Here Comes 2011

Welcome to 2011, the year of the Long-Term Evolution (LTE), A.K.A., G4 wireless connectivity. Only Verizon Wireless is offering it as I write this, but only through USB Modems.  Smartphones will be out later this year; so it’s here but just not available now to change your life.

The promised upgrade in broadband, whether we want it or can afford it, is a perfect metaphor for the upcoming collision between economic reality and political machinations.  One of three things will happen as the 112^th Congress is sworn in; a) it will continue business as usual, b) it will change spending in Washington DC, or c) our creditors will take away our charge card. America is unprepared for all three. Choice b would be not to raise the federal debt – much easier said than done. Choice a will debase the Dollar and cause inflation before the second leg of the 2008 Depression starts (Oh, and you thought we were pass that crisis?).

In 2010, the big winner was gold and silver amongst other commodity products. Below are finviz.com charts showing 1 year, 6 months, 3 month returns of the major futures markets. Silver was up 83.5% and Gold was up 29.5%. Stock averages trailed; The Russell 2000 was up 26.3%; NASDAQ 100 was up 19%; the S&P 500 was up 12.9%, followed by the DJIA, which was up 11.2%.

The 30-year Treasury Bond was up 5.6% for the year and the 10-year Note was up 4.2%. The US Dollar was up 1.2%. However, December was unkind to the 10-Year Note, as it lost 3% and the 30-Year Bond lost 4.2%.

On Monday, the stock market blasted off into triple digit territory, closing up 93 points. Optimism was everywhere in the air, not to mentioned an extra 850 billion in tax cuts to goose prices. I believe the DJIA will cross 14,000 this year and the S&P 500 will also cross 1450. The market will be wildly overvalued at that point, as the market is currently only recklessly overvalued, with more potential headwinds in the second half of the year from a slowing Chinese economy, a double-dip recession in Europe, and housing bubble collapses in Australia and Canada.

Gold and silver was savaged this Tuesday morning; February Comex gold last traded down $44.60 at $1,378.30 an ounce. Spot gold last traded down $36.40 at $1,378.50. The London P.M. gold fix was $1,388.50 versus the previous P.M. fixing of $1,405.50.  Silver futures for March delivery fell $1.617, or 5.2 percent, to $29.508 an ounce, I expect a consolidation period could last until the spring. This will range-bound gold’s price to $1,300 to $1,500.

Cost-Push inflation is being reflected in oil and food prices. Gasoline is now over $3.00 a gallon, on its way to $4-$5 a gallon this year. This inflationary pressure will weigh on a fragile consumer’s pocketbooks, therefore, GDP growth. Higher prices, combined with city and state firings of employees (layoffs is when you have a chance of getting your old job back) suggests higher unemployment and increase the chances a double-dip recession by the end of the year.

Fed Chairman, Ben S. Bernanke, has openly expressed a desire to inflate asset prices while holding down inflation on the theory that not doing so will reopen the door to deflation.

The minutes to the December 14^th FOMC policy meeting was released today which said in part, “While the economic outlook was seen as improving, members generally felt that the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program, and some noted that more time was needed to accumulate information on the economy before considering any adjustment,”.

Only a neurosurgeon’s scalpel could be so precise. In my view, we can only wait to see which of the Fed’s missions will fail.

Conventional Wisdom is propagating that the private sector will ride to the rescue of the economy and President Obama’s reelection. Why would they? Demand is absent in the marketplace for goods in all but the luxury segment. Even the low-end retail segment is fading. Bottom-up stimulation is being withdrawn from the economy as state budgets, which spend locally, are being slashed, unmercifully.

If American business was serious in creating jobs here in America, they would be demanding trade protectionists’ measures to protect American workers. Once upon a time, business and the Chamber of Commerce did such things. Sadly, if we update the year by a decade, as the Eagle’s sang in their song Hotel California, “We haven’t had that spirit here since 1969”.

Below are my 2010 predictions with comments. Four of my predictions were right, three were too early, and four missed the mark. Without government intervention, my record would be eight out of eleven.  The take away is I was too conservative in my thinking which err on the on the side of caution for investors. Since the economy and the financial markets are disconnected like never before, and the government’s heavy hand has all but destroyed real price discovery, analyzing what is happening and predicting the consequences of those findings are becoming more and more a fool’s errand.

2010 Predictions	Result	Comments
I. The bond market will suffer its worst lost since 1994.	Wrong	Too early. The bond market began selling off in the 4th quarter. QE II artificially suppressed interest rates.
II. Gold will surpass $1,800.00 per oz.	Wrong	Too early. The direction was right, the magnitude was off. It went from $1,100 to $1,421 or 29.5%.
III. The Democratic Party will lose the House and barely retain the Senate.	Right	Bingo.
IV. The FDIC will temporarily run out of funds to shut down bad banks.	Wrong	The FDIC left open 900 bad banks otherwise they would run out of funds.
V. At least two states will default on their general obligation bond interest payments, roiling the municipal bond markets.	Wrong	Too early. The municipal train wreck will occur this year.
VI. Either, Tim Geithner, Lawrence Summers, of Ben Bernanke, will leave the administration before 2011.	Right	Lawrence Summers, bye bye.
VII. State and Federal taxes will rise in 2010.	Wrong	Silly me. I thought politicians would do the right thing instead of extending the Bush tax cuts.
VIII. Inflation will rise above 5% at least one quarter in 2010.	Wrong	Prices are rising but it is not being reflected in the CPI. Stay tuned.
IX. The yearly high for stocks will occur in the first half of the year.	Wrong	Quantitative Easing II (QE II) saved the stock market.
X. At least one western democratic government will fail and be replaced with another democratically elected government.	Right	The UK and Australia
XI. Residential real estate prices will drift lower YOY on the S&P Case-Shiller HPI	Right	Year-on-year, sales are up 0.2% for the 10-city adjusted index but are down 0.8% for the 20-city index

An Alternative to the Trillion Dollar Deficit

Am I the only one who thinks that a trillion dollar deficit, proposed by the President-elect, is financially insane?

True, as we head into the deepest recession since the Great Depression of the 1930's, we may succeed in becoming the Great Depression II. However, before we touch a lit match to a fuse on a trillion dollar budget deficit (not to mention funding for the wars in Iraq and Afghanistan occuring outside the annual budget, which will surely detonate our country in the future), let us try to address the original problem.

We all agree residential real estate began this current economic slide and that residential real estate's recovery is necessary to end this slump. So, let us rethink the solution.

Since a trillion dollars is on the table, why not try the following; The US government enacts a new program to refinance the following mortgages: 1) all sub-prime mortgages that have reset and will reset. 2) Any mortgage that is underwater by more than five percent; 3) mortgages of homes repossessed in the 4th quarter of 2008 and currently unoccupied, if the previous owners are interested in returning.

Once the government has identified these mortgages, borrowers may apply for a new, 30-year, fixed-rate mortgage, issued at one percent over the current 30 year T-bond.

Do not stop reading. Here is how we save residential real estate and America.

All refinanced mortgages are backed by the full faith and credit of the US government. All refinanced mortgages are assumable.

Yes, I said ASSUMABLE.

Catalog the benefits. Currently, a raging debate about mortgage cram-downs by banks is taking place. Both sides have valid points. By refinancing existing mortgages and paying off lenders immediately, investors holding MBSs are "made whole", per the terms of the mortgage, and contract law is preserved.

Is a home more valuable or less valuable with an assumable loan? The current inventory of vacant and unsold homes would quickly reduce while prices stabilized. Ask a real estate agent if a home with a 30-year, fixed rate mortgage, at 4.25%, completely assumable, is marketable.

Banks' capital requirements and their need to raise cash for 2009 is lessened. Banks will also have fewer assets on their books. Retirees living on fixed income investments are starving for yield. T-bills and CDs today only reduce investors' disposable income and subtract purchasing power from the economy.

On a $200,000 mortgage, refinancing a 6%, or 8%, 10% mortgage, down to 4.25% mortgage is like getting a stimulus check, for several hundred dollars, every 30 days. Would a small business owner rather receive a lower tax rate and fewer customers or 10 or 20 homeowners in his neighborhood with additional money in their pockets?

Vacant homes lower property values. Vandalism occurs to individual properties, squatters break in and stay illegally, and crime can increase in the neighborhood.

The government could begin taking applications 30 days after Congress approves such a bill and begin issuing checks within 90 days, for immediate repayment of mortgages to lenders and injecting more disposable income, through lower mortgage payments, throughout the economy. The psychological benefits to the country alone, with such a program, are incalculable.

Mortgages are public records. This program is completely transparent. As the money is spent, its final destination is available for all to see.

Lastly, if the government is going to destroy the dollar by issuing two trillion dollars in obligations this year, why not try this approach first.

It is just as insane as a trillion dollar deficit for years to come.