Realizing the Fraud of Economic Recovery

The Dow rose 200 points yesterday, bringing it only about 75 points below the 10,300 level. Why is the 10,300 mark important?

It’s not really…it’s just the point where this bounce will equal the bounce following the crash of ’29. No reason in particular that this bounce should be the same as the one 80 years ago. But no reason it shouldn’t either.

Gold rises with the stock market. The yellow metal hit a new record over $1,100 yesterday. Why is that that important? Well, it’s not important either. But gold still has another $1,000 or so to go before it equals the last bubble peak in gold, set in 1980 – on an inflation-adjusted basis.

The point is, there’s plenty of room on the upside for gold…and not much room left on the upside for stocks…

Stocks are going to be hit hard when people realize that the recovery is a fraud. When will that happen? We don’t know. But another big wave of foreclosures might be the thing that sets it off.

“The Second Wave Begins…”

This was the title of a report over the weekend from John Hussman. The gist of it is that the long-awaited ‘second wave’ of foreclosures has, perhaps, finally begun.

First, many of the Top 50 metro areas in the US are reporting “sharp increases in foreclosure activity.

“Rising unemployment and a new variety of mortgage resets continued to gradually shift the nation’s foreclosure epicenters in the third quarter away from the hot spots of the last two years and toward some metro areas that had avoided the brunt of the first foreclosure wave,” said James J. Saccacio, chief executive officer of RealtyTrac. “While toxic subprime mortgages drove much of that first wave of foreclosures, high unemployment and exotic Alt-A and Option ARMs are spreading the foreclosure flood to more metro areas in 2009.”


“While the news itself is no surprise in the sense that we have expected and written about this situation repeatedly in recent months, the phrase ‘sharp increases in foreclosure activity’ is notable in the context of widespread views that credit difficulties are abating. Below is a reminder of where we stand in relation to the reset curve. This news of a shift in the character of foreclosure activity comes precisely in tandem with the beginning of the predictable second wave. The pleasant lull in the reset schedule is decidedly behind us.

Monthly Mortgage Rate Resets

“The mortgages certainly do not reset at Treasury bill yields or even at standard spreads over LIBOR. Instead, they reset to a ‘premium’ spread above those rates. That ‘yield spread premium’ is precisely what the homeowners agreed to in return for the undocumented loan, and is particularly obnoxious at the point of reset if the mortgage itself is underwater (loan amount in excess of home value). Given that these mortgages were written during the last stages of the housing boom, at the highest prices, it is reasonable to assume they now sport very high loan-to-value ratios.”

So, there you go.

If Hussman is right, we’ll soon see real estate prices take another tumble.