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The Daily Reckoning Monday, September 21, 2009 A whole new wave of foreclosures is coming... If consumers won't borrow, the feds will borrow for them... Leaving the US despite an abundance of $5.95 Breakfast Specials... The Mogambo on the importance of listening to silver...and more! Saying Goodbye to the Borrow and Spend Economy by Bill Bonner London, England Let's get this straight. Household credit is shrinking... Profits are shrinking... Employment is shrinking... Housing values are shrinking... The wage base is shrinking... But the recession is over! Whoa...how is that possible? This weekend's news brought no surprises. For example, the housing picture is still depressing - unless you're a buyer. There's "no bottom in sight" to Florida condo prices, says Barron's. And Reuters warns that option ARM mortgages "are about to explode." At least, that's what the attorney general of the sovereign state of Iowa says. The option gives the homeowner the right to pay only the interest (or in some cases less than the interest) for the first few years. They're sometimes called IO mortgages (interest only). And now these mortgages, written at the height of the bubble, are beginning to reset to more normal terms. According to Reuters, 128,000 people in Arizona alone will face reset IO mortgages next year. How much more will these people have to pay? Between 5 and 10 times what they're paying now. Almost all these homeowners are underwater. They bought at the bubbliest period. How many of them can afford a 400% increase in their mortgage payments? How many of them will be willing to pay? Not many. That's why a new wave of foreclosures is coming. And that's why house prices are likely to keep going down; the supply is going to increase, while the demand (willing and able buyers) will probably stay steady. Meanwhile, the California jobless rate has risen above 12%. But let's go back to the first item - shrinking consumer credit. This is the key thing. The expansion of the US economy - broadly speaking - from 1945 to 2007 depended on consumers' willingness to go further into debt. Wages rose during the first half of that period - supporting consumption. But as the great boom continued, more and more of it was based on credit, not on wages. At the end, it was almost all credit expansion. Consumers weren't earning more money...nevertheless, they kept spending more and more money. How did they do it? By borrowing. Without this borrowing the economy would not have grown. And now what's happening? Well, consumers aren't borrowing anymore. Consumer credit is going the other way, shrinking rather than growing. The feds are trying to counteract this major trend. This year, they're borrowing $1.7 trillion. Consumers won't borrow; no problem, the feds will borrow for them! [And this, if for no other reason, is a clear indication that the proclaimed recovery of the US economy is nothing more than an elaborate rip-off. Don't be fooled by Big Ben's "the recession is over" nonsense. Click here to protect yourself and your investments.] So far, the feds have put at risk about $13 trillion in order to counteract the downturn. This is about equal to the amount that Americans had lost in the crash. But while the crash wiped out $13 trillion in housing and stock market wealth, the feds have no obvious way to put the money back. Banks were easy to reflate. Bankers and federales are tight with each other; they're happy to share out the taxpayers' money. But getting money to the consumer is a different matter. The banks don't lend and the consumers don't borrow. Of the $13 trillion the feds have put at risk...very little has actually made its way to the consumer economy. Result: no new boom in consumer spending...no new boom in hiring...no new boom in production or profits. Pity the poor investors who are counting on a bull market. Profits aren't increasing. So the increase in stock prices is based on an increase in the multiple. As stocks rise, investors pay more for each dollar of earnings. Unless there is a big boom coming, this will turn out to be a mistake. The Dow rose 36 points on Friday. Gold ended the day at $1008. And the dollar keeps sinking; on Friday, American visitors to Europe found that it cost $.147 per euro. (More below...) More news from Ian Mathias at The 5 Min. Forecast... "We hear from every corner of Washington that the recession is over," writes Ian in today's issue of The 5. "According to the stock market, a recovery is underway. But did someone forget to tell the bond traders? "Here are two recent US treasury yield curves - June 2009, when the recession (we're told) was just beginning to end; and today, supposedly in the early stages of recovery. We admit, we're not bond experts... But isn't the yield curve supposed to grow and steepen when recovery is on the horizon? If Ben Bernanke is right and the recession is over, why are bonds in more demand now than they were three months ago? "'We remain concerned that little or none of the turn in the economy appears to be reflected in the Treasury bond market,' adds our macro- advisor Rob Parenteau. 'Treasuries have benefited of late from large purchasers who invest with little or no macro view - namely, the Fed, who has been rebuilding its Treasury holdings while slightly shrinking its balance sheet; foreign central banks, who have fled agencies and replaced them with Treasuries; and commercial banks, who have begun riding the yield curve with their mountain of excess reserves. "'If the short end of the Treasury curve begins to rise, the interest expense line item of the budget deficit will start to climb, as the Treasury has financed much of the recent public debt issuance at the very short end of the yield curve. Similarly, if the long end rises, mortgage rates are likely to follow, and any housing revival will get snuffed out in short order. "'So far, we have avoided these outcomes as the Fed, foreign central banks and commercial banks have placed the requisite bids for Treasuries, but we suspect this gets tougher in Q4 as the Fed's quantitative easing comes to an end and the foreign central bank portfolio shift winds down.'" Wanna make sure you get The 5 - in its entirety - sent to your inbox, every Monday through Friday? You can...by becoming a subscriber to one of Agora Financial's paid publications, such as Breakthrough Technology Alert. Their latest report details an epic piece of news that could make life better for the entire human race - and could give you your shot at incredible wealth. But you must act before Wednesday, September 23. Get all the details here. And back to Bill with some more thoughts... "Things have changed so much," said a colleague yesterday. "We've been telling readers that they could live so much more cheaply overseas. But now, about the cheapest place in the world to live is the US..." We spent Sunday with the publisher of International Living magazine. "Prices have fallen so much in Florida that you really get more for your money there than practically anywhere else," she continued. "I think Florida may be cheaper than Buenos Aires," added son Will, who's been living in Argentina for the last three years. Housing is cheap in the United States. In Texas and Arkansas, housing is probably the best bargain on the planet. Food prices are going up; still food in the US is much cheaper than it is in Europe. And cars? We have a friend in Paris who goes back to the US to buy his Mercedes. Even with the cost of shipping the car back to France...and the cost of refitting the car to European standards...he still saves about $10,000. "I was just in Paris," Will continued. "You pay $10 for a cup of coffee and a croissant. In Florida, I can get the 'Breakfast Special' for $5.95...and it has everything. Pancakes. Bacon... Everything." "But what is amazing," continued our International Living colleague, "is that interest in moving overseas is going up. It's not about money. Apparently, a lot of Americans are just fed up...or afraid. They want to get out. They see taxes going up or they see the society going down the tubes. I don't know. But many say they just don't like the way things are going. "One thing I hear is that they think American society has become meaner...ruder...less civil. You can't have a polite discussion of politics anymore. People get really upset and nasty. I mean, someone yelled out and called Obama a liar in the middle of a joint session of Congress. And a substantial part of the US population regards the guy - the guy who called him a liar - as a hero. They think Obama is a traitor... "I think this is really a result of the financial downturn. People feel betrayed. Let down. They think something is very wrong. That the nation is in decline. So they look for someone to blame. And they tend to blame each other. Conservatives blame liberals. Liberals blame conservatives. They blame the bankers. They blame the capitalists. They blame the government. "I guess that's what happens when you get a major correction or a big financial crisis." We recalled what happened in Germany in the '20s and '30s: "Germany was probably the most civilized country in the world - before WWI. Artists, philosophers, scientists, mathematicians, musicians... Germany had the best in the world. The war shook the public's faith in its leaders. But then, according to people who lived through the period, the financial crises of the '20s and '30s were worse. Hyperinflation...depression...strikes...a decade of financial chaos and disruptions led to a breakdown in social order. By the early thirties, groups of communists and fascists were battling in the streets. People seemed to leave the center and move to extreme positions. Soon, the Nazis had the upper hand and Hitler was voted into the government." Until tomorrow, Bill Bonner The Daily Reckoning The Daily Reckoning PRESENTS: With the recent up-tick in the prices of gold and silver, it's no wonder the Mogambo is back on his soap-box, touting the importance of adding these precious metals to your portfolio. And even if he can't speak to them directly, it doesn't stop them from screaming, "Buy me!" as loud as an inanimate object possibly can. Read on... Speaking Silver's Language by The Mogambo Guru Tampa Bay, Florida Everybody knows that I can always be counted on to go ballistic about silver being such a Screaming Freaking Bargain (SFB) because of (according to the most recent Official Mogambo Count (OMC)) more than a dozen very good reasons, which is a lot of reasons, and that at $17- and-change per ounce, silver is loudly saying, "Buy me! Buy me!" although obviously not in the literal sense, nor (perhaps less obviously) in the "voices in my head" sense, which shows I am responding to therapy and why everybody is so pleased with me. One of the reasons for my bullishness and bullheadedness about silver is the large short position, which is the number of ounces already sold (opening the short position) but which have not been bought yet (closing out the position), which means these shorts are going to get clobbered if they have to cover their short position by buying silver at a higher price than they sold it. So I was very interested when Ed Steer's Gold and Silver Daily reports says that the commodity futures market report shows that bullion banks' "silver net short position now stands at 213.6 million ounces...about a third of world silver mining production...all held by 'four or less' bullion banks." He characterizes this as "grotesque beyond description", which I guess it is, since it is hard to even imagine such a thing, which implies that these "four or less" banks are so stupid that they would be short silver when the fundamentals are so compelling that my throat is bloody and raw from screaming, "The fundamentals of silver are compelling!" "This means it is NOT ‘beyond description’ when it is perfectly described by silver, which is also ‘grotesque beyond description’ and which can be described as ‘like gold’!" And this is even ignoring the headline "Gold & Silver Market Alert - Buy before the Breakout!" from Julian Phillips at Goldforescaster.com, which reflects my sentiments exactly. In gold, the situation is similar, in that Mr. Steer says, "The bullion banks' net short position now stands at 211,342 contracts... 21.1 million ounces. This is well over 25% of world gold production. This is also grotesque beyond description". Suddenly I see an opportunity to hide my rising excitement and get a quick laugh! So I said, "This means it is NOT 'beyond description' when it is perfectly described by silver, which is also 'grotesque beyond description' and which can be described as 'like gold'! Hahahaha!" Well, I am laughing at my own joke and having a wonderful time when I looked around and noticed that nobody else appreciated my little joke about circular reasoning, which, upon reflection, I admit is pretty bad, and I am pretty embarrassed about it. I don't know why I thought it was funny, except for maybe it's these new pills that are supposed to keep me from screaming my guts out in fear about the coming collapse of the dollar and the attendant horrific rise in consumer prices that destroys America and plunges us into a post-Apocalyptic nightmare. And, parenthetically, they work pretty well, too, except for the catatonia and the, you know, drooling. Mr. Steer sees my embarrassment and starts talking about how many of the owners of futures contracts in gold and silver said, "We want our metals!" People with inquiring minds want to know, "How much gold and silver was delivered so that we can maybe see if the Mogambo Who Thinks He's So Hot (MWTHSH) is actually turning out to be right about gold and silver going so much higher in price because the despicable Federal Reserve is creating so much money and credit that inflation in consumer prices is guaranteed, which would be indicated by a rising price for silver!" Well, it turn out that "The final totals for August are as follows... gold 5,728 contracts [572,800 ounces] and silver 91 contracts [455,000 ounces]", which doesn't seem like a lot, but what in the hell do I know? So, I report these things without knowing what they mean because I am pretty stupid and I am just in it for the money, so all I can ever see is the obvious, especially when it is pointed out to me, which he apparently does when he says it means, "August was a big month for gold deliveries...but not for silver. September is a big month for silver deliveries...but not for gold." I still don't know what it means, but a big buying of gold and silver every other month is plenty enough to keep their prices rising and demand growing, which is Another Good Reason (AGR) to buy gold and silver beyond the obvious good reason that they always soar in value and price when the government is acting so irresponsibly, or when the Federal Reserve is acting so irresponsibly, but especially when both of them are acting irresponsibly, like now! It's enough to make you squeal with delight, "Whee! This investing stuff is easy!" Until next time, The Mogambo Guru for The Daily Reckoning P.S. And with these fundamentals of silver being so compelling, it is a wonder you're not buying silver at this very instant. So what are you waiting for? Go forth and buy yourself some silver before it is too late, and you are screaming in agony at the horrible poverty you've doomed yourself to because you failed to listen to the Great And Powerful Mogambo (GAPM), who has warned you time and again that if you don't by gold, silver and oil, you will indeed pay for your feckless ineptitude... Hahahaha! Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications. Click here to visit the Mogambo archive page. The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future Introducing the Single Best Way to Make Sure You'll Never Run Out of Money...