In the first half of the past decade, subprime loans were king. They were cheap and easy to get approved. Along with the subprime boom came subprime adjustable-rate mortgages (ARMs), which were equally easy to afford...for a while.

Of course, the "A" and the "R" in ARM meant that the interest rate borrowers pay changes, or resets. The majority of these resets occurred between the summer of 2007 and the summer of 2008.

This period saw a massive amount of mortgage interest rate hikes, which caused millions of foreclosures. Things spiraled down from there, eventually freezing nearly all credit and causing the panic of 2008.

Of course, that's the 50-cent version of recent history. There were plenty of other financial calamities that went along with this, including the bundling of mortgage-backed securities and risky derivative products.

If you believe the Obama White House and the glass-half-full press corps, you'd think this mess is now behind us. We are, after all, in a recovery...right?

Unfortunately, no one is talking about the second wave of ARM resets and foreclosures...

You see, this second wave will come crashing even harder than the first. It's made up of a type of mortgage called "Option ARMs." These give borrowers the option of how much they want to pay during the first five or 10 years of repayment:

1) The full amortized rate, including interest and principal.
2) Interest only, or...
3) A token payment, well below the amount needed to cover the interest on the loan.

This third option causes the mortgage balance to INCREASE instead of decrease. And usually, the borrower can continue to make minimum payments until the mortgage balance increases to 125% of the original amount. That's when the trouble begins...especially if the interest rate increases at the same time.

This is the exact situation in which many homeowners now find themselves.

Obviously, these option ARMs were supposed to be reserved for customers with better credit than those who took out subprime mortgages. But apparently, they were handed out to almost anyone who wanted them.

According to Whitney Tilson and Glenn Tongue of T2 Partners, who are experts on this subject, about 80% of option ARMs are negatively amortizing. Meaning these so-called top-tier borrowers are heading further into the hole. Once their rates reset, they could be in serious trouble.

And that could be happening very soon:

The chart above shows the two peaks in the mortgage-reset wave. The first peak is comprised of subprime ARM resets. And the second is mostly constructed of option ARM resets. We appear to be in the eye of the storm.

That fact alone shook our nerves when we first discovered it. But it was a different chart in Tilson and Tongue's most recent presentation that really got us startled... It's also the reason I'm predicting the dollar spike in 2010.

Instead of resetting as expected after the first five years, many option ARMs are so negatively amortized that they are hitting their automatic reset cap.

That means they are resetting early...like right now.

As you can see from the second chart, the expected reset peak was to occur in 2011. But the real peak is happening now. You can also see that the amount of mortgages resetting is spread over a longer period of time than originally thought, but is peaking much earlier. Unfortunately, it's not the peaks that matter.

You see, those are just resets. But with unemployment reaching quarter- century highs every month, and the massive number of homeowners about to receive mortgage bills for two to three times what they are used to paying, we find ourselves in an even scarier environment than this time last year.

It takes anywhere between 3-12 months for most homeowners to actually go into foreclosure. Therefore, the wave of Option-ARMs that are now resetting could cause a major wave of foreclosures over the next 6 to 18 months.

It's tough to say exactly when the storm will come. But my guess is the second half of 2010.

This second wave of foreclosures will not be good news for the economy or the stock market...At least that's my guess.

Regards,

Jim Nelson
for The Daily Reckoning Australia

• Another Big Wave of Foreclosures
• Subprime Meltdown Has About Run its Course
• Americans Behind On Mortgage Payments
• The Interest Only Mortgage Option
• Mortgage Crisis: Shark With an Appetite

This caused the federal debt clock to add a 14th digit (by breaking the $10 trillion dollar mark).

We've also got an out-of-control trade deficit. For having a 40% share of the world's economy, we certainly don't produce that many goods.

Finally, we have a credit crisis that is causing many to worry that our lenders, like China and Japan, will turn off the tap.

With this nightmarish scenario we find ourselves in, it wouldn't surprise us if the US' credit rating fell. That would cause an immediate panic in the currency markets and send the buying power of the dollar into a tailspin.

I guess what we're saying is get out of the dollar as fast as possible!

There are a couple of ways to go about this:

Currency Protection Strategy No. 1: Sell the Dollar

The easiest way to get out of the dollar is to trade in the cash you don't need to live on for another currency. You might even be able to hold other currencies in your brokerage account.

Here at Lifetime Income Report, we don't recommend currencies directly. We're here to help you find income, not to pick currencies.

Exchanging currencies is one way to protect your wealth from a potential dollar disaster. But it's not the only way...

Currency Protection Strategy No. 2: Buy Precious Metals

There's probably no safer way to protect your wealth in the world than to own gold and silver. There are many Web sites and exchanges where you can do this, as well as coin dealers that can help you make this move.

While we personally think precious metals are going to continue increasing in value, you probably shouldn't just spend all your money on gold nuggets. There's a big difference between the spot prices and what you would pay. Gold coins, for instance, are trading at a hefty premium over spot.

Currency Protection Strategy No. 3: Buy US Companies With International Exposure

Again, this shouldn't be a surprise. We have many US companies in our portfolio. After all, we are here for income, not to be global traders. But you'll probably notice that most of our US companies have plenty of international exposure.

Currency Protection Strategy No. 4: Buy American Depositary Receipts

We saved the best for last. This is the theme we have been hitting the hardest in recent months. ADRs have been a cornerstone of this newsletter. From the very first issue, we had at least two ADRs in our portfolio. This month, we are adding another.

There's a huge reason why we buy ADRs instead of the currencies themselves. Instead of just the upside of foreign currency to US dollars, we also get the benefit of fast-growing emerging markets and mega income from international players.

You see, foreign markets, especially now, have huge dividend yields.

The US is near the bottom of the list of places for income investors to look. The smart money is in companies staying out of the dollar.

Regards,

Jim Nelson
for The Daily Reckoning Australia

• What Happens to Gold When High Inflation, Excess Cash, and Falling Dollar Jolts Economy?
• Gone Fishin’ Investment Strategy
• US Dollar Declining as China’s Currency Rises
• The Problem With a Well-Diversified Portfolio
• Citizens Easily Coerced into Using Government Currency

Take wind energy for instance...

The wind energy industry added 20 gigawatts of capacity last year. That's 31% more than the year before and 176% more than just five years ago. Europe already proved that this growth is steady, and both China and the U.S are finally jumping on board. Not even the NIMBY's can stop it.

(NIMBY - meaning "Not in My Backyard" - refers to those who reject projects around them even if it benefits them. NIMBY-ism is the main reason why certain proposals for wind farms are rejected.)

Solar power has also presented amazing opportunities. The sale of solar cells increased upwards of 40% last year alone. It's even made investors big money in the stock market. One of the biggest winners last year on the NASDAQ was a solar company named First Solar, Inc (NYSE: FSLR) If you would have sank just $1,000 into this company at the beginning of 2007, you would've walked away with $8,854.

There is only a certain amount of time during the day when windmills can produce energy - their "capacity factor." The average capacity factor for wind power is about 30%. The rest of the time, these windmills sit like giant statues waiting for the next gust of wind. During that period - the "energy time gap" - no new electricity is going onto the power grids.

The same goes for solar power...

The sun doesn't shine 100% of the time. Even in the vast deserts of Southwest U.S., in the peak of summer, the sun is only up about 14 hours a day. When it is up, there are problems with cloud coverage. The average capacity factor for solar power is around 25%.

So up until now, these renewable energies have been useless...

Without the ability to store the electricity that these renewables are producing, there's no reason to build new wind farms, solar-power plants or any other "green" electricity producers.

Until now, batteries were the only choice. Batteries offer great energy storage, but take too long to charge. It takes anywhere from one to ten hours to charge batteries. Unfortunately, with a capacity factor for renewables under 30%, we don't have that kind of time to wait for batteries to charge.

There is one solution for the energy problems of tomorrow By using a special type of device called a supercapacitor, we have the solution to the fatal "energy time gap."

Batteries are chemical devices that use mass transfers over a certain period of time. Supercapacitors store ions, which can be stored and released very quickly. It's like instant energy.

But, that's not to say that it has to be one or the other. In fact, the two work very well together. Supercapacitors bring fast storage and release of instant power - which is crucial - and batteries use this to advance their storage and long-lasting energy release capabilities.

Changing batteries every few years at wind farms and solar plants, let alone hundreds of other battery-powered locations, becomes quite expensive and time-consuming. These supercapacitors last between 1,000 and 10,000 times as long. In fact, there is a company already manufacturing and selling these products for use in windmills.

But, supercapacitors' advantages don't stop here...

When a car brakes, or a crane drops, energy is released. And until now, that energy isn't recaptured. It's wasted. Supercapacitors can actually capture that energy and use it again for other purposes. Using the crane example for a minute...

When a crane drops its massive arms to pick something up or unload something, there is a large amount of natural energy (gravity) released. Batteries cannot charge in the time that the crane is dropping, but supercapacitors can. That energy is then stored in the supercapacitor. When the crane needs raised up again, that stored energy is used. Hundreds of different industries can apply this principle to their own energy needs.

Take transportation for instance...

Supercapacitors can collect energy as a vehicle brakes, then release it when the vehicle accelerates, giving a nice boost of energy without any emissions. Every single time someone pulls up to a stop sign or red light the vehicle wastes energy. That energy can save massive amounts of gasoline every second of the day, all over the world. And, both countries and manufacturers are starting to pay attention...

China has an enormous pollution problem. With the 2008 Beijing Olympics coming up, the country is desperately trying to turn its public transportation "green."

Chinese hybrid bus makers recently signed two contracts for the use of supercapacitor technology. With the rush to have it done by the opening ceremony in August, we should see a rush to buy up as many of these as possible between now and then.

The U.S. Advanced Battery Consortium has already arranged deals for use of its patented supercapacitors, in combination with Lithium-Ion batteries, in next-generation Plug-in hybrid electric vehicles (PHEVs) in the United States.

In fact, news has already started to show up in this field. In January this year, it was announced that one of the leading automotive electronics suppliers has designed a was to use its supercapacitors in a major automaker's electrical system, and it will go into full-scale production in the second half of next year.

The role of supercapacitors in the transportation industry is limitless, let alone renewable energies and industrial applications. It's certainly something to keep on eye out for.

Sincerely,

Jim Nelson
for The Daily Reckoning Australia

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