A Disaster of Epic Proportions

By: Christopher Galakoutis | Tue, May 2, 2006
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Despite the fact we just went through one of the warmest winters on record, it was nevertheless a winter of discontent for many in the real estate market.

Inventories of unsold homes have been building for several months, as interest from prospective buyers has slowed to a crawl from the feverish pitch of the past few years. And while springtime is historically a good time of year to clean up the old house and stick a "For Sale" sign on the front lawn, judging by the number of signs out there around the country this year might very well break records for the number of homes available and unsold.

Not helping the sales numbers are reports that banking regulators, always fashionably late to every party, are closely monitoring the mortgage loan industry. They are expected to issue guidance in the next few months that may restrict certain loan types; the types that can throw a homeowner into foreclosure when the so-called "teaser" and other inducement type rates expire.

I came across a mind-boggling statistic recently in a Washington Post article by Kirstin Downey that I thought I would share. It indicated that roughly two-thirds of all people who purchased homes in the Washington area in 2005 used adjustable rate interest-only or option mortgages, up from 2.2 percent in 2000.

Mortgage brokers are, not surprisingly, quite concerned about any regulation that might disturb this most surreal of relationships, not to mention their very profitable gravy train ride. They argue that borrowers are taking out these types of loans because it is the only way they can afford to buy a home. One broker quoted in the story went as far as to say that without these types of products homes could not be purchased, and any action to remove them would in fact precipitate a "disaster of epic proportions" in the housing market.

A separate disaster in the making, one that might precipitate the precipitating action above, is the action in the US dollar the last few weeks. After rallying for all of 2005, the greenback has struggled so far in 2006 with the action pointing to a continued decline, having in the past few days broken through key support levels at the 86-87 range on the US Dollar Index. If the index were to break below 80, it could very well freefall from there, bringing with it yet another season of discontent-- a much chillier one than the balmy conditions many are expecting.

Included amongst those who seem to be unconcerned is our new US Federal Reserve chairman, Ben S. Bernanke. In a letter to a California Congressman last month he stated the following: "Although US trade deficits cannot continue to widen forever, these deficits need not engender a precipitous decline in the dollar, nor should such a decline, were it to occur, necessarily disrupt financial markets, production or employment."

Bernanke continues to use the "V" word as well. No, not "V" as in "V for Vendetta" the movie, which one would assume any response from him might be limited to a resounding "no comment", but rather, his favorite word in the English lexicon, "Vigilance". In testimony before Congress last week, he continued with his vigilant inflation fighting theme, even as the price of gold and other barometers continue their march higher.

Despite Bernanke's assessment, there should be no doubt that a dollar decline will have wide reaching ramifications, not least of which will be the increase in the cost of virtually everything Americans need to buy on a daily basis. As America has outsourced massive amounts of production to China and other low cost centers, very few of the items Americans consume are actually manufactured in the United States. A declining dollar by definition would result in a proportional increase in price of the imported goods.

While these impending threats gather in the not too far off distance, Americans remain oblivious to them, having gotten so used to the Federal Reserve safety net and bubble prosperity they have forgotten that real prosperity is attained only through hard work, savings and investment in real, income producing assets. That was the legacy left behind by former US generations; one that has been set aside and squandered the way Paris Hilton dating playboy heirs to Greek shipping fortunes are accustomed to doing.

The home for instance, throughout all of time the symbol of family and stability that most strived to own free and clear, has been reduced to nothing more than a vehicle of speculation by the so-called "flippers" as well as ordinary Americans; individuals whose actions one might argue are far removed from the great generation of Americans that built this country into a superpower. The Federal Reserve, enablers of this false prosperity by conditioning the populace to embrace credit and run up debts like drunken sailors, is revered by consumers that don't know any better, and cheered on by Wall Street pundits who continue to profit the further up the creek Americans paddle.

In due time the action in the various markets that are of no concern will become a dire concern, and the Federal Reserve as well as the mainstream pundits will be exposed for the incompetents that they are. Regrettably by the time that comes to pass, similar to the vindication of the Arthur Andersen firm after it was reduced to nothing but a puff of smoke, the damage will have already been done.

With gold over $600 and rising, silver over $12 and rising and oil over $70 and rising the inevitable standard of living adjustment between East and West may now finally be under way. Millions of Chinese, now setting their bicycles aside in favor of shiny new cars, are gaining strength and momentum while saving and buying gold. Americans on the other hand, with too many cars and debts, too happy and too out of shape to compete, will in all likelihood need to hit bottom before any renaissance could begin.

Perhaps a good start along the comeback trail might be loading US bound cargo ships, which will surely contain fewer and fewer consumer goods in a deteriorating US dollar environment, with Chinese bicycles while in return Americans send the Chinese their cars. With oil prices headed to the stratosphere as the US dollar declines, Americans won't be in a position to afford to drive them anyway.

Those thinking this may not be a fair deal need only remember all the years Americans received real goods from the Chinese in exchange for worthless IOU's. With that reality as a backdrop, and given the great shape Americans can get into utilizing their new methods of transportation, the Chinese would actually be doing us a favor.

To learn how to preserve your wealth and protect your purchasing power, I suggest that you download a free copy of Euro Pacific Capital's research report entitled "The Collapsing Dollar; The Powerful Case for Investing in Foreign Equities" available at www.researchreport1.com.



Author: Christopher Galakoutis

Christopher G. Galakoutis
CMI Ventures LLC
Westport, CT, USA
Website: www.murkymarkets.com
Email: info@murkymarkets.com

Christopher G Galakoutis is an independent investor and commentator, who in 2002 re-directed his attention to studying the macroeconomic issues that he believed would impact the United States, and the world, for many years to come. He works diligently to seek out investments for his own portfolio that align with his views, and writes about them on his website. With a background in international tax, he also works with clients holding foreign investments (ExpatTaxPros.com), ensuring their global income tax costs are being minimized.

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