The Third Quarter is getting off to a rousing start. Economic data for the day is generally good – manufacturing shrunk less than expected and pending home sales rose more than expected. As of this writing (12:40 P.M. Eastern) the Dow is up 1.25%. Traders seem willing to forgive the larger than expected drop in private sector payrolls.
We’ll see how long that forgiving attitude lasts…
Earnings season is right around the corner. It seems that expectations are pretty low. I’ve read a few commentaries that suggest that estimates are low enough that companies should be able to meet them. Of course, what corporate America has to say about the future will be important.
Of course, I’ll be watching the banks closely.
*****A lot has gone right for the banks lately. Changes to accounting rules have allowed them enough breathing room to operate. Mortgage loan modifications have brought in fees. And trading activities have even helped some banks to boost profits.
Still, I believe there’s another banking shoe to drop.
As I reported yesterday, foreclosure sales are the majority of home sales these days. And when a bank sells a foreclosed home, it is a realized loss. That’s as opposed to a non-performing loan or a foreclosed home that has yet to be sold, which can be counted as an asset.
Further exacerbating this is that banks are not realizing as much profit on those sales of foreclosed homes as they’re all flooding the market with them and thus driving down prices.
So I expect to see higher losses affecting banks’ earnings in the future. These losses may not show up in the earnings season that’s about to begin, but they are looming.
*****It was reported today that mortgage applications fell 19% last week, another sign that foreclosures are driving the market. It also reinforces the point that once foreclosure sales slot, there may well be little demand for traditional home sales to pick up the slack.
Rising interest rates and still-falling home values are also impacting new mortgage applications. It’s a buyers market, and there’s no reason to rush in when prices are falling and loan costs are rising.
*****Bloomberg is reporting that 20 million of the 93 million homes, condos and co-ops in the U.S. are underwater as of March 31, 2009. Somebody will take these losses at some point, whether it’s the homeowner, the bank or the government/taxpayer or a combination of any or all of the three.
******We know that sub-prime mortgages were a major source of non-performing loans and foreclosures. Now, prime mortgages are in trouble. In his morning missive to his traders, TradeMaster Daily Stock Alerts’ Jason Cimpl had this to say:
Delinquencies on prime mortgages soared in the first quarter of this year. Delinquency rates on prime mortgages, the least risky category, were 661,914, a jump from 250,986 a year earlier. Two thirds of all mortgages in the U.S. are prime mortgages, so any percentage increase in delinquencies represents a huge absolute number of delinquent mortgages. Here is more proof that banks are in for a tough few years as they must monitor their loan portfolios even closer and suffer write-offs. If prime mortgages start going south in a big way, look for banks to stiffen lending standards even more. Either way, this will have a negative impact on their bottom line numbers
The evidence is building that the economy is nowhere near out of the woods. And we can also see that banks will be facing serious problems ahead. As I said yesterday, investors should be on their toes.
Also, we’re not recommending downside positions on banks – yet. But that time will come, and there will be a lot of money to be made.
*****I’m giving my staff the day off on Friday. There will be no Daily Profit that day. And I’ve cajoled Jason into giving us his video chart analysis tomorrow, so we have that to look forward to tomorrow…
If you can’t wait, check out Jason’s video from last week and get a special opportunity to try his TradeMaster service. Click here.
Today is NewsletterAdvisors.com Wednesday and this week we’re featuring Doug Casey, Chairman of Casey Research and one of the most respected names in profiting from periods of economic turmoil. Doug oversees several investment advisory services including The Casey Report, Big Gold, International Speculator, and Casey Energy Opportunities. He also offers investors a number of free publications including Casey’s Charts and Conversations with Casey.
Today’s interview is a little longer than you’re used to, but Doug has such a wealth of knowledge and experience with profiting from economic calamity-as we’re living through now-that this will be well worth your time. Doug shares with you his thoughts on "The Greater Depression".
Conversations with Casey
Doug Casey on the Greater Depression
Ian: Doug, you’ve been, as one subscriber recently dubbed you, "the town crier of America" for some time now, warning about what you call the Greater Depression. Do you really see that as being what’s ahead for America? You have seen the country seemingly headed for the precipice before, but it somehow missed going over the edge… what makes you think that it’s going to happen this time?
Doug: Clearly it’s a judgment call. There are things that could put off what I see as the inevitable, for another cycle. It seemed in the ’70-’71 recession that things could have gone over the edge. Even more so in the ’74 recession. Things were even more serious in the ’80-’82 recession. And actually, in the early ’90s, it once again looked like we were going to bite the dust.
But every time, the government came to the rescue. As unemployment went up, businesses started to fail, and the stock market went down, they "solved" these problems by lowering interest rates and printing up money. And those things are not the solutions to the problem but are ultimately the cause of the problem.
When you have a house of cards, you should let it collapse – and build a proper house. Using the financial equivalent of chewing gum and bailing wire to build the house of cards even higher can’t prevent it from eventually falling after it reaches some ridiculous height. Fifty stories? A hundred stories? That’s exactly what they’ve been doing, and it’s going to be a big mess to clean up.
As to whether we’re actually going into the Greater Depression now, can I be certain about that? Well, perhaps not. Perhaps friendly aliens will land on the White House lawn and gift us with a magical technology that will solve all these problems. It’s a judgment call, and I don’t see any way out of it this time.
As bad as things were in the past, we’ve never had six or seven trillion dollars outside of the U.S. We’ve never had such an acute and chronic balance of trade deficit as we have today – which, incidentally, is a sign that the country is consuming more than it’s producing. We’ve never gone into a really nasty downturn with interest rates already at historic lows.
I think the odds of this being the start of the Greater Depression are extremely high.
I don’t see any green shoots.
Ian: Don’t see ’em, or don’t believe ’em?
Doug: There’s always a certain cyclicality to everything. In the episode from 1929 to 1933, it didn’t go straight down. In 1930 and 1931, people thought they saw signs of recovery along the way. I think it’s going to be very much the same way this time.
One thing to remember is that while the depression that started in 1929 may have come to a bottom in 1933, it took a long time to recover. There was a cyclical recovery in 1937, and why was that? Roosevelt had the good luck to have been elected dead flat at the bottom. So it wasn’t his policies that cured the last depression, it was luck and good timing, combined with the fact that they were creating a lot of money after Roosevelt took the dollar off the gold standard. That resulted in a false recovery, from 1933 to 1937, and it went downhill again.
People say that World War II cured the depression, but in fact, it made it worse. As bad as things were in the ’30s, they were worse during the war in the ’40s. You couldn’t get shoes. You couldn’t get gasoline. You couldn’t get tires. You couldn’t get just about anything that was being used for the war. The war prolonged and deepened the depression. The thing that ended the depression was not the war but the fact that since people could not consume, they were forced to save. That delayed consumption resulted in a huge amount of savings, and that’s what caused the recovery in the late 1940s.
The point I’m making is this: You’ve heard the old saying that history doesn’t repeat, but it rhymes? I’m afraid that for many reasons, the government is doing just about everything possible to push the economy over the edge. First of all, the government is much more powerful than in the 1930s. People are much more used to thinking of the government as being the solution to the problem, instead of being the cause. They are going to make exactly the same mistakes – but bigger this time.
They are going to wind up destroying the currency.
It’s probable that American will end up in a war, for a number of reasons.
What we’re looking at is something that’s going to be long, dismal, and really unpleasant – much worse than what happened in the ’30s and ’40s.
Ian: Okay, so this is what you see coming, and it’s a big part of why you advocate setting up a crib outside of the U.S. We get a lot of questions from readers about that, which you’ve answered with your comments about Argentina and Thailand, etc. But we also hear from those who don’t want to leave or feel they can’t for any number of reasons. Is there a way for those who stay to insulate themselves from the coming Greater Depression? There are fixed-rate, long-term mortgages, as we spoke of last week – what else can people do?
Doug: For those who stay in the U.S., the answer to the economy’s problem is going to be the same as the answer to every individual’s problem: you have to produce more than you consume and save the difference. Regardless of what happens to the economy in general, if you do that as an individual, you will survive and prosper.
But remember, it’s not going to be easy.
Listen, all the real wealth in the world is still going to exist. It’s just going to be reallocated from old owners to new owners. And you can become one of the new owners of the wealth that people have created over the millennia by producing more than you consume. That’s the key. It’s also just the opposite of what most Americans have been doing for the last couple of generations.
I’ve got to say, however, that there are a lot of reasons not to want to stay in the U.S. Government controls of all sorts are going to become more stringent. There’s going to be a lot more state surveillance, a lot more police activity. The crime level is going to go up as things get bad – the government is going to respond to that. Despite the fact that everyone’s got a flat-screen TV and a McMansion, I think it could get quite unpleasant in the U.S.
Ian: If things really get that chaotic, do you think the U.S. could slip into open revolution? If things turn as ugly as you say, the government will go for people’s guns, and there are a lot of those in the U.S. who have sworn to use them rather than lose them.
Doug: Yes, I’ve met some of those people. I think it could get that unpleasant, I really do.
One of my favorite songs is Al Stewart’s "On the Border," and one of the lines from that song I like a lot is: "On the wall, the colors on the map are running." This has happened throughout history. These arbitrary lines on maps are not written in stone. They can change very easily for all kinds of reasons.
People say that the U.S. Civil War – which is a misnomer; it should be called the War Between the States – settled the issue of entities leaving the U.S.
I don’t think so. I think it could happen in any of a number of ways, formally or informally over the next generation or two. If the entity controlled by those in Washington looks at all the same in 100 years, or even 50 years, I’ll be very surprised.
Why people think that borders and governments are set in stone is actually beyond my comprehension. People forget that there are areas of France, Spain, and Britain, to name just a few among old and stable European countries, where even today, people are actively talking about leaving. And they’re at least as stable as the U.S. is – and notice that I call it the United States, not America. As far as I’m concerned, America has disappeared. America was an idea, not a place, and it’s been replaced with the United (by force) States.
Even though Doug sees perilous things in store for the U.S. economy, every crisis holds opportunities to profit – for those who can recognize and act on them. Read the report of Casey Chief Economist Bud Conrad on his favorite investment of the year… an almost sure-fire way to make money, because this particular economic development is literally inevitable. Click here to learn more
P.S. Earlier I mentioned I’m not recommending shorting any U.S. banks yet, but there is one bank you should have in your portfolio as a long position. It’s an Indian bank that is immune to U.S. mortgage exposure and has seen exponential growth-economic turndown or not. Find out more about this bank in my new India stocks report. Click this link to get a copy