I Remember When...
Mike Hoy
May 15, 2004
I really get excited these days. There is opportunity everywhere.
It's terrible to feel this way, especially, when I know that
it means so many people are going to be hurt from the fallout.
I would love to help them, but the simple truth is, I can't,
and no one else can either. What we have come to accept as normal
in our lives is about to come back to haunt us, in a way, like
most of us have never seen before. Many people have raised red
flags and have done everything in their power to make individuals
aware of the eminent dangers they face. The warnings just fall
on deaf ears.
Everyone has forgotten that we are not the perpetual owners of
this country and planet. We are just the caretakers. We are here
for a very short period of time and then we are gone. Most of
the time, our forefathers left things in a better way than when
they inherited them. Not now! We have guaranteed those that come
behind us a tougher way of life. This is true in many different
fields. Debt is the overriding problem the world faces today.
Because of this debt, our children's children will be faced with
the challenge of trying to pay the bills of those who foolishly
preceded them in life. There are so many different topics that
one could address in dealing with the mistakes we have made in
the last 30 years. I want to focus on interest rates.
For years I've wondered whether the record high prime rate of
20.5% set in 1980 was the high for the cycle. I didn't want to
believe that events, circumstances and inflation could ever get
to levels that called for such extreme measures to be taken again.
I think I now have the answer to that question. Our insatiable
desire to acquire "things," be they bigger houses or
cars, it doesn't matter, they are all still things, will lead
this country to financial destruction. Triggered by the rise
in interest rates.
Rising interest rates, particularly if they climb to higher than
expected levels in a short period of time, could set into motion
the attempt to unwind trillions of dollars worth of derivatives.
With the derivative market at or approaching $200 trillion, this
could open "Pandora's Box." LTCM was minuscule in comparison
to the speculation that has occurred since it's failure. Greed,
speculation, mismanagement and stupidity have been running rampant
for years. All under the guise of being necessary for the economy
and the markets.
Some things are necessary and some are pure luxury. We have become
confused in trying to distinguish one from the other. The reality
is, if you can't afford it don't buy it. Time and debt will differentiate
one from the other. When times get hard, we may still be able
to keep the necessary items, the luxuries will be long gone.
Rising interest rates will signal the beginning of the end.
What's my point? I believe we have come to the period of time
when rates will begin to rise. This is no secret! The secret
is how high they will go before they finally peak. Like I said
"I remember when" they went to 20.5%. The trigger to
rising interest rates then, was the rise in oil prices.
Through the decade of the 70's oil prices rose and real estate
prices followed right along. Now I know some of you are thinking
that times are different now than then. You are absolutely right!
They are so much worse. The levels of debt are unprecedented
to any other time in history. Never in the history of mankind
has a society "borrowed" it's way to future prosperity.
Sure things look good while credit is easy. The problem comes
when the debt must be repaid, if it can. Somewhere, down the
road, we are going to have to face reality.
In the 70's, as oil prices rose, we had plenty of oil. Today,
the demand for oil is at all time record levels and there have
been few, if any, major oil fields discovered in the last 10
years. With the increased demands from India and China, demand
could continue to explode.
Throw into that, the lack of refineries and you have a pretty
good story of continued rising prices. And we expect these foreign
suppliers to continue to deplete their, ever declining resources,
at an increasing record pace, and at dirt cheap prices. Why?
Because we are the United States, and we say so. I don't think
so! Pretty naive if you do!
Then, you have real estate. I don't care whether we have a bubble
in real estate or not. That is irrelevant. The bottom line is
simple. Real estate prices will eventually fall as interest rates
rise. Pure mathematics and economics, dictate that rising rates
will make housing less affordable. Rising interest rates will
also signal an end to the refinancing game, that has gone for
years. Where has the money come from to propel this economy forward?
You got it, refinancing. This all ends! Those of you who refinanced,
for the sake of a lower payment will be all right. Those of you
who pulled all available cash out, could be faced with some difficult
times ahead.
The worst, will fall on those of you with adjustable rates and
interest only options. We have interest rates at levels we will,
more than likely, never see again. These rates should be locked
in, for your own protection. If you cannot afford the mortgage
with a higher rate, then you are buying too much house. You may
think, that you will move before that makes a difference. But,
what would happen if the value of your house were to fall below
the mortgage on your home? I'm not a finance expert, but, the
question I have for all of you is, "are you guaranteed a
mortgage?" If you were to find yourselves in a position
where you could not afford to move and you wanted to convert
to a fixed mortgage, could you? Are you guaranteed a conversion,
will the interest rate be affordable?
Think about it! Who would loan you money on an asset that is
worth less than the current market? I don't trust these financial
institutions. I believe they are fully aware of the potential
risk that they face, and they have their butt covered, in the
event of a declining market. You, on the other hand, may be fully
exposed. You may be in a position where you may not be able to
get a mortgage, or an affordable rate. Where does the risk fall,
when the world realizes that not everyone who wants a home can
afford, or should own one? I fully disagree with many of the
Fannie Mae commercials. I also believe that Fannie and Freddie
have some very unpleasant surprises in store for some money market
funds. "Pandora's Box" is about to be opened. Do you
know what your money market fund has your money invested in?
This is just my thinking, I'm not a finance expert. But, someone
should be asking these questions. If I had one of these mortgages,
I guarantee you, I would know all the answers to these questions.
Why has the Fed lowered the rates to 1% in the first place? I
don't buy the reasons they give. I prefer to think of it as a
way to force the money out of savings and into the market. Why
else would they destroy the sanctity of saving? The 1% rate hurts
those who most need it to live on. They destroyed saving for
the sake of the refi. game and an attempt to "Recover to
a bubble." (This will be a future article.) There is also
one other very important reason. Who gets to borrow at the 1%
rate? How about Fannie, Freddie and the major U.S. Corporations.
What losses will be faced as the borrowing rates approach or
surpass the rates they have lent the money out? What will future
earnings look like as their borrowing costs rise? Borrow short
term and lend long term. Live for today! What kind of horror
story does this preclude? The absolute worst! A meltdown of our
financial system. The puny earnings they have earned by playing
this game do not justify the risk they have put the taxpayer
in. Even though they are not government guaranteed, do you really
think they won't be bailed out?
My final point -- in the 70's, as interest rates and oil prices
were rising - guess what else was going up? You got it! Gold!
The whole time rates and oil were rising, so was gold. Funny
thing is, they all peaked out about the same time. Seems to me
interest rates are just about to begin rising. It could be a
long time before they see their highs. After all, there seems
to be no question that the fed will do everything in it's power
to keep the money spigots open.
Many people have asked me to tell them the ultimate high and
when gold will peak. I don't have those answers, but, I have
a hunch. My hunch is, gold will peak around the same time interest
rates peak. And I believe rates will go higher than anyone is
dreaming. One can begin to truly think about gold peaking, when
one is fearful of owning the 10 year and 30 year bonds. Remember,
interest rates are just about to BEGIN rising. This process will
take years to go full cycle. It will not be over until all foreign
countries have dumped their US bonds, notes and bills. I had
originally planned to invest the proceeds from the sale of my
precious metals holdings in the long term bond. At this point
I question the "full faith and credit" thing. Could
be a great "speculation!"
Yeah, I remember 20.5% and $875. This time it's worse and those
in charge don't have a clue! Or do they? I don't think they care
so long as they get in office or remain in office. Remember the
spelling of the words inflate and deflate. Did you ever really
think about them? infLATE and defLATE. Yeah, they both end with
LATE, see that Greenie? Seems kind of appropriate...
...Seems to me they may call you "Latespan" at some
future date!
May 13, 2004
Mike Hoy
Mhoy1954@aol.com
321gold Inc
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