Homeowners Can't Catch Up

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Now the summer days are dwindling down to a precious few. This morning, it is overcast and chilly here in central France. The leaves on the aspen and linden trees have turned yellow already and whenever the wind blows, they flutter to the ground as if they were trying to get away from something.

This afternoon, we have been invited for a private tour of a grotto not far away. According to our information, hundreds of years ago, the grotto was sealed off by falling rock. Thus it was protected and preserved remains of human habitation from 30,000 years ago.

“Yes, there is a span of about 10,000 years in which there is little evidence of human habitation in Europe,” said the owner. “Maybe humans almost died out during that period; we don’t know what happened. But when this cave was opened, we found some remains that were dated from that era. It’s a remarkable find. A group of 20 scientists has been working there all summer. They told me they found 1,000 artifacts a day. Of course, we’re not talking about statues and battle axes. Most of these discoveries are bone fragments…maybe even grains of cereal…”

We’ll find out more this afternoon…

Meanwhile, we turn our attention to the world of money. And we begin by asking:

Just what are we trying to figure out?

Well, we want to understand what is going on…don’t we?

And we want to try to guess about what is likely to happen next, don’t we?

We’d like to know, for example, whether stocks were going up or down…and whether this is a good time to buy property…or gold…or Treasury bonds. We’d like to know, wouldn’t we?

Of course we would. Unfortunately, u201Cit is not given to man to know his fate,u201D as the ancients put it. All we know is what happened in the past…and the fate of men who came before us… Even that we known only in a wispy, uncertain kind way. All we have are stories…

Back to that in a moment…

Here are the facts from yesterday:

The Dow rose 30 points. Oil closed down — to $72. Gold remained where it was.

Ben Bernanke was put up for another term as head of the Federal Reserve. And the Obama administration said the downturn was a little worse than it had thought, so it’s estimate for the 2010 budget deficit had to be updated — increased by 19% — to $1.5 trillion. The Congressional Budget Office did its own count and came up with $1.4 trillion. Either way, it’s a lot of money.

We have wondered where the money would come from. Yesterday, Goldman’s top economist, Jan Hatzius, said he thought much of it would be u201Cmonetizedu201D by the Fed…with the Fed’s balance sheet increasing as much as $2 trillion.

The Fed’s balance sheet is the monetary ballast for the whole economy. As it increases, so does the amount of sail the economy can put up. In theory, the potential for inflation increases geometrically; one dollar on the Fed’s balance sheet could be multiplied into $10 in the economy. Bernanke has already doubled the Fed’s balance sheet — buying up and additional $1 trillion worth of Wall Street’s failures and the feds’ debt. He might have to buy another $2 trillion worth — bringing the total to $4 trillion — before this crisis is behind us, said the Goldman fellow.

Home prices are still going down, says the latest report, but u201Cless than forecast.u201D Is that good news? Well, it could be worse.

The latest sales figures show an uptick. But careful analysis shows that homes sales figures are still terrible. People are buying $250,000 houses…but they’re the houses that sold for $500,000 in 2005. And the poor folks with $500,000 houses…and jumbo mortgages…are sinking. Almost half of them will be underwater by 2011, according to one estimate.

The feds now say that 10% unemployment is unavoidable. Naturally, when people lose their jobs they have a hard time keeping up with mortgage payments.

“Bay Area Delinquency Rates Soar,” says a headline.

Two years ago, when a homeowner was late on his mortgage payments, there was a 45% chance that he’d catch up. This is known as the “cure rate.” Well, now the cure rate is down to 6.6%. Homeowners never catch up…they fall further and further behind until the house is foreclosed.

Want some more news? In past recessions, the United States emerged first and pulled the rest of the world out of its funk. This time, the United States is still on its way down…so analysts look to China. The Peoples’ Republic says it is growing fast. It also says it will have an inflation rate of 2% this year. Currently, prices are falling at a 1.8% rate. China is in deflation, not inflation. What’s up in China? We won’t know for a while…but don’t count on it to pull the world out of a correction. China needs a correction as much as anyone.

We’ve been alerting readers to a special announcement that Strategic Short Report’s Dan Amoss was set to make this past Monday: the next major bank headed for collapse.

Not only did this report create a major buzz at the Agora Financial headquarters in Baltimore, but on Monday, national media outlets began digging around for more details on Dan’s financial short play.

Out of respect for those who took us up on the Strategic Short Report offer, we aren’t going to release the name of the bank — yet. But we can tell you this: this bank not only didn’t reduce their dividend, they dropped their loan provisions.

Day traders may be cheering, but for the long haul, this spells disaster. Says Dan: “I still expect a big surge in provision expenses, likely as soon as the quarter ending in October. If you don’t believe that the Canadian and US economies are going to come roaring back, which I don’t, this is still an attractive short sale.”

For 40,000 years — maybe longer — our ancestors have walked the very earth where your editor puts his feet. They lived. They died. What did they know? Scientists say they were as smart as we are. What did they talk about? What did they think about?

“Every time something is given, something is taken away,” we suggested over dinner last night.

“No, that’s not right. You’re saying that life is a zero-sum game…that it can never get better…that it can never really improve…that there can be no real progress…” Elizabeth replied.

“Well, not exactly…I’m saying that there are no free lunches in nature. That if a man is smarter, he is not likely to be faster too. But I’m not saying anything particular…or scientific…I’m just announcing a general principle…more like a vague intuition about the way things work. According to one theory, for example, mankind migrated from Africa to Europe. In Europe, during the Ice Age, he encountered a great challenge: cold weather. Most humans and pre-humans probably couldn’t survive it. But some did. And they did by evolving into maybe smarter…maybe slower…people with bigger heads. According to the latest thinking on the subject, the bigger brains were a disadvantage in warmer climates…because they got too hot. I guess they took up too much energy too.

“But they were an evolutionary necessity in colder climates…where the cold weather not only made possible a hotter head, but also made it a necessity. People needed bigger brains to anticipate the change of seasons and save winter, for example. They had to see what was coming. They had to look at what was coming…and prepare for it. They had to work together too…to hunt large game…and to fight off competitors. Those who couldn’t do so died out. Well…that’s the theory.”

Every day, here at The Daily Reckoning, we give you information on the latest trends and events in financial markets. But everybody has access to the same information. And what is information, anyway? What is it worth? What does it mean?

For thousands of years, people exchanged information. Then, it must have been a different kind of information…things we can barely imagine…about where animals were getting their water…about where to find seeds and how to avoid sickness…how to prepare for winter…and how to fend off wild animals. Then, the dominion of the human species was not so sure. There were saber-toothed tigers, lions, wolves, even mastodons…giant sloths… Early man was probably as often prey as hunter. He had to be on his toes to survive.

Information was one thing. But there was more. He needed wisdom…and technology… as well as facts. He had to learn to store food for winter as well as beat back attacks by wild beasts. He had to know how to make cloaks out of animal skins…and how to stock firewood for a rainy, snowy winter…and how to find shelter.

We imagine tribes sat around the campfire and told stories. The stories reported victories and defeats…disasters and triumphs…heroes and enemies. But the stories were more than just information: they carried lessons…moral lessons…about what to do and what not to do.

That is the tradition to which we are heirs. We pass along information: but without a story, the information is just noise.

Our story is the story of the seasons. It’s the story of heroes and villains…of fatal flaws and inevitable disasters.

The common flaw is an old one. The Greeks couldn’t seem to tell a story without mentioning it. u201CHubrisu201D …the kind of pride that goeth before a fall…the arrogance that leads people to think they can get away with something… that they not only can know their fates…but that they can control them.

Today, Ben Bernanke is our tragic hero. His flaw is as obvious as his challenge. He thinks he can stop the world from turning…. stop the seasons…avoid the hard, correcting winter by tempting the sun with bailouts, stimulus and cheap credit. His arrogance is an affront to the gods.

The old tales tell us what will happen. He will fail. But when…how? That is a different story. It is the story future generations must tell. We must live it.

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis and the co-author with Lila Rajiva of Mobs, Messiahs and Markets (Wiley, 2007).

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