Monday, May 30, 2005

RENDING THE FABRIC


Chinese textile fair, BBC news
I lurk around gold bug sites because the next and last bubble before the world realigns itself is gold. Here is a very interesting article about lending money for housing speculation that nails it pretty close.
I recently had an e-mail conversation with someone in the mortgage business, and this is what he had to say about one lender in particular, Golden West Financial (NYSE: GDW), a firm that has always enjoyed a blue-chip reputation: "For the past ten years, Golden West has been the most admired financial firm in the U.S., according to Forbes and Fortune. It has been dominated by two of the wealthiest people in the world, Herb and Marion Sandler, husband and wife co-chairs, who have run it with an iron fist since the 1960's and with highly conservative and principled residential mortgage lending. They have by far the lowest foreclosure rate in the industry on their loan portfolio, which is primarily invested in California.

"Their primary lending unit, World Savings, is now offering on owner-occupied homes 90% loan-to-value, no-income-verification, cash-out refinances into negatively amortizing, adjustable-rate mortgage loans. There is no liquid-reserve minimum, nor is there a stated-minimum credit score. This type of loan was not available even through the sub-prime private lending market just five years ago. Today it is being made available by the company that has built a reputation for soundness, ethics and character that makes Warren Buffet[t] pale in comparison. Do ya think Herb and Marion know what is happening in their company? If the icons of business ethics are doing this what do you suppose the rest of the industry, comprised of mere mortals, is doing?
This entire article details both in close up as well as nationally. I heartily recommend reading it in full, especially the loan officer's personal story.

My daughter, during the last housing bubble that popped in 1990, worked for a loan company as a cold call processor. She had the same experiences. It taught her a lot about speculation and moving money. The debate is no longer "is this a balloon" but "how bad will the pop be?" and in this case, the pop goes a weasel will crater your neighborhood because...

Philadelphia, its suburbs and indeed much of Pennsylvania have experienced a foreclosure epidemic as low-income homeowners take on mortgage debt they cannot afford. In 2000, the Philadelphia sheriff auctioned 300 to 400 foreclosed properties a month; now he handles more than 1,000 a month. Allegheny County, which includes Pittsburgh, had record auctions of foreclosed homes, and officials speak of a "Depression-era" problem. The foreclosures fall particularly hard on black and Latino families.

For some American homeowners, the greatest housing boom in U.S. history has delivered riches. They repeatedly tap their homes for equity and use the cash to purchase granite countertops, a BMW, even a trip to the Super Bowl. But there's a dark side -- a sharp rise in foreclosures that is destroying the single greatest generator of personal wealth for most Americans.

Foreclosure rates rose in 47 states in March, according to Foreclosure.com, an online foreclosure listing service. The rates in Florida, Texas and Colorado are more than twice the national average. Even in New York City and Boston, where real estate markets are white-hot, foreclosures are rising in working-class neighborhoods.
When foreclosures are rising in all but 3 states, this is an alarm bell considering that we are not in a recession at all but in a housing value boom. Employment is supposedly up and so are incomes but bankruptcy is up, too. As the bad news overwhelms the fragile system, all sectors begin to collapse, always beginning with the lowest levels. Just like in the 1920's, the farmers and lower working classes began to fall apart before 1929. Then everyone was sucked into the Depression.

Back to the gold bug sector of the internet comes this warning shot:
The Organization for Economic Cooperation and Development (OECD) is warning that the U.S. current account deficit will hit $900 billion or 6.7 percent of U.S. gross domestic product in 2006. These very large numbers are caused by a continued reinforcement of global imbalances: on the one hand, a very low U.S. savings rate, high U.S. consumption fostered by very low interest rates, and cheap Asian goods flooding the U.S. market (cheap because Asia subsidizes their exports through low exchange rates). On the other hand, we have lackluster demand in Europe and some Asian countries, notably Japan. OECD chief economist Jean-Philippe Cotis told the Financial Times: “We are not saying there will be a doomsday tomorrow morning ... but because the adjustments [to global imbalances] are relatively slow, we are running the risk that an accident will happen. [..] Time is running out – the numbers are getting big, big, big.”
"Accident"...what accident? How about 9/11 style implosion? The reverberations of that day still ring like a bell. The false wealth inflator that was launched by desperate men in the USA to paper over serious problems is now about to end as all such schemes end: in collapse that will destroy probably the entire banking/lending superstructure.

What event will trigger this? A war with China? A massive earthquake/tsunami on the West Coast? Volcanic eruptions? Six or more catagory 5+ hurricanes hitting the USA? It can be literally anything Mother Nature chooses to fling at us. Whatever it might be, we don't have the capacity to deal with it anymore. We spent our wad.

So time for a full blown trade war with China. After lecturing the Communist Chinese about free trade, they turn around and do exactly that to howls of protest from fake free trade countries. The fakest of all is Japan with Europe and the USA close behind. The entire lending system of the free trade countries rests on China and Japan recycling trade surpluses with the USA in particular. But this is about to come crashing down.
"Since the United States and European Union (EU) side have imposed quantitative restrictions China-originated textile goods, how can the Chinese government continue to impose export tariffs?"Bo said. The Chinese government must treat their enterprises fairly, he added.

Monday's decision was announced in the wake of EU decision to impose quotas on imports of Chinese textiles, as well as US decision to re-impose restrictions on seven kinds of Chinese textile and clothing imports recently.

On Jan. 1, 2005, when the global textile quotas were eliminated,China voluntarily imposed export tariffs on some textile goods so as to limit its export growth. On May 20, China again decided to raise the export tariffs on 74 categories of textile products, with a 400-percent hike for most of the products.

The United States and the European Union, disregarding these voluntary measures taken by China however, still imposed strict restrictive measures on textile import from China since the beginning of this year.
As the currency systems collapsed in the 1920s starting with Germany, trade began to suffer, too, as all entities tried to prevent Germany from exporting their way out of the financial bind they were in, in this case, paying back Britain and France and the Low Countries for war damages. Unable to raise the money via trade deficits with these nations and the USA who was bankrolling all of this, they cut their losses and tossed in the towel causing a domino effect. Trade barriers shot higher and Japan ended up excluded leading them to invade Manchuria and WWII was launched.

Easy to follow the money to the bitter end.

Gold bugs hope to glide through this by purchasing gold. Only this failed in 1930 and will be foiled again via government edict. The USA sits on the most gold in the world. The Fed is the ultimate OPEC of gold. They can raise or lower the value of gold in a snap or even outlaw it. They did this in the past and will do it in the future.

This is why the only real power is the oldest power: people cooperating with each other. United we stand and all that!
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