Addicted to Debt

Welcome to Endrogado Nation…

West Camille Street in Santa Ana, California, has been ‘devastated,’ says the local paper.

House prices rose from an average of $182,000 to over $600,000 in just five years – driven higher and higher by the easiest credit conditions ever to fall on planet earth. Lenders targeted Hispanic families, who saw home ownership as a step towards middle class status.

Alas, not every step takes you in the right direction.

Most of the mortgage loans were of the adjustable rate variety and most of the houses they were used to buy had prices that were also adjustable – but in the opposite direction. Now, prices are said to be falling by 10-12% per year…with many of the houses on West Camille in foreclosure. California has 6 of the top 10 foreclosure metropolises – with Stockton, Modesto and Merced particularly hard hit.

“Bank Owned” is a polite way of describing the new status of the foreclosed houses…while a Spanish word is most often applied to their former owners – endrogado (from ‘to drug’ oneself).

Endrogado means, in this context, hooked on debt. It describes the poor homeowners of West Camille Street…and much of the rest of the nation…from the most modest family, to the U.S. federal government itself.

David Walker, Comptroller General of the U.S. Treasury, has read our book, Empire of Debt. We know because he told us so. And now he’s using some of our own Daily Reckoning ideas to describe the jam the nation is in. We have to learn from history, says he…particularly the history of Rome, which has similar themes to those we see in today’s news. He goes on to say that it is as if the whole country were on a “burning platform” of fiscal deficits, under-funded healthcare and retirement programs, and military commitments far beyond our means.

The new capitalist gods must love the poor – they are making so many more of them. From the doublewide in Bakersfield to the banks of the Potomac and everywhere in between the country is ‘endrogado.’ The people who took out the ARMs now have barely a financial leg to stand on. And the people who stuck the ARMs to them are going broke. Today’s news brings word that Atlanta’s largest mortgage provider, Homebanc Mortgage (NYSE:HMB), has filed for bankruptcy.

Still, the endrogado ones are becoming even more endrogado. Retail sales in July went up! And federal spending races ahead.

But don’t worry. Credit expansions are followed by credit contractions. Debts get paid off, defaulted, written off, written down, worked off or inflated away. All debts go away, dear reader.

*** A dear reader writes:

“Who cares?! Nothing matters. Banks should write as many risky loans as they can. No one will ever be held responsible because the Fed will always step in to save the day for the stupid banks, the stupider hedge funds, and the even stupider investors. You people at The Daily Reckoning are still preaching and practicing the old fashion theory of responsibility. FORGET IT!! It’s passé! Dive in. Open a hedge fund. Start a mortgage brokerage service or a bank. When the crap hits the fan, the Fed will come in and take over for you. Write loans with no deposit, no appraisal and no income needed. Sell them to the Fed. Let the Fed stay up nights while you sleep cozy with your profits. The American taxpayers patience has no end, his pockets have no bottom and his bottom has no problem with being spanked for crimes he didn’t do.”

Indeed…we’re keepin’ it real here at the mobile Daily Reckoning headquarters. We checked this morning and found that central banks were continuing to put more money in the system. Keep that liquidity flowin’ and the party might keep goin’! On Monday, the ECB put up another $47 billion in loans. The bank of Japan put in more money too.

*** Meanwhile, Forbes warns, “U.S. Economy Faces Downturn Threat.” Of course it does. Economies have to take some time to breathe too. Unless all this new liquidity somehow manages to make the credit bubble bigger…and worse…a slowdown in credit should mean a slowdown in the economy later in the year.

*** Milk is near a record high…

The price of milk has jumped more than fifty cents in the past six months. And as incomes in the Far East rise, so does dairy’s popularity.

“Starbucks has been viewed as the symbol of success,” says President of Starbucks Greater China Jinlong Wang.

But weight of the blame of the high price of milk can’t be rested solely on the shoulders of the latte and frappucino drinking Chinese…in fact, most of the responsibility should go the biggest fraud our country has seen in a while: Ethanol.

*** “One striking difference between Europe…especially France…and America,” said a perceptive visitor recently, “is the lack of retail space. At home, everywhere you go…there are malls, strip malls, shops…and more shops. Here, there are just these little stores…and occasionally a small mall. Nothing like in the United States. And these places are often closed. God forbid you want to buy something between noon and 2 PM…or after 6 PM.

“I saw a statistic. The United States has about 10 times as much retail space per person. I don’t know why. It’s just part of the culture. We shop for things. We don’t stock anything. We don’t grow our food. I’m amazed at the gardens around here…everyone seems to have a garden behind his house here in Normandy. I guess they just ride their bicycles into town to get their bread and go to the butchers. They don’t need much else. That’s probably why they don’t use much fuel either. They don’t have to drive around looking for things everyday.”

Bill Bonner
The Daily Reckoning
August 14, 2007

And now…

…more views from Short Fuse in California…

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Views from the Fuse:

*** “Since 1971,” writes Bill in today’s guest essay, “the high priests of the new money cult produced a kind of miracle, equivalent to the virgin birth and the wedding feast at Cana combined. That is to say, they produced money with no connection to anything rare or valuable. In the words of St. John Maynard Keynes himself, they created money ‘out of thin air.’ This miracle has had the whole world agog ever since. Today, the world’s entire economic and financial system operates on this faith-based money.

“Thin air was never more forthcoming. No one knows where the money comes from or what it is worth; but everyone is happy to take delivery. Indeed, the multitudes worship it…and pray for it. Muslims go to mecca; Jews have their Wailing Wall; these mammon-worshipers dream of nothing more than getting a job on Wall Street and getting lucky in Las Vegas.

“It is upon this miracle money that the whole faith rests…”

*** “Inflation, at least the way bean counters at the Labor Department calculate it, continued to rise in July. Wholesale costs inflated at 0.6% last month. That’s an annual rate of over 7.2%, three times the level forecast by Wall Street. And the biggest surprise of this morning’s CPI report,” reports Addison in today’s issue of The 5 Min. Forecast.

“But, most of the gain was driven by energy costs. ‘Core inflation facing producers grew only slightly,’ reports CNNMoney.

“Phew! What a relief.

“Since energy prices are really of no concern to wholesale manufactures, the fact that they accounted for the majority of inflation isn’t a big deal. We feel better…

“Ummn… not so fast. Even without those pesky food and energy costs, core producer prices were up 2.3% year over year, the biggest jump since September of 2005.”

For the rest of this story, see today’s issue of The 5 Min. Forecast

*** “Don’t you think Ayn Rand’s Atlas Shrugged should be resurrected as required reading in today’s world?” writes a reader.  “It might be helpful if you signed off… ‘WHO IS JOHN GALT?'”

Perhaps this reader took notice of the same article we read this morning from Fortune magazine. The United States, while still a young country in the grand scheme of things, is, nonetheless, aging; and our bridges, water and piping utilities, even electrical infrastructure, are aging along with it.

The article looks to the Rand novel and wonders if America is having an Atlas Shrugged moment – what with the busted levees in New Orleans, the bridge collapse in Minnesota, the pipe burst in New York City.

Why, speculates the writer, is our national infrastructure so widely ignored?

Well, spending money on infrastructure, however necessary it may be, isn’t sexy. It doesn’t make good headlines or buy votes. But, like most issues in our country (think debt, subprime meltdown, etc.), we wait until there is a problem – or a national disaster – to jump into action.

Chuck Schumer recently told the New York Times: “Routine but important things like maintenance always get shortchanged because it’s nice for somebody to cut a ribbon on a new structure.”

In the case of Atlas Shrugged, the solution is clear: privatize everything. But will that work in the ‘real world’?

Says the Fortune article: “No way a bridge falls if a profit-seeking company, properly incentivized, had been charged with maintaining it, goes the argument. That, however, is dangerous thinking. There are certain things the market just can’t be trusted to handle. Imagine that bridge-maintenance company having to cut expenses this quarter by delaying work for just a few days. Imagine how the CEO might feel if the stock would drop if he couldn’t make the quarter.

“The markets don’t always work for the public good. Just ask CEOs of mortgage lenders that pushed no-documentation loans, which anyone with common sense knew was just asking for trouble. The solution isn’t to abolish government. It’s to make government work better.”

Hmmm…AF Investment Symposium attendees would point out that our friend Doug Casey would have a bone to pick with that last sentiment…but that’s a discussion for another time.

Chris Mayer, whose newsletter Mayer’s Special Situations has been examining various infrastructure sectors for investment opportunities, weighs in on the debate.

“American states and cities will be forced to either throw immense amounts of money at problems as they occur,” said Mayer, “or they will have to sell off bits of their infrastructure to private enterprises.”

Chris believes that either way, companies that refurbish and repair infrastructure may see repaid growth in the near future.

“Companies that provide piping repair and installation for water and oil utilities have already been quietly outperforming major blue chips for years,” said Mayer. “If history is any guide, these stocks should do well even if the overall market struggles. Somehow, despite the great track record, these stocks have largely flown under Wall Street’s radar.”

Short Fuse
The Daily Reckoning