When The Roof Caves In

“About fifteen months ago, I spent two days with Dr. Richebächer, soliciting his views about the debt-heavy U.S. economy and its booming housing market,” writes Eric Fry to his Rude Awakening readers this morning.

“We sat on a balcony in Cannes, France, discussing the probable fate of the American housing market. The balcony belonged to Dr. Kurt Richebächer, as did the prescient predictions I heard that day.

“‘The American housing market is in serious trouble,’ Dr, Richebächer insisted at the time. ‘It is one the verge of a major collapse.’

“The date was October 14, 2005, and at that time, the housing boom was still booming…and almost no one imagined that the good times would end very soon. But Richebächer did not refrain from predicting imminent disaster.

Kurt Richebacher
September 13, 2007

Read on below…”
When the Roof Caves In…

And now some news from Short Fuse in the City of Angels…


Views from the Fuse:

Curiouser and curiouser…with the dollar at all-time lows against major currencies, and gold at all time highs, it’s as if the Fed has already made their rate cut. Why are they acting this way? Is it just on speculation that the Fed will cut rates…or is it due to something else?

“The reason the markets are acting this way,” writes The Survival Report’s Brian McAuley this morning, “is because the Fed has ALREADY lowered the rate.”

No, this is not a “conspiracy theory”. If you look at the daily average Fed funds rate since August 8 (two days before the you-know-what hit the fan), there have only been two days that the rate has been over the official target of 5.25%.

“During every other day over the past month, the actual fed funds rate has been maintained well below the official target. In fact, the average fed funds rate since Aug. 10 has been 4.96% – 29 basis points below the official target of 5.25%.

“So while everyone seems to be wondering if the Fed is going to lower the fed funds rate at next week’s FOMC meeting, the Fed has actually already lowered rates by over a quarter of a percentage point over the past month. This is one reason why we are already seeing the dollar trade lower against other major currencies and gold rally.”

And it looks like people in Texas were taken a bit off guard last night, as Hurricane Humberto smacked the coast with 85 mile an hour winds.

“This little fella came out of nowhere… Humberto went from a low pressure system, to tropical depression, to Category 1 hurricane in less then 24 hours,” writes Addison in today’s issue of The 5 Min. Forecast.

“Humberto rolled right through the Total SA, Valero, and Motiva oil production facilities. All told, these plants refine almost 1 million barrels of oil per day. The storm produced no noticeable strain on prices… at least, no more than low supplies of the black goo are already exerting.

“Still, if you’re a Bulletin Board Elite subscriber, your Atlantic storm repair and reconstruction play made a nice jump.  Gunner’s been intensely watching NOAA reports… hurricane woes alone shot up his penny stock 11% yesterday.  Humberto might jack it up again, and a system about 930 miles east of the Lesser Antilles is already making news.”

“Greenspan blamed for double bubbles,” says a headline in the NY Post. At last…finally…they’re on to the old humbug.

Of course, Greenspan is not really responsible – at least, not alone – for today’s huge credit bubbles. As Ben Bernanke explained, there was a lot of money coming into the world financial system from other sources. The Asians, for example, seem to know how to make money but not how to spend it. Thus are they left with billions of dollars of savings. And when the price of oil rose from under $20 to over $70…it put a lot of money in the hands of oil producers. What could they do with all that extra money but put it into investments? And whose investments were better known, more liquid, and more universally accepted than those that were quoted in U.S. dollars?

Naturally and inevitably, people who earned dollars…or who had dollars…or owned dollar-based assets…or who printed up the dollar bills themselves…thought they were hot stuff. Everyone wanted what they had. Prices on Wall Street went up. Wall Street bonuses soared. Hustlers started up hedge funds…private equity funds…and funds of funds to grab some of the loose change.

All this money coming into the United States drove down interest rates. But it wasn’t just the foreign savers who drove down U.S. rates…and it wasn’t just the foreigners who were stuffing American capital markets with cash. After the mini-correction of 2001-2002, Alan Greenspan and George W. Bush panicked. Greenspan cut rates to “emergency” low levels… the lowest rates since the Great Depression…and the federal government jacked up spending while cutting taxes. The result was the biggest wad of new cash and credit ever to come into world capital markets.

What happened next? Boom…Bubble…now, B…ust?

Yesterday, the price of oil hit a new record high at $79.91. Meanwhile, the dollar fell to a new record low – at $1.39 to the euro (EUR). Wheat hit a new record high of $9 a bushel – twice what it brought a year ago. And the commodity index registered a new high too. Gold, the ultimate measure of paper currency destruction, held steady…despite estimates that the U.S. money supply has been growing at a fantastic 50% annual rate – following the market shock in the summer!

So much new cash and credit…so little real wealth!

Pity the poor American householder. Just a few months ago he had people lining up to lend him money. Now they’re on the phone wanting it back! He had gotten used to refinancing. But now refinancing is tough…and more expensive.

He goes to the grocery store and finds his bread and breakfast cereal have gone up in price. He gets his health care bill and finds it rising faster than his income. He drives into the gas station – he’s shocked by how much it costs to fill up his tank. He hears on the news that the government says inflation is under control…the federal budget is balanced…and all is well. But then he looks at his own cost of living and realizes that the feds’ numbers are nonsense – they merely left out two of his biggest expenses – food and fuel…and they cheated on the others.

And as for Bush Budget…

…he’s sure the feds are pulling a fast one there too. Look at the numbers more carefully, says Fortune Magazine, and you find a deficit of more than $400 billion…

…and then, he discovers that his adjustable rate mortgage is going to be reset.

Get ready for a ‘deluge’ of resets, says Reuters. So far, only about a third of the subprime ARMs of 2005 and 2006 have been reset… the crest of the wave is still ahead.

Home sales have already crashed…and forecasts are being revised downward every week. They’re already at a 15-year low in Southern California.

And now, the “housing slump is starting to pinch the economy,” says an item at San Francisco Gate. Shopping malls are feeling the pain, adds the New York Times.

And in Detroit, some 700 houses are to be auctioned off between September 21st and 23rd. These houses have been on the market for more than a year. The banks and mortgage lenders who own them are desperate to get them off the books. So this should be interesting…finally, we’re going to see houses marked to market. Some are expected to go for as little as $5,000.

Well, at least the cost of housing is going down…at least in Motown.

Here in London, the Financial Times reports that property prices fell in August – for the first time in two years. Property bulls argue that Britain is a small island and that there is a shortage of housing. Yet, there are said to be about 850,000 empty properties in England alone.

Finally, a sarcastic letter from a Dear Reader. Our comment follows:

“The analogy you revived, about the Pope having no power to back up his condemnation of the Nazis was especially poignant.

“The brilliant insight you’d expressed about these Islamists is truly revealing. Without standing armies under a governmental hierarchy, they’re about as much a threat as that stupid, self-absorbed, impotent Pope

“By pointing out the obvious fact that all this ridiculous waste of money and effort in trying to route them out and neutralize their activities is so much a mindless goose-chase, you have encouraged me to consider some sort of political pressure to realize an even greater economy!

“Think of it! Let’s all get together to force governments worldwide to eliminate the hugely wasteful expense involved in dispatching millions of dangerously hapless, bumbling police officers from endlessly meandering around the planet, needlessly poking into everyone’s private lives to find criminals. After all, without armies under structured governmental control, criminals are nothing more than an infrequent incidental inconvenience. Who should care if a fairly large proportion of them acquire machine guns, shoulder fired rocket launchers and caches of sophisticated explosives? Any chance that they’ll get their hands on enough biological or radioactive agents to affect more than a few thousand people every few years, is so slim that any level of concern is completely overblown! No armies…no governments…no problem!

“Surely, we could eradicate more than half of the losses of money attributable to criminal activity! We can just absorb the initial cost, and save trillions. The whole thing has demonstrably proven to be a failed effort, after all. Tens of thousands of years, we’ve been futilely trying to eliminate crime! For what? We’ve still got them slinking around in the shadows. Hell, any people affected were bound to die at some point anyway. It’s all so obvious, isn’t it? Just ignore it!

“How about it? You sign over all the proceeds of your publications to me, and I’ll immediately get to work on it! People need to wise up! Let’s join forces and help them see the light!”

Our dear reader presumes that we are opposed to fighting crime. Not so. It was a crime to bring down the World Trade Center. The cops should have gotten on the case and brought those responsible to justice.

Armies are made to fight armies – to protect the state. Cops are on the beat to fight criminals, and to protect individuals and individuals’ property…unless you live in a Banana Republic or a police state – where the army pretends to fight criminals…but actually controls the homeland population.

But we do not want to join the argument. We merely want to understand why people think the way they do. What is clearly a mistake to us…is clearly a necessity to someone else. And both of us have the same facts before us. Why the difference of opinion?

More to come…

Bill Bonner
The Daily Reckoning