Beware the White Shoe Boys

One of my favorite commentators to listen to regarding the economy is trends forecaster Gerald Celente.  This is not only because his predictions have often been eerily accurate, but because his satyrical Bronx attitude cuts right through the crap and leaves me laughing even in the face of bad economic news.  He was recently interviewed by Matt Cooper of The Last Word, on Irish radio, and had plenty of attitude and insight to share regarding midterm elections, quantitative easing, multinational corporate takeover and the global economic crisis.  I decided to transcribe the interview so as to more effectively share his words with my readership here at The Paper Boat.  To experience the full impact of the interview, however, I recommend you indulge yourself in a few minutes of informative entertainment and actually listen to Celente speak at the link provided below.

An Interview With Gerald Celente on Irish Radio, November 3, 2010

MC:  So the American midterm elections have been a massive success for the Republicans, a big blow for President Barack Obama, although Bill Clinton as well has had a similar experience in 1994 and it didn’t stop him from being reelected two years later.  But who better to analyze things for us than an old favorite guest of ours here on The Last Word, the Chief Executive of the Trends Research Institute joining us from New York, Gerald Celente.  Hello to you, Gerald.

GC:  Hello, Matt.

MC:  So, what do you reckon the political and indeed the economic consequences of the mid term elections are going to be?

GC:  Nothing, and nothing.

MC:  Okay.

GC:  Yeah, it’s one criminal group replaced the others.  The Gambino’s replaced the Bonnano’s.  The Republicans replaced the Democrats.  Nothing of any consequence is going to change.  It seems as though Americans have, uh, Attention Deficit Disorder.  Go back to 2006 midterm elections.  The Democrats get swept in.  They repudiate the Bush presidency and his congress under the guise that the Democrats in office are going to end those criminal operations called wars in Iraq and Afghanistan.  And what happens?  They bring in Obama later on and what does he do?  He… he increased the troop strength into Afghanistan into 70,000 more troops.  It’s the two-headed one party system.  The Wall Street gang is in control of the White House.  This is all just show.  They’re gonna make the big story about tax breaks for the filthy rich and whether or not they’re going to gut the already gutless Obamacare, and whether or not they’re going to balance the budget, and in the meantime the big story today, Matt, is how much money is the Federal Reserve going to dump into the markets?  You know, that… that, uh, digital money not worth the paper it’s not printed on?  That’s what everyone’s really waiting for.  The rest of this is just a side show.

MC:  Well, indeed.  Talk to us about this, what they call quantitative easing.  Can you explain what’s involved in this and what it’s supposed to do?

GC:  Well, it’s white shoe boy language, “quantitative easing.”  All it is is dumping more money into the financial system so that big banks can borrow at zero, continue to do their speculation and “investments” (with a quote- “investments” is really, you know, just gambling), and charging people high interest rates in return so they can continue to make profits.  The global economy is in collapse.  I don’t have to tell you folks over there in Ireland… you know one of the pictures we have in our Trends Journal, the Autumn Edition, Is that… that cement truck crashing through the gates of the Irish Parliament.  They’re doing this around the world.  The central banks are dumping money into the economies to keep the big boys afloat.  They call it “austerity measures.”  It’s people getting taxed more, getting less benefits, losing jobs, so they can bail out the guys that made bad bets with bonds.  It’s as simple as that, and they’re doing the same thing here.

MC:  What’s the alternative?  There are plenty of people in this country who’d like to say “Burn the bondholders.  Let’s not repay them the money that they lent recklessly to our banks and which our state took responsibility for.  Let’s restructure the amount of debt that we have to repay- our national debt.”  But the problem is, we still need to borrow it.  Will we be able to borrow it from somewhere else if we don’t repay these guys?

GC:  Of course they will.  Why should these guys not get burnt?  You know what gets me mad?  All my life I hear about free markets and  capitalism, until the big guys start taking losses and then they come out with this load of bologna that “Oh, they’re too big to fail.  If they fail then the world will come to an end.”  No, no, capitalism then takes place.  You know what the motto of the Trends Research Institute is?

“Break the chains, buy local and bank local.”

The only way the people are going to make it is to take the power away from the power brokers, and that’s all these politicians are.  What a disgusting spectacle.  From that clown Cowen you got over there to Sarkozy, to Berlusconi, to Obama, Bush, Clinton… you go down the line, you know who these people are?  These are the same people you couldn’t stand in high school and college that wanted to become the head of the, you know, class president or head of the student council and they always used to suck their way up and brown nose to everybody else so they could get what they want.  Now they’re telling us what to do.  They don’t have a clue.  If you watch the election results last night in the US, yeah, it was a disgusting…  You hear the guy saying the same things.  “We’re gonna balance the budget and we’re gonna free up the.. the… the credit lines so that small business could again start borrowing and expand.”  Nah, one thing has nothing to do with another.  It’s called globalization.  They’ve taken all the good jobs and sent them to China along with the technology and the people have over borrowed because of the criminal activities of the banks by loaning the money at these ridiculously low rates with no… with no collateral, and now they want the people to bail out the banks.

MC:  What’s the alternative?  You tell us how we can get out of this mess, what we can do Gerald, please.

GC:  Number one:  you have to stop spending money you don’t have.  You know, I’m old enough to remember when people didn’t buy things on credit.  As a matter of fact, I remember in the U.K. when credit cards first came out, you were a loser if you used your credit card.  It meant you didn’t have money.  Buy only what you can afford and buy local.  Build a local economy in every way.  You know, whether it’s drinking all Irish booze, buying all Irish food you can, making Irish shoes, Irish shirts.  Every country, every community has to support each other.  The whole lie of globalization only helps out the multinationals, and these are the people that when they need austerity measures, that’s the one they’re really bailing out.  I’m not nostalgic, so what I’m saying is let’s go back to a formula that really worked before. The whole World Trade Organization, NAFTA, globalization has crippled the working people.  You take a nation of proud people that used to be merchants, they used to be craftspeople, artisans, manufacturers, and now… mom and pop businesses… and now what they’ve turned them into is service sector society.  Now they’re clerks and cashiers.  Service sector… servant… serf.  When they bemoaned the beginning of industrialization, even in their wildest dreams… Blake would’ve never have imagined it to have degenerated into this.

MC:  One final point though, Gerald.  When we were ourselves alone here in this country, when we had trade barriers against the rest of the world where we thought we could be self-sufficient, it was a disaster for us.  It was entering the European community, expanding our exports beyond Britain into Germany, France, the rest of Europe into the United States, that’s when we prospered.  If we didn’t have the foreign multinationals in this country now we’d be completely bereft of jobs, bereft of exports, bereft of income.  So, would that sort of protectionism not hurt us?

GC:  Not that kind… I’m not talking about total protectionism.  It’s not a level playing field.  You know, go back to the Cold War days when you used to hear about those “Communist Chinese.” those “Red Chinese.”  Guess what- it hasn’t changed.  All the deal is, Matt, is that manufacturers have taken their business over to China, they get the product manufactured there, they ship it back and mark it up.  In the meantime they sold the technology because the Chinese aren’t stupid.  “If you’re gonna manufacture here, we want your technology, too.”  That’s why they have the trains that are now the fastest in the world, whether it was Siemens, Hitachi or everybody else giving it to them.  So what I’m saying is we don’t need the multinationals.  We don’t need Kraft.  We don’t need General Foods.  We don’t need any of them.  We don’t need Nestle.  They’re cornering the market.  And what we do need is more local manufacturers to be able to compete.  It’s not a level playing field.  I’m not a protectionist.  I say open up the markets, but let’s call it what it is and if it… and so for us in the States I can say with full certainty that before NAFTA, before World Trade Organization, this country was the most egalitarian in the world and now the gap between the rich and the poor is the widest in the United States of any of the industrialized nations.

MC:  Gerald Celente, as ever, it’s been great talking to you.  Gerald is the chief executive of the Trends Research Institute.

Trends Research Institute
Gerald Celente Speaks with Matt Cooper on Irish Radio About the Global Economic Crisis
November 3, 2010
http://www.trendsresearch.com

Business Insider
Man Slams A Cement Mixer Into Irish Parliament Building As Austerity Protests Erupt Across Europe
Vincent Fernando
September 29, 2010
http://www.businessinsider.com

Foreclosure Tsunami Alert

Tsunami alert!  Run for the hills!  A brand new foreclosure wave is headed for a city near you!

The Wall Street journal published an article last week that probably got less attention than it should have, because the implications it contained are major for the housing market.  According to the article by Mark Whitehouse, the inventory of unsold homes on the market now stands at 107 months. That is to say, it would take close to nine years at the current rate of sales to eliminate the backlog of foreclosed homes currently on bank balance sheets in addition to the shadow market of homes in distress and headed for repossession. Just in terms of supply and demand this promises to put a huge damper on price growth in housing for a long time ahead. There is tremendous supply and very little demand at current prices.

Over the past couple of months I have been perusing the listings of foreclosed homes at Realty Trac, the Irvine based online marketplace for foreclosed property. What I’ve seen has been shocking. There is an option on the website to view foreclosure listings in a map format, where you can look up any neighborhood you are interested in and see specific homes and what stage of foreclosure they are in. There is already a glut of homes listed for sale, but in every neighborhood I’ve looked at the number of homes for sale is dwarfed many times over by the number of homes in distress. For every house listed for sale there are at least five others around it in some state of foreclosure. The backlog of unseen inventory waiting to hit the market is of monstrous proportion. Granted, I’ve been looking at the housing market in the Los Angeles area, which is one of the areas worst hit by the effects of the real estate bubble. The view is exaggerated here. Nevertheless, while foreclosure numbers are concentrated in metro areas, the number in the Wall Street Journal article pertains to the national market. The US has nine years of housing supply, when a healthy market normally holds enough inventory for around six months of sales.

The basic foreclosure process is fairly simple to understand.  There are three stages of development. The first is a state of “pre-foreclosure” that begins when three to six months of payments have been missed on a property loan. The lender orders a trustee to record a Notice of Default, commonly referred to as an NOD. The homeowner then has three months to bring the loan current and avoid repossession of the property. The rate at which homeowners are able to do this across the board is called the “cure rate.” It is important to note that the cure rate today has fallen to historic lows- very close to 0%- so just about all the properties in pre-foreclosure today will end up seized by the bank.

If a loan is not brought current in three months, a sale date is scheduled for the property. This sale is called a Trustee Sale, and typically takes place on the steps of the county courthouse. The property is auctioned off to the highest bidder, who must pay in full with cash. This method of buying properties is usually left to professional investors, as properties are sold “as-is” sight unseen with no room to negotiate contingencies, and the buyer is responsible for any liens. The opening bid price for a property at auction is set so that it covers the outstanding balance of the loan along with interest accrued and any additional fees or attorney costs. Because so many of the homes falling into foreclosure today were originally purchased at monstrously inflated prices during the housing bubble or refinanced using very overly optimistic appraisals, the opening sales bids make them overpriced even at auction. This, along with the sheer volume of homes washing up onto the courthouse steps these days is leaving most auction properties unsold at the end of the day.

When a distressed property fails to sell at auction, ownership reverts to the bank. This is the third and final stage of foreclosure. The property becomes an REO, which stands for Real Estate Owned by lender. This will be the inevitable outcome for the majority of mortgages entering delinquency today, which is very bad news for banks. The government’s loan modification programs have largely resulted in failure and have not made a dent in the number of homes ending up back on the books of lenders. Due to changes made in 2009 by the Financial Accounting Standards Board, banks have been allowed to avoid marking these assets to realistic market prices, resulting in the crisis appearing much less severe on paper than it actually is. The fact is, if those reclaimed properties were valued at what they would actually sell for on the market today instead of what they were appraised at when the banks originally issued loans on them in the midst of a housing bubble of unprecedented proportion, many banks would be rendered insolvent. They do not have enough in reserve assets to cover losses on all the bad loans coming home to them. The banks instead are presiding over an expanding flood of property that is now worth half of what it needs to be in order for them to reconcile their books and stay in business.

Despite the mark-to-make-believe accounting trickery going on these days at banks, we have seen the institutions fail in such numbers since this crisis began that the FDIC essentially ran out of money back in 2009 covering the losses. To date 307 banks have failed since 2007, with the number of banks going under in 2010 about to surpass that of last year. For better or for worse, the market has a way of finding equilibrium despite our best efforts to control it.  This crisis is worsening for banks, and that further threatens the stability of the economy as a whole.

Famous investor and philanthropist Warren Buffet once said “It’s only when the tide goes out that you learn who’s been swimming naked.” As the waters of housing mania subside we are seeing more and more incidents of fraud exposed, and the situation in the foreclosure business is proving to be no exception. Legal issues coming to light recently regarding so called “robo-signers” and illegally confiscated property are expected to put a damper on the speed with which foreclosures are processed.  Several of the largest banks have stopped foreclosure processing altogether until the situation is properly investigated and rectified.  This will result in the temporary delay of an unknown percentage of REO properties reaching the market, which some market watchers are predicting will offer a temporary reprise from declining housing prices. Inevitably these foreclosures will be sold , however, so it is just a matter of time before the market succumbs to their influence.  In addition to this, many potential buyers will most likely be wary of purchasing foreclosed property until the legal issues are worked through, which in itself will place downward pressure on the market as sales dry up.  Currently, a quarter of all home sales nationwide are REO properties, with the numbers in bubble affected states like California, Nevada and Arizona coming in at fifty percent.  However it plays out, a new wave of foreclosures is upon us. It may suffocate the market in a long slow flood or knock it over with a swift forceful blow, but it has arrived nonetheless and it’s already getting our toes wet.  Expect to see further price depreciation ahead in housing.

Realty Trac
http://www.realtytrac.com/

The Wall Street Journal
Number of the Week: 107 Months to Clear Banks’ Housing Backlog
By Mark Whitehouse
October 30, 2010
http://blogs.wsj.com/economics/

Foreclosureblues
Shadow Foreclosure Avalanche, Coming Soon to a City Near You
Keith Jurow, Ph.D
October 29, 2010
http://foreclosureblues.wordpress.com/

Calculated Risk
Number of Bank Failures: 2010 about to surpass 2009
October 23, 2010
http://www.calculatedriskblog.com/

Reuters
FDIC To Consider Ways To Replenish Deposit Fund
Karey Wutkowski
Sep 18, 2009
http://www.reuters.com/