by
Bill Bonner "The last shall be first," says the Bible. "Shan't the first, then, be last?" The GDP growth rate fell 40% between the second and third quarters. According to Dr. Richebächer, consumer debt has risen 77% since the end of 2000. Apparently, the gravity of it is now dragging Americans back down to earth. And bond market investors seem to see it the same way. T-bond yields have fallen to 4.78% for the 30-year bond. Are we right? Is the economy really weakening? Does gravity still work? Is the Pope still Catholic? Are there still Okies in Muskogee? But stock market investors think we're wrong. They've bidden up the Dow to over 12,000. Yesterday, even after the news was out about the slowing economy, stocks gave up only a couple of points. And in today's headlines, all we find is noise. "U.S. Consumer Spending, Income Rise...Inflation Slows," says Bloomberg. All is well, in other words. But wait... "Consumers hold onto their dollars," adds CNN, noting that household spending is "weaker than predicted." "Wal-Mart, weakest monthly sales in years," reports MarketWatch. The data is contradictory, misleading and confusing. What can we do but stick with our old verities? The way to become wealthy, we recall, is to make sure your outflow does not exceed your income. Because if you spend too much...and owe too much...pretty soon, your upkeep becomes your downfall. Yes, we know...the stock market is booming. But, wait...what's this? Former Treasury Secretary Robert Rubin has some curious thoughts about the equity boom: "I think there's been a curious phenomenon in the equity markets, at least in the last few months: When there is news that the U.S. economy is slowing, the market often gets stronger because investors figure the Fed will stop raising rates, or maybe lower rates – or maybe they think bond yields will decline. For some reason, they don't seem to say to themselves that earnings may be lower. I think it's very strange." Strange indeed. So, yes, of course, America has the biggest, most dynamic economy in the world – we grant that. But we also know that history grinds the "biggest" down to the smallest...and it wears away the shine on the "most dynamic" until it is as dull as everything else. We don't claim to know how it all works, but we're pretty sure that spending more than you earn is not a good formula for financial success. And we're pretty sure that the more something looks as though it might lead to instant wealth, the more dangerous it is. "China's Dollar Reserves Approach $1 Trillion," says another headline. Where did Chinese get all those dollars? It's very simple, dear reader. China – along with other exporters – sells things to Americans. If the world economy were well balanced, it would turn around and also buy things from Americans so that it would come out about even. But China doesn't want nor need what America makes, so it saves the dollars. China runs a trade surplus; America runs a trade deficit that is reaching up towards 7% of GDP. And America has been running up its bill so long, it hardly worries about it. Trade deficits have become like the Nicene Creed – eternal and unchangeable. We think the Chinese will sell us things from now to eternity and take dollars at about the current rate of exchange for just about the same length of time. Likewise, they have watched the Dow get whacked in 2000–2001...and bounce right back. So did the economy. And the dollar too! "That is just the way things are," they say to themselves. But it is not really the way things are. Things – especially things in economics and finance – are cyclical. Sometimes, people are willing to buy a stock at 17 times earnings. Other times they want more for their money...even down to five times earnings. And things work – as near as we can figure – according to rules that we can't do anything about...but that we can't ever completely ignore either. When someone spends more than he earns (unless it is on capital investment) then somehow...sometime...he gets poorer. You can see this happening in the international accounts. Foreigners are taking their surpluses and buying more and more U.S. assets. They own 43% of marketable U.S. treasuries, 32% of U.S. corporate bonds, and 16% of U.S. stocks. Twenty years ago, America crossed the threshold from being a net creditor to the rest of the world, to being a net debtor. Now, it's – by far – the biggest net debtor in world history. The Okies in Muskogee still fly Ol' Glory down at the courthouse. Our guess is that things still work as they always did. • Tomorrow, we remember the dead. Yesterday, we went over to the little cemetery near our house to put flowers on Aunt Jacqueline's grave. She's the only one in the family buried in France. She loved the place. "You mean, she wanted to be dead in France?" asked Edward. "Well, not exactly. But if she had to be dead," Elizabeth explained, "France was as good a place as any." We cleared off the granite tomb and put chrysanthemums on it. That is the custom in France. All around us, there were so many chrysanthemums it looked like a flower shop. The dead made no remark. Except for the very recently deceased, none of them had ever heard of adjustable rate, minimum payment, low-documentation mortgages. What a pity; the poor old stiffs had to pay for their houses! They had to save money for down payments. They had no "Neg Am" options. Instead, they had to make payments every month, or risk having the house taken away from them. And then, they never got to "take out" equity. What equity they had, they had actually paid for. Taking it out made no sense. If they hadn't wanted to own the house they wouldn't have bought it in the first place. Nor were houses expected to go up in price. They didn't go anywhere. They were worth what a buyer paid for them; rarely were they worth more. The poor saps never realized what a money machine a house could be. You wonder how previous generations could be so stupid. • Meanwhile, from Forbes, comes a report on what an opportunity the housing industry offers to people who are still alive: "The real estate market has never offered such opportunity for graft. Since the housing market started to soar in 2001, mortgage fraud has become the fastest-growing white-collar crime, according to the FBI. Last year crooks skimmed at least $1 billion from the $3 trillion U.S. mortgage market. "Now that the market is slowing, fraud is only rising. As business dries up, there's increasing pressure on lenders, brokers, title companies and appraisers to be profitable. That means loan and title documents aren't scrutinized as carefully as they might be, and courts – many of them so low-tech they resemble Mayberry – can't keep up with the volume of paper. "Then there's the mad rush to sell, particularly by people who paid high prices for homes and suddenly can't afford the mortgages. "It's like a tasting menu for con artists and grifters, so tempting that in some cities drug dealers have turned to mortgage fraud, plaguing lower-income neighborhoods with crooked mortgages rather than crystal meth." The Forbes article tells the story of a pair of thieves, known as the Bonnie and Clyde of mortgage fraud. The two would forge documents and steal identities in order to borrow money to buy houses – and then disappear with the cash. We read the article carefully and still didn't quite understand how it worked. Apparently, they were able to get several lenders to put up far more than the actual value of the houses...pay the seller...and pocket the difference. Why the lenders would do such a thing is a bit of a mystery. And why all the money didn't have to clear through the respective lawyers at closing is also a bit of a mystery. But then, we're not up with the latest practices of the mortgage industry. In our experience, the lender actually knew us personally – which made him reluctant to lend anything at all – and certainly nowhere near the actual purchase price.
How is this possible? The Bonnie of the duo was caught, and now awaits trial. She explained to Forbes how Clyde "tried to convince her that theirs were victimless crimes – that no one really ever got hurt, and everyone was in on the con.
Maybe it is so. November 1, 2006 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. Copyright © 2006 Bill Bonner |
