The Financial Markets are Melting

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It's happening - The mortgage market is now coming to a standstill, as the largest lender in the U.S. is about to file for bancruptcy protection. Will the Fed let that happen? We'll see...

Bottom line is, with CFC coming to a close, this will cause thousands to be laid off. The refinancing of a property is now coming to an end because it'll be near impossible to do. ARMs coming due will not be able to be refinanced and those people will walk away from their homes or get foreclosed on. All of those people that have used equity loans and lines to buy investment properties are going to see their properties cheaper than ever thought possible, and when you're upside down around the million dollar mark, it doesn't matter how good your credit is, you'll feel the strain. Soon, banks will see defaults on their A paper, banks will be at risk, laying people off left and right to salvage their financials, and this will lead into a huge meltdown of the world economy.

What I have predicted in the past is becoming more and more evident, but the scary thing is that it's playing out a whole lot faster than that I anticipated. I expect us to be in a recession by the middle of next year, and the depression to hit, obviously 3 periods after that. But, this is going to be bad with millions of people out of work, and major banks going under. This is because all of the financing that banks have taken up and incurred are going to be defaulted since these people are going to lose thier jobs and not pay. When it comes to survival, credit scores aren't a big deal.

In the end, it'll get better as the stronger currencies of the other countries around the world will help boulster our economy with exports increasing to levels not seen since the 60s. This will cause a manufactering boom, and keep people employed, but at substandard living. There won't be anymore families purchasing a half million dollar home on credit with stated income. It'll be renting a small apartment, if they used to be home owners, or owning a small home.

Granted, this is all speculation that the fed keeps interest rates where they are. Who knows... It may change! But, at this point, the roaring 00's are over! The teens will be known as the GD2.

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I have been trying to figure out the starting point to my theories on wealth and the masses. I haven't come close to it yet, but I am closely examining the interworkings of society and what drives it and I have come up with new theories along with the overall - The fact that the economic cycles are in place to make the rich richer and the poor poorer and when someone is a threat to that status quo, they are either paid off and become one of them or are simply killed, as we saw with JFK and MLK Jr., and many others that we haven't heard of for this very reason, and which is the reason why I write on this blog, keep my profile private, and say what I say, because I have nor the power nor the money to be a threat, but is an easy kill, as no one would ever know my idelogies.

With my current thoughts, I have come to the conlclusion that CEO's and other top ranking executives are merely the generals in this battle. They are paid handsome subsities to control the wealth and power of those that I speak of, with no ends. The troops are you and I who are fighting this battle to attain as much money as possible in order to keep these people rich and powerful. Who are they? I Am still trying to figure out - read above. It wasn't until a certain time, which I am trying to pin point, that those people began to realize that they must appease the masses and put on a smoke and mirror show in order to make it so they are happy and content in the way things as to not entice a coup, rebellion, or any of the sort. This is most evident in the American society as we have more forms of entertainment than did anyone in the past. Romans used to have their shows in the coliseum, and many others have had their forms of entertainment. We have television, sports, etc, etc... and that is an excellent way to mask the facts that there are people controlling this aspect of our lives - And profit off the smoke and mirrors to conceal this identity. Small businesses are allowed to start up in order for the masses to feel a sort of empowerment as to appease the masses. When they get out of hand and people begin to think that they can make money and a life of their own, the status quo begins to break and that is when "inflation" or credit worthiness begins to deteiorate, and that's when it gets harder for people to start a business until a recession begins and people start losing their jobs and small businesses aren't able to profit because there aren't enough people with money - That's when the depression hits, which should be had every 60-80 years to clean up the people who think they don't need the system... Finally, the status quo is back in place and a whole new cycle begins of trying to have people stay happy by entertainment.

I recently began the theory that this ultimate starting point I speak of is inherently the shareholders of companies. Meaning, that everything makes sense, that the reason we push products and we do what we do is to increase shareholders values - which is true. But, then I realized that the stock market is merely a source of liquidity for these people that want to leverage themselves to make more money. Who profits from all of this? I am trying to figure this out. Who is in power? Why do I ask these questions - It's because the ultimate goal of any successful individual is power and money. You can't have one and not the other in order to be successful and be one of the elite that I try to find. Is Bill Gates one of these elite? I don't believe so, because he only has money. His power is limited to the extent of his wealth, and is limited to only his company. However, he has much influence on people and aspects of life.

Politics - I do want to get into, but the problem being is that my ideoligies will get me killed. It is not accepted to have these ideas. What must a person do in order to achieve a level of prosperity?

Capitalism... Is it working?

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I'm trying to figure out if Capitalism is truly the way to go. As an economist, I try to look at short term and long term effects of decisions. Capitalism, by nature, allows people to choose the best products, the most convienient prices, and adds to competition between suppliers of such products. With the competition comes better products and yet greater innovation, as the competition keeps trying to, "one up", eachother. In a perfectly competitive enviroment, the greatest market share will lead to the greatest revenue base to expand operations in order to increase it's R&D to advance their technological advantage over their competitor.

Okay, I'm done writing, I lost interest in this subject, but I have a whole theory on this if anyone likes to talk economics/politics

The horrible recession to come

The horrible recession/depression to come

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Welcome to another one of my economic blogs. But, this one is serious. Call it inside information, call it observances, call it what you will - Bottom line is that we're heading to a hard fall economically which will laeve us vulnerable on many fronts for economic subordinace.

It started today when I put in another equity application. This was the 4th equity that I put in this month like this. The customer had adequete equity in their home - about 100K. The value was stated by the customer about $550K, and the customer just refied with BAC for 420K - For those of you not in California, this is a normal thing... You still can't find a small condo for under 300K, at least not in the past... So, I submit the application. When I go to check out the details, the appraisal comes in at 450K. That leaves 30K of equity, and that leaves the customer not able to refinance their auto debt, their credit cards, etc, which they wanted to do. This is the 4 th loan like this. On average, the appraised value of the property came back about 70-100K Lower than the customer thought, or even Zillow.com said. Amazing.... BUT WAIT - So, I talk to Ricardo, the business specialist. He said that he is experiencing the same thing on the business end. Its harder to qualify customers.

Now, you have to understand, Wells Fargo is AAA rated by moody's and S&P both, and has the best credit rating. So, in light of the recent subprime debacle, I can understand them tightening credit - but this much? Apparently they are taking the low end of appraisals and being on the safe side of all credit lending.

Okay, so Wells Fargo is conservative. But, what is that to say about the future? Is Wells Fargo actually a leading indicator of what's to come? If so, the banks across the U.S. are going to tighten their lending practices - Which will decrease Consumption and Investment - Both contributing factors in the GDP, the benchmark to measure economic performance. This is not even taking into account of an economic downturn, or interest rates rising. This is merely the tightening of lending practices.

What does this mean? This will start filtering through the business community. As small businesses need to finance the inflating cost of goods, that is actually an affect of the increasing cost of capital that is passed on to the consumer/small business, that the small business won't be able to borrow like the could/should. This will start having the small businesses laying off people, which will start hurting the Consumption in GDP. Not only that, but the Consumption will also hurt because Consumer credit is getting harder to approve. So, for those that haven't taken out equity lines of credits on their home for emergency's, thinking it's there for a rainy day, it won't be, because they won't qualify when they get laid off. This will reduce consumption significantly that luxury goods will start decreasing. This will, in turn, put more people out of jobs and decline the economic activity even more.

The problem here is that we will be sliding into a recession and inflation will be rising, because the cost of capital is higher, and corporations will increase prices based on this. So, the government has already stated that inflation is more important than economic activity, so this will raise the probability of Fed Funds rate tightening. Once this begins to happen, we will see the real declines in real estate and the economy, and this is when the depression will hit.

Once this happens, it is inevitable that prices will come down, and deflation will take hold, and things will come back around. But, this is going to be a hard time for the United States. The biggest fear I have is that it will depress our economy so bad that we will be more vulnerable to take over, economically. However, if China and Japan quit financing our debt, then we will experience Germany during WW2 - Google it. With a lack of faith in the American economy, Government spending, another component in the GDP will also take a beating. This will set us into a deeper depression. Will this happen? I guess we'll see, but I doubt it'll get to that extent.

Bottom line is, things are a changin' - Stock are at all time highs, Real Estate is at all time highs, Bonds are at all time highs, commodities are near all time highs, and international stock markets are at all time highs... WHERE DO YOU PUT YOUR MONEY TO MAKE MONEY?!? ALl things correct after some time, and by correct I mean go down... It's the cycle of business and life. Unfortunately, I think that if we go into a depression, the whole world will as well, and we won't go into the deep depression I talk about, because we will work it out. So, hold onto your cash, be patient, and get ready for a downturn unlike anything we've seen in the past 25+ years... I'm thinking on the levels of the late 70s, early 1980s...

Real Estate Crash

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Real Estate Crash

Check out this article

http://www.bankrate.com/brm/news/real-estate/20060121a1.asp

Here is the deal... Real Estate is a renewable resource. i.e. All those people that say that land is scarce and there is, "nowhere else to build, so property values have to increase", are uneducated, ignorant fools. The price of a renewable resource is dependant upon it's demand - and the quanitity is inelastic and independant of that of the price. However, the quantity as described in the example above is the amount of homes actually for sale. As real estate prices become to come down, more and more people will be either trying to sell their homes in order to keep their gains, some will have to sell because they are upside down on their mortgages, and some will be foreclosed on. I believe the two latter will be the worst of this cycle and anyone buying into real estate from now and for the next 4-5 years will experience a horrible financial burden.

Here's the problem. Real Estate will not crash. It will be a slow leak that will not prove to be a problem until a home owner goes to sell. When they believe that the $500,000 home that they now have for sale is worth that much, but they can't get it, they'll wait for months to get that price, and only lower it in small increments. All the while, home prices will be falling and they will not see the pain until it comes time to sell - Be it having incentives such as paying the closing costs to even paying for people's moving expenses... Worst yet, those that have no equity, and are upside down are going to experience the biggest pain of all.

If Real Estate even corrects a mere 10%, which I believe it will be more than that, the price of the average Los Angeles home being about $500,000 will decline to $50,000 - Now, for those that have interest only loans that come due in a 5 year period now need to refinance, but aren't able to because they don't have enough equity. So, they'll either have to take a higher interest rate to do over 100% financing, not to mention the title insurance needed for it, or face selling at a loss, and now OWING the bank $50,000 for nothing more than trying to buy a house, and now in debt $50,000. As seen with the example above with the article - It is happening...

Welcome to the reality... Real Estate is dropping... Those that are trying to get in the game are too late... Those that have bought in the past year are screwed... Those that have bought over a year ago can kiss their equity goodbye. If you want to buy house now - I highly don't recommend it...

Good luck to all who like Real Estate.

Looking back in history

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It all started on 9/11/2001. The attacks on the downtown skyline of New York left a country in shock and the possibility of an economic slowdown was inevitable. People began thinking they should save for that emergency that all of the advisors told them may come. But, with pressure (possibly from the Bush administration – I am a conservative though!!), the fed began lowering rates below what they thought necessary to show that we are a strong country that can bounce back from an attack of those measures. This began the debt driven boom of the early 2000's.

With the cost of borrowing at it's cheapest levels since the 1960s, the debt driven economy began to expand. Memories of the stock market crash were fresh in people's mind, and people wanted to find an investment that was safe. Savings accounts were yielding merely 1-2%, money markets weren't much more… People began to realize that they could then save money by buying a home instead of renting. People began flocking to the residential real estate market to purchase homes. With the limited regulation, lenders began to find that this was very profitable and began lending to anyone who could afford it. Not before long, lenders then introduced creative mortgages in order to help those that couldn't afford a home, could now afford one by paying interest only over a certain amount of time. Laws of supply and demand played a part in the big metro areas, where people wanted to live the most – where the jobs were. Home prices began rising, and with that people began to feel wealthier. Inevitably, people began spending more as they felt like they could afford it. The roaring 20's couldn't match the early 00's, as the American dream became owning investment properties and renting them out. Jobs were plentiful with the spending habits of Americans and savings rates were the lowest in years.

There were moderate price corrections in parts of the country by the end of 2006, but it all started when regulators began imposing stricter policies to have lenders qualify potential mortgages. This sent a variety of lending companies bankrupt. Even the CFO of Countrywide said that 60% of their customers that had these creative mortgages wouldn't qualify under these new guidelines for underwriting. By mid to late 2007, there wasn't much of a change – But, the numbers were increasing in delinquencies of mortgage payments, foreclosures and prices of homes began coming down.

The economy began slowing down in early 2007, but the fuel for the boom became the anchor for the bust. The mortgage industry led to a large number of job growth. With real estate prices dropping, people began spending less and saving more, but what they didn't realize is that they already have forgone the majority of their future wages due to increased financing through vehicles, equities, and mortgages. As the economy became more unstable, the yield of bonds came down as the demand rose, and this gave people the idea that they could refinance their homes. For those that got in the game late, the price of their home dropped below the price they paid, and they weren't able to refinance at the lower rates. Not only that, but because of regulation, the ones that got into the game moderately late couldn't refinance because they couldn't qualify. This led to an increase in homes for sale and foreclosures, which brought the price of homes even lower. The homeowner had felt the effects of buying on margin… You can make a lot, but you can also lose a lot.

With consumer spending drying up, the economy slowing down because of this, and the price of homes dropping to a level never thought seen, deflation began coming into play. What was once a half a million dollar home was now for sale as a foreclosure or on deep discount. Many small businesses began closing because the prices that were demanded in the market place couldn't support the costs associated with doing business. This caused more unemployment and sent the economy into a recession. Since the majority of people already committed their future earnings to their debt through financing, people began to feel the pressure associated with financing. Some tried to seek refuge through bankruptcy protection, but because of the new bankruptcy laws, it made it harder for people to walk away from their debt. Unemployment was at an all time high because of the consumer spending drying up and the personal savings rate at an all time low.

It wasn't until the economy was seen unstable by the major bond holders – China, India, Japan, etc. Baby boomers began retiring and the strain of the unemployment on the federal government's revenue through taxation began affecting the national debt. There were huge amounts of money going out, and not enough coming in – because of the unemployment and the recession that the country was in. The government began raising taxes since they needed the increased revenue. The government also tried lowering the fed funds rate, but people were stripped too thin from their borrowing habits. The depression hit when the price of the bond dropped as the major holders began selling out because it was seen as too risky. The U.S. then didn't have the funding needed to support the programs that were in place to help those that needed it most during this recessionary period. The depression hit and hit hard. Spending was at an all time low and unemployment was at an all time high.

Laws of investing

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I am starting a new blog - Laws of investing. These are some of the things I have recently learned while trading... They are laws, meaning you must follow these when trading for your own account.

1. Never trade on emotion...
2. NO investment continually goes up forever... You can trade on the natural fluctuations that are caused by emotion, but you will never find any asset to continually rise.
3. NEVER get greedy. You know you are greedy when you tell yourself, "Just a little higher and I'll sell out". Take your gains and be satisfied you made money and didn't lose.
4. Never use limit orders unless you are up and want to hedge against losing your profits.
5. Never trade after the market closes so your trade gets executed the next day.
6. Never invest in illiquid assets for short term profits...
7. Buy what you believe to be good - Not what friends, coworkers, analysts, or anyone else.
8. If your stock goes down, have a set percentage it drops and then BUY MORE!!! If you are having second thoughts, see law #7
9. If you wouldn't invest in the investment you currently have because the price is too high - That's when you sell... If you think it'll keep going up forever - See rule #1, 2, and 3
10. Residential Real Estate in Southern California sucks for an investment as of 2007. Do not invest in residential real estate, even as an investment property that you'll rent out.