Saturday, August 19, 2006

The Horses Mouth: U.S. Comptroller General

Ever want to take a look into the financial future of the United States of America?
Then read what U.S. Comptroller David Walker has to say (article 1, article 2).

If you think the U.S. government is going to take care of you when the next recession hits, forget about it. Prepare yourself now. Revise your household budget, cut your expenses, reduce your debts, sell useless or declining-value assets (boats, extra cars, etc.), and SAVE AS MUCH MONEY AS YOU CAN in safe investments and financial instruments!

Next stop? Financial Ruin.

Millions of Americans breathed a sigh of relief after Mr. Bernanke's August decision to maintain current interest rates. But do people really believe that there would be no consequences to this inaction?

Thursday, August 17, 2006

Watching, Waiting....

You've got to feel sorry for Orange Country home realtors who in the past have been pulling down huge commission checks for selling over-valued, over-priced homes the last several years. Now they've got to actually do some work to "earn" that undeserved cash.

But damn those potential buyers in Orange County! They are now turning into a patient lot! They are not as easily convinced as before to buy in to deep-end financing schemes for a lousy 3 bedroom, 2.5 bath matchbox house in the illustrious OC! This OC Register article claims that home sellers are equally patient.

But the patience level of home buyers may not be as variable as that of a motivated home seller. Not all sellers find themselves in the same financial situation. Some are sitting pretty financially and not worried about a thing. But there are many real estate speculators (home flippers) and over-leveraged homeowners in OC as well. What happens when an over-leveraged, motivated seller who's adjustable-rate mortgage rolls-over to the higher rate? Re-financing doesn't make sense because the value of the home has declined. He tries to price the home aggressively (but within his mortgage bank's pricing guidelines) to get rid of the property, but still can't sell due to buyer patience and a fear of rising rates come September?

We may soon find out the answer. Inventories in Orange Country continue to climb and home sales remain slow in August, perhaps the last "hot summer sales month".

Tuesday, August 8, 2006

Fed pauses on rate hikes, but door left open

OK, so there we have it.

No interest rate hikes this period following a 9-to-1 decision from the Federal Open Market Committee, which means the streak of the past 17 consecutive interest rate hikes to slow down the U.S. economy and control inflation officially comes to an end today. The federal funds rate, which is the rate at which the Federal Reserve Bank lends US dollars out to fellow banks, will remain at 5.25%.

So how did markets respond? All of the key U.S. market exchanges ended down today and inflation remains a huge worry for investors.

A rate hike would have tightened the U.S. money supply and have further controlled an already high rate of inflation in the country, as measured by the consumer price index or CPI (the CIP is just one tool used by economists to measure inflation) of 4% in 2006 year on year. Typically the U.S. CPI (rate of inflation) has averaged around 2.7% per year since 2000.

What does the FOMC pause mean to the average American consumer? It means that loan and mortgage rates will not rise in the short term, but that prices for everyday goods and services, including energy and food, will likely rise in the coming months. It will also mean that the US dollar's value will gradually decline even more, and hence the value of US dollar-based investments will decline, and the purchasing power of the U.S. dollar to buy foreign goods will likely also decline.

This tactic to cheapen the U.S. dollar's value plays well when one considers the massive debt that is accruing by the U.S. government and only slowly being paid down.
The brilliant plan of borrowing $5.00 on Monday, but paying back only $3.50 on Friday makes good financial sense for as long as you can get away with it.

In the short term, that tactic appears to work like magic. But eventually global investors in U.S. dollars will catch on to this idea and quickly tire of getting the shaft. If the dollar devaluation strategy continues, the U.S. dollar may eventually lose its magical luster as investors decide to place their assets in other currencies and investment vehicles to achieve their desired returns.

Federal Reserve Chairman, Ben Bernanke, and the Federal Open Market Committee reconvene on September 20 to determine whether rates will be paused again or possibly increased. Based on today's comments statement by the FOMC, the door for future rate hikes has been left wide open.

Monday, August 7, 2006

To Raise or Lower Interest Rates: It Doesn't Matter.

Ben Bernanke and colleagues at the Federal Reserve Commission may be wringing their hands tonight as to whether to raise interest rates a record 18 consecutive times - or to pause and do nothing. The fact is, it won't really matter to most Americans. We are all on a collision course with recession:

Housing sales are slowing down, home building and related industries feeling a crunch.

Consumer confidence waning, demand for durable goods in decline

Corporate financing for equipment has declined

Energy prices are already at an all-time high, and with news today of the BP/Alaska Oil Pipeline fiasco, a $100/barrel of oil is no longer an impossibility

More American families than ever before are "├╝ber-leveraged": having financed overvalued homes with adjustable rate loans, driving expensive inefficient vehicles for transportation, and at the same time trying to afford the sky-rocketing price of continued education for their children - all with a weakening U.S. dollar.

The rate of savings for the average American family remains at a negative, "minus 1% of disposable personal income" - from James Altucher column, The Underlevered American Household

We should take our medicine now, Mr. Bernanke. It's a big shit sandwich and everyone will have to take a bite!

Tuesday, August 1, 2006

Housing Bubble Now Popping - U.S. Economy Doomed

Sometimes the business of life and pre-occupation with our work and family hides a terrifying truth that lies before us. The slow, certain detioration of accumulated, perhaps speculated, wealth.

If you're a home realtor or a mortgage banker these days, now's the time to take that 6 month vacation and perhaps leave the country. In a about 3 to 6 months, a large part of your rolodex of 6 digit home buyers is going to want to off you.

If you're renting and thinking about buying a home today, don't. It's probably the worst financial decision you could possibly ever make at this moment in time.

And if you're already a homeowner and have overextended yourself financially, now would be a good time to cut back on discretionary expenditures and to seek professional financial, and perhaps legal assistance to weather the upcoming shit storm that will take all of your money. The next great American housing crash and biggest economic recession since 2001 is upon us.