Last week I made the case against real estate as an investment class. My recent change of heart is due to the ridiculous amount of market tinkering the Fed, the Treasury, and the central bankers around the world are doing to “support the real estate market”. All the bad loans, the foreclosures, and the schizophrenic Hank Paulson with his “on again - off again” bailout schemes, is putting the banks on hold…not knowing quite what to do with the growing REO on their books.

They are holding on to a ton of it because Hank said he was building an auction platform to buy all their troubled loans. Hank called this program TARP….or the troubled asset repurchase program…and he put a really sharp Wall Street guy (…haven’t we had enough of these guys?) in charge by the name of Neel Kashkari. Hank went to Congress and got almost a trillion dollars so he could buy up the bad loans and save the real estate market. Help the guy on the street, you know…you and me.

But a funny thing happen on the way to “helping” the American public….

The banks stopped lending to each other…like some errant children, they decided to stop playing nice and started killing each other right in the middle of the mall!

What is Hank to do? It’s embarrassing….trying to separate these children…get them to stop fighting…stop them from being petty, greedy, and only out for themselves. Hank remembered he had a pocket full of money…your money. So he offered nine of the “bigger” kids a truck load of “ice cream” if they could shape up and fly right. This took $250 billion of the $750 Congress gave him to fund TARP.

And it seems to have “worked” since the LIBOR and the TED spread are down some, but bribing kids or bankers to behave wears off quickly. So on Monday of last week, Hank said in a press conference, he was not moving forward on TARP. He was going to stick with direct investments(bribes) in banks to get the markets working again.

What?

Hank realized he’ll need the remainder of the $750 billion just to keep the banks from destroying each other …and us in the process.

There are rumors running all over Washington since Monday, that Hank’s job is hanging by a thread. Every Congressman who voted for the bailout bill looks like an idiot now that Hank’s approach to fixing the “worst financial crisis in a century” shows less insight than your 14 year old babysitter shows when the kids act up on her watch. Bribes, picking favorites, and appeasement at the highest levels is exactly what I’d expect of a part-time baby-watcher, but we deserve more from the Secretary of the Treasury.

With the government and the Fed knee deep in “fixing” things, where can one find an investment that is less susceptible to this meddling? Better yet…what investment could actually benefit from it?

Well let’s look at the alternatives left after eliminating real estate. It can’t be stocks with a recession headed our way. It can’t be the bond market; those yields are so low they don’t cover inflation. The same goes for sticking money in a CD or money market account; yields are horrible. Commodities like sugar and pork bellies with a global recession aren’t the way to go either…but we all have to eat, so their might be something there a little later.

But right now…the only investment class that makes any sense to me is …. drum roll please….

Gold!

I know what you are thinking…I’m not about to trade the gold futures market….and you right to say it. I’m not thinking that either.

I’m saying buy actual physical gold bullion…and coins if you like…but mainly the bullion.

(If this is the first time you’ve read my stuff, you’re probably scratching your head right now. If you go back and read some of my earlier stuff here on BiggerPockets Blog, I recount the story of my call to short Fannie and Freddie 26 months ago when they were trading at $60 a share…and the home builders…and the subprime lenders.

I even gave a five live seminars here in Denver on it back in the fall of 2006! Telling folks to short those stocks when everybody else including Jim Cramer was advising the opposite sounded crazy too…but those who took my advise don’t work for a living anymore. Which begs the age old question - “Is blogging work?”)

Here are my reasons….

First, as we saw, there are no other reasonable investment options. Soon the big money will come to that conclusion too.

Second, if you like real estate for it’s hedge against inflation, you’ll love gold because it’s a storage of wealth just like real estate. The only differences is in a down market I can still sell my gold in a matter of minutes, not months.

Third, if you believe like I do, that all this lowering of rates and printing money at a pace the US has never seen before will end in 1970’s type stagflation, owning gold could prove to be the wisest decision of your life. Once you own some gold, you actually want Bernanke to keep printing money( he’s not likely to stop regardless).

Well I could go on for an hour about fiat currencies, a seriously out-of-whack M3, and the under reported unemployment numbers that lead to a very ugly economic picture moving forward, but suffice it to say, if even a tenth of it happens, gold will be the only safe haven.

If we could only buy physical gold the way we buy rental real estate….25% down, finance the remainder…gold would be the best investment - at least for now.

Oh, wait…you can! Check out my BiggerPockets blog this week for more on gold…I’m planning on posting a few ideas for you!

Next week I’ll be writing on why Paulson resigned…and explain in more detail who his successor, the mystery man, Neel Kashkari really is…at least I hope so!

Bye for now!

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Tags: Economy, gold, investment, paulson, real estate investing

During the Clinton years, it was, “it’s the economy, stupid!” Now, without doubt, “it’s the mortgages, stupid!” Without a major fix, the global economic meltdown, most experts say, will only grow worse.
And, if you think that is not possible, just check out the value of GM shares! They’re so weak, you can almost trade in your current GM vehicle for the entire company!

Individual banks have been lining up to announce they have come up with plans to help people who are on the verge of foreclosure. These plans don’t go far enough or help enough people.

The Government announced yesterday, a “plan to ease mortgage payments for troubled borrowers through finance giants Fannie Mae and Freddie Mac,” according to Reuters.

But even this is probably not enough.

A New York Times report paints a stark and scary picture of the housing situation in the nation at the moment. The article quotes a real estate data company’s findings that 7.6 million homes in the U.S. are “underwater” (the new term for negative equity)–and more than 2 million more are about to fall off a cliff.

And, one poor California town, Mountain House, has the dubious distinction of having about 90 percent of all its homeowners owing more on their mortgages than the actual worth of their houses!

Clearly, the government must do more…a lot more…to stop these homeowners from, understandably, walking away from their devaluing homes.

The solution will by its very nature be unfair to those who borrowed wisely and are continuing to pay their mortgages. But, when a town has 90 percent of its home owners in negative equity–with more towns to surely follow–fairness becomes less important than being practical.

Whether you voted for Barack Obama or not, you have to almost feel sorry for the guy, taking office with the expectation that he will save the U.S.—the world—from further economic ruin.

A new AP poll just out shows 7 in 10 people–an amazing 72 percent– “voice confidence the president-elect will make the changes needed to revive the stalling economy.” 44 percent of Republicans reportedly feel the same way!

But “Superman” doesn’t fly into Washington to save the nation till January 20th and many bad things can happen till then.

That is why Bushman, if he has any sense of legacy, will use the same awesome executive powers he used to subvert the Constitution to help jolt the economy.

A lame-duck Congress was a possibility…but leaders there don’t feel much like calling one if Bushman is going to stand in the way.

As the saying goes—-lead, or get out of the way! That’s a hint, George.

Photo Credit: DifferentObamas

Tags: fannie, foreclosure, foreclosure rescue, freddie, housing rescue, mortgage, paulson

I promised you last week after outlining my belief the “frozen credit markets” was a contrivance by Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson, I’d spill the beans on why the dynamic duo wanted to lay their hands on $700 Billion since it wasn’t needed to thaw out anything.

So here goes..and I warn you it’s a little radical…but given this weeks events, I’m even more convinced it’s true.

My Theory on the Fed’s Bailout

As we discussed last week, the TED spread is the measure everyone is using to show how frozen the credit markets are and to repeat, this measures the willingness of banks to lend to each other.

The current story is the banks that formerly lent to each other at .5% now won’t lend to each other at 4.5%…and the TED spread proves it. Paulson and Bernanke used this “fact” to extort $700 Billion from Congress for the expressed purpose of ‘buying the toxic loans’ (I never bought that “toxic loan” story. The banks already took the hit, so how does getting a few dollars for yesterday’s writeoff help?) which are causing banks not to trust banks. Once those bad loans are taken off the backs of the banks, the fear to lend bank-to-bank will disapper…frozen credit markets thawed…crisis averted.

There’s only one thing wrong with this story…it’s not true.

Did anyone bother to ask if there might be another reason banks don’t want to lend to other banks?

The real reason the banks still left with capital (ie. Wells Fargo, JP Morgan, Bank of American…a few other mega-banks) don’t want to lend to the those banks who need it is simply because they don’t want to.

Yep, that’s right…they don’t want to.

If you were them, one of the Big Three, why would you lend to a small regional bank when withholding the loan will most likely make the bank a takeover opportunity for you at pennies on the dollar once the FDIC closes them down due to (because they couldn’t raise the capital) failure to meet reserve requirements?

You wouldn’t. You’d let them go under.

Big banks are withholding loans so under-capitalized banks fail. Once the under-capitalized banks fail, invariably the FDIC brokers a buyout to one of the Big Three or another mega-bank. This is market consolidation at gun point, but it’s working. Two more regional banks failed today.

To support my hypothesis, over the last couple of days, Paulson has saber rattled about buying a direct stake in some banks (an idea he never mentioned as the bill was getting debated in Congress) seemingly frustrated by the lack of “thaw” so far. This means the few big banks are going to get Treasury money to continue their buying spree. Buying failed banks even at pennies on the dollar costs money and they just as well use Hank’s money (I mean your money) as their own.

What Hank doesn’t spend help big banks gobble up small ones, he’ll use to appease our foreign credit buyers. A little unintended consequence of an artificially raised TED spread is a stock market tumble and confused foreign central bankers.

Simply call a quick meeting of the G7 financial leaders to calm their worries…and that is taken care of. Watching the stock market fall has it’s up side. It lends further credence to the whole “frozen market” cover story and puts even more pressure on those banks on tilt.

The biggest consolidation of banking, investment, and mortgage power, after all this over, will rest with just a handful of companies…companies hand-picked by Ben and Hank. Call me a quack, but in a few years when you have only 4-5 companies to pick from to get a checking account…it will be too late.

I really hope I’m wrong…

Photo Credit: SmileMyDay.com

Tags: bank, banking, Credit, credit markets, housing, lending, mortgage, paulson

Paulson’s $700 Billion bailout bill passed the House on a 263-171 vote and the President signed it into law. Last week I promised a discussion (assuming Congress would pass the bill) on whether or not the Bill would work. So let’s get to it..

Will the Bailout Bill Work?

First, this is a false question. Paulson and Bernanke scared Congress who in turn attempted to scare the voters by painting a picture of Main Street catastrophe…businesses going bankrupt, unemployment spiraling out of control, and no lending to consumers of any kind.

To discuss whether Paulson’s bailout will work to solve these calamities is to accept the premise they exist.

They do not.

Businesses today have availability of credit. Consumers with decent credit scores can get mortgages, car loans, and credit cards as easily today as last month or last year. Returning to sound credit underwriting principals should not be mistaken for a credit freeze due to lack of liquidity.

As a matter of fact, the only institutions that can’t get credit are commercial banks seeking overnight lending from other commercial banks.

That’s it.

That overnight bank-to-bank lending is the only “frozen” credit market …and many believe it was Bernanke himself who drained the liquidity out of the market intentionally leading up to the first vote so every news story would be about the TED spread and a “frozen banking system”.

Bernanke drained $125 Billion of liquidity as evidenced by the Slosh Report from September 18th to September 24th at exactly the time he should have been adding.

Huh?

Why would Bernanke do this?

The Fed MANUFACTURED a crisis for Paulson to fix. Fix with $700 Billion of tax payer money that is. The Fed will pump liquidity back into the system once the bill is law.

This bill was nothing more than economic extortion. If I make you think I’ve kidnapped your child when I haven’t (giving you self-created “evidence” to support the claim) and convince you for the safety of your child to pay me a ransom, I’ve committed a serious crime.

Bernanke and Paulson have done nothing less…

If Paulson and Bernanke knew the American economy was NOT headed for collapse but simply used it to lay their hands on $700 Billion, the question arises…

“What is the real reason Hank and Ben want $700 Billion?”

That question will get answered next week….and you ain’t gonna like it!

Tags: $700 billion bailout, bailout, bernanke, paulson

Of course Congress had to wait till October to pass the $700 billion socialization of the American economy: October is, after all, the month best known for the Bolshevik revolution that brought Vladimir Lenin and gang to power in Russia.

How fitting, then, that the Senate and then the House will no doubt approve a measure that will have taxpayers bailing out bankers and putting the U.S. government into the business of running banks and mortgage houses (of course, it already does so with Fannie Mae and Freddie Mac and AIG.)

No one seems to be talking about the hidden cost of going from school to school and library to library to purge them of ancient texts that actually refer to the United States as having a free market place.

One thing that should by now be readily apparent: this crisis is really not about subprime mortgages and really never was. It is about the invention of a alternate banking system that was not regulated or really supervised in any way…a system that operated at a level of greed and probable criminality the likes of which we haven’t really seen in this country since the days of the robber barrons.

And, guess what? The robbery is still ongoing! Of course the bailout will end up costing $700 billion and probably more, even though we are being told it is unlikely to in the end.

Of course taxpayers won’t get their money back. Of course the proposed limits on executive pay will be worthless; companies will skirt this by just paying executives more with things such as stock options in place of straight salary, thus getting around the rule (provided it passes, of course.)

If Lenin weren’t so waxed lying in state in Red Square, he’d be smirking at what is happening in the U.S.

But as the great-grandfather of the October Revolution, he would certainly understand.

Tags: $700 billion, bailout, fannie, freddie, housing bailout, mortgage bailout, paulson

Scott Pelley interviewed Treasury Secretary Henry Paulson on 60 Minutes Sunday night and I thought I was going to blow a gasket.

Pelley reminded Mr. Paulson of a quote he said way back in April 2007:
“I don’t see sub-prime mortgage market troubles imposing a serious problem. I think it’s going to be largely contained.”

And when Pelly asked why he didn’t know this coming, Paulson replied “Hindsight is 20/20… I didn’t expect quite this.”

Are you kidding me? Now, I may be just a pretty little girl and may not know a lot about this “economic stuff”, but how is it that I saw this coming 5 years ago? I was a manager of a real estate agency from 02-04 when houses were getting 10 offers and people with bad credit making $60K a year were buying $500K houses. We saw this catastrophe happening right before our very eyes and knew that very very bad things were going to happen once these loans started to adjust.

You’d Have to be Blind to Miss the Signs

We were having meetings to discuss it for goodness sakes! We were telling our agents that they need to learn how to become REO agents because that is where we were going to be in a couple of years! I even considered becoming an agent just so I could be an REO Agent when this puppy was going to hit the fan! That was way back in 2004! (Thank god I didn’t go that route. After all, it’s so much more fun to be a stressed out real estate investor rather than a stressed out REO Agent.)

Fast forward to the last 2-3 years and see all us investors educating ourselves to buy houses in this market crash. Did we investors know it was coming?

So how is it that we “regular” people knew that our market was going to crash and 10’s of thousands of people where going to loose their homes and banks were going to fail – but very important smart people like Paulson “didn’t expect quite this”?

Pelley also quoted several emails by analyst for credit rating agencies on Wall Street and one of the emails from two years ago said:

“Let’s hope we are wealthy and retired by the time this house of cards falters.”

Well it’s almost what we investors have been saying for the past couple of years – except that we are saying “Boy - We are sure going to be wealthy and retired by the time this crash is over.”

Tags: $700 billion, Economy, Hank Paulson, meltdown, paulson

We all know by now about the $700 Billion Paulson rescue plan he’s been attempting to stampede through Congress for the last week. But do you really know what’s in it? Do you know what those against it want in the plan before they sign on?

What Hank Wants

Let’s take a look at the three most important measures in the Paulson Plan:

(1)The Treasury Secretary is authorized to buy up to $700 billion of any mortgage-related assets [Sec. 6].

Let’s look at this more closely. This measure will allow him to purchase the mortgage “related” securities. The verbiage is really important here. Notice the plan doesn’t say “mortgage-back securities or whole mortgage, but mortgage “related” securities. The reason for this is the truly underwater investments crippling the balance sheets of investment institutions and banks, is the mortgage derivative investments.

A mortgage derivative is an investment product that really increase returns when things go well, and REALLY rack up loses when things don’t. Racks up losses so quickly and so large it freezes the whole secondary market function for mortgage capital…at least that’s what Paulson is contending. These investments are then sliced and diced into sub-products many of which are worthless now with no hope of recovery.

Can buying worthless investments make the banks whole again and by proxy then free up the secondary mortgage market? If you were contemplating bankruptcy due to some bad “investment/purchase” decisions and decided to have a garage sale to unload all your bad choices. Do you think selling me your 50 inch Plasma TV for $100 is going to make you whole again?

It won’t…but I digress. I’ll discuss whether the plan “works” or not next week.

(2) The ceiling on the national debt is raised to $11.3 trillion to accommodate this scheme [Sec. 10];

Pretty self-expalinatory…the Fed lends the US the money and in order to allow the Fed to print the money, the national debt ceiling must be raised. This is what puts taxpayers on the line for the payment of this rescue plan.

(3) best of all: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency” [Sec. 8].

This proviso is what I call the “Hank as King” measure allowing the Treasury Secretary to act without impunity, supervision, or regulation with his decisions on what to buy, what to pay, and what to ask for in return.

Isn’t it the lack of oversight, regulation, and prudent financial choices that created this mess in the first place. Now we are being asked to allow it again?

Wow! Paulson has no shame adding that power in to Section 8. It’s funny a “Section 8″ is also the code which allows for a military discharge for being crazy…and I think Hank is a little crazy if he thinks anyone is going to sign on to this!

Want Dissenters Want

The Congressional leaders who are currently voicing opposition to the rescue plan say they won’t pass anything that doesn’t contain provisions that have some accountability, require the government to negotiate an equity position in exchange for their investment (ala AIG), limit corporate executive compensation and/or the paying of dividends to stockholders, and mandate loan modifications to help home owners in foreclosure on mortgage assets the government buys.

Time will tell if this is more grand-standing than real objections.

Would this Paulson rescue plan work even if it passed? Could it make things worse?

That’s the topic for next week…so stay tuned…

Tags: $700 billion, bailout, Economy, Hank Paulson, housing, mortgage bailout, paulson, rescue plan