The Second Wave of the Housing Crisis, Profiting from Carbon Caps, U.S. is “out of money,” Lunch with Ron Paul and More!

by Addison Wiggin & Ian Mathias

  • The “second wave” approaches land… the latest look at the housing crisis yet to come
  • Dan Amoss on an investment likely “to trend upward over the next few years”
  • Chris Mayer identifies “the most expensive thing to hit the economy since the financial crisis began”
  • Dollar suffers historic sell-off, falls at rate unseen since Bretton Woods breakup
  • Plus, one takeaway from our meeting with Ron Paul


  Almost a year ago today, we forecast the “second wave” of the housing crisis — a flood of option and Alt-A ARMs due to resent in early 2010. This chart was our pièce de résistance:

Today, we admit we were wrong… the second wave of the housing crisis will likely be even bigger then we expected. Analysts at Credit Susie have updated this cult classic chart. Check it out:

Now, they’ve done you no favors with this whole color scheme/format change, so here’s the meat of the updated chart: Credit Suisse added an “unsecurtized ARM” category to the coming wave of resets, a move that bumps monthly loan resets up $2-5 billion. Monthly resets are now larger across the board.

What’s more, the “second wave” crisis that was thought to be over in late 2011 is now crashing down well into 2012. According to the group, the swell of option and unsecuritized ARM resets will not only be bigger than the subprime fiasco, but now it’s forecast to last twice as long. Hmmm…

  “Housing is typically the sector playing the starring role in most U.S. economic recoveries,” writes the Richebacher Society’s Rob Parenteau, “along with consumer durables like autos, furniture and electronic appliances. Public infrastructure plus cost-cutting capital equipment expenditures will have to pull more of the load this time around, but these factors won’t kick in until next year.

“There is still no sign of life in the mortgage applications for new purchases — at best, they are stabilizing in recent weeks. Refinancing activity remains strong, although off the earlier highs. We conclude this sector, which tends to lead the business sector, and should be a beneficiary of low interest rate policy moves, is, at best, stabilizing of late. That is, stabilization in activity terms, or production and sales — to be sure, home price deflation still reigns, and prime mortgage delinquency and default rates are, consequently, still climbing.”

  “Job Losses Push Safer Mortgages to Foreclosure,” headlines The New York Times. According to the Old Gray Lady, “From November to February, the number of prime mortgages that were delinquent at least 90 days, were in foreclosure or had deteriorated to the point that the lender took possession of the home increased more than 473,000, exceeding 1.5 million.”

  Heh, and when it rains, it pours: Home prices fell another 2.2% in March, reports the latest rendition of the S&P/Case Shiller home price index. In other words, the home price “rebound” recorded in February is officially moot.

On an annual basis, national home prices are down 19%, a record crash. Let’s go to the chart:

  Traders will be keeping a close eye on Treasury bond prices this week. As we highlighted Friday, bond yields have broken out to the upside… a dangerous scenario for country that is admittedly “out of money” (see below). The yield on a 10-year note closed at 3.455 Friday, its highest level since November.

“The Fed will not be able to set an absolute ceiling for Treasury bonds yields,” writes our resident CFA Dan Amoss, “unless it wants to follow in the footsteps of Zimbabwe’s central bank. The Fed can still monetize long-term Treasuries, but it’ll have to pick its battles carefully, or risk quickly destroying confidence in the U.S. dollar. It’ll probably try to suppress yields in incremental fashion, with the goal of preventing Treasury bond yields from skyrocketing swiftly.

“Every bond investor knows that trillions of dollars worth of Treasury bonds will need to be sold to finance deficits over the next two years alone. These bond investors will lower their bids at Treasury auctions in anticipation of the impending tsunami of new Treasury supply. Why buy now if you expect Treasury bond supply to overwhelm demand? This means that yields on Treasury bonds should trend upward over the next few years.”

Nevertheless, the U.S. government still plans to auction a stunning $162 billion in debt this week. There’s more than one way to profit from this runaway trend… many of which we’ve highlighted in the latest installment of our Retirement Recovery Series. Check it out — completely free of charge — here.

  “We are out of money now,” President Obama surprisingly stated on Saturday. “We are operating in deep deficits… This is a consequence of the crisis that we’ve seen and, in fact, our failure to make some good decisions on health care over the last several decades.

“So we’ve got a short-term problem, which is we had to spend a lot of money to salvage our financial system, we had to deal with the auto companies, a huge recession which drains tax revenue at the same time it’s putting more pressure on governments to provide unemployment insurance or make sure that food stamps are available for people who have been laid off.

“So we have a short-term problem and we also have a long-term problem. The short-term problem is dwarfed by the long-term problem. And the long-term problem is Medicaid and Medicare. If we don’t reduce long-term health care inflation substantially, we can’t get control of the deficit.”

What do they say… the “first step toward recovery is admitting you have a problem”? Let’s hope he can stay on the wagon, so to speak.

(We’re spotting a trend here too… when ever cornered with a debt question, President Obama turns it into a pitch for healthcare reform. Investors take note.)

  GM’s goose is cooked. Despite borrowing another $4 billion from Uncle Sam on Friday, the company announced today that it will need at least another $7.7 billion by next Monday to stay afloat. On top of that, their debt-to-equity deal with bondholders is not expected to come to fruition by its deadline — midnight tonight. Billions more in supplier bills come due at the end of the week… without a massive government bailout, GM will likely go into bankruptcy before President Obama’s June 1 deadline. 

  A climate change/carbon cap bill has cleared the House Energy Committee. What’s called the Waxman-Markey bill is quickly slithering its way through the legislative process… much to the dismay of our resident value investor:

  “This looks likes the most expensive thing to hit the economy since the financial crisis began,” warns Chris Mayer. “First off, the stated objective of cutting carbon emissions by 83% by 2050 will go down in history as outrageous — akin to when Who drummer Keith Moon drove his Lincoln Continental into the pool at the Holiday Inn. I think members of Congress must be smoking the same thing Moon was.

“To meet the Waxman-Markey bill’s goals would mean we have to go back to a carbon footprint about as big as the Pilgrims’ at Plymouth Rock circa 1620.

“So I think the bill is absurd. I think it is also a great blow to what is left of American industry. But who cares what I think? As the great Jeffers wrote, “Be angry at the sun for setting/ If these things anger you.” This is the way the world works. Politicians do dumb things. We have to play the ball where it is. And that means we have to figure out who wins and who loses.

“Among the winners, look to agriculture and trading desks. Agriculture, for whatever reasons, is exempt from the new rules. So farmers don’t have to worry about those manure pools out back or the flatulent cows emitting methane all over God’s green meadows. Those big tractors? Burn up that diesel!

“And as if the government doesn’t help financial firms enough, it is going to hand them a nice tomato in trading carbon credits. The head of Morgan Stanley’s U.S. emission trading desk said: “Carbon, while relatively small, is a critical piece of our commodities offering.” So some financial firms with trading desks in carbon get a nice little payday.

  Oil’s caught up in a volatile trade today. Traders have to digest the North Korean missile episode, the bottomless U.S. economy, as well as the latest from OPEC. Saudi oil minister Ali al-Naimi called for $75 barrels in the near term, and also issued this ominous forecast: “If others do not begin to invest similarly in new capacity expansion projects, we could see within two-to-three years another price spike similar to or worse than what we witnessed in 2008."

In the quirky world of commodities trading, that news puts crude oil at $61 a barrel, down just a bit from Friday.

  Stock traders are brushing off all the bad news today. While North Korea’s latest nuclear test phased overseas markets, the Dow and S&P 500 have forged ahead, up 2% as we write.

Housing? GM? Waxman-Markey? Bond market? Evidently of little concern to Wall Street today. It’s the latest consumer confidence number that’s given traders good vibes… the Conference Board’s measure of consumer confidence soared 14 points in April, to 54.9. That’s an eight-month high and the biggest monthly move in six years.

  The dollar index just capped off its worst week in 24 years. Spooked by the ailing U.S. economy and recent Treasury bond woes, currency traders sold the dollar index down 5.1% last week, its worst since 1985. If traders would have sold the dollar index down just 0.1% more, it would have been its worst showing since 1973, when the Nixon administration formally abandoned Bretton Woods.

Thus the euro is up a full nickel since this time last week, to $1.40. The pound is up 6 cents from last Tuesday, to $1.59.

  No surprise, gold is sitting pretty. Traders are taking some profits this today as the market rallies, but the spot price is still above $950 an ounce, barely below a two-month high.

  “Apparently, the fate of the dollar rests in Rep. Barney Frank’s hands,” Addison writes us today, taking a break from his Financial Reckoning Day update. If you recall, Addison (along with Bill Bonner and Bruce Robertson) met with Ron Paul Thursday in Washington. As promised, Addison pressed Paul about HR 1207, his proposed bill to audit the Fed.

“Dr. Paul has introduced legislation to audit the Federal Reserve,” Addison reports, “something which, believe it or not, cannot be done under current law. He has gotten 179 fellow representatives to sign on for support. But as chairman of the House Banking Committee, the decision to bring the bill to the floor for a vote rests with Barney Frank.

“‘Most of these guys are just trying to figure out a way to keep their cushy jobs,’ said one staff member we talked to. ‘You’d be surprised what a few well-placed phone calls and letters can do to move legislation forward.’”

We don’t go in for politics much here at The 5, but a short look at the list of supporters reveals the bill is already being tagged along partisan lines. A few members of the Democratic Party have been wondering what’s going on behind closed doors at the Fed too, as have the muckety-mucks at Bloomberg. If you’re interested in forcing the issue, Rep. Paul has provided sample letters you can send, suggests where you can send them and explains the purpose of the bill on video here.

Thanks for reading,

Ian Mathias

The 5 Min. Forecast

P.S. If you haven’t heard about our Memorial Day special offer, here’s your last chance: We’re offing six free months of our most expensive service to help you kick off a summer of profits. But at midnight tonight, the offer’s off the table… be sure to take advantage now, right here.



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