An interesting look at the housing crash… could home prices fall another 30%?
FDIC hints at “bad bank” creation… Dan Amoss on how it will affect our government and your portfolio
Obama bill near $900 billion… Chris Mayer on the “Great Suppression” of our generation
Bill Jenkins says the dollar will rally, despite it all
Global scarcity hits home… targets chicken wings, Girl Scout cookies
Plus, readers speak out against stem cell science… Patrick Cox responds
Housing prices have returned, on average, to 2004 levels:
Now that the blowoff phase of the bubble has been erased, we ask, how much further should home prices fall? This is the “credit crisis” after all, the “worst recession since the Great Depression.”
The stock market has pulled back to early 2000 levels… who’s to say housing shouldn’t do the same? That would mean another 30% fall in prices, at least.
Or what if they fell to the pre-“irrationally exuberant” days of 1995? That’d be a 50% fall from here…
Of course, a continued plunge in home prices would continue to wreak havoc on banks … whose books are still bogged down with home loans and mortgage-backed securities, despite the billions in TARP money having already been spent. Hence this development:
The FDIC wants to set up the much hyped “bad bank.”
According to Bloomberg this morning, FDIC chairwoman Shelia Bair is lobbying to lead what she calls an “aggregator bank,” essentially a Resolution Trust Corp. of our generation.
“The purpose of the ‘bad bank,’” explains Dan Amoss, “would be to flush most of the junk securities and loans clogging up the banking system, placing them in quarantine until a major refinancing initiative spurs a recovery in the value of these securities. If some of the securities don’t recover in value over time, it doesn’t really matter to the government; there’s no need for them to remain solvent in an accounting sense. In fact, Uncle Sam can never be insolvent as long as the dollar is accepted as a currency. The real cost will come in the form of diminished faith in the dollar and much higher gold prices.”
Heh, and how will the FDIC price these toxic assets? Who knows… the same task was enough to convince Hank Paulson to give the bailout money directly to the banks in exchange for an ownership stake last November.
"The amount of working capital you’d expect the government to take into this would be around $3-4 trillion," Simon Johnson, a senior fellow at the Peterson Institute for International Economics, told CNN — the only estimate we’ve seen on the cost of such an institution.
Either way, the way things have been unfolding, the new bank will overpay, and taxpayers will get stuck with the tab.
Meanwhile, the Obama stimulus bill is quickly approaching $900 billion.
The new president strolled over to Capitol Hill yesterday to bribe (really, that’s the word) congressmen ahead of a House vote on the bill today. The Obama administration stuffed all kinds of last-minute pork into the bill, including a $69 billion tax break aimed at wooing Sen. Grassley, the ranking Republican on the Senate Finance Committee.
The House is expected to vote on the bill today, and it will likely pass. Should the Senate follow suit, we’re sure it will be celebrated as a “historic display of bipartisanship.”
“I think of this period as the ‘Great Suppression,’” says Chris Mayer. “The government keeps trying everything it can to suppress the unfolding economic bust. Whether the Great Suppression succeeds or not is beside the point. What concerns us is that its actions will have consequences in the marketplace. And as investors and speculators, we have to think about what those might be.
“It’s sometimes uncanny how history repeats. Historian Frederick Lewis Allen writes about the New Deal of the 1930s in his book The Big Change: ‘It rewrote a good many of the rules of the economic game as played in America. The New Deal continued to prop up ailing corporations through Hoover’s RFC; made arrangements to prevent near-bankrupt firms from going broke; aided farm owners and homeowners in meeting their mortgage payments; underwrote the financing of new housing enterprises; insured bank deposits…’
“It also went into the business of stimulating the economy directly by ‘building dams, bridges, parkways and playgrounds on a grand scale.’ If FDR walked the Earth again, Obama’s stimulus would look familiar.”
So what should investors be seeking?
“‘Shovel ready,’” continues Chris, “is the hot new phrase in Washington these days. It means a project is all set to go as soon as the money arrives. The list of projects for Obama’s plan are shovel ready — so they say. As soon as Congress approves the deal, the money goes right to work, like a needle sticking into a vein.”
Traders love today’s bailout developments, as financials are leading the way in a broad rally today. Wells Fargo threw another log on the fire this morning, boldly announcing that it will not seek any more TARP funding. Despite posting a $2.6 billion fourth-quarter loss (nice work, Wachovia), the company said its on solid footing and doesn’t want anymore handouts from Uncle Sam. Bravo.
The Dow opened up over 100 points. Most banks are up at least 10%.
“Economies are contracting, consumers are spending less, job losses are increasing,” sums up our currency adviser Bill Jenkins. “This will, of course, lead to more of the same, until Mr. Market feels that everything has come back into balance. The big question on everyone’s mind is will they come back into balance? For decades, the United States has been the world’s biggest economy, and the U.S. dollar has been the reserve currency. To us, that has represented some sort of equilibrium. But now that the United States seems hellbent on destroying the reserve currency of the world, what will become of things?
“Into the near future, I believe we will continue to see more dollar strength. The ways of men change slowly, as do their perceptions. This is why so many lose their fortunes in trading. Just about the time the bull market has come to exhaustion, the general public jumps aboard, thinking the tide has turned for the long run, only to watch the bottom fall out of their plans. And contrariwise, people begin selling bottoms, only to see Mr. Market punish them for being so slow to react.
“The dollar is still the world’s reserve currency. People will continue to run to it because of uncertainty. Yet such a state of affairs cannot last forever.”
The dollar index remains around yesterday’s levels, just above 84.
Today we see some sovereign wealth fund activity for the first time in a long time. State-owned investment pools from China, Singapore, Kuwait and the UAE all crept from the woodwork to bid on the aircraft leasing unit of AIG.
AIG has been steadily dismantling itself since its faux bankruptcy back in September, with many assets being sold for pennies on the dollar. But the International Lease Finance Corp. happens to own about $55 billion in planes… evidently, a hot commodity around the world.
AIG has also recived bids from private equity bigwigs like Carlyle Group, TPG Capital and KKR. The first round of bids is currently being tabulated. The second round will happen sometime in February.
“Super Bowl Sunday has its own set of problems,” warns our resource trader Alan Knuckman, “A shortage of chicken wings has doubled prices in some areas.”
“It’s not that there is a chicken shortage. There are plenty of breasts and legs to go around, but wing demand has reached new heights. The cause is the bankruptcy of poultry giant Pilgrim’s Pride and the entrance of KFC and Pizza Hut mass marketing the tasty boney treats.
“I like to be optimistic, but I want to let my concerned Agora Financial friends know that this may be only the beginning of the problem. As the dollar goes down, commodities rise, pushing up corn and oil prices once again. Enjoy the game, and maybe get a freezer?”
Despite devastating price declines in the commodities and resource markets last year, Resource Trader Alert continues to post gains. Fact is, you can still make money, even if the market is going down. Find out how, here.
Last, if there were ever a sign that times are tough:
For the first time in their history, the Girl Scouts of the USA this week announced they will be making smaller cookies and putting less in each box… but still charging the same price.
“This was the only alternative,” outside of jacking up the price, lamented Girl Scout spokesperson Michelle Tompkins. According to the scouts, the cost of making and transporting cookies has risen more than usual this year while sales are expected to fall. Thus, you’ll find fewer Thin Mints, Do-si-dos and Tagalongs in you order this year… Lemon Chalet Cremes won’t be quite as big. Sigh…
“The lessons concerning the impact of the global market is a good one for the girls to learn,” Tompkins said “especially in these challenging times.”
“The Bush administration,” writes a reader responding to yesterday’s issue , “opposed federal funding only for research done on embryonic stem cells, not adult or cord blood stem cells. There are currently many diseases being treated successfully with adult stem cell- and cord blood stem cell-derived therapies and, despite all of the hype, NONE from embryonic stem cells.
“In fact, research and experimentation done with embryonic stem cells on mice has shown the growth of out-of-control cancers using embryonic stem cells. Imagine that: Go against God’s natural design and all hell breaks loose; work within the confines of natural law and respect for human life and good things happen!
“This is an extremely important moral and ethical distinction between embryonic and other stem cells — embryonic stem cell research requires the destruction of the embryo, the destruction of a human life — adult and cord blood stem cells do not destroy human life.
“You have a responsibility to your subscribers to not downplay or inaccurately report on these extremely important differences.”
“Why are you lying,” asks another, “misleading and deceiving readers about stem cells? First, you must differentiate about the difference between embryonic stem cell research and adult stem cell therapy. Not one efficacious treatment using embryonic stem cells has been found. In fact, at least six people have died because of embryonic stem cell therapy. President Bush limited embryonic stem cell research, but pushed vigorously adult stem cell research through which over 70 astonishing and very useful applications have been applied. All the promise lies with adult stem cell research and its new revelation using skin cell modification. Embryonic stem cells are dead in the water. If my daughter were dying of some disease, I would not allow embryonic stem cell therapy to be used.
“You, sir, should be ashamed of your propaganda and deception regarding this new medical field of research!”
The 5: We appreciate your candor, and turn for a response to Patrick Cox, who’s got his finger on the pulse of the changes in this industry: “I’ve covered this issue in depth in my newsletter,” writes Patrick “and alerts, too. iPS cells have made embryonic stem cells fundamentally obsolete.
“Still, the [company name] spinal cord therapy is based on embryonic stem cells, because that’s all that was available when scientists started working on stem cell cures.
“Incidentally, none of the cell lines in use were ‘farmed.’ These cell lines are based on embryos that were created in fertility treatments, but then discarded because the client has already accomplished the goals of the treatment: pregnancy. This happens all the time; the unutilized embryos are just discarded.
“It is irrational to say that it is all right to create and discard embryos in order to achieve pregnancy, but not to use the cells (destined for destruction anyway) for therapeutic purposes. If there is unethical behavior, it is the use of cells for fertility purposes.
“There are elements of the pro-life movement, however, that are adamantly opposed to stem cell therapies because of their ideology. I’m sympathetic, but the fact remains that the Obama administration has kicked out the jams regarding stem cells. The science is legitimate.”
The 5 Min. Forecast
P.S. If you’re interested, we posted a discussion of the “investment” opportunity, as opposed to the moral probity, represented by changes in the research funding policy. You can read it free of charge, here.