The Next Wave of the Housing Crisis, Oil $132, Dollar Falls, The $175 Burger, and More!

by Addison Wiggin & Ian Mathias

  • Could the housing crisis really be bottoming? One chart shows the worst is yet to come
  • Moody’s explains AAA rating fiasco: computer glitch
  • Oil at $130… what’s behind the latest crude climb, and why it should go even higher
  • Congress does its part to keep oil prices low… how does one sue OPEC?
  • Plus, how much would you pay for a hamburger? America’s most expensive, below



Despite popular belief to the contrary, we haven’t seen the worst of anything yet:


One of the more brilliant innovations in the mortgage industry in the last four years — the option ARM — allowed homeowners to pick their payment each month for a few years. As the borrower, you decide how much to pay each month… bare minimum, interest only or — gasp — interest plus part of the principal.

Great while you get to choose. But when the option expires, the bank resets your ass with a hefty fixed rate.

That second wave of adjustable-mortgage resets won’t even begin until next year. And as you can see from the chart above, the quantity dwarfs the amount that caused Wall Street, the Fed and Congress to vomit in unison already this year.

“The credit crisis will extend well into 2009,” opines Oppenheimer analyst Meredith Whitney, “and perhaps beyond.”

Whitney became somewhat of a contrarian demigod last year when she brazenly forecast Citigroup’s massive write-downs before the crisis dominated headlines. Her report yesterday had “investors” racing for the exits.

“Multitrillion dollars of loans were underwritten,” writes Whitney characterizing the root of the problem, “with the false assumption that home prices would go up in perpetuity on a national basis.”

Unfortunately for many… the assumption was false.

“We see no near- or medium-term comeback,” she says of the firm’s outlook. “We believe losses will only accelerate further and be far worse than even the most draconian estimates. Due to continued deterioration in consumer liquidity, we are raising our loss expectations significantly for the group and lowering our earnings estimates significantly.”


As the crisis unfolds, it’s not just Wall Street fat cats getting the shaft. “There are 12 parking lots across Santa Barbara that have been set up to accommodate the growing middle-class homelessness,” CNN reports. Counseling centers there have urged the city to lend parking lots during the night, as this atypical breed of homeless car owners needs a legal place to sleep.

“The way the economy is going,” said Nancy Kapp of the New Beginnings Counseling Center, “it’s just amazing the people that are becoming homeless. It’s hit the middle class.” Knapp said these parking lot hostels are overwhelmingly populated by senior citizens and single mothers.

From time to time we find ourselves wondering: How could all of this happen? This morning we have our answer: It was all a big mistake.

A “computer glitch” prompted Moody’s to incorrectly assign billions of dollars of worthless debt their coveted AAA rating. An investigation by the Financial Times reveals many of the AAA ratings Moody’s assigned in 2007 should have been “up to four notches lower,” but were left AAA… well… because the computer said so.

Moody’s officials were well aware of the error, but did nothing. According to the salmon-colored rag, Moody’s fixed the glitch by quietly reducing errant ratings during their massive wave of downgrades late last year.

“It’s so absurd,” writes our managing editor, Chris Mayer, by e-mail this morning, “it might just work. I’m telling you… if a fiction writer wrote this story, we’d laugh our ass off. ‘That’s ridiculous,’ we’d huff, ‘no one would believe that.’

“You can’t make this stuff up.”

Stock investors appeared for a few rare moments yesterday to be coming to their senses. Banks and housing-related stocks led the major indexes to sizable losses. The Dow shed 1.5%. The S&P 500 lost 1%.

Selling began right on the opening bell, thanks to a horrid premarket earnings report from Home Depot.

No surprise, really, the dollar took a turn for the worse last night, too. The dollar index is down a full point since Monday… clutching at 72 this morning.

Inflation appears to be rearing its wart-speckled head in Germany, too. The news prompted currency traders to speculate the ECB will raise rates before the U.S. Federal Reserve. Throw in a dash of “stunning deficits” in the U.S., a morsel of “soft economy” and a cup and a half of “uncertainty” surrounding the mortgage crisis… and voila, you’ve got a recipe for the dollar to retest its former lows.

“It’s too soon to tell,” says Chuck Butler, “if this is a ‘true reversal’ of the sell-off the past few weeks or a false dawn. But to me it looks like the euro’s heading higher once again, and the negativism toward the U.S. dollar is slowly creeping back into the mind-set of the markets.”

The euro trades at $1.57 again today.

And thus the real story today: $130 oil.

Concerns over supply pushed oil into the high $120s last week. Dollar weakness has brought oil to its 11th record high in the last 13 trading days.

“It’s a very scary, very volatile market right now,” notes our commodities trader Kevin Kerr. “We’re seeing the same patterns in the trading pits we’ve seen all along: strong demand and a weaker dollar. And even with prices at this level, there is no rundown in demand.

“But at $130, we’re really in uncharted territory. Speculators are coming in, and since we’re at record highs every day, there’s just no telling how much it might pop up day to day. A lot of traders I spoke with are getting ready for $140-150 barrels.”

Better make that $132, as a matter of fact. Oil’s been rising all morning.

“If you look at the price of oil,” Chris Mayer observed yesterday, “you find something interesting.”

Since January 2001, you can explain the move in the price of oil largely as a function of increasing money supply. As the amount of money grows, the price of oil rises. In fact, almost 87% of the move in the price of oil can be explained by the increase in money supply:

$100 per barrel oil is what we would expect to see, given this relationship between the oil price and money supply.

“Given that we are still in the midst of a credit crisis of sorts,” Mayer continues, “it seems unlikely the Fed will tighten money in any way at all. That leaves a clear path for the price of oil and commodities to continue to rally in nominal terms.

“The other thing to remember — and people forget this by worrying excessively about a U.S. recession — is that the story of oil is no longer a U.S.-centric story.”

Here we reprise a chart we’ve shown you in The 5 before. It’s worth keeping in mind.

China and India are consuming oil at a rate the U.S. did in the early years of the 20th century. Even if they move half the distance Hong Kong or South Korea have — that’s strong demand with or without a recession in the U.S.

It’s worth noting Chris’ readers took 112% on half the shares in his Bakken energy driller yesterday. That’s 112% in three months. This story is just beginning, if you ask us. Get more details here.

Retail gasoline prices are at record highs yet again this morning. The national average is now $3.81. Diesel soared to over $4.55 yesterday.

But don’t worry. Congress is on the job. Yesterday, the House approved legislation that would effectively allow the Justice Department to sue OPEC.


“The House today with a strong bipartisan and veto-proof margin,” beamed Nancy Pelosi, “voted to hold foreign oil cartels and Big Oil accountable.” Apparently, the president’s embarrassing trip to visit the Saudi’s last week wasn’t enough for them.

Pelosi brings new meaning to the term “Grin f&*k”

Under the proposed bill, OPEC nations would be subject to the same antitrust laws as U.S. companies. Should that occur, the U.S. government could sue OPEC members for any sort of purposeful supply or production restrictions. After all, as Americans, it’s our God-given right to buy and consume as much of the world’s oil as we see fit, at a price we choose.

Hey, maybe if we sue Iran and Venezuela, they’ll refuse to pay… then we can legitimately invade and kick the crap out of them too. What’s a two-front war when you can have four?

“Americans are facing real economic hardships that cannot be overcome with symbolic legislation,” said Texas Rep. Nick Lampson, one of only two Democrats sane enough to vote against the bill. “This bill would do little more than create another layer of bureaucracy at the taxpayer’s expense.”

Congress is dragging the CEOs of Exxon, Conoco, BP and Chevron up to Capitol Hill again today, too. As if anything has changed since April 1, 2008 — the last time Congress wasted everyone’s time trying to appear like it’s “doing something” about rising oil prices.

The first time this band of reprehensible oil thieves testified on Capitol Hill was Nov. 9, 2005. Back then, members of Congress were outraged that oil had risen to the bloated price of $58 a barrel. Or that Exxon Mobil had generated record revenues. Or that Americans were paying the unimaginable sum of $2.20 for a gallon of gas. Or all of the above.

Either way, good thing they acted when they did.

Gold edged itself back up to $925 today.

The Toronto exchange hit an all-time high of 15,000 and change yesterday. Go, Canucks.

Despite woes in some of the world’s most powerful boardrooms, somebody still has discretionary cash to spend. Otherwise, who’s going to buy this:

The chefs at The Wall Street Burger Shoppe have taken the crown for the county’s most expensive burger. A stone’s throw from the NYSE, traders can cash in their crude oil contracts and feast on this silly amalgamation of Kobe beef, foie gras, black truffles and — naturally — edible gold flakes.

“Wall Street has good days and bad days,” says co-owner Heather Tierney. “We wanted to have the everyday burger (for $4)… and then something special if you really have a good day on Wall Street.”

Heather said she expects to sell 20-25 of the $175 burgers each month.

“T. Boone Pickens said about six months ago that crude was going to $85,” remembers one reader. “Why should we believe him this time?”

The 5 responds: He said he thought oil would find support at $85, if it corrected. Either way, T. Boone is a speculator. Like anyone else, he doesn’t know what’s going to happen next, and it’s his money on the line if he’s wrong. However, he has made billions betting right in the past. Yesterday, his comment helped move the market. You can do what you like with the information.

“It seems to me that the decline in the use of jet fuel,” writes a reader, “has more to do with airlines going out of business, in addition to regional carriers cutting money-losing routes, than to a lower demand by travelers. Your comment left a vague impression that lower demand might be the reason for less jet fuel this year.”

“Aren’t airlines just like flying subways?” asks another, making the same observation. “Like the subway or the train, they publish a schedule and whether two or 200 people are on board — the train/plane has to leave, because it is due in the next station/city to discharge/pick up passengers. It seems to me the reduction in jet fuel usage might be attributed to the fact that several air carriers have ceased doing business recently. Less planes in the air — less fuel used.

“Judging from the crowds trying to get through security for my last trip between Newark, N.J., and Orlando, Fla., nobody seems to be flying less. Just an observation, and the conclusion seems logical, but I have no real proof. Keep up the good work.”

The 5: The only thing we know for sure about the airline business is we don’t ever want to be in it. But if consumer demand is increasing, why, as you point out, have six carriers — Eos, ATA, Aloha, Skybus, Frontier and Air Midwest — declared bankruptcy this year?

“High fuel prices are grounding aircraft from sea to shining sea,” our Peak Oil enthusiast Byron King recently asserted on CNN’s Glenn Beck Program . “I call it ‘Silent Spring.’ By next year, up to 70% of U.S. cities with airports will confront dramatically reduced airline service, if they have any air service at all.

“Major hubs will be O.K., if you call packed aircraft and high ticket prices O.K. Larger nonhub cities will still have service, but not nearly the selection of just a few years back. If you want to travel, the days of just ‘hopping a plane’ are over.

“Smaller towns will go back to waiting for the milk train to pass through. There will be no regular airline service. At best, small towns with some important feature (a manufacturing plant or some other piece of critical infrastructure) will see very intermittent service such as just a few days per month or (best case) a couple days per week.”

“Regarding Odyssey Marine and all those gold coins,” writes the last, “if the Spanish government can claim ownership, then why not the Central or South American countries that the gold was stolen from. The government of Peru is probably quietly rooting for the Spanish so that it can have its turn using an equally absurd argument.”

The 5: Heh. No argument here. We’d love to get a crack at those coins ourselves, even if only for the novelty of it.


Addison Wiggin
The 5 Min. Forecast

P.S. A recent CNN poll puts “rising inflation” as the No. 1 concern of average Americans today. With the election on the way, the economy should, you would think, take center stage. Unfortunately, most people don’t understand the sweeping changes going on in the global economy today.

Neither do we, exactly… but we’re willing to entertain any myriad of possibilities. That’s why we’ve invited some of the most forward-thinking minds on the investment landscape to join us in Vancouver at our ninth annual investment symposium, July 22-25. You’ll recognize Jim Rogers, Bill Bonner, Doug Casey, Chuck Butler, Rick Rule, James Howard Kunstler and a host of regular contributors to The 5 as featured speakers.

This year’s event promises to be historic… and seats are filling up fast. If you’re interested in joining us, get details here or call Barb Periello at (800) 926–6575 and tell her Addison said you can have one of the remaining seats.


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