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The Daily Reckoning | Wednesday, February 22, 2012 The shadow inventory tsunami about to hit the housing market, The hand-over-fist money insiders will make on your properties, Plus, Bill Bonner on cutting deals to stave off the truth, when the youth will finally revolt and plenty more... ------------------------------------------------------ 10 Million Blind Could Regain Sight In the 21st Century, a new dawn of medicine has emerged that could restore the sight of 10 million people worldwide. It’s a medical breakthrough that is unprecedented in human history. In fact, this amazing technology could eventually improve... and extend... every life of every person on earth. And one tiny California Company, priced under 80 cents per stock, is at the forefront of this revolutionary medical treatment. Click here to get the full details on this explosive penny stock that could significantly advance the field of regenerative medicine — and possibly make you ridiculously rich. The Debt-Growth Flip Flop Opposing Trends in Debt and GDP Growth Bill Bonner Reckoning today from Buenos Aires, Argentina... $100 billion down... $40 trillion left to go! Hey, don’t hold us to those figures. But yesterday European sages cut another deal to stave off the truth. Instead of defaulting openly and honestly — as Greece has done over and over again ever since 1827 — the Greeks will be ‘rescued.’ Sayeth Lucas Papademos, the technocrat leading Greece through its vale of deceit: “It’s no exaggeration to say that today is a historic day for the Greek economy.” He’s right. It’s no exaggeration. It’s an outright lie! What’s historic about the 15th rescue? And as soon as the Greeks are fished out of the water, they’re to be given a shave and a haircut. No kidding. They’re supposed to shave off more public employees, more spending, and more benefits. Already, one of 5 people is out of a job...with 2 out of 5 unemployed among young people. In November alone, 126,000 Greeks lost their jobs — the equivalent of 3.5 million job losses in the US, in a single month. But the Greeks aren’t the only ones who are suffering. Their creditors are supposed to suffer a $100 billion haircut, too. Sounds like a default to us. And what’s important about Greece’s 6th major default on its foreign debt? It defaulted for the first time in 1827. Since then, it’s made a habit of it. The important thing, from our point of view, is that the Europeans are de-leveraging...getting rid of debt — at least a little, around the periphery of Europe. Trouble is, there’s a whole lot more. And the level of debt, generally, is still increasing — thanks to the very same officials who just cut the latest Greek deal. Here is where the numbers get a little unreliable. No, heck, they’re totally unreliable. But at least they give us a sense of the scale of the problem. If you have debt equal to 100% of your income you can probably handle it. If the interest rate is 5%, you devote one twentieth of your revenue to debt service. But if your debt goes to 200% of your income, the burden of the past begins to weigh on the future. You have to cut spending and investing, because so much of your income must be used to pay for things that have already been produced and consumed. Growth slows. The economy groans. At 5% interest, you’d have to devote a full 10% of your income just to pay the interest. At 10%, you’re in real trouble...with one of every 5 dollars already spoken for, even before you get it. The world produces about $50 trillion worth of output per year. Some countries — usually poor ones — have very little debt, for the simple reason that no one would lend them money. Others — such as the UK and the Netherlands — have total debt burdens over 500% of GDP. (Much of it is mortgage debt, which is a special case...since it may be considered an on-going expense, a substitute for rent.) Even at 200% of GDP, debt doesn’t have to be a permanent and irreducible drag. If the economy grows faster than the debt, the burden becomes lighter over time. That is what happened in the US, for example, after WWII...and again, during the Clinton years. The problem now — grosso modo — is that the growth is in the countries with little debt...and the debt is in the countries with little growth. In the US, for example, debt increases two to three times faster than GDP. Most of the developed world is not so different from Greece. Some have more debt. Some have less. Overall, they have government debt equal to 100% of GDP. Household debt adds another 200% of GDP...or more; the typical developed country has total debt somewhere around 300% of GDP. Total GDP is about $40 trillion. So in order to get total debt even down to 2 times GDP they need to wipe out $40 trillion of debt. A long way to go...a tough row to hoe... World oil production is about to be shaken to its core... You won’t believe which nation analysts at Wall Street’s biggest banks expect to become the world’s biggest energy producer by 2017 — or the effect it will have on America... our economy... our future... Click here to see who is set to become the new king of oil — and how you can use the news to go for big profits as early as this MAY! The Daily Reckoning Presents Uncle Sam’s Fire Sale. Minimum Investment: $1 Billion AddisonWiggin In my investment letter, Addison Wiggin’s Apogee Advisory, we spend a great deal of time, money and resources looking for new investment ideas that our subscribers can act on independently. Sometimes what we find instead is outrage. For example, the federal government is about to dump millions of the foreclosed homes at fire-sale prices to hedge funds and private- equity firms with government connections. If you’re an individual investor who might like to get in on the action, forget it! You’re shut out of this deal. Homeowners who might be interested in buying the foreclosure property next door? Out of luck. And retirees hoping for a return on their money more than 1.8% on a five-year CD find another avenue closed off. Prior to the calamity of 2008, we might have thought the deal we’re profiling today unthinkable. But now we’re becoming as immune to new instances of blatant cronyism as American babies are to diphtheria. If you’ve got the hammer for it, we may as well get down to brass tacks: As many as 10,000 properties might be unloaded in a single transaction during the first quarter of 2012 — thanks to a government program so new it doesn’t have a catchy name yet, only the working title “Enterprise/FHA REO Asset Disposition.” Roger Arnold, chief economist for Pasadena, Calif.-based ALM Advisors, has a different name for it — “the largest transfer of wealth from the public to the private sector.” As of last September, there were about 800,000 “real estate owned” or REO homes in the United States — homes repossessed and on the market. Close to one-third of these — 250,000 — sit on the books of Fannie Mae, Freddie Mac and the Federal Housing Administration. That is, 250,000 homes are owned by you and me, the US taxpayers. But that number is about to explode: According to Ken Harney at the real estate industry publication Inman News, “The three agencies face a tsunami-sized shadow inventory that is now heading their way — a combined 1.4 million delinquent loans on their books, at least half of which, they estimate, will end up in foreclosure.” So now we’re talking that 250,000 number suddenly ballooning to nearly a million. The early-warning waves of the tsunami started lapping at the shore in November, when foreclosure auctions reached a nine-month high. The final numbers might end up even higher: Late- stage delinquencies tallied by Lender Processing Services in January approach 2 million. Thus, the hypothetical excuse for the fire sale: “Even with heroic efforts,” Harney says, “Fannie, Freddie and FHA won’t be able to handle that level of REO volume using their current systems of individual sales, directed at owner-occupants and small investors.” Thus, “You and I will not be allowed to participate,” says Roger Arnold of the newprogram. “These [new] investors will come from the private-equity and fund community, Goldman Sachs and its derivatives, as well as foreign sovereign wealth funds that can bring a billion dollars or more to each transaction. “The US taxpayer will get pennies on the dollar for these homes, and then be allowed to rent them back at market rates.” The groundwork is being laid right now. During the first week of January, the Federal Reserve issued a white paper on housing: “A government-facilitated REO-to-rental program,” it said, “has the potential to help the housing market and improve loss recoveries on REO portfolios.” Three Fed governors put the word out in speeches the same week. The big boys can smell the money and they are lining up to play. Among the players that expect to profit big from this government- sponsored scam are the private firms that already manage properties for the government. The Department of Housing and Urban Development calls them “management and marketing contractors.” Their principal owners and officers tend to consist of former high-ranking officials with HUD, the Treasury, FHA and so on. There are 20 of these “M&M” firms, according to a list on HUD’s website. On the theory that perhaps you could reclaim some of your tax dollars by investing in these firms — the same theory with which we suggested ITA, the defense and aerospace ETF — we examined whether any of them are publicly traded. None are. Sorry. No, the only way you’ll be able to make any money off these insider deals will come long after the feast is over and you’re allowed a few crumbs. “Once the privatization has occurred,” one analyst observes, “and the properties are generating rental income for the investors, the initial investors will cash out by forming real estate investment trusts (REITs), real estate operating companies (REOCs) or limited partnerships that will be made available to retail investors.” Alas, by then, the easy money will have been made...at your expense. Feels pretty good, doesn’t it? That’s why, increasingly we find ourselves casting our gaze overseas, longing for returns in foreign lands in places where the governments are somewhat less corrupt and the playing field slopes somewhat less directly toward the pockets of crony-capitalists. Regards, Addison Wiggin, for The Daily Reckoning P.S. Around these pages, it’s almost become passé to speak of imminent economic collapse. After all, we’ve been warning you about bursting bubbles — from the dotcom bust to the subprime meltdown and through to the financial crackup and coming student loan debacle — for over ten years now. Still, when we made each of these predictions, giving our readers plenty of time to prepare, we were often scoffed at by the mainstream press. (Maybe you get the same feeling, for example, when you mention the advantages of investing in gold to ever-incredulous family and/or friends...? Well, you know what we’re talking about.) And yet, our biggest prediction to date, one we call “The Mother of All Bubbles,” seems to fly right over most people’s heads. We wonder, do they actually believe in “the recovery”? Do they really think things have changed? And, if so, that it has done so for the better? Or are the details in our report simply too much for them to stomach? Take a look here and let us know what you reckon. And now back to Bill with more thoughts... Bill Bonner Austerity comes to the USA? Not exactly. But The Wall Street Journal reports that taxes are set to go up: First, the top marginal personal tax rate rises to 39.6% from 35% as the Bush tax cuts expire at the end of 2012. Second, a limit on itemized deductions will add a further 1.2 percentage points to the top rate. Third, a new 0.9% Medicare tax on incomes over $200,000 gets imposed ($250,000 for joint filers). Fourth, the top 15% rate on long-term capital gains rises to 20%. Fifth, dividends will once again be taxed at ordinary rates — 39.6% for the top income earners. Sixth, a new 3.8% tax on investment income gets introduced for incomes over $200,000 ($250,000 for joint filers). Seventh, the top estate tax rate goes from 35% to 55% (60% in some cases). The estate tax exemption falls to $1 million from $5 million (the gift-tax exemption also drops to $1 million and the rate adjusts hither to 55%). Unless action is taken, these tax increases will take some of the metal out of America’s already-anemic ‘recovery.’ *** And here’s something else that’s blocking the path to genuine recovery: Young people no longer start off in life with a clean slate. They’re heavily burdened with debt. They can’t spend. They can’t buy. Bloomberg reports: As outstanding student debt approaches $1 trillion, it’s one more reason record-low interest rates aren’t doing more to boost housing. The tighter lending standards that have emerged in the wake of the recession weigh particularly on younger, first-time home buyers, according to a Federal Reserve study sent to Congress on Jan. 4. These households tend to be younger, often have relatively new credit profiles, lower-than-average credit scores and fewer economic resources to make a large down payment, the report said. “Potential first-time homebuyers have been disproportionately affected by the very tight conditions in mortgage markets,” Federal Reserve Chairman Ben S. Bernanke said at a homebuilders conference last week. “First-time homebuyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly.” The Fed’s white paper said 9 percent of 29- to 34-year-olds got a first-time mortgage between 2009 and 2011, compared with 17 percent 10 years earlier. “These data suggest a large decline in mortgage borrowing by potential first-time homebuyers due to not only weaker housing demand, but also the effect of tighter credit conditions,” the Fed said. Outstanding education debt surpassed credit-card debt last year for the first time, according to Mark Kantrowitz, publisher of FinAid.org, a student loan website. Recent college graduates carry an average debt load of more [than] $25,000 each, which can limit their ability to qualify for mortgages even if they’re fortunate enough to land a job in a market with an unemployment rate of 9 percent for 25 to 34 year-olds. Calling it a “student-loan debt bomb,” the National Association of Consumer Bankruptcy Attorneys warned Feb. 7 about the effects of rising student debt on recent graduates, parents who cosigned their loans and older Americans who have gone back to school for job training. “Just as the housing bubble created a mortgage debt overhang that absorbs the income of consumers and renders them unable to engage in consumer spending that sustains the economy, so too are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future,” John Rao, vice president of the NACBA, said on a conference call. Normally, the housing ‘escalator’ works like this. Young people buy starter houses from older people. The older people move up to the family homes, buying the houses of people who are selling out so they can buy retirement houses. If the starter houses aren’t bought, the escalator stops. Young people can’t buy; so, older people can’t sell. The other part of the story — not widely reported — is the enslavement of the young to the old. In effect, instead of families paying for their children’s education, they force the children to borrow the money from the government. Then, paying it back, the money is recycled to old people — through Social Security, Medicare, and so forth. Meanwhile, the government borrows trillions more to fund their giveaway programs. In the US, the total is over $15 trillion and rising — most of it destined to pay benefits for people over the age of 50. And guess who’s supposed to pay for all this debt? The young, of course! How long before they revolt? Regards, Bill Bonner for The Daily Reckoning