Third Party & Independents: Archives

David,

While I wouldn’t dispute the vast majority of your facts here, isn’t it a bit alarmist to use the term “meltdown”?

Also,

And smart investors will invest overseas instead of here, a trend already underway.

I think much of this can be explained by simple diversification. And, I would suggest to you that smart investors will invest overseas as well as here.

Finally,

But we can only avert this calamity by voting out incumbents in 2008.

Now, I know this is your pet cause but c’mon isn’t it somewhat intellectually dishonest to assert that this is the only way to fix economic instability? You are a creative, intelligent, guy. I am sure you can think of other methods to foster economic stability. Because—and I’m really going to put myself out there with this one, but—it just doesn’t seem to me like simultaneously firing every elected official in the country will be all that stabilizing. [And, yes, I do realize that not every officeholder is up for reelection—it’s just so much more dramatic.] ;^)

Posted by: jrb at March 13, 2007 06:42 PM

jrb, the statistics and facts are what they are. I am alarmed by them. I am even more alarmed that you and many other Americans aren’t.

Where did I say or recommend that we vote out ALL incumbents? I have never said that and will never say that. Reread what I said for accuracy please.

Posted by: David R. Remer at March 13, 2007 07:02 PM

David,

I agreed with your post right up until this chapter:

In other words, lenders loaned money against a collateral value on homes which no longer have that collateral value. Foreclosures are climbing. Folks have been spending their refinance loan money on things and lifestyles that have no collateral value. With wages failing to keep pace with inflation in energy, medical insurance and care, and education costs, all a higher priority than a mortgage, 100’s of thousands of Americans are choosing to default on their home payments instead of education, health care, and energy to get to and from work.

So, what you are saying is that foreclosures are on the rise because of wages failing to match inflation? That people are ‘choosing’ to default on their loans…

Sorry, David, but that is just not what is happening. The reason foreclosures are up is because when all of this ‘refinancing’ was going on, it was not because people saw a change to spend money on more stuff, it was because interest rates PLUMMETED. People were talked into refinancing (because they don’t have the right education to understand the true cost of doing so) at low rates and ‘while they were doing so grabbed their equity out as well’.

But that, in and of itself is not the reason for the foreclosures. You see, the rates were really low, really really low. AND they could be a lot lower if you did what is known as an ‘Adjustable Rate Mortgage’. I saw people getting less than 3 percent mortgages! Amazing! Great news, right?

Of course, this previous year was the year that the rates ‘adjusted’. So all of these people, who don’t understand how money works because no one ever taught them in school or forced them in real life, got a very low payment, took as much equity out as they could make the payments on, and then went on huge buying sprees. But now, the rates are higher, the monthly payments are much higher and these people can no longer afford to pay for them.

It has nothing to do with ‘wages not matching inflation’. Sorry about that myth but the reality is poor decisions of the home owners who thought they were getting something for nothing are now paying the price for living in the moment and not the future.

And your answer is to vote for people who will do what? Manipulate the market so that gains are not possible, just steady, boring, low growth. Much like the return we see on Social Security investments?

Sorry, I’ll put my trust in the American worker/business owner to work it out and build their situations in life while I make sure not to make STUPID decisions like refinancing to an adjustable rate that I can barely afford and it guaranteed to go up. I think I’ll be fine.

Posted by: Rhinehold at March 13, 2007 07:19 PM

BTW, I agree that we do need to eliminate debt, both personal and governmental. How do you propose to do that, by cutting back on what we spend as individuals and Americans or by taking more money from those that are smart enough to build wealth to bail out those who don’t know what to do with wealth?

Posted by: Rhinehold at March 13, 2007 07:22 PM

Of course the Democrats are going to claim that this aint nothing that can’t be fixed by electing a Democrat President and putting more in Congress in 08. And the Republicans are going to claim that by keeping a Republican in the White House, and giving them back control of Congress will solve the problem.
And both are full of crap.
Our government needs a complete overhaul. The problems facing this country need to be solved with real solutions and not band-aides or smoke and mirrors.
Everyone in DC needs to be thrown out and folks that will address the problems facing this country put in. That means no Republicans or Democrats in office.

Posted by: Ron Brown at March 13, 2007 07:27 PM

Oh, and before I forget, quoting the ‘DOW’ is an interesting ‘snapshot’ of how the overall stock market is doing but is actually meaningless to most investors. No one invests in all 500 DOW companies with the same amount in each, etc. 401K fund managers look at what stocks are rising and what stocks are falling and move the stocks around in order to maximize growth irregardless of how the ‘overall market’ is doing. Even with the 5% and 2% drops in the DOW recently, there are still stocks that increased in value, and to be honest, figuring out which ones will rise and which will fall is not that hard of a job, especially for a good fund manager.

Just remember to never pay a load or go with the plan that you are being recommended if the broker is getting a kickback commission for selling that specific fund to you.

Posted by: Rhinehold at March 13, 2007 07:30 PM

David,

I respect you, but I still expect honesty!

Where did I say or recommend that we vote out ALL incumbents? I have never said that and will never say that.

The following is from http://voidnow.org/faq.php#Q04

(04) QUESTION: Why should voters vote out (or recall) most (if not all) incumbents ?

ANSWER: Because, most incumbents (if not all) are irresponsible.

You are the President and Founder of that organization, right?

Second, yes the facts are the facts. However, you also have some assertions in there that I hadn’t planned to make an issue out of but for your less than genuine response. For instance:

They [Haliburton] got the American billions of tax payer’s dollars, and now they are running to the Middle East since Democrats are going to being scrutinizing their dealings with the Bush Administration. China will be wanting Haliburton’s services in the future, and that would conflict with American interests. So, they are going to become an Arab corporation where America can’t interfere and chastise them for not being patriotic.

Now, I’ve never been a fan of Haliburton and am not in the practice of defending them against anything. Yet, your description of what is going on is not technically acurate.

Finally, I didn’t mean to imply that I don’t think we have problems. I merely think that when you title your post “Market Meltdown” it shouldn’t read down in the middle of the text that:

This is not a “sky is falling” scenario. In an instant, if a comet hits the earth, everything is over. That is not what is happening here.

As “meltdown,” according to merriam-webster, implies a a rapid or disastrous decline or collapse—you know, like if the sky fell.

cheers.

Posted by: jrb at March 13, 2007 07:32 PM

Rhinehold
Adjustible Rate Mortgages (ARM) are a ripoff. I know of folks that got real low rates on their mortgages or equity loans and with in just a few months were paying higher interest rates than the fixed rate at the time the note was created. And when the rates went down do you think their rates went down?

Posted by: Ron Brown at March 13, 2007 07:45 PM

Ron,

And don’t forget the money they paid to the loan company for the privilege of being screwed over! Most of these loans wouldn’t pay for themselves in savings for at least 2 years, by then the rates are up and they’ve ended up paying a ton more money for a worse loan.

I don’t know people are stupid enough to fall for them, I sure ran from them screaming. My take on it is that we either need to educate better or let them learn from their lessons by having to get back on their feet from their mistakes. We should give them mentoring and VERY temporary help, not long term assistance or prevention.

Look at the number of people still living in FEMA camps from Katrina, they don’t have the desire or drive to try and do better for themselves, instead they are still living in horrible conditions on our dime with no plan on what they are going to do tomorrow.

Posted by: Rhinehold at March 13, 2007 08:33 PM

Ron, I don’t think it’s that ARMs are a rippoff so much as (like Rhinegold says) that they’re used by people who have no business getting one.

When I bought my house, I put down around 70% of the cost and then got a 5 year ARM, which I paid off before the rates rose. In my case it was perfect. I was going throug a phase of low income when I bought the property and wanted low monthly payments until I was able to pay off the balance over a relatively short term.

The problem is that too many people see that low monthly payments will put them in a property they couldn’t otherwise afford. Real estate agents and banks encourage them, and when the loan balloons at the end of the fixed rate period there’s little or no equity, bad options for refinancing, and subsequent disaster.

And it’s also the case, of course, that these gimmick loans helped to grossly inflate property prices in lots of places, creating a vicious cycle for uneducated home buyers.

Posted by: Loyal Opposition at March 13, 2007 08:34 PM

David,

You’re right, errr………… I should say correct.

We’re on the edge. There is no getting around it.

We’re on the edge financially. More and more Americans are struggling from paycheck to paycheck. Personal savings is extremely low. Personal debt is extremely high. The national debt is between the mid sixty percentile and 70% depending on whose figures you use. Neither figure is good.

Health care in the USA has become a huge problem! Several states are taking this on because the feds are asleep at the wheel. We now have nearly 20% of Americans that have no health insurance! Many of the uninsured rely on ER care which increases costs to everyone.

We’re buried neck deep in a war with no end in sight and recent reports show that we’re redeploying troops that have been declared “unfit to serve” because we’re trying to run a war “on the cheap”. That’s damn shameful!

Our nation has become nothing but shameful! We’re too easily distracted with issues such as “gay sex” and celebrity death, etc.

The next “NEW DEAL” will probably disappoint all of us. Especially after all of our resources have left the country either by corporate manipulation or international debt.

War without end, debt without end, amen!

Posted by: KansasDem at March 13, 2007 08:57 PM

LO
Your one of a very few fortunate ones. Most folks can’t go in with 70% which means they can’t get the ARMs paid off that fast. They usually have to go with a 30 year mortgage. The interest rate can jump quite a few point during that time. The mortgage companies are relying on that.

Posted by: Ron Brown at March 13, 2007 09:15 PM

Rhinehold, you don’t know what you are talking about. Fact: the proceeds from the refi- loans got spent, NOT INVESTED.

There is no foreclosure, no default, no bankruptcy if folks who refinanced keep making their mortgage payments, Rhinehold. BECAUSE foreclosures are increasing dramatically, because defaults are climbing, because Bankruptcy filings are going up, not down, SAYS these folks are not able to make their payments. WHY? Either their wages went down or their expenses went up, or BOTH. And there is government data for both.

Posted by: David R. Remer at March 13, 2007 09:25 PM

David,

The ARMs went up on those loans, the monthly mortgage payment went up by 20-50% for many people, they then can not afford the loan. Ask people who knows someone who has been through a foreclosure recently, that’s the main culprit. Not the ‘declining real wage’ but their own stupidity in not thinking that their payments would go up that much so soon.

Yes, they spent the money, that’s part of the problem. I never suggested they invested it, they spent it because it was like a big party to them. They didn’t see anything other than 6 months down the road. Now their loans cost more than they did when they were fixed before they refinanced, they effectively lost the finance charge they paid to get the loans and the money they got out of the house is spent so they are so upside down that they can’t ‘re-refinance’ and end up just losing the house.

Posted by: Rhinehold at March 13, 2007 09:34 PM

Rhinehold said: “401K fund managers look at what stocks are rising and what stocks are falling and move the stocks around in order to maximize growth irregardless of how the ‘overall market’ is doing.”

You have a lot to learn about the 401K industry. They are not daytraders and their mixes of stocks for big cap, small cap, foreign, diversified, etc. do not get remixed on a frequent basis. And that is as it should be. 401K’s are intended for the long term financial retirement investments. A large number of them don’t remix except on a monthly, quarterly basis, or semi-annual basis.

Which is why I advised 401K investors to get out. They were poised to lose what they gained in coming months, because 401K managers don’t react to market fluctuations or corrections, and neither do 85% of all 401K investors.

At any rate, having all my money in cash, I am pleased to buying on these big down days in small percentages, and am prepared to do so throughout the rest of this summer as the economy slows and the market drops. This is what I advised 401K investors to prepare for back in June.

But, if you read my article of June, you will see conservatives saying I didn’t know what I was talking about. Well, I am buying while they are selling trying to minimize their losses. That’s all the proof I need to know I was right.

Posted by: David R. Remer at March 13, 2007 09:39 PM

As a manager in the financial services industry, I have been buying subprime indirect car loans for years. We use it like an individual might, to boost our revenue by taking on more risk. Pooling these indirect car loans allows us to mitigate risk because we can expect and overall portfolio return and default rate. In the case of indirect auto loans the over all rate minus the losses pays a higher rate to us than we can earn making “A” paper loans.

As an industry, the financial services industry, knew this was coming. To the points on this post you have individuals managing payments and not manaing total debt. They get the 3/1 ARM or Interest Only mortgage with the hope that they can grow into the bigger house and bigger payments through promotions and career success, maybe even tax cuts! ;) And some fail, like those that buy a car beyond their budget fail.

Financial institutions accept the risk of lending money knowing there will be default, and we reserve for that default. That loss.

Home ownership is at a record high right? I would have faith that once these families, mothers, fathers, children experience what it is like to live in a house. That they will, in the long run, do everything they can to maintain that house. Or even better, as they learn from poor decisons make better ones on their next purchase. And for the kids, they will learn from watching their parents suffer.

And FYI, when I have “Joey Bagofdoughnuts” in my Collections department call on loans and get payments, it is exceedingly rare that we will NOT get the mortgage payment.

Great discussion

Posted by: Honest at March 13, 2007 09:42 PM

Rhinehold said: “I don’t know people are stupid enough to fall for them, I sure ran from them screaming. My take on it is that we either need to educate better or let them learn from their lessons by having to get back on their feet from their mistakes.”

Financial literacy in this country is appalling. I agree with you education is very much needed from 3rd grade on regarding financial management.

I differ with you on letting them learn from their mistakes. How does one learn from losing their home or having to declare bankruptcy. I guarantee you, 90% of those who do will not be blaming themselves or their own actions for what happened.
Nor should they if they were forced out of a higher paying job into a lower paying one, or saw their savings wiped out by medical costs, or saw their disposable income shrink with rising insurance costs, food costs (seen the price of vegetables lately), gasoline which was 30 to 40% cheaper when they took out their mortgage or refi, not to mention home heating and cooling costs.

Then of course there is that segment of the sub-prime mortgage industry that convinced Congress and far too many low wage American first time buyers that 40 or 50 year mortgage was the way to go. OUCH! They never did achive equity in their home. And if the job requires moving, they are now finding themselves have to pay steeply out of pocket to sell their house and move.

Posted by: David R. Remer at March 13, 2007 09:48 PM

“foreclosures are increasing dramatically, because defaults are climbing, because Bankruptcy filings are going up, not down, SAYS these folks are not able to make their payments. WHY? Either their wages went down or their expenses went up”

David,

You must know by now that it’s all the fault of the “lazy man”! If Mr. Lazy weren’t so lazy we’d all live in Shangri~La! Having read the headlines about the military being stretched to the limit thousands of people would be lining up to serve to solve the problem. We’d all offer to do our share both physically and financially.

We must get rid of Mr.Lazy! Then we’ll be fine.

Posted by: KansasDem at March 13, 2007 09:50 PM

Honest, Brea-based ResMAE Mortgage Corp. said Tuesday that it had filed for Bankruptcy Court protection.

Santa Monica-based sub-prime lender Fremont General Corp. said it no longer would offer second mortgages to home buyers who need to borrow their down payment.

Last week, Irvine-based New Century Financial Corp. said it would have to restate earnings for 2006 because of losses tied to sub-prime mortgage defaults.

ResMAE is at least the 20th mortgage company to be sold or closed as delinquencies rise and the market for home loans to high-risk borrowers contracts.

Doesn’t sound to me like these corporations did very well in managing their risk as you allude in your comment. They may be a small piece of the sub-prime industry pie at the moment, but, like the CEO of CountryWide said today, there will be ripple effects for some time to come.

Posted by: David R. Remer at March 13, 2007 09:55 PM

Rhinehold, the majority of ARM’s are not held by the working poor. Those are middle class and upper class getting hit hardest by ARM’s. A lot of them with college educations. So much for American education, in math, anyway.

Posted by: David R. Remer at March 13, 2007 09:56 PM

Loyal Opposition said: “The problem is that too many people see that low monthly payments will put them in a property they couldn’t otherwise afford. Real estate agents and banks encourage them, and when the loan balloons at the end of the fixed rate period there’s little or no equity, bad options for refinancing, and subsequent disaster.”

You nailed it. That is the scenario that is giving the markets the heebeejeebees. There is going to be a liquidity problem for low income earners. The days of low wage earners and illegal immigrants buying homes on 50 year mortgages are behind us, and that spells trouble for the construction, sub-prime lending, and credit card industries to start with as foreclosures and bankruptcies continue as aftermath. Then come the ripple effects.

Posted by: David R. Remer at March 13, 2007 10:02 PM

Kansas Dem, add to your facetiousness the fact that a huge segment of our population cannot and do not balance their checkbooks, and we have one helluva statement about both our educational system and predatory lending industries unleashed by the Republican reign of laissez faire (or should that be LAZY Faire?)

But, I have to say, I don’t see Democrats tackling these issues in Congress. I see them giving up ground at every turn on almost every issue. It is starting to look like Democrats are going to do nothing unless and until they can get a one party government of their own, like the Republicans had. In my eyes, that makes them Republocrats, with little to distinguish them apart from each other.

Debt is the problem. If Democrats think PayGo is going to be all they have to do, we are in REAL trouble.

Posted by: David R. Remer at March 13, 2007 10:07 PM

“They didn’t see anything other than 6 months down the road.”

Rhinehold,

You’re undoubtedly somewhat right. What we see now is that nearly half of our fellows are able to truly sustain themselves. We’ve failed!

We’ve failed personally and as a nation! We’ve failed to the extent that we’re willing to blame it on anything but ourselves. Hell, let’s blame it on the Hispanics!

We have a Presidente’ that say’s we don’t need a fence. I guess it’s better to round up the “strays” after they come over on our side. Well, duh, we’re mistreating human beings with our detention system. It will take 60 years to fix what Bush screwed up south of the border.

Posted by: KansasDem at March 13, 2007 10:18 PM

David

Timing is everything. Despite the fall in stocks this week and even today, If you sold on June 10 and missed the appreciation and dividends of a portfolio of the S&P 500, you would be still about 9% poorer. If you had some small cap and international stocks, you would have lost even more by selling too early.

My retirement fund allows me to check back at earlier dates. I did the math. The account is 18% HIGHER today than it was on June 10. That is subtracting my contributions and after today’s decline. I have a reasonable balance of index funds, international, S&P 500 and small caps. I do not trade. I just do what anybody can do AND many people do.

The last six months were great for stocks. You missed that if you sold off in June. We gave some back in the last couple of weeks, but we are still better off for being in the market.

2006 was a great years for investors, especially the last six months.

If you predict downturns, you will be right eventually. The trick is to figure out when and not be out when the upturn comes.

Posted by: Jack at March 13, 2007 10:27 PM

David, you sound to be unwittingly something of a “supply-sider” here in your sudden concern for the markets and investors.

Fact is that a collapsing housing market can actually be very good for the savvy little guy who isn’t yet in the market and who lives on income instead of investments. If your goal in buying a house is to LIVE there and slowly pay it off instead of flip it in a couple years, or live there and treat it like a giant piggy bank to borrow against, it’s not a bad time at all to buy when property values are coming down.

I know of local neighborhoods where properties were totally unaffordable in recent years for moderate-income people that are now covered with For Sale signs.

Of course, taking the supply-side point of view, you might ask how many of these people work for companies that might now downsize or who might lose out on other investments. And you’d be very right to ask that—that larger picture is a very Republican point of view, however.

Posted by: Loyal Opposition at March 13, 2007 10:31 PM

They are not daytraders and their mixes of stocks for big cap, small cap, foreign, diversified, etc. do not get remixed on a frequent basis.

There is a middle to the two extremes you are pointing to. When selecting a 401k you can choose the fund that is more aggressive and does move stocks around (a bit) or the very long term growth 401k plans, depending upon your need and disposable investment savings.

I am not suggesting these funds are changing stocks several times a day, but they do look for trends and move stocks around over the period of months to catch rising submarkets and industries that will do better than others and get a better return for their customers.

I choose to put part of my investment money into a long term strategy fund and another part into a higher risk, greater reward, historically well run fund that I think will increase over the long haul better but know that it is possible that I will lose because the funds are not as stable.

It is not a one size fits all industry.

Posted by: Rhinehold at March 13, 2007 10:33 PM

the majority of ARM’s are not held by the working poor.

No, but as a percentage of how many poor homeowners moved to ARMs this recent low interest period when the banks swooped in and ‘hucked’ them out of their money by selling them a bill of goods, I think you’ll see a huge rise in the number of poor who did sign up. And a huge rise in the number of these people who are foreclosing. The middle class and more wealthy are either doing ARMs because of good financial decisions, stupidity or taking a chance to make out ok knowing that they have the funds to keep from going under.

I live in the zip code in the US with the worst foreclosure rate. I see what goes on around me and I did what I could to educate those that would listen not to sign up for the ARMs. Now I see for sale signs all around me, a great opportunity for those with funds to come in and flip those houses right back to the people who just lost them. It’s sad, but it’s not the government’s fault…

Posted by: Rhinehold at March 13, 2007 10:37 PM

Jack, for 401K investors the trick is to be in a position to buy at or near market bottoms given opportunities from 1 to 5 years out.

Yes, you made some money, but, if you have not stop lossed, you are still losing what you gained. And if you stay in for the full 10% or more correction, you will have lost all your gains. You would have earned more with a passbook savings account in Credit Union. Are you buying into this steep down days? Or, has your investment level over these last 8 months left you risk averse in a downtrending market, praying for a reversal in the market to stop your losses?

For a majority of 401K investors, selling now equates to sealing their recent losses. Hence, if the correction continues, they will keep losing their gains since last June.

On the other hand, if they put their money in international stock funds and fixed funds back in June, they would NOT be risk averse to buying on these steep down days of the last two weeks, and poised to keep their meager earnings of the last 8 months and earn better than fixed funds in a slowing GDP economy which is now assured for the rest of this year.

Nothing is gained in the stock market if a correction wipes out the gains. Like you, I stayed in the international funds at 20% until early February at which time I reduced it to 10%, knowing that the American correction was coming and that it would have an international effect. Which it is. But, now is the time for me to incrementally bump it back up again.

Market timing plays have a radically different strategy with 401K funds than with OTC trades. 401K plans don’t facilitate day and reactive trading. They do facilitate a longer trend strategy watching market fundamentals and psychology and acting in anticipation of fundamentals.

You make more in a 401K fund by selling when the market exceeds its fundamentals on psychology, and buying on the big dips, rather then riding the troughs and crests which cancel each other out to a great degree and yield only what the longer term market direction is capable of producing.

Posted by: David R. Remer at March 13, 2007 10:46 PM

David,

You are correct!

The current Populist Party has some ideas.

Somewhat liberal, somewhat conservative, mostly in favor of preserving America.

http://www.populistamerica.com/about_us

I’m thinking it’s the best of everything. Everything is tempered by something else. No needs seem to be overlooked at the cost of someones selfishness.

IMO this could be the party of today!

Posted by: KansasDem at March 13, 2007 10:48 PM

Rhinehold said: “Now I see for sale signs all around me, a great opportunity for those with funds to come in and flip those houses right back to the people who just lost them. It’s sad, but it’s not the government’s fault…”

Problem is, those that just lost them, are no longer qualified to repurchase due to bad credit ratings. There in lies the “soft” in the soft housing market. You can’t flip those house back to those who just lost them. Because when they lost them, they also lost the credit rating needed to qualify to buy them even at lower cost and higher rates. The sub-prime lender industry is contracting. And the Democratic Congress is now holding hearings to go after the predators.

Flipping? Not in this housing market and not in most areas of the country. Supply simply exceeds qualified buyers and this gulf is going to increase at least through the Summer and Fall.

Posted by: David R. Remer at March 13, 2007 10:55 PM

Kansas Dem, I will check it out. Thanks.

Posted by: David R. Remer at March 13, 2007 10:56 PM

David

I learned in college that market timers end up with holes in their shoes. I have invested my 10% since 1988. Sometimes I paid more, sometimes I paid less for the same amount of stocks. I didn’t sell off in 2000, so I lost money. On the other hand, I didn’t sell in any of the other years so I made money. I lost money only 4 out of the last 18 years. Even with those losses, I made 12.1% a year for those 18 years.

Let me repeat that I am not a smart stock picker. I just do what anybody with a little money can do.

If you had an S&P index fund in 2002, you lost 22%. But the next year you made 28.42% and if you were in small caps you made a whopping 42.9%.

So you have risks on both sides. How many guys “saved” their money by getting out in 2002, but then forgot to get back in by 2003?

Nobody has been able reliably to predict the market. Following your advice in June would have cost an investor about 20% of his portfolio. Maybe you will be right this time. Maybe not. The closest thing we have to a free lunch is a diversified portfolio. You should own some international, some small cap, some large cap, real estate and if you are near retirement some bonds. If you do that you will be okay. Maybe not this year, but over your working life.

BTW 2 - Timberland tends to return around 14% a year if you take reasonable care your trees and you are patient.

Posted by: Jack at March 14, 2007 12:06 AM

David:

This is an excellent buying opportunity. Here are my comments to your june post:

I think you are wrong about recommending people sell stocks for the following reasons:

1. The market has an upward bias. In general the Stock Market increases over time.

2. Stock valuations are extremely low, as measured by the Federal Reserve. (About 30% undervalued). Earnings on the S&P are about 7% of stock price. Investors can “borrow” at lower rates and buy companies through stock purchaces. This arbitrage will balance out over time with either higher interest rates or a higher stock market. In the meantime it will act as a floor on the stock market.

3. Pessimism. When pessimism of high, (after 9/11) it is a great time to buy into the stock market. Conversely when optimism reigns (Like in the last part of the last decade) it’s time to sell. Right now stock investors are pessimistic.

4. We have a strong economy with corporate earnings surprizing on the upside. When earnings reports surpize on the upside usually the market goes up.

5. The Fed is near ending it’s rate hike schedule. The Fed is clearly saying that increases in interest rates are “data dependent”.

6. Commodity prices have moderated. The front cover of Barron’s magazine is bragging about commodities. It’s a sure sign we are at or near a peak.

7. There is no sign of a recession.

I would like you to write down the date and what the indexes are saying. I believe in a year or two those who follow your advice will regret it.

I want you to notice that I correctly predicted the fall in commodities, the ending of the fed raising interest rates and that the market was at a bottom and not a top.

Here are my predictions 8 months later. Go ahead and right them down.

1. This recent sell of is a buying opportunity. Stock prices will be substancially higher 12 months to two years from now. Just like last summer, if investors buy when you say sell, they will be well rewarded.

2. The fed will begin to ease rates before the end of this year. (probably late summer).

3. The economy will continue to slow. There will be no recession in 2007.

4. What I would now change from last time we had this exchange is that I now see signs of a recession, most likely in 2008. This recession will not be caused by debt as you say but by the fed. The fed is a new group of people who are want to make their mark as inflation hawks. There is a good probablilty that they will leave interest rates high too long and will cause a minor recession. I am not yet predicting a recession in 2008, but am concerned about one.

It’s a great time to buy,

Craig

Posted by: Craig Holmes at March 14, 2007 12:16 AM

David:

On the other hand, if they put their money in international stock funds and fixed funds back in June, they would NOT be risk averse to buying on these steep down days of the last two weeks, and poised to keep their meager earnings of the last 8 months and earn better than fixed funds in a slowing GDP economy which is now assured for the rest of this year.

Those who invested on the day you wrote you post in the S&P 500 or just about any quality us large cap stock fund are in great shape today and are pleased with their portolios.

Craig

Posted by: Craig Holmes at March 14, 2007 12:21 AM

No, Craig, not if they are still in the market. They are only in good shape (5 to 8% earnings after today’s losses since June is still not bad). But, if they stay in for the summer, they will have gained little to nothing in the year past in American stocks.

The consumers have been the mainstay of this economic up cycle, they bailed out the recession. They are now strapped to the wall with debt as consumer middle and lower class. Their debt can’t support the economy going forward and there is little else for the economy as a whole to grow on.

Staples will do OK, retailers catering to the upper 20% will do well, the medical industries will do well, and the energy industries will do well. But, that is not sufficient to prevent the GDP growth drop that is getting underway caused by the dropping discretionary consumerism of the rest of the population.

We agree, now is a good time for 401K’ers to start buying, and continue buying with each large drop, because a floor will settle in and modest equity growth will come thereafter for awhile. But those who never got out last summer will see their earnings eroded before the modest growth produces modest gains again perhaps as early as the end of this year.

It’s almost as if consumer confidence could be read as a six month leading indicator. It was down last June, and now it is climbing. Funny what transitions can do to indicators, making them appear to be Fun House mirrors for the unaware.

Posted by: David R. Remer at March 14, 2007 01:13 AM

David
It is partly the fault of folks that lose their homes because they fell for the Adjustable Rate Mortgage. And they need to know that is a mistake they made. Otherwise they’ll make it again, and again, and again.
It’s also the fault of the real estate agents, mortgage companies, and the lenders that promote ARMs. I asked a real estate agent I know if she or any real estate agent she knows has an ARM. She said “NO WAY” and that no one involved in real estate would have one. I asked her why they pushed them then and she said it was to make the sell.
I believe that experience is the best teacher around. But if folks are uninformed of why some mistakes are made they most likely will make them. And financial mistakes can cost dearly. Not teaching kids how to handle finances is one place where the schools and most parents are letting the kids down. My folks weren’t financial wizards by any stretch of the imagination. But one of the most important financial lessons I learned was from them. That was when they almost lost the farm because the there was more going out than coming in.
I’ll bet that if a school district tried to start teaching kids about finances that every financial institution around would do everything they could to stop it. I get the idea sometimes that they want the general public ignorant when it comes to finances.

Posted by: Ron Brown at March 14, 2007 11:05 AM

Couldn’t agree more, Ron.

I just want to see more truth in advertising and disclosure. If R.E. agents would never want an ARM for themselves, they should be obligated to state the consequences of an ARM to their customers before the contract is signed AND the consequences should be part of the contract.

None of us can be specialists in everything, and that means we ALL must depend upon the credibility, honesty, and expertise of others who perform services for us. Since, we are all dependent upon each other’s expertise, it only makes sense that our rules for contracts include full disclosure.

Posted by: David R. Remer at March 14, 2007 02:34 PM

jrb wrote: I respect you, but I still expect honesty!

David wrote: Where did I say or recommend that we vote out ALL incumbents? I have never said that and will never say that.

The following is from voidnow.org/faq.php#Q04
• (04) QUESTION: Why should voters vote out (or recall) most (if not all) incumbents ?
• ANSWER: Because, most incumbents (if not all) are irresponsible.

You are the President and Founder of that organization, right?

jrb,

I wrote that.
Technically, the phrase:

“(if not all)”

… is not a certainty, and does not equate to:

“all”

The word “if not all” means maybe; it is subjective.
It is not claiming it as a fact.

The word “most” is accurate, in my opinion, and most Americans polled.
I wrote that VOID FAQ, and still stand by it, because most (if not all) politicians ARE irresponsible.
Congress’ actually handi-work makes it easy to prove.
In fact, their irresponsible behavior would fill volumes.
Also, most polls show most Americans agree.

Afterall, can you name 10, 20, 50, 100, 200, or even 268 (half of 535) in Congress that:

• aren’t irresponsible


• aren’t FOR-SALE


• aren’t bought-and-paid-for


• voted YES to ban gifts, soft money, campaign finance reform, etc.


• don’t look-the-other-way


• don’t pander and peddle influence


• don’t spend most of their time trolling for big money donors rather than adequately addressing the nation’s problems


• don’t vote on pork-barrel, graft, waste, and themselves cu$hy perk$ and raises for themselves (8 raises between 1997 and 2006); simultaneously while our troops are risking life and limb, don’t receive adequate medical care or promised benefits


• and aren’t growing an already severely over-bloated government ever larger, to nightmare proportions.

Before you provide a list of names, be sure to check their voting records first.
Unless someone can name at least 268 (half of 535) in Congress, than the word “most” used above is true.

The main point is, and the logic is sound:

Congress will not become more irresponsible by rewarding irresponsible politicians by repeatedly re-electing them. It will make them more irresponsible.

David R. Remer,
Great article.
Hopefully people will take it more seriously.
Unfortunately, most do not because they don’t yet feel the painful consequences.
There will be consequences for:

• $8.8 trillion National Debt, which has never been larger. In 1950 dollars, debt now is quadruple what it was afer WWII.


• The %Debt to GDP ratio is over 64%, up from 33% in 1980 (i.e. doubled).


• There is no myth about stagnated incomes.


• The gap between the wealthiest 1% and the rest of the U.S. population hasn’t been larger since the Great Depression of 1929. There is no myth about the 1% wealthiest in 1980 having 20% of all wealth, and that 1% now has 40% of all wealth in the U.S.


• Deficits have never been larger, and $200 to $400 billion annaul deficits (in 2006 dollars) are planned to continue for years.


• The nation is swimming in massive debt. $20 trillion of personal nation-wide debt and $22 trillion of total federal debt. That’s $42 trillion of nation-wide debt (313% of GDP).


• Median household incomes have stagnated for 6 years, not to mention more workers per household, more debt, and longer work hours.


• Energy vulnerabilities.


• Energy costs are increasing (have you looked at your fuel and electricity bill lately?).


• Social Security is $12.8 trillion in the hole and has never been in worse shape.


• The Pension Guaranty Benefit Corp. is $450 billion in the hole.


• Medicare has never been in worse shape, with hundreds of billions of unfunded liabilities for the next year or two.


• We are still sailing directly toward the entitlements and demographics iceberg, with 77 million baby boomers that will be earning less, spending less, paying less taxes, and becoming eligible for Social Security and Medicare benefits at a rate of 13,175 persons per day!


• Government starting unnecessary war(s).


• War in Iraq and Afghanistan are not going well, and the cost is very high (lives and money). Yet Congress keeps voting on pork-barrel, and 8 raises for themselves between 1997 and 2006.


• Corpocrisy, corporatism, and corporate welfare is rampant.


• Foreclosures have risen significantly for two years (896,000 in 2005, and 1.2 million in 2006).


• Interest rates are increasing.


• Inflation is increasing (up from 1.59% for 2001 to 3.24% for 2006). With so much debt, more excessive money-printing could make it worse.


• Foreign competition has never been greater. it is a race to the bottom.


• Foreign investors (e.g. China) are starting to reduce their exposure to the falling U.S. dollar.


• Trade deficits have never been larger.


• Corruption in government is growing (it always is, without sufficient Transparency and Accountability to limit/reduce it), and the longer voters ignore it, the more painful reforms (if possible) will be later.

Nobody has a crystal ball, but it’s not hard to see the real potential for an economic meltdown.
Look at all that above.
It’s a bit too much to ignore, unless you’ve got some really rosy rose colored glasses.

Posted by: d.a.n at March 14, 2007 04:48 PM

D.A.N.

Thank you for your clarification RE: the authorship of that faq. I stand corrected. Sorry David.

However, I would (and do) take issue with the fact that now you are trying to say that, that statement does not mean what it blatantly says. “Most incumbents (if not all) are irresponsible”

For certain, “if not all” does not mean “maybe.” Or, are you suggesting that your sentence has the same meaning as:
Most incumbents maybe are irresponsible.

This would suggest that you meant: It is possible for most incumbents to be irresponsible. This is only a statement you would make at the risk of being labeled Captian Obvious. That statement would be along the lines of: It is possible that teenagers are bad drivers. Therefore, I highly doubt that someone of your obvious knowledge and intellect meant to write that.

Clearly, no. What you wrote and the meaning you are attaching to it now are very different. What you typed, clearly, is: Most incumbents are irresposible, with a few exceptions I would say all. If that is not what you meant, you may wish to look at altering the text a bit.

And by the way, D.A.N., I think you give me too much credit. I can’t even name 268 in congress without looking it up. ;^)

Posted by: jrb at March 14, 2007 05:10 PM

David

I do not understand this getting out last summer thing, if you advise people to buy on the dips.

Say you had stocks worth $1000 last year in June and you have that $1000 in cash. You buy T-bills and now you have around $1040. You have lost nothing

Now take the opposite. You kept your $1000 in a diverse porfolio. It went up. Before the “crash” you had around $1140. After the crash, you are down to around 1110. You still got $70 more than if you bailed in June.

You can argue, as you have, that things will go down (who knows?) but then you should not be telling anybody to buy on the dips. If the market is trending down, sell your stocks and sit on your hands until the upturn.

Re ARMS, it depends on how you use them. When I bought my house, I got a three year ARM at 5.85%. Fixed mortages were a percent higher. When I refinanced, I got 4%. I would have sure refinanced a 30 year fixed too, I would just be paying more in the meantime.

Besides, some people do not plan to live in their house for 30 years.

Posted by: Jack at March 14, 2007 05:13 PM

Jack, you should know better than to argue anecdotally to broad demographic trends and statistics. By definition, there are exceptions to broad demographic and population statistical trends.

As for the market, you are talking about timing the market in much finer detail than I am. I am talking about 401K traders, WHO, tend to leave their money in 401K portfolios without redistributing funds between fixed, international, and range of domestic equity funds. The argument was that 401K investors, INSTEAD of ignoring the markets altogether, should pay attention at the very least to whether or not the markets have exceeded fundamental supports for pricing. If the markets have, they should move funds to fixed. If the market pricing is not exceeding fundamental supports (that information is readily available everyday on MSNBC, for example), then they should be moving from fixed to equities.

That simple strategy will pay them better returns than just leaving their funds untouched over decades, which is what a majority of them do. That strategy is what I advocated in June, and it was a sound strategy.

Your mileage may vary depending on market accumen, activity level, and fund mix availability.

Posted by: David R. Remer at March 14, 2007 05:39 PM

jrb, are you arguing that D.A.N is not entitled to the opinion that most if not all incumbents are irresponsible? Surely not. Yet, you clearly quote his opinion and argue with it. You have a right to believe that most, if not all, incumbents are truthful, honest as the day is long, an responsible for all of us and the nation in every action. That’s fine.

VOID never pretends to represent all voters. VOID exists and appeals to those who believe for their own reasons that far too many incumbents are failing to lead as they the voters think they should be. And if a voter believes incumbent politicians are failing to lead as expected, the LOGICAL response is to vote for a challenger to that incumbent in the next election, because voting for the incumbent is voting for more failure in the eyes of the voter.

The logic is impeccable and sits as the foundation of the entire concept of voting in the first place. One does not have to vote for the status quo to keep incumbents in power. The vote is not necessary to preserve those in power, they will do that fine all by themselves. The reason for the vote is to REMOVE persons from power.

That simple understated premise of voting and democracy is LOST on most voters.

Posted by: David R. Remer at March 14, 2007 05:47 PM

David,

Maybe I wasn’t clear enough with what I typed. You seem to have misunderstood [or not actually read] my post. I in no way suggest anyone is not entitled to their opinion.

You stated:

jrb, are you arguing that D.A.N is not entitled to the opinion that most if not all incumbents are irresponsible? Surely not. Yet, you clearly quote his opinion and argue with it.

Actually, I quote his opinion then point out his subsequent mis-characterization of that opinion. That is followed by my suggestion that if his subsequent characterization is more acurately descriptive of his opinion than his initial assertion then on the site he may wish to alter that.

You have a right to believe that most, if not all, incumbents are truthful, honest as the day is long, an responsible for all of us and the nation in every action. That’s fine.

I don’t believe any politician is necessarily honest or responsible. That said, my initial point was that simply removing incumbents will not solve all of our country’s ills. And, honestly, sometimes it seems like you present that as the solution for EVERY problem.

Additionally, I agree with you. Getting rid of many of those in congress would be a good start, and I applaud the efforts of VOID. Also, I have never suggested that the logic behind VOID itself is in anyway flawed.

I would maybe disagree with you, however, on your last point.

The logic is impeccable and sits as the foundation of the entire concept of voting in the first place. One does not have to vote for the status quo to keep incumbents in power. The vote is not necessary to preserve those in power, they will do that fine all by themselves. The reason for the vote is to REMOVE persons from power.

I would argue that the “true” reason for the vote, the foundation of the entire concept of voting in the first place, is to provide citizens with the illusion of power and control over their government. Posted by: jrb at March 14, 2007 06:18 PM

jrb, thanks for the clarification and answers to my questions. We are in general agreement.

Voting arose from the demand of the people. I doubt they brought it up as an illusion of participation. I think their motives in establishing the vote were more concrete than that. Many of us have forgotten or failed to learn what their motives were initially. King George required no vote to stay in power. The vote is how you remove Wannabe Kings from power without having to fight the military under their command.

Posted by: David R. Remer at March 14, 2007 06:32 PM

David,

I suppose I view voting in this manner in large part due to the electoral college and its prescribed mechanisms.

Posted by: jrb at March 14, 2007 06:38 PM

jrb,

You’re right.
Removing irresponsible incumbents won’t fix everything.
But, it’s a good start.
Certainly, rewarding bad politicians by repeatedly re-electing them won’t fix anything.

Jack, Craig,

The picture isn’t getting rosier for most Americans.
We’re at a turning point.
If this Congress continues to live up to its Do-Nothing reputation (i.e. still 90% of the same bunch), it will only get worse.

Now, just think if we all had such a rosy outlook.
Where would we be then?
We’d probably be up [expletive] creek without a paddle.

Posted by: d.a.n at March 14, 2007 06:57 PM

D.A.N.,

You wrote:

Certainly, rewarding bad politicians by repeatedly re-electing them won’t fix anything.

My response:

Touche.

Posted by: jrb at March 14, 2007 07:05 PM

jrb,

Thanks.
I respect your comments.
You’ve got valid points.
We are perhaps only in minor disagreement?

I’d like to further this discussion about debt.

After WWII, we had huge debt.
But, Congress almost paid it off in the two decades that follow.
WWII was a HUGE war.
I’m not trying to diminish the sacrafice of any of our brave troops, but this war is not anywhere close to the scope of WWII.
What do you think will be the consequences of so much debt over the next two decades?
Others, feel free to respond.

Personally, I think we may have already passed the point of “no painful consequences”.
I really do think will be some painful consequences for so much fiscal irresponsibility (see list above).

What do you think?

Also, do you think the recent market volatility has anything to do with it ?
I do. What we’ve see so far is mild. It could get worse. Some say no recession in 2007?
There are no crystal balls. Just predictions. I think massive debt will continue to weigh us down for several years, like trying to swim upstream with an anchor tied around our neck.

Posted by: d.a.n at March 14, 2007 07:22 PM

D.A.N.

What do you think will be the consequences of so much debt over the next two decades?

Look, I too feel we have gotten ourselves into an uncomfortable situation. And, I think when we talk about debt we should be clear whose debt we are talking about—i.e. Americans’ personal debt [which is an issue] or the taxpayers’ national debt [which I believe is what you are asking about].

The consequences of our debt is exceptionally difficult to predict and, I think you would agree, depend on many factors both within and, outside, the control of our leaders in power. However, I would suggest that our uneducated, non-participating, populace should shoulder some of the blame for being complicit in this fiasco. I am certain that we will run into paiful consequenses.
I thought in late ‘05 that a recession was around the corner when the yield curve flattened. I still think it is looming. With respect to market volatility I am not aure I understand your question. Are you asking if I think the debt has a causal relationship with recent volatility, or vice versa. The latter is what I think I read.

Ultimately, I think we could reduce spending, and thus our debt, if people [citizens] were willing to be responsible and active. But, to borrow a line from one of my least favorite people, we fight the debt with the population we have, not the population we want.

Posted by: jrb at March 14, 2007 07:58 PM

Hmmmm … that doesn’t bode well.
Personally, and this is just a guess, I think the next 20 years will be a steady, gradual decline in most areas, due to the list above.
I’m beginning to think it’s out of control.
We will see.
It’s hard not to be concerned.
Some have no concerns at all.
Perhaps it is because they are wealthy?
My home and cabin in the mountains are paid for, my son already finished college, but I’m still concerned that we’re not on the right path.
It’s hard to think we’re on the right path when there are so many problems, growing in number and severity.

If we’re not careful, we may be revisiting history.

Posted by: d.a.n at March 14, 2007 08:22 PM

The Electoral College is still voting, just a different population doing the voting. The underlying premise of voting is not altered even by the Electoral College.

The Electoral College is a throwback to a time before TV, before Radio, before Telephones even, when most of the people could not be expected to attend the campaign whistle stops of the candidates and therefore, could not be informed about the Presidential candidates. It is like a human appendix, serving no useful purpose and occasionally causing considerable harm by its refusal to evolve away completely.

Posted by: David R. Remer at March 14, 2007 08:33 PM

Sorry D.R. Remer I was unable to respond to your post regarding the the mortgage related companies closing, restating earnings, and the ripple effect.

When mortgage markets heat up there is a sudden rush to create mortgage based companies. When they slow down they dry up, close, fail, and falter. While the volume her is up, it should not surprise anyone that mortgage companies that were not run properly or over bet on sub-primer mortgages are failing or struggling.

We should be a spike in default rates, no question. However, it would people still pay that mortgage first. And once someone has owned, lived in, and experience their own home … they’ll want to get back to it. I am always amazed at what financial service customers will do to maintain their house above a car, credit card, or student loan. They pay the house first.

That said, I am all for ensuring that more people don’t get hurt. Financial literacy is critical starting in junior high. This way when our next generation is offered a free 40 ounce beer mug for signing up for a credit card, they know to ask questions and/or just avoid doing it.

Here is an interesting joint statement for bed side reading:

http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/IA-SPMortgage.pdf

Page six is where to start, it supports your post.

Posted by: Honest at March 14, 2007 09:29 PM

David:

No, Craig, not if they are still in the market. They are only in good shape (5 to 8% earnings after today’s losses since June is still not bad). But, if they stay in for the summer, they will have gained little to nothing in the year past in American stocks.

Since you called a market top in stocks last June both the S&P 500 and the Nasdaq are
up over 11% including the recent sell off. In June the Dow was at 11,000 now at 12,000. This is only in 9 months. So 11% in 9 months is a very good return.

The consumers have been the mainstay of this economic up cycle, they bailed out the recession. They are now strapped to the wall with debt as consumer middle and lower class. Their debt can’t support the economy going forward and there is little else for the economy as a whole to grow on.

That is not true. The fed has yet to begin lowering interest rates. This is a very normal recovery. It is different in the every recovery has it’s own personality. It is normal to have imbalances at this stage. Nothing to worry about.

Staples will do OK, retailers catering to the upper 20% will do well, the medical industries will do well, and the energy industries will do well. But, that is not sufficient to prevent the GDP growth drop that is getting underway caused by the dropping discretionary consumerism of the rest of the population.

You are just seeing a fed generated slowdown to allow the fed to catch up.

We agree, now is a good time for 401K’ers to start buying, and continue buying with each large drop, because a floor will settle in and modest equity growth will come thereafter for awhile.

There hasn’t been a bad time to buy in the last four years. This has been a remarkably stable rally.

But those who never got out last summer will see their earnings eroded before the modest growth produces modest gains again perhaps as early as the end of this year.

Those who never got out last June are enjoying great returns. They should enjoy additional returns going forward.

It’s almost as if consumer confidence could be read as a six month leading indicator. It was down last June, and now it is climbing. Funny what transitions can do to indicators, making them appear to be Fun House mirrors for the unaware.

Pessimism in the market is rising to levels last seen since last June which was the latest great buying opportunity.

Craig

Posted by: Craig Holmes at March 14, 2007 09:54 PM

David/Dan:

Net worth of U.S. households skyrockets

By JEANNINE AVERSA, AP Economics Writer
Thu Mar 8, 5:27 PM ET

WASHINGTON - The net worth of U.S. households climbed to a record high in the final quarter of last year, boosted mostly by gains on stocks, the Federal Reserve reported Thursday.

Net worth — the difference between households’ total assets, such as houses and bank accounts, and their total liabilities, such as mortgages and credit card debt, totaled $55.6 trillion in the October-to-December quarter.

That marked a 2.5 percent growth rate from the third quarter, the previous quarterly record high. Stocks gains helped fuel the increase in net worth, although real-estate gains played a role, too.

For all of last year, households’ net worth rose by 7.4 percent, a slower pace than the 7.9 percent increase registered in 2005.

Household debt, meanwhile, grew by 8.6 percent in 2006, down from a 11.7 percent increase in the prior year. The Fed said this deceleration “was accounted for by much slower growth of home mortgage debt.”

One of the things I like about this economy is that the household networth keeps growing. 7.4% if very healthy. That is over $3 Trillion dollars new wealth created in one year!!

Even you guys have to admit that assets growing faster than debt is a good thing.

Craig

Posted by: Craig Holmes at March 14, 2007 10:02 PM

David/Dan:

This is from Markmans article above

If the market continues to stumble over the next five months, as I expect, then it will foretell at least a serious pause in economic growth on the six month horizon, though probably not an outright recession. My economic and investment models continue to forecast the potential for one last hurrah in stock prices this month before a precipitous decline in July through October. That’s potential, not a guarantee. But it’s enough of a potential to worry about.

He was very very very wrong about the market. The market enjoyed great gains from July to October. The recession he predicted in the article you are quoting did not happen. On reflection Markman could not have been more off the mark. He predicted down, and the market has gone straight up.

I am really not sure of your point in quoting him. Markman predicts a tough rest of 2006 and household networth skyrockets?

Craig

Posted by: Craig Holmes at March 14, 2007 10:07 PM

Honest:

Sorry D.R. Remer I was unable to respond to your post regarding the the mortgage related companies closing, restating earnings, and the ripple effect.

When mortgage markets heat up there is a sudden rush to create mortgage based companies. When they slow down they dry up, close, fail, and falter. While the volume her is up, it should not surprise anyone that mortgage companies that were not run properly or over bet on sub-primer mortgages are failing or struggling.

I can respond a bit to your thoughts. It has been pretty obvious to many that the real estate in some markets was over heating. There is a website put out my PMI (the ones who insure mortgages in case of default). The measure the residential real estate market for risk of decline. I like their website because they view the market through the eyes of risk. Their goal is to determine what premium to place on a loan in care of default.

Here is the link to that publication it’s great:

http://www.pmi-us.com/lenders/eret.html

What their data has shown for a couple of years now is that while the over all US real estate market is ok, and no great fall off is pending here are some places where the market is crazy. In those markets that have appreciated beyond reason there is some serious issues of depreciation.

I listened today to Bill Gross who is founder of Pimco Funds and manages the largest corporate bond fund in the world. He basically said today that we should call these loans what they are “junk loans”. It is these “junk loans” that are getting all the chatter. They were high risk to begin with and should be regulated.

What I see going forward is a slow unfolding of the issue of defaults confined to these “junk loans”. Bankruptcy of mortgage lending companies is one phase. Look next for “cockroach’s leaving the ship”. This is a term professional investors use. It basically means that as the liquidity leaves a market you will see fraud and legal action. In up markets everyone looks good and the illegal stuff is hidden. Now that the housing market has stagnated, we will be able to see who was doing what in businss.

You will know the process is near and end when you see some guys wearing suits in handcuffs with a policeman pushing their heads down so they can get into a squad car.

It’s all a part of normal economics here in America.

Oh then of course congress will get involved and add some additional laws. I’m not sure how much good that does since people are breaking the ones already on the books!!

Since the US economy basically rotates through these issues, there will be another one on it’s heals. It’s normal.

Craig

Posted by: Craig Holmes at March 14, 2007 11:01 PM

Craig said: “Since you called a market top in stocks last June”

Where? Where did I call a market top last June? I did no such thing. The point was that a meltdown was coming in the Housing Market and that was going to reverse market gains when it came within the seeable future. Hence, the position to be in when it came was as a buyer of equities, not a seller.

That was the point. No one can predict where a market will top or bottom. Even the experts get those guesses wrong. But, one can make an effort to position oneself to be a buyer when it is going down, and a seller when it is nearing the end of its run. With the Housing Meltdown in the foreseeable future, it was good advice to reposition to be a buyer after the meltdown came, not a seller (for non-day trading longer term investors like most 401K holders).

And Markam was NOT very very wrong about the market. He was ONLY wrong about the timeline by a few months. Sheesh, you are sounding like Republican, denying facts to make your case. Has the housing market not been declining? Haven’t prices been falling? Didn’t the stock markets just lose 650 points over this issue?

He was right on everything but the timeline, and given market psychology, that is always a tenuous prediction even for the professionals. But, even his timeline was off by only a few months.

Posted by: David R. Remer at March 15, 2007 02:20 AM

Honest, your estimate of priorities for folks is plain wrong. When people are faced with their child needing medical care or making the mortgage payment, I assure you the vast majority will forego the mortgage payment in lieu of the medical care.

Maslow’s hierarchy of needs comes into play here. The simple fact that the majority of homeowners whose mortgages are foreclosed on, are still working and make more income than their mortgage payment, says they have other spending priorities before the mortgage payment. If this were not so, foreclosures would not be on the rise.

Posted by: David R. Remer at March 15, 2007 02:25 AM

Honest
It’s true that folks will put off other bills to make sure they have a place to live. This is regardless of if they’re buying or renting. Having a roof over your head is a very high priority for most folks. But David has a point too. A lot of folks have spending priorities higher than a mortgage payment.
We own our house free and clear. And while We were paying on the mortgage we would’ve put off, and did a couple of times, paying other bills to make sure the mortgage was paid. That was us. And a whole heap of other folks too. But that’s not everyone.
But while we put off paying other bills a couple of times to pay the mortgage, the one thing we weren’t willing to do is let any of our youngins go without medical treatment. The mortgage would’ve just had to wait. You can always by another house. But have ya ever tried to replace a youngin? It don’t matter how many more you have. You just aint gonna replace the one ya lost.

Posted by: Ron Brown at March 15, 2007 11:56 AM

Craig
Thanks for the link. I was looking of their web site.

Posted by: Ron Brown at March 15, 2007 12:01 PM

Craig,

The networth is largely due to over-priced real estate and stocks. The next recession will erode that, as it always does. That is not the best indicator of net worth. Especially when there is a housing bubble that is still deflating.

Now, if you were to give statistics on people that have more real assets (own them free and clear), and reduced debt also, it would make a stronger argument.

But, as we all know, the $20 trillion nation-wide personal debt has never been larger, and neither has the $22 trillion total federal debt.

We look at the same data and see completely different probable outcomes.

Still, looking at the big picture, and history, and cycles, and the math, there is most certainly a valid reason to be concerned about whether the next few decades will get better or worse. It’s not mere chicken-little alarmism to see the potential for things getting worse when you consider the following factors and consequences of the following:

• entitlements/demographics iceberg we keep sailing directly toward


• an aging population; 77 million baby boomers becoming eligible for Social Security and Medicare at a rate of 13,175 persons per day!


• looming shortfalls in Social Security and Medicare


• healthcare that is not only increasingly unaffordable, but dangerous too!


• exacerbation by massive uncontrolled immigration (legal or not) of the less educated and impoverished (already, 32% of illegal aliens recieve welfare, and already cost U.S. tax payers over $70 billion annually in net losses)


• massive debt (over $42 trillion nation-wide) that has never been worse; 313% of GDP


• government that enforces the law selectively, and ignores the Constitution; eminent domain abuse; abused pardons and politicians above the law; government FOR-SALE;


• government that keeps growing and growing to nightmare proportions


• the inherent inflationist nature of our fiat funny-money monetary system


• energy vulnerability


• In a voting nation, education is paramount.
  But are we getting more educated? The quality of public education is falling while the cost is rising significantly.


• trade deficits that have never been worse


• increasing global competition, and politicians that are all to eager to sell out their fellow Americans; corpocrisy, corporatism, globalization, the race to the bottom

A weatlhy person, perhaps, has little to worry about (which is part of the problem).
But, the majority of Americans might have something to worry about.

Looking at the big picture, it’s not unreasonable or alarmist to be concerned.
Yet, there are those that seem to want to ignore all of that ?

But, then again, the majority of 200 million eligible voters have mostly themselves to thank for it, since they keep rewarding irresponsible politicians by repeatedly re-electing them.

Posted by: d.a.n at March 15, 2007 12:54 PM

That is, a market meltdown is not at all far-fetched.
Especially since Congress is increasingly ineffective, and very deserving of the title “The Do-Nothing Congress”.
And rewarding irresponsible incumbent politicians by repeated re-electing them ain’t do anything but make them more irresponsible.
It’s time for an Article V Convention.
Politicians are afraid of it, which ought to be telling us something.

Posted by: d.a.n at March 15, 2007 01:01 PM

Also, trying to judge the health of the nation and economy by the stock market (alone) is not a good strategy.
The stock markets can be very volatile.
There are winners and losers.
Overall, over a long period of time, stocks go up (even after adjusting for the ever present incessant inflation), but that does not mean everyone is a winner. Who are the winners? For a while now, mostly, the wealthy have been getting wealthier. Wages for the lower and middle income groups have stagnated. And the so-called increased net worth is a red herring, since it is largely based on volatile values of stocks and real estate. But, then, the wealthy actually control our FOR-SALE government.
In 1999/2000, many people lost a lot of money (trillions nation-wide) and never recovered, and a lot of them were baby boomers, which will also exacerbate the approaching demographics/entitlements problem. Many are going to have to work longer, increasing competion for jobs with the younger workers.
Of course, most have only themselves largely to thank for it. There was a definite irrational exuberance that led to a lot of foolish investments in the late 1990’s. It wasn’t hard to see that bubble couldn’t last forever.
The same thing happened in real estate after 1999, as people fled from stocks to real estate.
These bubbles are destabilizing and largely a result of irresponsible fiscal policies.

Before that, there was the housing/real estate bubble of the 1980s (along with the Savings & Loan bail-out) that contributed to the recession of 1990-to-1991. Some how, the tax payers always get screwed. These cycles are perpetuated by bad government fiscal policies (inflationist practices, excessive money printing, debt, borrowing, and general fiscal and moral bankruptcy). But, then, those same tax payers keep rewarding irresponsible politicians for it by repeatedly re-electing them.

Posted by: d.a.n at March 15, 2007 01:46 PM

Rhinehold,

I agree people are stupid to buy into ARMS, but in years gone by we called that usery.

Credit isn’t the problem. Unsound credit is the problem. Jesse Jones was famous for helping to turn around the Depression USING responsible credit and requiring businesses to be responsibly run as a condition of the credit. He wouldn’t like the CEO lottery and platinum parachutes of today’s “free marketers”

Posted by: gergle at March 15, 2007 04:40 PM

I find it hard to believe that 24% (or higher) credit card interest rates is even legal.
I was listening to a guy testifying before Congress that had charged $3200 for his wedding on a credit card.
However, his credit limit was $3000.
Thus, the bank raised his rate to the maximum for going over his credit limit.
After a while he had paid over $6000 and still owed another $4000 !
The day before he went before Congress, the bank called him and said they would forgive the remaining $4000, since he had already paid $6000 on the original $3200. No coincidence there, eh?

Posted by: d.a.n at March 15, 2007 05:10 PM

Yeah d.a.n, just coincidence. Banks are always willing to forgive debts. LOL
My 22year old wanted to get her get some credit established. She sent off for a guaranteed approval credit card. What she got was information telling her that she would have to deposit $500 in the bank issuing it and send them a $25 processing fee. Her credit limit would be $500 but if she wanted a higher credit limit she could deposit more money and they’d raise the limit by the amount she deposited over $500.
Here’s the kicker though. The fees are $250 per year and the first year is due in full soon as the card is issued. The interest rate is 25.9% but after she makes every payment on time for a year they’ll lower it. How much they didn’t say.
She did the smart thing and used file 13. And I’m helping her establish her credit by cosigning on a new Chrysler Sebring.
Last time I cosigned on a car I ended up with it.

Posted by: Ron Brown at March 15, 2007 07:02 PM

I agree Ron, can’t replace a yongin, I’ve attempted sales, barters, and straight trade and those options have yielded nothing but strange looks. ;)

I see it every day on the job at our financial institution. However, as a community entity we try and mix financial decisions with financial literacy. We do have people that know they can make payments walk and go elsewhere when we challenge their need to buy something at the maximum of their debt to equity ratio. Our lending folks get some irrate response about why we would question what the customer wants to buy. Which we do not do, we ask do you need to spend that much given your cash flow?

On the otherside, we are proud when we identify high rate credit cards, mortgages, or auto loans our members obtained when they were too anxious to close and get their car, vacation, or deck. We refiance dozens of cars a week where the Finance & Insurance guy at the dealer managed to get an “A” credit person to sign up for a double digit rate.

Financial literacy is bleeding accross this entire post and is a founding part of solving this problem. It is kind of like teaching your youngin that hot things can burn you. ;)

Posted by: Honest at March 15, 2007 07:35 PM

For every 1.00 earned by someone on a stock trade, someother person lost 1.005 in the market. The .005 is a loose estimate of brokerage fees.

Think about that for a moment. For every winner on a stock trade, there is an equal and opposite loser of their money in stock trades. It’s like Las Vegas where the HOUSE rakes in its commission win or lose, and betters bet on winning someone else’s losings.

When Warren Buffet makes millions on a stock trade, thousands of regular folks investing for their retirement lose from their account. And vice versa of course, on rare occasion, (Buffet has a competitive advantage.)

This is precisely why Bush’s idea of privatized Social Security investments in Equities is such a HORRIBLE idea. In the end, some will retire nicely while others would have done better to put their money in a passbook savings account at .03% interest.

Posted by: David R. Remer at March 15, 2007 08:25 PM

David:

Where? Where did I call a market top last June? I did no such thing. The point was that a meltdown was coming in the Housing Market and that was going to reverse market gains when it came within the seeable future. Hence, the position to be in when it came was as a buyer of equities, not a seller.

When you titled your article :

Get Your Money Out of Stocks, Now!

The advice proved to be completely wrong. Investors who followed your advice missed out on a huge market rally. Since you gave that advice and including the recent market decline the S&P is up 11% in 9 months!!

And Markam was NOT very very wrong about the market. He was ONLY wrong about the timeline by a few months.

He was wrong here:

I think there is real potential for another 10% to 20% decline over the next five months. As much as I wish that weren’t the case, it seems unavoidable.

and here,

So how does this fit into the stock picture? Keep in mind that stocks lead the economy, not the other way around. In other words, while it’s tempting to say that if the economy is weak then stocks should be weak, it doesn’t work that way. The weak stock market last year and so far this year has helped forecast a softening economy in the second half of this year.

Basically he was just plane wrong.

Here was your prediction last June:

Craig, I am using the May 8, 2006 high. I believe the market will correct to around 20% below that mark before fall is over. My 1262.58 is what I had in my notes as the recent high. I failed to update my notes on May 8.

If you were correct, the market would have closed at 1010.06 sometime this fall. Instead it closed today at 1392.28 which is 38% higher than your prediction last June. Not only that but 1392.28 includes all of the recent sell of data.

At some point you and Dan should start to listen to me a bit on economics.

Let me “tee off” on housing.

There is not national meltdown. On a broad scale there is only a deceleration in housing increases. That means that housing was rising at a faster rate before.

There are isolated areas where there is a market decline. (Housine prices declining). (Such as Southern California). The housing market is simply slowing down.

There has however been a melt down in certain commodities. Oil “melted” from $75/barrel to the high fifties today. Copper has “melted” down by about a third. Meltdown means rapid decrease in prices. That has not occured on a national basis.

What has happened is a “meltdown” in the junk mortgage business, or high risk loans. These high risk loan defaults are in California and other places where there has been job issues. (Michigan comes to mind).

There is no “housing bubble” on a national level. There are bubbles on some local levels.

This will subtract from GDP, (maybe a percentage point). Just as the rise in home prices probably added a percentage a year, or something like that.

The economy may go into a mild recession in 2008. That isn’t because of any crisis. It is simply because as recoveries age imbalances occur. They have occured when our country had very low debt (1800’s) and when we had high debt (late 1940’s), and when we had medium debt (1970’s).

The world is thrilled with our credit score. Every day the world votes with their pocket books by investing in US treasuries. Currently they loan us 30 year money at 4.7%. There is no possible way the world would do such a thing if they had any worry at all about our debt load.

There is a debt issue. We do need to have lower debt. But this extreme language of a meltdown is wrong. It is a problem, but there are always problems. I would challenge you to find a time in US history when we didn’t have economic problems to address. I would also challenge you to find a nation that in your opinion does things the way you think they should be done, so we can all compare.

Craig

The current headline news your are reading is about junk loans. The overwelming reason for default is job loss.

Posted by: Craig Holmes at March 15, 2007 08:44 PM

Craig wrote: At some point you and d.a.n should start to listen to me a bit on economics.

Yikes !

So we can be deep in debt and bankrupt too ?

Craig wrote: Let me “tee off” on housing. There is not national meltdown.

No, the sky isn’t falling.

But, the housing market is in a definite bubble that is still deflating.
Debt is huge.
The entitlements/demographics iceberg is huge.
Too many of the slumbering voters don’t have a clue.

There will be a different bubble to follow the real estate bubble. Perhaps another stock market bubble. That’s pretty much been the cycle. These repeated instabilities are largely due to irresponsible federal fiscal policies (i.e. excessive debt, spending, borrowing, and excessive money-printing, which results in too many people runnin’ around like chickens with their head cut-off lookin’ for some place to put their money so it won’t erode away to nothing).

As for a “melt down”, we’re not there yet, but we are on the path. If the government continues to grow the massive debt, borrowing, spending, waste, and excessive money printing, and fails to address the approaching demographcis/entitlements bubble, then an economic meltdown is not at all far-fetched.

Craig, you are assuming that Congress will change direction in time.
That’s a big assumption.
Especially based on Congress’ track-record for the last 30+ years.
Each day that goes by, the farther we get from the required in-time course change.
With 77 million baby boomers retiring at a rate of 13,175 persons per day, something is going to have to change, and the time is not that far away, and the longer it (and many other things) goes ignored, the worse it will be later.

• (1)I’m glad you agree that we have a debt problem.
• (2)Jack agrees that we are sailing directly toward an entitlements iceberg.
• (3)And my issue is that Congress is too corrupt, too FOR-SALE, and too irresponsible,
• (4)and so are too many voters that keep lazily pulling the party-lever, and blindly rewarding irresponsible incumbnet politicians by repeatedly re-electing them. Most voters don’t even know how serious the debt problem is. Hell, on Jay Leno one night, most people couldn’t even tell you how many zeros are in a trillion.

The issue just isn’t (1)entitlements and (2)debt.
It’s the (3)attitude and corruption of Congress.
And the (4)voters.

(3) and (4) are possibly more serious issues, because (1) and (2) are dependent on (3) and (4).

In a voting nation, an educated electorate is paramount.
Well, we’re gonna get educated alright, but I don’t think most Americans are gonna like getting their education the hard way, but they only have themselves to thank for it, since 78 million of 200 million eligible voters don’t even bother to vote, and most of the other 122 million voters lazily pull the party-lever, and repeatedly reward bad politicians by repeatedly re-electing them, letting the two-party duopoly take turns running the nation into fiscal and moral bankruptcy. If we stay on this course, there WILL most likely be an economic meltdown. Not just a recession, but a depression.

Posted by: d.a.n at March 15, 2007 09:26 PM

The world is thrilled with our credit score. Every day the world votes with their pocket books by investing in US treasuries. Currently they loan us 30 year money at 4.7%. There is no possible way the world would do such a thing if they had any worry at all about our debt load.

They’re going to be sorry. Already, China is reducing their exposure to the falling U.S. dollar.

Just because other countries are foolish enough to lend money to our federal government doesn’t prove everything is safe and rosy.
What it proves often is that those nations’ own fiscal policies are worse than our own.
When the [expletive] finally hits the fan, all that so-called net worth, and over priced stocks and real estate will suddenly become worth a lot less than before.
Those countries may be about to learn a hard lesson too.

Posted by: d.a.n at March 15, 2007 09:33 PM

Craig, your comments are dense. Is that on purpose? What part of “ripple effects” discussed by CountryWide and Greenspan do you not understand. This isn’t over. 401K’ers will make profits as you indicate if they get out now. But, they won’t. The data shows they will ride correction through the summer and lose all they gained in the uptrend.

That was the whole point of the article. I understand your eternal optimism in every higher markets won’t allow you to see that. That’s fine. And when it finishes its correction via dropping GDP growth and ripple effects in the lending industry, you will surely find some other avenue of justifying staying in the markets despite the foretelling of bad news.

By all means, keep your money in. For every loser who rides the down trends, there is a winnner in stock trades. That is why stock markets are the most lucrative legal gambling in the world. The losers don’t confess to losing out of shame and the winners crow when they luck out. So consumers in the markets are always predominantly Bulls over time hearing mostly about the winners and rarely from the losers.

And the fact is, there are always roughly an equal number of winners and losers in the stock markets overtime, (brokers excepted of course), and everyone participates in losing, though most don’t tell when they do.

Posted by: David R. Remer at March 16, 2007 01:40 AM

David:

I understand the need to attack the person instead of my main point. My main point is that you predicted a 20% fall off last June that would occur in 2006. Instead the market rose. The S&P is 40% higher than you predicted. That is not dense, it is fact.

So now you are saying:

This isn’t over. 401K’ers will make profits as you indicate if they get out now. But, they won’t. The data shows they will ride correction through the summer and lose all they gained in the uptrend.

Why should readers believe you now, when you wont accept responsibility for last June’s comments?

Can you at least admit that your forcast of a 20% sell of in stocks in 2006 did not happen?

Craig

Posted by: Craig Holmes at March 16, 2007 05:09 PM

David:

Here is some raw data for you to chew on from PMI. This is the insurance group that offers PMI mortage insurance. Their deal in real estate is to measure risk so they know how much to charge customers.

The average risk score is 342, indicating a 34.2 percent chance of home price declines in two years. This is a 14- point increase from last quarter, and an 81-point increase from the same quarter a year earlier. This quarter, 19 MSAs have a greater than 50 percent chance of home price declines, up from 18 last quarter and 11 a year ago.

When you talk about meltdown. (your words). That implies to me that home prices are declining. They are not. However there is a 34.2% chance that our major markets will see home prices two years from now that are lower than today. So what?

Craig

Posted by: Craig Holmes at March 16, 2007 05:18 PM

Dan:

Assuming all that you have said is true, why would rational people lend money to the US Treasury for 30 years at 4.5%?

Craig

Posted by: Craig Holmes at March 16, 2007 05:22 PM

Craig wrote: Assuming all that you have said is true, why would rational people lend money to the US Treasury for 30 years at 4.5%?

Good question.

What makes you think it is rational?
Just look at history.
Several economic down-turns were preceded by similar seemingly rational behavior.

There are several reasons for that and none of them are good:

• (1)They don’t know any better; they are ignoring the potential disaster of so much debt, borrowing, spending, and excessive money printing.


• (2)Did you miss the link above about China reducing its exposure to the falling U.S. dollar?


• (3)Inflationist practices world-wide fuel fo