Ding Dong
Who do they Think They are Fooling?
Mike Hoy
Jun 10, 2005
I never cease to be amazed at the blatant levels of ignorance
and stupidity that exists in the world today. The games that
are being played in the financial markets can only end in one
way; badly!
With the Fed having raised
the short term interest rates at least eight times in a row;
one must be totally in the dark to not question how the long
term rates can fall at the same point in time short term rates
have risen by 2%. This defies all forms of logic. The reasons
why this is happening is real simple and I believe the mysterious
buyer, who is probably based out of the Caribbean, is real hard
at work and making all his elves work overtime to print the money
to pay for it. This act of buying the 10 year bond and moving
it to new high prices and yields below 4% has been brought on
by a desperate attempt to avoid disaster in the hedge fund industry
and real estate industry.
Take, for example, GM and Ford
having their bonds lowered to junk status; this alone should
put upward pressure on the long term interest rates as a result
of bringing to light the risks associated with investing in junk
bonds. Newton has to be rolling over in his grave. This is very
serious business as there has been an unquenchable greed, by
the hedge funds, to acquire the highest yielding paper on the
street for the last several years, using the greatest leverage
possible, to maximize the profits in the "carry trade game."
Rumors abound everywhere about
the losses in hedge funds as a result of the squeeze put on by
rising short term interest rates coupled with the losses, in
principal, from GM and Ford being downgraded to "Junk Status."
Most people do not realize the risk the financial system faces
with the leverage that has been added to the system by the hedge
funds. The individuals behind these hedge funds care little about
the repercussions of being wrong and the havoc that they will
bring to the system. They have no fear or respect of the consequences
of being on the wrong side of the trades they make. With the
10 year bond rising in value the hedge funds have been given
an opportunity to sell their bonds and exit their positions before
they get hit again. The mysterious Caribbean buyer seems to have
created great liquidity, in the long term bond market, at a time
it was needed most.
For the last several years
the Chinese and Japanese have been the largest buyers of the
10 year bond. There is no question that the Chinese and Japanese
are no longer the buyers; this alone should put heavy upward
pressure on interest rates to replace the buying that is no longer
coming from these two countries. With no buying or very little
buying of our bonds from the traditional buyers; who is left
to buy the never ending stream of new paper in the market? I
can think of only two choices; hedge funds with their leverage
and "Uncle Sam." Can you say "Monetization?"
Another example of this type
of stupidity is the housing market. There is no underwriting
being done on these interest only mortgages in dealing with the
inevitable reality of rising interest rates coming down the road
in one to two years. Over half the mortgages being written in
California are interest only mortgages. This is the mortgage
of preference because the buyers cannot afford traditional 15-30
year mortgages. I am very aware of the long standing dream of
each individual to own their own home; but at some point in time
the fact will resurface that not everyone can or should own their
own home.
The real estate speculator
is another growing breed of addict who has accepted the interest
only mortgage with open arms. Why would an individual, whose
only intention is to flip or trade a property, want to spend
a dime more than he absolutely has to, out of his own pocket,
in the pursuit of his trade? He won't and this is where the problem
comes in. As rates rise the value of his properties will fall
and he will then find himself underwater on his sound investments.
The most devastating risk to the real estate industry is the
potential for the buyers to disappear overnight. One day these
people may wake up and find that they are the "greater
fool!"
This is the second reason that
the long bonds have fallen in yield. Just try to imagine the
havoc that will happen as mortgage rates begin to rise. A simple
2% increase in the rates being charged on interest only loans
will bring on a landslide of new foreclosures. As these peoples
homes hit the market the value of all real estate is coming down
and that will be a fact of life that no amount of manipulation
and wishful thinking is going to change.
The real question I have is
who has been stuck with ownership of these soon to be worthless
mortgages? Do you think the possibility exists that many of the
mortgages have found their way into Money Market Funds?
Most of you do not realize that when Long Term Capital Management
LTCM went under that there were money market funds whose net
asset values fell below $1.00. The "boyz" immediately
stepped in and brought the values back up to par and swept the
whole thing under the carpet; kind of like "Anderson."
The real losers will be the
home owners who were sucked into buying these trash mortgages
when they could have taken advantage of all time low interest
rates and bought a traditional mortgage, on a house that they
could financially afford, when rates were at their lows. Two
to three years down the road these people will look back and
wonder how they could have been so stupid. They will boil when
they think of the encouragement they received to buy the bigger
home with the more affordable mortgage. Worst of all will be
the financial hardship that will have been created to pay for
an asset that can not even be sold at a price close to paying
off the mortgage.
Why are the long term rates
coming down? Real simple; to give the hedge funds a chance to
bail out on their long term trades and to attempt to continue
the foolishness in the mortgage industry.
There is no question that the
Fed will pump the system to whatever level it needs until it
can no longer pump at all. We are destined, as a country, to
face both the ravages of inflation and deflation at the same
time.
INFLATION VERSUS DEFLATION = STAGFLATION
I break this down into two
sections "necessities" and "luxuries."
The necessities of life are going to experience inflation which
will most likely lead to hyper-inflation while the luxury sector
is going to go into the tank for the purpose of funding the money
to pay for the necessity sector. Real estate, homes, suv's are
all luxuries while gas, utilities, food, housing costs, insurance,
taxes; the things we write a check for every month are all considered
necessities. Stagflation is the wave of the future.
It seems that the American
people are going to pay a terrific price for the Fed's mistakes.
I know some of you may be thinking
that if a recession comes that interest rates will fall. Normally
this would be correct but we are in a different part of the cycle.
Normally a recession can be reversed within six months of lowering
rates; if this was a normal recession then we should have seen
this work three years ago. Instead our leaders took the easy
path and led us right down the road to disaster with their strategy
of lowering rates to all time lows. The only thing these people
accomplished is addicting the American public to debt and destroying
the concept of saving. This process has drained all equity out
of their homes leaving the citizen in debt up to his eyeballs
with a mortgage that will rise with the interest rates. Like
I said in my last article Tick,Tock,Tick,Tock,
the fuse is lit.
CHINA
The next topic I want to address;
is the topic of our government and the stance it is beginning
to adopt with countries like China. There are all kinds of pressure
being applied to the Chinese to float their currency. Why would
the Chinese want to float their currency when they know that
doing so would take their US Dollar reserves and immediately
reduce them by 25-30%? Do you really think the Chinese want to
take a haircut of that nature? I don't and I think it is real
arrogant of our government to try to shove this down their throat!
I believe our government is making a very big mistake; similar
to the belief that the Saudi's want to lower the price of crude
to save the gluttonous US Citizen money on their fuel bills so
they can continue to plunder the world's natural resources with
reckless abandon.
I feel there is no way the
Chinese will float the Yuan until they have spent the $400,000,000,000
they have in US reserves. They will spend this money and when
they do they will be on a shopping spree to buy the best foreign
natural resources the "X-Great American Dollar" can
buy. What they can't spend on natural resources they will spend
on building the infrastructure in China and increasing their
gold reserves. The repatriating of these dollars will bring about
inflation that even the Fed will recognize. I also find it very
interesting how they still continue to brainwash us into believing
that there is no inflation.
The simple act of telling the
Chinese to float their Yuan is also proof that the Fed is welcoming
inflation. If the Yuan rises in value against the dollar just
what is the end result of the rising cost of goods coming into
this country from China? Golly, that seems to be inflation in
its purest form. This too, will have a bad end.
THE FRENCH
The last point I want to address
is the fact that some people are calling for a resurrection of
the Dollar as a result of the French deciding not to play ball
with the rest of the "boyz." For some reason many think
that this is a reason or an excuse to buy the Dollar. I am sure
the hedge funds are all over this buying the Dollar in the belief
the Dollar will rise again. The only problem is the fact that
what we are really seeing is the rest of the world coming around
to the idea that the Euro is no better than the Dollar. They
may think that the Dollar is the place to be but the only thing
they will find out, in the end, is that both the Dollar and the
Euro are on board the same ship and that ship is the Titanic.
Have you ever really thought about the name "Titanic?"
Seems to me the Titanic should have been called the "Minnow!"
For the first time I believe
that we are seeing the street say that both the Dollar and the
Euro are "Junk!" This is a very important point to
understand because it also should be the signal that the next
leg of the gold bull is about to be unleashed. After all what
do they have left for an alternative? I have said before that
the time will come when all currencies fall at the same time
because of the lack of faith in paper and debt and gold will
be the last resort.
There is no question that as
these foreign countries dump the Dollar that interest rates will
rise and I believe they will rise to much higher levels than
most can even begin to comprehend at this point in time.
-Mike
I will be in Vancouver this
weekend for the 2005 World Gold, PGM and Diamond Investment Conference.
Mike
Hoy
email: mhoy@neb.rr.com
tel: 402-483-4484 Call between 8:00AM and 10:00 PM Central Time.
321gold Inc
|
