Housing Finds New Low, Prime Mortgage Defaults Soaring, Another $800 Billion Bailout, Gold’s Historic Rally, and More!

  And now we’re seeing default rates among “prime” borrowers soaring.

3.07% of prime mortgages were in foreclosure or at least 60 days late on payments in the second quarter, says the Mortgage Bankers Association. The previous record of 1.9% was set back in 1985.

“Jumbo prime” mortgages are getting it the worst. Those super-sized loans, so big even Fannie Mae and Freddie Mac wouldn’t securitize them, are defaulting at a rate of 7.5%. That’s three times larger than during the same period in 2007.

  Not surprisingly, the FDIC’s “problem list” of banks rose to a 13-year high today. 171 mystery institutions are now on its naughty list, the most since 1995. Since the end of the second quarter, the FDIC has added another 54 institutions.

Historically speaking, 13% of the banks in this list end up failing. Since this crisis is a bit of a historic exception, we’ll bump it to 20%… thus, another 30 banks or so could fail without surprising us. Over 1,000 bit the dust during the S&L crisis, so we’ve got some room to grow.
 
Total assets of these financials exceed $115 billion, up $37 billion from the second quarter. Of all the banks the FDIC oversees, over 2% are now on its “problem list.”

  The American economy shrank at an annual rate of 0.5% in the third quarter, we learn today, worse than the Commerce Dept.’s first guess of a 0.3% contraction. The market gave up a hefty portion of its pre-market gains on the news, but the additional contraction was in line with estimates.

  In response to all these economic indicators, the president-elect promises to give the economy the “jolt” it needs to get back into shape.

"The way to think about it is short term, we’ve got to focus on boosting the economy and creating 2.5 million jobs, but part and parcel of that is a plan for a sustainable fiscal situation long term, and that’s going to require some reforms in Washington," Obama said at a news conference introducing Timothy Geithner and Lawrence Summers, two of his top economic advisers.

"I want to see [another stimulus package] enacted right away. It is going to be of a size and scope that is necessary to get this economy back on track."

Back on track… to what? we ask, sheepishly. Credit-fueled consumer spending and another mortgage bubble?

  Obama refused to estimate the price of the second stimulus package, only saying that it would be “costly.”

"I believe we need a pretty big package here,” offered New York Sen. Chuck Schumer in support of bailout package he’s trying to get ready for Obama by Inauguration Day. "I think it has to be deep. In my view, it has to be between $500-700 billion, and that’s because our economy is in serious, serious trouble."

"It’s a little like having a new New Deal, but you have to do it before the Depression. Not after."

   “If we already have a big deficit,” Obama asked himself aloud at yesterday’s press conference, “and now we’re adding an additional stimulus, how are we going to pay for all that? The right answer is that we have to first focus on getting the economy back on track… We’re going to see a substantial deficit next year, bigger than we’ve seen in a very long time.”

The Bush administration is already looking like they exercised spending restraint.

The conventional wisdom says that Geithner and Summers are the right guys to help provide large-scale stimulus to the economy and fiscal restraint once the economy shows signs of improvement.

There’s a lot of faith floating around Washington and the financial press that the economy has somewhere to improve back to. But not a lot of ideas about where that might be.

  For their part, the Federal Reserve announced two new bailout plans this morning. Prodded by congressmen and their debt-laden constituents, the Fed first revealed a new worrisome acronym: the TALF.

The Term Asset-Backed Securities Loan Facility (TALF) is a program designed to stimulate the same asset-backed securities market that got us in this mess. The New York Branch of the Fed will led up to $200 billion to anyone willing to issue AAA paper backed by recently originated consumer and small-business loans. Ideally, this would encourage creditors to make more loans so they can turn around and use this free money to securitize them.

If this wasn’t complicated enough, the Treasury will cut the Fed a $20 billion check from the TARP, which will serve as credit protection for the new program.

  And in a separate program (no nickname for this one), the Fed said it will buy a few illiquid mortgage-backed securities from Fannie Mae and Freddie Mac. You know, just a small loan between friends… up to $500 billion.

“This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally," said the Fed’s statement. Yeah, doesn’t make sense to us either.

And just to remind you that there is truly limitless money to spend, the Fed promised to also buy $100 billion in Fannie and Freddie debt. Since both companies are controlled by Uncle Sam, we don’t see how that’s much different than writing Hank Paulson a check…

But what’s another $100 billion? Not like they’re paying for it.

  Including the Fed’s announcements today, but not Obama’s untabbed stimulus, the U.S. government has pledged over $8 trillion in relief to this credit crisis.

With CNBC’s help, we put the cost somewhere in the neighborhood of $4.2 trillion last week. But this $8 billion number, from Bloomberg, totals not how much the Fed and Treasury have spent, swapped or loaned already, but the “limits” of how much they’ve pledged to date.

Bloomberg’s lawsuit against the Fed, asking to see where all that money is being spent, is still pending.

  Somehow, all of this anxious hand-wringing hasn’t put much of a damper on the stock market. In fact, the U.S. equity market is near the end of a spectacular bear market rally.

Friday and Monday were the best two days for U.S. stocks since 1987. The S&P 500 is up a remarkable 13%, with all but 35 stocks benefiting by the two-day rally. All 10 S&P sectors gained, but financials led the way after the government made it quite clear that it would not allow Citi or any other mega bank to fail… regardless of the cost to taxpayers.

  “Don’t get too excited,” cautions our options adviser John Wayne Burritt. Mr. Burritt warned last week the S&P 500 had broken below key technical support at 769. That’s bearish for a couple of reasons:

“First off, a break below 769 means that the long-term technical support is now out the window. In fact, to find the next level of support, we have to go back to mid-1997. The level?: 734 on the S&P 500!

“Plus, the S&P 500’s break below 769 means the stock market has now given back 100% of its gains collected October 2002-October 2007. That’s a massive reversal and a very bearish factor.

“While the S&P did take out long-term support, it could easily bounce from here and shoot higher. But I don’t think that will amount to much. The ongoing fundamentals of the markets are still too weak.”

Bottom line: Downward pressure continues to mount on the broader U.S. stock market and the retail sector. Burritt suggests holding onto your put positions. And holding onto your hats, as well. “It’s going to be a wild ride!” he says.

  Like equities, gold is enjoying a big bear market breakout. The spot price is up almost $100 since Friday. You can buy an ounce this morning for a less cheap $820.

“I checked my records for the past 20 years,” notes James Turk of goldmoney.com “and found only one other instance when gold climbed $50 or more in a day. Interestingly, the other occurrence was on Sept. 17, 2008, barely two months ago. That rally also took gold back above $800.

“Gold itself is telling us two things. First, there is an enormous short position in gold. Huge rallies occur for a reason, and short covering is always a factor. In order to limit their losses, shorts will bid up the market in a desperate attempt to cover their position. The rule of thumb is straightforward — the bigger the short position, then the bigger the rally.

“Second, and more importantly, these huge rallies are signaling that gold under $800 is too cheap. A higher price is needed to bring supply and demand back into balance. Gold remains in a bull market, and so does silver. National currencies are in a bear market. Get ready for the next leg in the precious metal’s ongoing bull market.”

  The dollar is showing signs of a top lately. As the market booms, cracks in the greenback’s veneer are looking as visible as ever. In fact, the dollar index is plummeting as we write, down a full point this morning and another point and a half from yesterday’s high. This morning, it’s clinging to a score of 85.

  “With the stock market rallying,” explains Chris Gaffney from his EverBank perch, “currency investors felt comfortable enough to pick up some bargains in the Brazilian real and other higher-yielding currencies. This is the pattern that we have been seeing over the past few weeks, and one that looks to continue through the end of the year. I don’t personally think this is the turning point for the dollar, as we will likely see some more safe-haven buying before the end of the year.

“But longer-term investors can still take advantage of the prices on some of the beaten-down currencies that still have good fundamentals. I would include the Nordic currencies of Sweden and Norway, along with the commodity currencies of Australia and Brazil.

  “A capital gains holiday sounds initially attractive,” says a reader, responding to yesterday’s inbox. “But let’s just suppose that it happens and everyone rushes into the market, buying like crazy and then selling to others who buy lower and sell higher, etc. Isn’t this a Ponzi-like, fluff-financial feeding frenzy akin to what the financial geniuses were doing that brought us the crisis in the first place?

“There would be no new actual production of goods and services happening if the market were to rise; there is no new wealth actually being created, etc. We would be just ‘fluffing’ the system — everyone will temporarily feel richer, and then when the realization arises that it is time to find the exit, the spiral down will begin again.

“Two conclusions: Be careful what you wish for, and if it sounds so simple and too good to be true, maybe it is.”

  “Wouldn’t it just be cheaper,” our last reader fires off a quick question, “for the Federal Reserve to pay off ALL mortgages in the country?”

The 5: Jeez. As of July 2008, the Fed put the value of all the mortgages in the country at about $11.2 trillion. And as we noted above, Bloomberg now puts the commitment of the Fed and Treasury combined at $8 trillion. At the rate we’re going, you’re right. They should just offer the $8 trillion up and buy out all the banks at a discount. Now that would be “fluffing” the system, eh?

  “I enjoyed your plutocracy comment and followed the link you provided to Wikipedia,” notes another. “It would seem to me that a plutocratic America is really nothing new, despite the best efforts and intentions of some of the Founding Fathers. I think you might more accurately have said, ‘Welcome to the age of kleptocracy in America.’

“I mean, that a nation is indebted to the tune of trillions to a private bank (the Fed) in order to bail out the national banks (privately owned and controlled by the same people)!! If this is not the rule of thieves, then it is surely utter madness, nay?”

What a mess.

Addison Wiggin
The 5 Min. Forecast

P.S. We’ll be taking the next few days off to enjoy the Thanksgiving holiday. We’ll return on Monday to continue chronicling the end of the world as we have known it. In the meantime, enjoy your Emergency Retirement Recovery Series Webinar… it’s alive, right here… and free.