Foreclosures Surge, Commodity Boom Rages On, More on Bernanke’s Subprime Bailout, World’s Richest Man, and More!

by Addison Wiggin & Ian Mathias

  • Foreclosures spike to all-time highs… which slimy mortgage product led the way
  • Ambac’s rescue plan finally unveiled
  • Oil and gold rocket to new highs… Kevin Kerr on what to expect next
  • Markets alter list of world’s richest men… which famous businessman has regained the No. 1 spot
  • Plus, readers of The 5 demand our response… what’s so bad about Bernanke’s subprime bailout?


Nearly 6% of all U.S. homeowners were in some form of mortgage delinquency during the fourth quarter of 2007. That’s an all-time high.

According to this morning’s Mortgage Bankers Association report, the U.S. is currently enduring historic levels of foreclosures… at least since it started keeping track in 1985. Not surprisingly, adjustable-rate mortgages led the way. Foreclosure rates have doubled year over year in both prime and subprime ARMs.

(We received loads of reader mail on Bernanke’s request for a “Mulligan” on the entire mortgage bubble. You’ll find our feeble response below. )

As if to illustrate the MBAs report in real-time this morning, U.S. mega-lender Thornburg Mortgage is having a tough day:

The lender was unable to meet a $28 million margin call and consequentially, its lender – J.P. Morgan — has announced it will exercise default rights and “liquidate pledged collateral.”

In other words, another lender is about to bite the dust. Thornburg couldn’t pay its bills because its housing-related assets aren’t worth what they were a year ago. Now the milkman wants his money back… or a piece of the company. Look for more of these default scenarios in 2008.

And so much for an Ambac rescue. Ambac announced its latest, very hyped plan to stimulate the company and shore up its ugly balance sheet yesterday… sell more than $1 billion in common stock and $500 million equity units.

Rumors of a state-sponsored bailout or even a sovereign wealth fund infusion muckled about all week. No such luck. Just good old-fashioned wealth dilution for now. Ambac’s stock-selling plan will more than double the number of shares outstanding.

Those crazy enough to still own Ambac weren’t exactly in love with that plan. The stock fell nearly 10% on the news.

Yesterday’s release of the Fed’s “Beige Book” shows Fed governors accepting the economy for what it is: a charlatan’s ruse.

Growth “has slowed since the beginning of the year,” the lily-white report kicked off. “Two-thirds of the districts cited softening or weakening in the pace of business activity, while others referred to subdued, slow or modest growth. Retail activity in most districts was reported to be weak or softening, although tourism generally continued to expand.”

All districts cited “tight or tightening credit standards and stable or weaker loan demand.” Also worth noting, inflation worries mounted as “upward pressure on prices from rising materials and energy prices” were seen by each district.

The Beige Book’s bashful honesty did a fine job killing the “animal spirits” on the trading floor yesterday. Stocks rallied briefly as the Dow gained as much as 120 points early on. But all the major indexes pulled back and ended the day up about half a percent.

The private sector shed 23,000 jobs in February, reports the employment firm ADP yesterday. That’s the first monthly drop since April 2003.

We rarely give much credence to the ADP jobs report… or the Labor Department’s guess, due Friday, for that matter. Still… this is worth noting. The bean counters are struggling to keep the books on the positive lean. Should the BLS release a similarly dismal jobs report tomorrow… look out.

Gold struck a new all-time high yesterday of $993. After a brief retreat, the precious metal surged to new highs on more weak dollar news. Once again, gold has backed off its recent high this morning, to about $975. But we dare not bet against this rally… $1,000 could be here by the weekend.

Oil prices continued to skyrocket yesterday, too. After a very brief retreat to $99, oil has risen above $105 this morning, another all-time high.

A surprise inventory report from the U.S. Energy Department showed a reduction in inventory by 3.1 million barrels. Traders were expecting an increase of about 2.3 million. These days, that’s more than enough for a new record high.

“The weaker dollar is certainly a part of these commodity increases,” our Kevin Kerr told Larry Kudlow last night on CNBC. “But adjusted for inflation, really, we’re not even halfway there in some of these commodities, including oil. Bottom line, if the Fed doesn’t step in and start supporting the dollar, you’re going to see commodities climb exponentially. Not to mention worldwide demand is just huge.

“Oil’s going to $125-150,” Kevin concluded. “We might see some pullbacks in the short term due to healthy supply, but this is something that Europe has been living with for a very long time… we’re just getting a taste of it today.”

To honor this incredible commodity bull market, we’re offering our Resource Reserve at a specially discounted price. The Resource Reserve is a collection of our finest commodity letters… Outstanding Investments, Resource Trader Alert, and Energy & Scarcity Investor, plus the soon to be launched Gold & Options Trader. We already bundle these products together at a discount to buying them individually, and starting tonight we’ll chop off an extra few bucks to sweeten the deal.

If you’re looking for a comprehensive solution to playing the commodity boom, keep an eye on your inbox tonight for details on the Resource Reserve.

For what it’s worth, even the loudmouth equity cheerleader Larry Kudlow is worried about the dollar and its effect on commodity prices. The demons in Hades must have felt a sudden icy chill…

“This is the new big theme,” he said on CNBC last night, effortlessly reversing his economic stance for the past few decades. “I don’t think the commodity rally will end, maybe not in my lifetime, unless and until the U.S. government finally defends the U.S. dollar. I’ve changed my thinking on this… I am very worried about inflation.”

“We gotta get off oil,” added our always convincing president yesterday. “America has got to change its habits.” He went on to push his weak ethanol strategy… again. The energy bill passed by Congress calls for ethanol refiners to increase ethanol output by a multiple of five — from 7 billion gallons per year today to 36 billion by 2020.

“That’s good if you’re a corn farmer,” Bush chuckled, “and it’s good if you’re concerned with national security.”

The dollar, as you might guess, set new records of its own. The dollar index found itself at another all-time low of 73.1 late last night. The euro marched to another record high of its own: $1.53. The pound is back at $2 even. The loonie gained to $1.01, and the yen stayed at 103.

We note that both the Bank of England and European Central Bank chose to leave their benchmark lending rates unchanged in their monthly meetings this morning.

On the scarcity scene, scientists are flooding the Colorado River.

The U.S. Department of the Interior has ordered the folks running the Glen Canyon Dam at Lake Powell to flood the Colorado River at a rate of 300,000 gallons per second for the next 60 hours. If the Empire State Building were an empty container, this man-made flood would fill it in less than 20 minutes.

The government is ordering the flood to restore sandbars and ecosystems in the Grand Canyon, but we hasten to add that the billions of gallons of water will end up in Lake Mead… the very lake we showed you last week being sucked dry by neighboring cites. How convenient.

For what it’s worth, Buffett’s back on top:

Mr. hamburger and a Cherry Coke himself retook the title of Forbes’ “richest” man on the planet yesterday.

Buffett pocketed a cool $10 billion since this time last year, due almost entirely to Berkshire Hathaway stock appreciation. The Oracle of Omaha is now estimated to be worth $62 billion, besting Mexican tycoon Carlos “Slim” Helu’s $60 billion net worth and Bill Gates’ measly $58 billion.

If you’d like to ride Mr. Buffett’s coattails, Berkshire Class A shares peaked at an incredible $150,000 a pop in December. You can pick one up today on the “cheap” for about $139,000.

“What do you propose for the people who cannot pay the adjustment on their ARMs?” asks a reader. “Just saying that it is not right for people to renege on their debts doesn’t solve anything.

“Kick them all out of their houses and the lenders get to hold the bag anyway (a lot of otherwise worthless real estate). If the lenders’ pockets are deep enough, they may be able to hold the bag AND tread water long enough to come out OK. If you like that scenario, you must also like tons of the working poor living on the street, in their cars and in shelters.

“Is this a great country or what?”

“Ben Bernanke’s comments about the banks doing something to help the people losing their homes are absolutely correct,” writes another. “It is obvious that you are not in the housing industry. For the banks to help out the people in these homes by working with them and doing an extension on the home, taking the payment that they can afford and taking less on the amount that the people must pay off on their home is smart!

“Right now, I am a builder and realtor and have had the market hit us head on. The principal reason was the banks put too much easy money out in the market; next, the news media filled the air with so much fear that a lot of this is self-prophecy. Before we knew it, people got scared and walked away from their homes.

“So things get tough, and now the banks don’t take partial payments or work with customers at all. They just take the home back and put it back on the market for 50 to less than 75 cents on the dollar, killing the whole neighborhood’s values.

“Where is the bad idea of working with the original buyer if you are going to throw away that much money?”

“Since the lenders are already taking a beating on their foreclosures,” adds a third, piling on, “maybe debt forgiveness isn’t that crazy of an idea. For instance, a lender is owed $600,000, and a house is worth $500,000. The lender forecloses and sells the property for $480,000. Subtract closing costs, add carrying costs, and it net about $450,000. Nobody wins.

“Now say the lender lowers the principal amount of the loan to $525,000. The owner agrees and starts paying his payment. Win-win. One less house on the market, banks getting at least some cash flow and the owner keeping the house. When you look at the alternative, it’s not that crazy. The fact that the lenders had some complicity in that debacle should not go unheeded, nor should their responsibility. Housing prices are going to stabilize only when the supply starts decreasing. Keeping foreclosures off the market is a good start.”

The 5 responds: You’re probably right. What can they do now but try to save everyone’s ass?

Unfortunately, our comments come from an entirely different perspective. We were scoffed at when we predicted the mortgage bubble would arise, having studied the exact phenomenon a scant 10 years before in Japan. Ridiculed a few years later when we suggested it couldn’t last, and now we’re heartless, out to lunch and less than pragmatic about the collapse.

It would be amusing, if it weren’t such a tragic farce. It’s fruitless to point out there ain’t no such thing as a free lunch when the government and media are complicit in — even arrogant about – fomenting, then excusing, recklessness. And when lenders and borrowers alike have come to expect it. What a wet blanket we are, eh?

But let me ask you this: How long is the credit system — the heroin that courses through the veins of our euphoric American life — going to function if debtors are consistently encouraged to renege? It IS crazy. Be careful what you wish for. Screw it, we’re already past that.

The real answer in this case is the mortgage bubble should never have happened in the first place. But since we have been admonished since childhood never to use the word “should,” as it implies some moral superiority on our part, let’s try this: Let the chips fall where they may. As our friend and mentor Bill Bonner often says, in markets, as in life, “People don’t get what they expect, they get what they deserve.” That’s not a moral judgment on our part… but simply the natural order of things.


Addison Wiggin
The 5 Min. Forecast

P.S. If we seem unusually cranky this morning, the Ultimate Fighting champion who baristos at The Daily Grind when he’s not in the ring poured us a hazelnut, instead of a French roast. We didn’t realize it until we’d driven away. No one should ever pour a man hazelnut in the morning. It’s just not right.


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