Say Goodbye to Mr. Bubble

Words of Wisdom from Peter Grandich

"Americans have been robbing Peter to pay Paul, but Peter is tapped out!"

"A good part of America’s current prosperity is based not on genuine gains in income, nor on high productivity growth, but on borrowing from the future. Much of this borrowing came by way of extremely low interest rates thanks to former Fed Chairman Greenspan’s opening of the monetary floodgates after the Internet bubble burst. This, in turn, created a far more dangerous bubble in the real estate market where refinancing of ones home was not used so much to send the children to college but to buy plush hot tubs, $5000-barbecues and a whole host of items not necessary for every day life."

"No one country is more impacted by the health (or lack of) of the U.S. economy than our neighbors to the North, Canada. In a speech in New York City recently, Bank of Canada governor David Dodge said that unless the imbalances that have caused a huge current-account deficit in the U.S. are corrected soon, the likelihood of a “disorderly correction” will grow."

"How huge is it? America went deeper into debt to foreigners last year as the deficit in the broadest measure of foreign trade hit a record $804.9 billion. Remember, the current account covers not only trade in merchandise and services but also investment flows. The deficit represents the total amount of borrowing that the U.S. must do every year from foreigners."

"Do you want to help many Americans? Let them in on a little secret- if you borrow money, it eventually has to be paid back! We’re a nation of debt junkies. The windfall in the real estate boom could have gone a long way in pairing down our debt but instead we as a nation are worse off than before the windfall."

"Federal Reserve data shows that the value of household real estate climbed 71% over the past five years. But mortgage debt grew even faster, up 75%, as Americans refinanced or took out second mortgages."

"Outstanding consumer debt is up 27% over the last five years, well ahead of the “reported” 13% cumulative inflation rate. Perhaps the saddest place to see debt burdens rising is among the elderly. Among households headed by someone age 75 or older, 40% had some sort of debt in 2005, up 33% from just 2003."

"A recent Bloomberg-Los Angeles Times poll reeked of serious unrealistic investor expectations. Affluent investors were given a mythical $1 million to invest."

The results were:
• About 30% would put it in real estate, 22% in stocks, 14% in mutual funds and just 8% in bonds.

• 60% of them expect returns of 10% or more in 2006.

• 80% said stocks will perform as well as or better than they did on average in the last decade.

• Two-thirds expect lower household debt and higher net worth this year (hold on a minute, I need to stop laughing).

• 64% are confident that Bernanke will be able to keep the economy stable.

"If you want any further proof that Americans in general are hooked into whatever Wall Street feeds them, realize that the greatest commodities bull market in the modern era has been underway and not one person in the poll chose commodities."

"I believe America has entered a period of social, economic and political upheaval unlike anything it has ever witnessed. With regard to the financial markets, there are three key factors that I believe will have the biggest impact going forward."

They are:
• the U.S Dollar
• the real estate bubble and
• the Middle East.

"If you ever wondered what it must have been like during the fall of the Roman Empire or when the Great in Great Britian no longer described your dominance as a world power, have no fear that you won’t be around during the demise of the United States of America as the world’s number one economic power. It’s unfolding right before your eyes."

"And, constantly beating the Chinese up in the press and Congress over the Renminbi and trade practices may make for good sound bites on Election Day, but it’s doing serious damage to a country who has been supporting our huge debt appetite."

'“The bubble's not popped. The market is self-adjusting now. The prices are reducing.”
- John Corcoran"

"I bet there are real estate agents twisting Mr. Corcoran’s famous quote about bubbles in explaining why it’s still a great time to buy real estate."

"(Do you know what the realtor said all the way down after being thrown off the top of the Empire State Building – so far so good)."

"Make no mistake about it: much of the consumer spending in recent years has come thanks to the combination of sharply lower interest rates and increasing home prices, which allowed many Americans to refinance and/or take out second or even third mortgages."

"Extremely creative financing and ultra liberal lending practices also put people in homes that 20 years ago could have never happened. All of this IMHO merely delayed the day of reckoning for living beyond our means."

"While they don’t ring bells at tops, the housing bubble has clearly burst."

"Sales of new homes plunged by the largest amount in nine years in February while the median price of a new home dropped for the fourth straight month. The inventory of unsold homes hit a record at the end of February."

"Another bearish indicator has been the slowing volume of home-equity credit lines from commercial banks. From 2002 to the middle of 2005, they were growing at an annual rate of about 35%."

"However, in March banks held $433 billion in revolving home-equity loans, which was actually down from the peak in August of $439 billion. Home-equity loans were heavily marketed by banks and other lenders as an “easy” way to get fast money by simply writing a check. I guess that “reality” of actually having to pay for something is hitting “home”.'

"The bubble was able to continue thanks in a major way to a tempting array of cut-rate mortgages that put people in homes who might otherwise not have been so “fortunate”.'

"Adjustable-rate and other, riskier loans with low initial payments allowed homeownership rates to hit a record 70%. But, now trouble is brewing according to Chris Krehmeyer, executive director of Beyond Housing, a non-profit group that offers homeownership support services in St. Louis. “Sixty percent to seventy percent of the calls to our hotlines are now related to ARM (adjustable-rate mortgage) loans.”'

"According to the Mortgage Bankers Association, about one in five homeowners in several states with high-interest (subprime) ARMs were at least 30 days late at the end of the year."

"I wrote last year how states like California, where about 60% of all loans in 2005 were adjustable rate, could witness the dark side of the bubble as early as 2006."

"California, say good-bye to Mr. Bubble."