The Second Housing Crisis, Bonner’s New Pair Trade, Buffett’s Cartoon and More!

by Addison Wiggin & Ian Mathias

  • Prominent bank predicts another housing meltdown: Half of U.S. mortgages will soon be underwater
  • Hell freezes over… Bill Bonner says, “Buy the dollar”
  • Patrick Cox with a countercyclical niche sector primed for profits
  • Want a raise this year? Better work in Washington
  • Buffett’s latest venture: Kids cartoons?
  • Plus, 5 readers are no fools… two worthy cash-for-clunker rebuttals


  According to one of the world’s biggest banks, 48% of U.S. mortgages will be underwater by 2011. Man… and the critics call us “doom and gloom”?

But that’s the word from Deutsche Bank this week, which claims the number of U.S. mortgages worth more than the actual value of homes is going to double in the next couple of years. In line with our forecast yesterday, the bank is especially worried for prime and jumbo borrowers. 41% of prime borrowers will be underwater by 2011, says the DB forecast, up from 16% at the start of this year. Jumbos will be even worse, with a 46% underwater rate.

“The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding," said the bank’s report.

How significant? They’re expecting home prices to fall another 14% by 2011, for a total crash of 41%.

(By the way, we think this second wave of the housing tsunami is going to wash out one big bank that most people think is safe and sound. We’re brewing up a special report on the matter… stay tuned.)

  Yet the band marches on in the stock market today. Despite a small loss yesterday, the S&P 500 is up 1.5% this week, 11% for the year.

Major indexes looked as though they might retreat today… tech bellwether Cisco reported lousy earnings after yesterday’s close, and the latest from Target and J.C. Penny show a reluctant consumer, at best.

But this morning’s unemployment claims number is keeping shares afloat. Evidently 550,000 new claims for jobless benefits is a bullish indicator for tomorrow’s jobs report. The Street expected a smaller drop from last week’s 588,000 claims. As we write, the market is around breakeven.

  Still think this isn’t a bear market rally? Shares of AIG have been skyrocketing. The company — technically insolvent and 80% government owned — shot up 60% yesterday and is up another 26% as we write. Traders are lathered up over AIG’s new CEO and its earnings announcement tomorrow. From a low of $6 a share in March, AIG has more than quadrupled. One shares goes for $25 today.

  “No one knows how long this rally will last,” writes Bill Bonner, “certainly no one here at The Daily Reckoning headquarters. It will continue until it runs out of gas. That could be tomorrow. It could be months from now.

”It will run out of gas sooner or later, and probably this fall. A real, durable bull market would require an economic boom — a genuine recovery. We don’t see that happening…

”And when the recovery turns out to be a clunker, they’ll probably put popular trades into reverse. Oil will go down; the dollar will go up.

”You want to speculate, dear reader? Sell oil… buy the dollar. Wait for another crash this autumn.

“I expect this rebound to end… and for stocks to go down, possibly down a lot. The dollar is what people want when they are frightened. The dollar is going down now because they think there’s no longer anything to be frightened about. But when this recovery disappoints them, investors are going to be more frightened than ever. Because they’ll realize that we’re faced with a depression… and that the feds can’t do anything about it. They’re going to rush to the safety of dollars… at least for a while. Probably long enough to shake out a lot of gold buyers.”

  Maybe another “buy” for when the going gets tough: ”Health care stocks are traditionally countercyclical,” says our tech analyst Patrick Cox. “This isn’t surprising since consumers tend to cut back on everything else before sacrificing medical care. It’s no accident that biotechs in the Breakthrough Technology Report portfolio have done well.

”There is, however, another aspect of companies that control breakthrough medical technologies that makes them immune to downturns: Their initial customers include extremely wealthy early adopters.


”The number of high net-worth individuals — people controlling at least $1 million in assets excluding primary residence — has been growing dramatically for decades, far outpacing inflation. They and their immediate families comprise a population that may exceed 25 million people. Spending on luxury items by HNWIs and family members remains strong. While the biggest concentrations of HNWIs are still in North America and Europe, the fastest growth, by far, is in China and India.

”The market segment that continues to buy Ferraris, yachts and private jets will also buy regenerative therapies for themselves and their loved ones. HNWIs are largely immune to the big economic fluctuations. When stem cell therapies bestow the power to rejuvenate hearts, livers, skin and cartilage, even at sky-high prices, there will be millions and millions of happy buyers.”

Will you stand to make a profit? Patrick’s readers are very well positioned in this niche. In fact, we’re expecting some big news from one of his favorite biotech plays in the next few days. It’s such a big deal to Patrick that we’ll be sending an investment alert to you tonight… watch for it.

  Looking for a raise this year? Better work for the government…

In another sad sign of the times, Washington D.C. is now the number one metro area in America for those seeking a salary bump, says a study from WorldatWork, a group of HR companies. 77% of companies operating in the District plan on giving raises this year, says the group, second only to the Tampa area.  And the average raise in D.C. will be 2.3%, the highest in the country.

We can’t say exactly what our forefathers had in mind when they spawned this union, but we really doubt it was a table like this:

  The dollar found a new 2009 low yesterday, but is back on the rise today. Some mild trepidation in the stock market has pulled the dollar index from a yearly low of 77.5 to 77.8.

  The British pound is the currency story du jour. The pound plummeted almost 2 cents in a matter of seconds this morning after the Bank of England announced it would buy $85 billion worth of U.K. government bonds… in finance parlance, they plan on even more debt monetization. According to the central bank, the recession is “deeper than previously thought.”

“Just when we thought we had the BoE pegged,” writes our currency advisor, Bill Jenkins, “they tell us that the world crisis is worse than we thought, and they expand their quantitative easing by 40%.

“The pound sterling tanked this morning, making $1,500 for every trader who was short one standard lot (in a matter of just 5 minutes)! I always say, read a math book! These things don’t add up. Read a history book! What they’re trying has never worked anywhere else, and it won’t work here.

“So kudos to the BoE today for standing up and telling us the truth… the problems are worse than we thought. Sadly, their cure to the illness will only make it worse.”

Want Bill’s help trading this trend? Check out Master FX Options Trader here.

  Mild dollar strength and a pause in the stock market rally has oil buyers tapping the brakes. The light sweet stuff is down a buck today to $71 a barrel.

Gold is holding strong. At $965 an ounce, the spot price is right around yesterday’s high.

  And we’d be crazy to skip this one: Warren Buffett’s backing a cartoon series, starring his animated self.


This fall, Buffett will play (a notably leaner) version of himself in “Secret Millionaire’s Club,” an AOL cartoon series that targets 6-11 year olds. In each episode he’ll help a demographically diverse group of kids who have decided to open a candy store together. It’ll “entertain kids and deliver a message,” Buffett promises. Some leaked themes are the dangers of credit card overuse and the virtue of fiscal patience.

Heh, we’d like to have some more fun with this… it’s certainly an easy target. But it’s also an important effort, and we hope it makes some kind of a difference — even if the only kids that watch it do so at the insistence of their BRK.A. shareholding parents. We were taught a whole barrage of useless information in our formative years… while financial prudence might not be as exciting as a bug collection, we’d rather have tomorrow’s leaders know how to make a budget. They’ll be up to their noses in our fiscal BS… they better be ready.  

  “I’m angry over the waste and stupidity inherent in the Cash for Clunkers program,” writes a reader responding to yesterday’s inbox. “A ’clunker’ is an asset, maybe of limited value but still of value for what it can produce. Probably the loan to purchase the clunker was paid off years ago. Therefore it represents immediate ’net worth’ or ’wealth.’ As a society we need more debt-free assets and less debt. Because the Cash for Clunkers program requires that the clunkers be destroyed, it is an insane program which increases federal borrowing in order to destroy societal wealth. Clunkers deliver miles. Your reader’s 1982 BMW with 165K miles probably has another 50K miles to go. That remaining capacity could be of real value to a person who cannot afford a new car.


“The federal government is trying desperately to hold on to economic times past which are gone forever due to the leveling of world wages and the shift of manufacturing capacity to other parts of the world. We become more like Mexico every day whether we like it or not. The true value of clunkers will increase as time goes on. The stupidity and ineptness of government infuriates me.”

  “In San Rafael, Mendoza, Argentina, where I live,” writes another reader, “I drive a 1967 Ford F100 pickup. It has a 1987 Perkins diesel engine, and I use it every day to work hard in very rough dirt roads and off-road too. I bought it less than a year ago for about the equivalent of US$7,500. If I were to sell it today I would get more for it as these are very sought-after vehicles due to their original tough manufacturing.

“A lot of cars here are recycled and re-recycled many times over by skilled mechanics, and these compete well with new vehicles that are very expensive. I ask then, would it not be convenient for the U.S. to export those old clunkers to places like where I live? They could make a helluva good profit for their trash and save the environment from the negative effects of unnecessary manufacturing.”

The 5: Amen.


Ian Mathias

The 5 Min. Forecast

P.S. Want a free copy of Bill and Addison’s new book, Financial Reckoning Day Fallout? We’d like to offer you a complimentary copy of the newly updated bestseller if you’ll do us the favor of reviewing it on your blog or website. No strings attached… all you have to do is email us at with your blog url and mailing address.


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