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."
Hussman:
"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.
"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.
Bill Bonner
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by prozak on 11 November 2009:
Is it that straight forward?
I looked into this last week (just through google searches) and there are cases it seems where ones payment might go from $100 a month to $3000 a month. But there are also cases that wont be so dramatic.
How many of the dramitic resets are there? How many of those old reset numbers have already defaulted? I don't think property values in the USA will get that much worse fromt he next reset wave.. another 20% fall from here is a drop in the ocean.
What we should be keeping an eye on is the value of mortgage backed securities and how these are being marked on balance sheets around the world. A hard task since a lot of banks (and the fed) have decided to live in an alternate reality... and create (at least the perception of) a load of zombie banks. We need to know who really is afloat and who is not.
Also what is the value of the new mortgages being written - JPM beefing up mortgage business as we speak... banks in the UK being TOLD to lend more and at 90% LTV.
Comment by Ross on 11 November 2009:
Just remember that the US lends long & fixed rate and funds short (av down from 7 to now 3 years). It isn't only the past lending but the present that will count in the reckoning.
Comment by Watchful eye on 30 November 2009:
Keep an eye on Australia, they have missed the GFC all together for the best part it might as well have taken the trailer story along side the lochness monster as things that 'dont really exist'. People are borrowing massive amounts of money, median house price is nudging $500,000 or 10 times the medain income and Auctions are easily exceeding 30% of there reserve.
The market was cooked in 2008 and the measures used tocounteract the GFC have lead to 40 year low interest rates, massive commonwealth incentives (grants of $21k for first home owners) and reduced stamp duty. This has produced a n approximate 40% increase in properties for first home owners market, it has blown out massively.
As conditions return to normal in respect to rates there will be one almighty busting of the bubble. There is a subprime looming here and it has the ability to cripple Australia as it did the US. Most Australians refer to there home as there wealth core, irrespective of what they have borrowed to own it, when values drop (as they will) the idea of real wealth will simply evaporate.
Comment by Ned S on 30 November 2009:
Welcome back Pete!
Comment by Justin on 30 November 2009:
Prozak, I just found this on another website;
The Australian government gave a formal green light on Monday to a proposal to invest up to $8 billion in additional public funds to support the country's residential mortgage-backed bond market.
Comment by Ned S on 30 November 2009:
It's the one and only Oz government protected growth industry ... How could any Oz tax payer NOT invest in it?
I'll be in for my $550,000 worth of snout in trough stuff next year - After ken Henry has firmed up the details of how he'd like me to invest in same - And Krudd has said said Duh, Yeh, Maybe, Me dunno - Whatever Ken says is good providing it don't hurt me getting re-elected!
Comment by Greg Atkinson on 30 November 2009:
Ned - I think we all know that Swanny is not going to let Oz home prices fall before the next election at almost any cost. The problem is we have the RBA who seem intent on trying to keep a lid on prices while the Government seems to be trying to pump them up. It all looks pretty messy to me.
Comment by Ned S on 30 November 2009:
RBA dropped interest rates way too low to keep a lid on house prices Greg. Aussies know interest rates will be [comparatively] low for many years I think?
Comment by Ned S on 30 November 2009:
One of the things that hit's me in the "eye" Watchful Eye is that a country where you reckon house prices have gone down a bit (17% I believe???) reckons it's at war - And all da bad people in all de whole wide world is out to get dem ... Ooooh? So it's media fawn at massah gubment's feet - Paranoia = Americoia! Youse poor silly stupid baskets!
Comment by Ned S on 30 November 2009:
Over one straggly bearded busted arse Mussie with a plasic watch on his wrist - Ohhhh - America, you must be SO afraid!!! What a god damn laughable busted arse hoot!!!
Comment by Ned S on 1 December 2009:
Hmmm ... Had a yak to one of me foreign mobs tonight - Ya outdoor dunny? Yuse use it once it gets cold? Nah - No problem! What about ya washing ya clothes? That's not a problem either - We always do them by hand in the house? ... Ah, the West has so much to learn!
Comment by Ned S on 1 December 2009:
Wonder if this is the death of "It" - No chance I reckon! But it could happen in another 5 or 10 or 15 or 20 years hey??? Nah; Actually it won't - Because it's going to take WAY longfewrvthan thgat forv hum, ans to regrow a primordial spine - IMO?
Comment by Justin on 1 December 2009:
Enough talk, time for action. I'm gonna go write some mortgage paper & sell it to the government.
Who's with me!?