market will be more excessive due to QE.  Recovery is far off-- Las Vegas is off another 7% in Feb and a report came out saying that if you bought Las Vegas in 2005 it will take 30 years to gain back the value you purchased at (sorry can't find the link-- it was on cnbc this morning).  Prices are still down $110,000 from the peak in Vegas and 4 out of 5 sales are distressed. 
 
Nothing new here, just the unintended consequence of the government failing to see the future results of their actions.

QEII will look the same soon-- unless you believe that record high food prices, speculative stock bubbles and rampant commodity bubbles are already the unintended consequence of the latest Fed disaster.

QEIII:  Coming soon.  See QEII above.   

Monday, March 21, 2011

Used House or Used Lexus

Coming this Summer:  Lord of the Rings: The Two Towers

Wait a minute... that is the #1 movie in 2002. 

Silly me... Existing home prices are the same now as they were in 2002-- About $156K-- Same as April 2002.  I guess I was expecting a blast to the past...

Gas was $1.61 a gallon in 2002 and gold averaged $310 an ounce.  The S&P 500 played with 850-1150ish

Used houses were worth about $156K.

Today Gas is $3.50ish a gallon, gold is about $1400 and the S&P 500 is at about 1300.

Used houses are worth about $156K.

I guess that is about all that needs said about houses.  Expect prices to plunge further as rates rise and foreclosures flood the market.  This is coupled with no credit expansion for mortgages and no wage growth for Americans. 

I wonder which was a better investment in 2002-- house or Lexus?

The house is the same value today as it was in 2002... no loss, but no gain-- other than the 9 years of mortgage payments, taxes, insurance and maintenance.  A loan at 100% financing would run you about $1150 a month (for principle and interest) and you would owe about $138,000 today based on 30 year amortization.  Principle and interest out of pocket would be $124,200 over 9 years

If you bought a 2002 Lexus Rx300 you would spend about $36,000.  If you took a regular 5 year car loan you would have a payment of about $700 fiat dollars.  This car would cost you about $42,000 if paid over the entire term but it would be paid off in 2007. 

The Lexus would run for about 200,000 miles no problem, meaning that with regular driving of 15,000 miles you would have the car for another 4 years (of course no one does this with a car, but let's just say you are one of those people that drives a car forever). 

And today the Lexus is worth...  $11,195


Of course this is a stupid comparison at best-- it is just pointing out the state of the real estate market.   

Today potential buyers are thinking about ridiculous arguments like the one I just presented--  Do I buy a nice new car or dream vacation, or a new house?

Housing has no confidence right now and I understand why!  Prices have collapsed in the last few years, foreclosures continue to mount and so many people have had a real estate horror story via MERS disaster or modification musical chairs.  Housing will not recover until there is confidence in the market.  Potential new buyers will look at alternatives to where to put their money-- cars, stocks, vacations, land... the competition is endless.

And the housing market has some tough competition... The new Lexus RX 450h is a sick ride.    

Are you looking to buy a house in 2011?

Sunday, March 20, 2011

Bye Bye Affordable American Pie.

Oil prices lead to higher prices in food, and high food prices lead to Consumer Spending Halts. 
You can avoid driving your Escalade, but you cannot stop eating.

Why does anyone listen to the Fed Chair, Ben Bernanke on anything?  His track record is terrible.  Bernanke does not own a Delorian with a Flux Capacitor, and therefore cannot go into the future to tell us what the future looks like.  He is at best a contrarain indicator.  I have stated in previous posts that I believe Ben Bernanke sees himself as a Master Wizard that believes in magic, and that he has the magical magician power to control financial markets with his words... and the use of quantitative easing. 

I personally do not believe in wizards.    
House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong fundamentals.
A young Ben Wizzie in 2005
Housing prices crashed the year following this statement.
The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so .
Not yet a Master Wizard, Ben's call at the end of June 2008.

Our Fed Chair was just a little behind the 8-ball on this shot call as well.  On December 1, 2008 the National Bureau of Economic research came out and said the US entered recession in Dec 2007.  In Ben's defense, wizards cannot 'see the future' per se, they can only manipulate the outcome with QE and Fed speak.  At this point in his wizard training there had been no manipulations by the Feds. 
Fully aware of the important role that the dollar plays in the international monetary and financial system, the Committee believes that the best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States
A True Master Wizard, Ben Wizzie stokes the fire in Nov 2010

Ben's wizard speak has helped the market shoot higher since QEII MUCH.  He is proud of being the Fed Chair that controls the S&P.  While Main Steet struggles with the afterbirth of the recession, the good times keep rolling in Wall Street.  

Let's not forget an old adage in investing that all of us need to remember:  It is not different this time...  This goes for uncontrollable inflation crippling consumer spending AND Bernanke being 100% off the mark. 

Bernanke's QEII is about to turn full circle and will soon become a self-fulfilling prophecy.  QEII was put in place to increase inflation just enough to increase economic growth and jump start the velocity of money.  In reality, QEII is has become an uncontrollable 2-headed monster that is quickly leading us back into recession.

The 2-Headed Monster:  Food inflation and No wage Growth

Food is the 2011 story to follow-- follow crude and rap with your buddies about gas prices, but if you really want to watch the consumer fall to pieces, follow food.  


Food prices are at mania levels today.  You cannot hide behind these stats.  While families can choose to not drive, they cannot choose to not eat.  Humans are not autotrophic, meaning that we can not produce our own food source.  If a Master Wizard was able to, through monetary stimulus, he would turn all Americans autotrophic to avoid food increases.  That is just silly, but what is more silly is believing that food increases will not affect the consumer's purchasing power in 2011.  


The big problem for 2011 is that there is no more money.... literally.  The Avg wage has been dropping since 2007 and is expected to fall again this year.  As prices rose in the 1980's, wages followed and so did rates of return on fixed investments and CDs.  Today you would be lucky to find a CD that yields anything substantial, and slack in the job market is holding back wage growth.  As stated in a previous post, the participation rate in the job market has dropped from 65.5% in 2008 to 64.2% today while the number of working age Americans has increased.  If you look at the big picture, there is more slack in the economy than meets the eye.  What happens when the participation rate increases and these over 3 million 'recovery believers' re-enter the job market but there are no jobs?  Wages can not rise to cope with rising prices until unemployment is contained. 

Inflation is becoming a big problem, but if a Master Wizard sees no inflation, inflation is not real.  The CPI measurement system is a complete hoax and needs to be abolished. 


Costs are rising rapidly but the question is:  Who takes it in the shorts?  Consumers or companies. 

Consumers take it in the tank:  Gas rose another $0.7 in the last week to over $3.57 a gallon-- The highest price ever recorded for this time of year.

Consumers will most likely take it at the grocery store as well-- Food prices rise at the fastest rate since 1974.
The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost.
Ben Bernanke 2002

So, here we are, at the crossroads of another recession brought on by a consumer slowdown or a true turning point in the recovery.  I have a hard time seeing a true recovery, but I cannot say I see stocks collapsing anytime soon either.  If the adage of don't fight the FED holds true, the bull may stampede on.  Then again, the market is looking shaky today and the consumer is being pinched. June is a long way away, but I would guess that come June QEIII will be a sure thing... We just don't know what it will be called yet or where the but-zillions will be poured into.

Food Stamps for all?  Gas subsidies?  Research to make autotrophic humans?

That is for the wizards to determine.   

RandR




Sunday is to Relax: Big Thanks: Big Week to Come

THANKS FOR READING!

First and foremost, I would like to send a big shout out to all the Peak readers-- We appreciate the support and hope you enjoy the site.  For sites focusing on macro economics that blend in references to gangsta rap, Humpty Dumpty, master wizards, Bono bashing and borderline crude sexual references in order to get their point(s) across, we think we are pretty close to the number one place to go on the web.

As our readership grows we hope to be able to offer some more interactive discussions and polls, but we promise to not sell out to the man and advertise dick pills or fat loss creams (but an ETF sponsor would not be turned down!).

We will continue to post 4-5 times a week, so check back often!

BIG WEEK AHEAD

This week is starting to look like a week of mega news for the financial world.  Some of the stories include:
  • Total disregard for currency valuations for all the G-7 fiat currencies.  This last move looks to be a direct attempt to strengthen the dollar, disguised as a wolf in yen's clothing. 
  • Radioactive Spinach and the tsunami you rode in on.  Japanese officials say that 2 of the 6 reactors look to be back online.  33% is not to shabby-- unless of course you are talking about nuclear reactors that will NOT melt down.  I have a hard time setting the bar at anything under 100%.
  • Libya Shmibia-- What is uglier than Egypt melting down?  Libya.  What is uglier than Libya melting down?  Saudi Arabia.  When is Iran going to join this party? 
  • Nothing finer that inflation in China.  You want inflation?  Go the Big Red Engine.  The fan is still spinning in China, but sh*t is being shot at that fan from a bazooka.  What happens when the sh*t hits the fan? 
  • US consumer vs the no inflation but rising prices monster:  This is not the 80's-- in the 80's we had wage growth.  We have not had wage growth in the US since 2006-2007.  Anyone who thinks the 'resiliant US consumer' won't do an about face when gas and groceries eat up all that sweet sweet disposable income probably works for CNBC.  People bought last year due to deflation.  consumers LOVE deflation for TV's but hate deflation for houses.  Who wins-- Big automotive-- they have been selling deflating goods for over 100 years and no one seems to catch on.   
  • Europe's about face on raising rates:  Times be a changing in the EU.  The disaster that is the Euro is about to be dealt a blow when the sure thing of raising rates becomes the big chill. 
All this on tap this week... Some great posts to follow.  And if you are stressed, you had better run down to your local 7-11 and stock up on menthols-- looks like those are going away just like your home equity.

SUNDAY IS TO RELAX

Please take today to relax and breath-- Sunday is to relax. 

I personally battled a fence yesterday and lost-- I took a 2X4 to my forehead from about 8 feet and I have a welt the size of Russia in between my eyebrow and my receding hairline.  Hurt like a Mutha...

With that being said, make sure you appreciate and enjoy the things in life that are important to you.

For me it is my little girl-- she turned one month old yesterday.

video
The yawn and the end is precious! 

Have a great rest of your weekend!

Randr

Wednesday, March 16, 2011

Nuclear Real Estate Meltdown Will Begin the Next Bear...

Unless of course the bear is already out of hibernation

Grrrrrr..... 

I love listening to the financial world during times of chaos.  Everything has a silver lining:

Goldman says little impact from a Japan disaster on the US.

Kudlow was talking today about how great the markets performed over the last few days as if the S&P was his youngest kid and the chaos from all areas was a pee-wee baseball game. 

I am really starting to see a glass that is half empty at this point, and it is NOT just because of Japan.

First and foremost, Japan is in trouble.  The Bank of Japan is printing money like no tomorrow to keep the panic controlled and the nuclear issues, which may be a little exaggerated, are not going away when (or if) they get the reactors online.  The effects of the quake, tsunami and nuclear disaster will plague Japan for a long time and will most likely send the country into a very deep recession.  Why-- same reasons why recessions always happen-- real estate, energy and unrest.  Real estate will crash in this area of Japan.  Energy is a gimmie here.  Unrest will come from the displacement of Japanese who are laid off, living in poor conditions or who have experienced loss. 

I say Japan is just the icing on the cake.  The majority of the world was already falling back into near recession, so why not have a MAJOR event to kick off the party?   I'll bring the keg.

It's still just about real estate

I am pretty sure we are starting to see cracks of the next real estate bust-- they are 100% apparent here at home in the US (no need for another link on US real estate sucking wind-- you know the situation), but may parts of the world have been stimulating their economies through the last recession with the same deadly drugs Greenspan et al used to bring on the recession-- easy credit for real estate. 

Here is a great video from Mike Maloney in front of a DEAD 9 building super complex in Russia that I can only imagine was set to cost many but-zillion rubles.  While I don't see eye to eye on Mike's 'gold to 15,000' views, his real estate predictions are very spot on based on excessive lending without demand. 

Real estate is predictable, but every boom is followed by the 'it is different this time' crap.    The crap is about to hit the fan and the result will be the same-- loss of wealth, restricted credit and massive job losses that leads to the 'unforseen' recession. 

I recall an article in 2005 declaring the new state bird of Florida was the building crane.  Funny really-- the pun and the irony of that declaration (ironic as many cranes are endangered species).

If you think it is different this time in Australia, Canada, China and Brazil, please read a great Bloomberg piece on Miami in 2007-- Miami Article Bloomberg

The oversupply will force prices down as much as 30 percent, the worst decline since the 1970s, and help push Florida's economy into recession as early as October, said Mark Zandi, chief economist at West Chester, Pennsylvania-based Moody's Economy.com, who owns a home in Vero Beach, Florida.
I'm sure someone called Mr. Zandi high in 2007... 

They were correct-- Miami's condo prices fell closer to 50%-60% when the market crashed. 

Real estate is the real reason the next bear starts.  When real estate crashes, jobs are lost in numbers that make your head spin and commodities follow on the way down.

Pick your poison...
I'll take Australia melting before your eyes in conjunction with Hong Kong that results in a consumer spending halt for 500 points off the S&P, Alex.

Japan may have a nuclear disaster, but the global real estate meltdown is just beginning.

Tuesday, March 15, 2011

GDX ETF which tracks large cap gold and silver miners has formed a lower high earlier this month. If it breaks the trendline and highline support which it is currently sitting on then it could see an acceleration of selling pressure in the near future. If it bounces off these two points it could bring new highs. My point is it is a good trade (risk, reward) either long or short with defined stop losses. I would lean towards the short side if that area is cracked. If it bounces I would lean long with a tight stop.

JAPAN is NOT a buying opportunity

Markets are in full reaction mode today to the possible Japanese nuclear disaster.

In addition to this, Japan has had over 200 aftershocks.

Is this a buying opportunity as over $700 billion has been wiped out of equity value in the Japanese market.

I am certain there will be relief rally, but I see a rough year for 2011 in the market from Japan. 

Buyer Beware

Japan is the world's 3rd largest economy and could be crippled for some time.  In addition to this, the Bank of Japan has printed money in unprecedented amount to try and keep order in the disorder.  Will this help?  Yes in the short term, but Japan is already at over 200% of debt to GDP, the largest in the world.  If Japan has a nuclear meltdown, ALL markets should fall 20-30%, while Japan should fall over 50%. 

A total loss of confidence from Japanese people would follow, leading to bank runs and a collapse of the stock market.

Regardless of the nuclear issues, Japan has just gone through an event that is equivalent to the atomic bomb during WWII.  These issues are being down played in the media to try and control panic.  Panic should not be controlled when it is in the shadows of the worlds largest earthquake and the first potential nuclear disaster since 1986.  Here is a WebMD article on the effects of radiation in relation to this event:  WEBMD article on JAPAN radiation

There has already been radiation leaks in this area and the area is MUCH more populated that Chernobyl.  Damage may have already been done and Tokyo is only 72 miles away and has a population of over $13 million.  Chernobyl affected an area of 150km.  Cancers were detected in Chernobyl for 12 years and child birth defects were common.

Japan was barely experiencing a quasi recovery before the quake-- Q4 GDP in Japan was already negative at -1.3%.  This event will drag their economy back down and the results will affect the world economy for a minimum of 12-18 months, even without a nuclear event. 

Everyone is saying this happened at the worst time-- there is NEVER a good time for a massive earthquake and possible nuclear disaster.  The uber bull market mentality  since QEII MUCH has every TV investor calling every opportunity a buying opportunity.  This is not a buying opportunity.  It is a chance to rebalance and take advantage of risk trades that have been so ignored.

The markets were needing a correction. 

There will still be a correction after the panic.  The world's 3rd largest recovery has become oatmeal.  Expect Japan to crash below those 2009 lows. 


Sunday, March 13, 2011

Europe Enters Unorganized Chaos

First and foremost, I need to send out my support for the people of Japan.  Natural disasters like the recent earthquake and tsunami make us realize how small each and every one of us really is. 
The Euro is a mistake that cannot be fixed, much like a person getting caught cheating on their spouse with a prostitute because the cheater’s spouse comes down with VD—on the surface you can sell the idea of ‘all is well’ to the masses at the county club, but eventually the truth comes out and everything falls apart rapidly.
The county club that is the EU is trying to hide their diseased whore, despite the fact that she is openly sleeping with many of its members.  While the EU tries to sell sunshine and cookies to the rest of the world, the Euro has VD and it is spreading. 
The EU whore is running rampant in many countries and it is only a matter of time before all the members of the EU have been affected by the disease, regardless of their fidelity to the currency.  While the regular VD may show up as syphilis or gonorrhea, the EU problem is a whoring of their currency and acceptance of a unified currency despite the fact that many EU country’s economies cannot, and will not be able to support themselves without individual currency manipulations. 
Regardless of the level of the sickness in the EU, the band plays on: EU ups bailout fund
The EU will raise its bailout fund from 250 billion Euros to 440 Euros.  In addition to this Greece is getting a loan modification for their loan terms, including a reduced interest rate and extension of repayment terms.  Ireland’s 85 billion Euro bailout will most likely be modified as well.
Treating the symptoms instead of finding a cure.
It seems as if Ben Wizzie is starting to rub off on the EU—inflate, inflate, inflate!  The problem with stimulus is that it is short term and needs to be continued or the effects will wear off.  Europe is not ‘fixing’ any of the problems, but instead is pushing them into the future, in hopes that the present will be better if the problems are out of sight and out of mind. 
More stimulus in the form of this bailout fund is quite the juxtaposition to Trichet’s hawkish stance in interest rates.  Everyone expects a 0.25% rate hike April, and many are calling for 2-3 hikes to battle inflation.  Euro to raise rates in April
Europe Enters Unorganized Chaos
Pumping stimulus for PIIGS and raising rates at the same time is unorganized chaos.  These actions are polar opposites of each other and will have horrible effects when mixed. 
Spain, Greece, Ireland and Portugal are insolvent.  Instead of being able to fail gracefully, or to inflate their individual currencies, they are being held up by the rest of the EU, who has to eat their dirty leftovers from the financial crash.  Raising rates will curb inflation, but it will also curb stimulating measures to grow credit growth and bring back investment.  Stimulus is inflationary.  Who wins? 
Investors will have to decide whether or not to buy many EU nation’s bonds.  I would think that in an increased stimulus, yet reduced growth environment that countries like Spain, Greece, Portugal and Ireland’s bonds will have to pay a massive premium over big brothers Germany and England.
How much would you pay?
Ireland bond yields are almost at 10%.  Is this is deal or a disaster?

Spain turns back the clock.
A Spanish fishing town is bringing back the old currency the Peseta. Spain Says UNCLE
A small Spanish town has reintroduced the peseta currency, nine years after it was replaced by the euro.

Business owners in Murgardos in northwestern Spain are encouraging locals to find old stashes of the coin in a bid to improve the area’s economy.

More than 60 shops in the Galician fishing town have agreed to accept the defunct currency alongside the euro in the hopes of encouraging spending.
This may be the best idea any EU country has come up with in the last 9 years. 
Learn from others mistakes? 
You would think that Europe would see that rampant stimulus leads to rampant inflation, but Europe is blinded—it is a symptom of the VD.  The EU knows If one of the PIIGS does down, they will all fall, and so does the Euro. 
The dominos are in line for one of two scenarios—Massive, unprecedented Euro weakening from PIIGS uncertainty and never ending stimulus or a complete collapse of the currency when Germans have had enough. 
If you are sleeping with the Euro right now I’d make sure to wear a condom.  Double wrapped.

Thursday, March 10, 2011

SPECULATION: China collapse allows Feds to unload QE bonds

Sometimes I connect something so crazy that it can’t be true… But still, it should be shared: 
My crazy idea about QEII and the connection to China:  Enjoy.
I think it is fair to say that China will be the big story for 2011.  It won’t be the Middle East or Europe (though Europe will either be a close 2nd, and the euro’s demise number 1 in 2012). 
The top 2011 story will be on how China over heated via inflation due to silly relaxed monetary policies from their central bank on real estate speculation, and the US Federal Reserve’s quantitative easing (QEII) that sent money out of safe assets, crippled the US dollar and created a speculative commodity bubble around the world.  The inflation in China will force rates to rise and lending to stop, essentially stopping the velocity of money immediately.  With no more money in the system, China stops working, falls into civil unrest due to cost increases and loss of construction jobs from the housing collapse.  It will be a global panic that comes out of nowhere (don’t they all…)
The 3rd story of the year will be how US Treasury bonds rallied to the lowest yields in history, allowing the Federal Reserve to sell their ENTIRE holding of bonds bought during the recession and QEII at a premium.
Does this sound too crazy to happen?  Maybe, but I don’t see why it couldn’t.  It may be what the Feds are looking to achieve.
...Stick with me on this one.
If the Feds are buying 70% of US Treasury bonds they know they will have to sell them some day.  If they sell them at a yield substantially higher than they purchased, they lose the farm—literally.
Maybe, just maybe, QEII was created to cause a panic (unknown what it would be at the time of conception) to drive buyers back to US Treasury bonds with massive demand at a VERY high price and low yield so the feds could sell their holdings.  What kind of panic would do that?  Simple—China collapsing.
Sheer speculation on a night with my 19 day old daughter who has restricted my sleep over the last few weeks…    
It could NEVER happen... right? 
Actual News:  Big deal tonight on China’s inflation—it is out of control and cannot be stopped unless they completely freeze the economy.  With that being said, China can either melt down in a bath of inflation or stop growth.  Both are crappy options, but at least they have options.. kinda. 
Cheers and have a good weekend.

Walk Away or Pay to Stay: The 2011 Housing Question

Is Your House Underwater like the Titanic is under the ocean? 

Short Sale may be the answer, because the big banks are not going to help you anytime soon...

The nasty principle forgiveness can of worms that was reopened today on CNBC-- it was orchestrated by money hungry monster bank retail services CEO, Chase's Charlie Sharf.  Here is an excerpt from the article and the interview: 
"We've got to be very careful that we don't create an environment where we encourage people not to pay, and that's the danger you have when you get into broad based principal forgiveness," said Scharf.
Scharf is really just watching his bottom line here.  I'm sure his butt-zillion dollar bonus structure relies on keeping 68 year-old former hippies tied down to a mortgage that is 40% underwater.  I'm guessing that there is a 'negative equity retention report' that is updated weekly and passed upon to drones of mindless minions in Mumbai and Atlanta, who follow scripted answers when they tell angry callers that they need to keep making payments and to try to modify their loans.

Touche Scharf-- You have to protect your investment buddy.  If not I'm sure your corporate buddies will eat your brain and throw your worthless body in a dumpster somewhere before they replace you with another robot. 

The problem with the monster bank 'keep paying and modify programs' is that you will never get ahead.  Sometimes a bad buy is just a bad buy and you have to sell (I know half you people have taken a beating on QID in the last few years trying to catch the falling knife).

Housing is not recovering this year-- I'm firm on that.  There are still too many people unemployed and there is too much inventory.  On top of this, mortgage credit underwriting only makes slightly more sense that Charlie Sheen's rants-- not technically WINNING in the world of mortgages.

I know this is not a popular stance for many, but I say in MOST cases it makes more sense to walk away via short sale than to pay.

Here are my top 6 reasons WHY to walk away via short sale:

#1) If you bought during the bubble in many cities and took a 100% loan you need to Walk away.

    Looking at the bubble year prices, it is obvious to see the credit bubble fuelled by non-prime lending.  The only reason the bubble occurred was due to manipulation of mortgage credit-- there was never any fundamentals, regardless of all the media hoopla during the time that hyped a never-ending housing bull. 

2004 - 2006 saw a dangerous level of subprime loans originated.  These loans correlate with the above chart to create the peak.  You can see the taper off as the suprime market died.


The only way to inflate the bubble again is to bring back subprime lending and ease underwriting standards.  This is about as likely as getting master wizard Ben Wizzie to admit that inflation has arrived due to QEII MUCH.  Why is this a valid analogy?  The housing boom was orchestrated by another Fed Chair-- the Sorceror 'see no bubble' Alan Greenspan. 

#2 Math Does Not Lie.

For this data I will use a Chart of Seattle-- Seattle was proclaimed to be immune to the housing market crash due to so many smarty pants and high-roller big wigs that lived there.  Well, that didn't work out so well.  Higher number of advanced degrees or crack huts in Cleveland it doesn't matter-- a bubble is a bubble is a bubble and bubbles always pop.  Seattle's average price has dropped from $453,000 to $337,000 in the last 4 years.


Hey Math, can you assist?  Math responds:  'Yea dude.' 

Amortization is a funny tool, but it is consistent.  If you bought an average Seattle home in 2007 and put down 0% you would have a $453,000 mortgage in 2007-- this is NOT an uncommon form of financing at this time in 2007.  100% LTV and 95% LTV one loan programs were popular when subprime started to fade.


The red box shows the balance of the loan today-- Still $116,000 over the fair market value today.

The Blue boxes show the total interest and the payments.  Taking the payment of $2715, we know that 4 years of payments on principle and interest = $130,320 paid into the house so far. 

The total interest to be paid on the home is $524,746 + the principle financed of $453,000 = $977,746.

Just under a cool million to own that 60's tri-level in the land of Starbucks and seahawks. 

TODAY you can buy the same house for $337,000 on an FHA loan at 3.5% down.  This means you will have a mortgage of $325,205.  Ahem... MATH...

The payment is the obvious difference (other than the loan amount) and shows a savings of $1000 a month.  This is equal to 3428 gallons of gas per year at $3.50 a gallon, or 1500 $8 burritos per year.  Sadly they don't sell the Make Believe Car of the future, the Chevy Volt, in Washington, but if they did you could OWN one in about 4 years of savings at $1000 a month.

The total interest is $294,360 + $337,000 (loan plus down payment) = $631,360

The home in 2007 is actually over $360,000 more expensive to own vs today-- more than the price of the home in today's market. 

There is NO reason to hold onto this house.  In addition to the scary numbers, please note that selling a $400,000 home will also cost $24,000 in real estate commission-- with this also taken into account, if you bought this home in 2007 you will probably not be able to sell the home until 2018 - 2020 and BREAK EVEN on the sale.  12 years of 2007 payments is equal to $390,960. 

If you are in this scenario, count your losses NOW-- housing values are expected to decline further.

#3 Short Sale MAY Not Cost You Anything.

I am getting into legal issues here, so make sure YOU contact a lawyer if you consider walking away from a home.  I am NOT a lawyer.

In most cases you will NOT pay anything if you walk away from a home that is your primary residence.  Why? 
  • You pay no capital gains on real estate if you live in the property for at least 24 months in a 5 year period.  underwater balances are presented as 1099 income, or personal gain. 
  • H.R. 3648  (extended to 2012) allows for short sale of primary residences with no repayment of the underwater balance, provided that:
  • The property sold in the short sale is the taxpayer's principal residence, as that term is used in IRC §121.
  • The cancellation of debt is Qualified Principal Residence Indebtedness
  • The indebtedness is discharged after January 1, 2007 and before January 1, 2012.
Mind you that there is some fuzzy wording if you ever took cash-out, but I have witnessed many short sales over the last 3 years an I have never encountered one instance of a lender pursuing the underwater balance.


If you are underwater by $116,000 and paying $1000 extra a month in payments like the Seattle example, you would be foolish to not look into H.R. 3648.  If you won't do it, your neighbors will. 


#4 Modifications are stupid.

Most modifications do nothing to help the homeowner-- they only help the bank.

The most common modification is to reduce the interest rate and to extend the term to 40-50 years.  This does nothing to help an underwater borrower.  They still are in a gaping hole of debt that will not be paid back and the reduced interest rate has no benefit with an extended term. 

$1000 payments for 30 years = $360,000 in payments.
$800 payments for 50 years = $480,000 in payments.

If someone is leaving a house because they are underwater on the loan, don't be fooled by the modification trap.  The modification rarely makes sense-- though banks have improved this process, but have yet to perfect it (that would take principle reduction...).

#5 Credit recovers faster than you think.

If you walk away from a home you will reestablish your credit sooner than you think.  You can go buy a boat and a Volvo today, walk away tomorrow and in a year from now, when you are vacationing in Boca with the oodles of money you saved, your score should be near the same as it is today as long as you kept your nose clean on all your other debts. 

In the above scenario with Seattle, you have to ask yourself-- 'What is my credit score worth?'

You will also be able to purchase again in a few years at a reduced price-- heck you can buy your old house back at a 35% discount if you want. 

#6 Retirement Planning

If you do not have ample retirement funds and your home is a debt and not an asset, and you are in your 50's or 60's, you are killing your retirement. 

Consider the reality of paying for that home with your Social Security checks.  You could be putting more money away, opposed to throwing it down a hole and lighting it on fire.  Most people will not be able to carry an expensive mortgage after they stop working.

If you can't sell it for a profit, and you are underwater on it, it is a debt.  If you are 58 and you have 26 years left on a mortgage I really hope you have Charle Sharf's but-zillion dollar salary.
 
There they are-- my top 6 reasons to walk away via short sale. 

Of course walking away via short sale is not for everyone-- some people have not seen the declines of Seattle and some people don't care-- if they took the debt they should pay the debt.  I'm down with that, but I also think that banks should help in the process.  I find it maddening that banks essentially have a blank check from the Feds and they still fail to do anything to help customers.  Not noted in the above cnbc article was a comment by a Chase rep that stated that the big banks would pass the cost of fee increases onto the bottom tier customer.  No shame and no sugar coating what-so-ever. 

Big banks suck-- they deserve a $30 billion dollar hit to the books-- maybe then they would treat their customers better.

Maybe then the banks would start giving away free toasters again.

Wednesday, March 9, 2011

76 Million Person Social Security Squeeze Begins NOW

Today:  Celebration of the 2 year Bull Market

Tomorrow:  Socialism

Great article today on where our (yes-- this is a good portion of your paycheck) money is going in today's reality: 

Government payouts—including Social Security, Medicare and unemployment insurance—make up more than a third of total wages and salaries of the U.S. population, a record figure that will only increase if action isn’t taken before the majority of Baby Boomers enter retirement.
Wow...  one third of all the wages are government payouts.  That is a Bigfoot on steroids number, especially when put into comparison with Europe being at 44%.  Yes, Europe is still higher than the Yankee Dollar, but remember that Europe is has always been more socialist in nature. 
Sadly though, this is only the beginning. 
The Baby Boomers start hitting 65 this year.  That means that the 76+ million person army of super consumers are starting to go away.  Is there any chance that ANY GROUP can ever fill the void from the loss of this adrenaline rush of spenders?  I think not and here are a few things to ponder:
  • Social Security will start to be exercised at a much higher rate:  84 Percent of persons 65 and older plan on using social security as a source of retirement.  30% plan on this being the ONLY source of retirement. A boomer will turn 65 every 18 seconds starting in 2011 and by 2037 when the last boomer retires the participation rate is expected to be 2 workers to fund one retiree, opposed to the ratio of 16 to 1 when boomers began to pay into the program.
  • Life expectancy for a boomer is just under 80 years old, opposed to 61 years old when social security was created.  This means the program is being stretched by an additional 19+ years.  By 2017 the program will take in less than it pays out and by 2037 it will only be able to operate at 75% payout. 
  • The US Census says that there will be a 79% increase in people people 65 and older between the years of 2010 and 2030:  This, coupled with the increase in life span will weigh down government health programs.   Average post health care costs are expected to be $33,000 per person (and over $100,000 if the person hits the century mark).
  • Over 12 cents of your earned dollars are paid into social security at today's levels, despite boomers only required to pay around 6 cents of each dollar (about a quarter century of wages for boomers) until 1990.
  • 2010 (dec) Gallop data showed that 60% of future retirees don't see Social Security being available when they reach retirement age. 


Social Security does not get the press it was receiving in 2008 and 2009 when we were at the depths of the recession.  A new found stock bubble (or boom if you take QEII anal suppositories on a regular basis) has muffled the cries of reform for social security and other government programs, but the threat is still as real today as it was 2 years ago when the S&P dipped under that limbo bar. 

In full disclosure, I am a Gen X or Y product (yes, product-- we are Americans capitalists, so lets call spade a spade).  I would consider myself a phenomenal product-- I produce many fiat dollars that enter the economy monthly.  But, as a person I am worried about the social security issue.  I honestly see the ONLY way to fully fund baby boomer's retirement is to steal from my retirement by raising the amount that is paid into the fund.  I also see this being coupled with higher taxes down the road, making retirement harder and harder to achieve for anyone still working. 

I do not have any beef with the boomers (I do have organic beef in my fridge, but no correlation).  The boomers were (and continue to be) phenomenal innovators and a dynamic group of people that I have called everything from 'dad' to 'Senoir Vice President of Operations.'  My generation has been small in comparison to the achievements of the baby boomers-- I mean we hyped snowboarding, social media and created apple wood smoked bacon, but boomers can claim the computer and ABBA... At least the computer was a good idea.  The problem I have with boomers is that there are so darn many of them, they don't die early like their parents (yoga?) and they are a generation of high expectations-- The biggest one being the expectation that their kids can afford to fund their lavish lifestyles into the golden years. 

I think that the recession has put unforeseen bumps in the social security program as well. 

A 2009 article released by the Federal Reserve stated a 47% increase in early social security applications in 2009.  This means more people are NOT paying into the fund.  High unemployment is a double whammy on this scenario--
 less workers = less money being paid into the Social Security fund.

And there really is no end is site to the drones of retirees collecting benefits over the next 20+ years.  The number of retirees that will be in the market will be more than triple that in 1970 and almost double that from the year 2000.

Gov't Handouts take the place of lost housing values: 
housing has lost $10 trillion in value since 2007, with estimates showing a loss to boomers retirement goals of $50,000 to $100,000 per household.  These figures do not take into account 'expected' appreciation (high expectations) from boom levels.  Boomers were under the impression that housing would double every 10 years and many took the McMansion during the boom opposed to keeping lower debt levels and contributing to retirement accounts.  These homes will need to be unloaded at a loss, meaning that any monies put into these homes are lost, as is the potential for this lost money to be put put into retirement accounts. 
Robert Shiller still sees a 25% reduction in housing values from today's levels.  If this holds true, more homes will enter foreclosure and the value of boomers retirement equity will suffer further, creating more of a restraint on government programs. 
This chart from 2008 from Gallop showed that future retirees were very hopeful for home equity being a major source of retirement.  As home equity evaporates, the expected dependence on government funded programs increases.  Unfortunately I can not find more recent data, but I can only expect that the numbers have continued to widen.  If you have any data, please post in comments.



Lastly, lost home values also strip away the largest transfer of wealth from one generation to their children.  But with boomers needing between 15 - 20 years of retirement will there be anything left to hand down?  I think not.

Effect on Stocks?

I can only imagine that stocks will suffer when Boomers are forced to pull their retirements to live on them for years.  I would guess that many a boomer has their magic number in mind to pull their entire portfolio.  I also expect boomers to pull their funds in entirety in full if the market takes another drop.

Dow 13,000?  Dow 14,000?  At some point boomers have to sell-- they will not risk loss again.  The consensus on boomer withdrawal  is that it will happen slowly overtime, but if the market crashes again, I see withdrawals accelerating rapidly from the boomers.

Social Security costs to the workers going up?

2011 actually saw a reduction of pay into Social Security to 4.2% to increase cash into the economy.  This is just stupid.  Social Security is the 76 million person aging elephant in the room and reducing the fund's growth and expecting it to not affect the payouts is about as smart at eating an egg and expecting to give birth to a chicken. 

Beware-- costs will rise for Social Security-- they have to.  This fund was already set to be insolvent in 2037 at the higher tiered deduction.

Sadly, I am in the 60% majority that sees social security, of which I have payed into the max amount out for many years, is dying. 

I will have no social security... You may not as well...

Plan accordingly today!

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