I was, and still am, against any governmental stimulus plan.  The plain and simple answer as to why is because they don’t work and usually create noise in the economy.  The only way things will get better is when the mal-investment is worked out of the system and assets flow from the weak hands to strong hands. 

Now with talks of another stimulus plan floating around, on the heels of this year’s $787 Billion stimulation, I can’t help but wonder if we would make the same mistake twice?

The stimulus plan passed in February “is executing pretty much as expected,” yet it “won’t affect the economy’s primary problems, which are falling values of assets like homes and stocks,” said Doug Holtz-Eakin, who was director of the Congressional Budget Office from 2003 to 2006 and is now president at DHE Consulting LLC in Washington. [via Bloomberg]

Executing pretty much as expected? Wait, and it won’t affect the economy’s primary problems?  Why the hell should we dream of stimulating a second time? 

Want to know how to really help the situation and truly firm up the economy FAST.  Have the government bailout all middle to lower class residential property owners by forgiving their second mortgages.  A large chunk of foreclosures will go away immediately, people will have debt relief and the ability to spend again, and all those subprime portfolios will start to perform again.

My friend at Paper Economy is testing out his new data visualization engine and he pulled together a scary chart of Year over Year house prices in Phoenix, Arizona. Can you believe it? We are below 2000 prices?

This is truly a frightening chart and I suspect that real estate prices could go even lower in Arizona, and the rest of the country for that matter, if people continue to get laid off.  This would confirm my observation from earlier this year about real estate and equity prices having further to fall.

I’m coming to a painful realization that I might have to eat my words regarding my S&P500 market bottom call.  I say this because of my recent observations in the bank owned/foreclosure market.  There seems to be too much “optimism” and inventory on the part of the banks!

My wife and I started trolling around the foreclosure markets again and found a potential property.  Its’a 2 bedroom, 1 bath cottage overlooking a lake in a decent neighborhood. It’s run down and needs a new septic system, new roof, and lots of inside work to bring it up to date.  The bank foreclosed on the property over a year ago with the judgement amount of $125,000.  That means the the bank was owed $125,000 on their loan when the bank took back the property.

Instead of putting the house back on the market at $125,000 or even $130,000 in “as-is” condition, the bank in their wisdom listed it with a realtor for $225,000!  Based on our calculations, you’d need to pump in at least $100,000 to fix up the place into something that people what to rent or even own.  In this market, there is no way someone would pay list price and then pump in an additional $100k to live in a 2 bedroom, 1 bath cottage overlooking a garbage dump.  As one might expect, they’ve had no offers and the property remains vacant.  

I highlight this property because its one example of the multitude of properties we’ve come across in similar condition and cirucumstance.   Compounding this problem is the daily influx of newly bank owned properties to the already excessive inventory.  It doesn’t take a rocket scientist, or neural net model, to tell you that something’s gotta give and my guess is equity prices.

Now’s a good time to buy a second property, if you can get a loan IMHO.  I have never seen the banks littered with so many bank owned properties, ever.  Don’t know where to find them?  Have a look here.

I’m still alive but been extremely busy with work and some old REI acquaintances. The rumor is that my REI friends have overseas investors interested in acquiring NJ property and they want me to be a part of this. So I’ve been busy poring over the latest foreclosure data and I’m utterly shocked by the damage that’s out there.

Within a six town radius of where I live (secret location), there are over 600 new default filings in the last 3 months alone. Stalwart places like Bergen County are mushrooming to levels I’ve never seen before when I was an active foreclosure investor. Back in the day I never went near Bergen County because the filings were so pitiful and the property would be snapped up in seconds by the retail market. Now its a different story, from 320 filings to over 2300 in four short years.

Part of me wants to organize the investors and start buying but the other part of my is scared shitless right now because its really bad and could get worse…

I’ve talked to half of the people that I polled previously for my Engineering and Economy Poll and I’m seeing some positive changes. I’ve been crushed recently with new work and we’re even talking of hiring people. My California buddy says work has been steady to UP (a change from Neutral) and my NJ buddy #1 has been very busy (a change from Neutral), I remain UP.

If the market has indeed bottomed and we’re seeing quite a bit of Engineering work, then I’ll take a risk and say that things will get better toward the end of this year and 2009 will be a lot better. You know what else this means? The Real Estate market is bottoming too.

Note to self: call your other buddies to confirm this!

I roamed around a lot when I lived in New Mexico and I came across several ghost towns. I loved finding them out in the middle of nowhere and poking around in them. If I had more time I would probably researched the reason why they were abandoned but we didn’t stay too long at them. Usually they were on private property and had big “KEEP OUT” signs and we had to always watched out for a Rancher with a big rifle. Still though, the sign and the lure of ghost town adventure didn’t deter my friend Kevin or me! I mean, how could you not be deterred?

I was chatting with the Chairman yesterday when he sent me this link from Bloomberg about the rise in house inventories and how they’re at the same level since 1973.

In January 1973, the number of finished new homes for sale was 97,000, when the U.S. population was about 212 million, according to the U.S. Census Bureau. In December 2007, 197,000 completed homes were on the market and in January 2008 there were 195,000. The current population is 303.5 million.

It seems that back in 1973, the % inventory to the US population was 0.05% and today its 0.06%. I really don’t know if these numbers are a cause for all the calamity the Bloomberg article alludes too but what it does mean is that home prices probably have further to fall. It’s just a matter of time till we work off the inventory and hit bottom and I think we’re almost there.

I saw this article posted on the Chairman’s Deli.cio.us link roll.  It seems it took only 6 to 7 days for the asset backed commercial mortgage paper market to start collapsing.

In normal markets, JPMorgan sells $25 billion of short-term IOUs for clients daily. “Within the span of six or seven business days, every single investor stopped buying asset-backed commercial paper tied to structured investment vehicles,” said John Kodweis, a managing director at the New York bank.  [via Bloomberg]

Quite amazing when you think about it.  No?

My wife and I leveraged a lot credit cards to help with our rehab project at the investment property. We utilized all those 0% interest for a year cards and transferred the balances when the rates readjusted (probably not the best thing to do for our credit scores). The neat thing is that we’ve paid them all off, except for one which will be paid off next month. In the end we had 2-1/2 years of free money for our project and managed the cards wisely.

Despite all this, I hate credit cards and plan on never using them again. I believe many Americans now share my sentiment, especially after they wake up to find to oppressive due balances.

“We don’t use our credit cards anymore,” said Lisa Merhaut, a professional at a telecommunications company who lives in Leesburg, Va., and whose family last year ran up credit card debt it could not handle.

Today, Ms. Merhaut, 44, manages her money the way her father did. Despite a household income reaching six figures, she uses cash for every purchase. “What we have is what we have,” Ms. Merhaut said. “We have to rely on the money that we’re bringing in.”[via NY Times]

As Laura Ingalls once said on Little House on the Prairie, “Pa always said to pay cash on the barrel.” Pa was indeed a wise man.

Ugly posted this interesting LA Times article his Del.icio.us link role a few days ago. It seems that people with upside down mortgages (where your mortgage is greater than the value of your house) are voluntarily letting their properties be foreclosed on.

A homeowner who can’t sell his house tells the L.A.Times, “Foreclose me. … I’ll live in the house for free for 12 months, and I’ll save my money and I’ll move on.”

Banks and lenders fear this kind of thinking — that walking away from a house could be the smart economic move — appears to be on the rise. Wachovia, in a conference call yesterday, warned investors that increasing numbers of homeowners are walking away from their homes by choice: “… people that have otherwise had the capacity to pay, but have basically just decided not to because they feel like they’ve lost equity, value in their properties…”

It sure makes business sense to me why homeowners are doing this, cut your losses and get out but is it the right thing to do? I don’t know if its right or wrong but I do know that the Banks need to start being more accommodative to all borrowers now. Lending has gotten so tight that our mortgage company wants to charge us $5,000 just to refinance our investment property, and we have great credit!

With all this voluntary foreclosure activity, is it time to be a foreclosure vulture capitalist? Not yet, wait till the banks are choking on supply.

The year is beginning to wind down and I’m looking forward to closing out my Forex trading with at least one position in AUDUSD and possibly a second in EURJPY if my buy order gets triggered when London opens. All this intervention by the banks can’t stop the overall trend for currencies until they change their policies, whether politically or economically.

So what does 2008 hold for the major currencies? Only time will tell as the new year unfolds but if things continue as they did this year, you should expect a further decline in the USD and hardly any appreciation of the Yen. I believe the Euro zone will eventually be tapped out, yes they’re feeling the pinch of inflation but it won’t hurt them too badly if they had to cut interest rates to spur thier slowing economy.

The one currency to watch is the Chinese Yuan. I believe that next year we’ll see a further appreciation of this currency relative to the USD as China must come to grips with its massive economic engine. No matter how powerful the sleeping Dragon is, nothing can hold back its currency from freefalls or meltups when the levy breaks. If you ask me, the immediate trend for the Yuan is UP but I suspect that China might enter into a period of stagflation if it doesn’t reign in its massive inflation by free floating the Yuan.

The Yen will probably do nothing next year, the Bank of Japan is still seeing a weak economy and is in no hurry to raise rates. The Australian Dollar and the New Zealand Kiwi are over inflated by all means. The Aussie D and Kiwi Yen crosses are by far some of the most favorite carry trade currencies out there and they have a high carry trade premium in their price. Sooner or later the Bank of Australia and the Bank of New Zealand will have to cut rates in response to a slowing global economy reeling from the subprime mess and when they do, watch out for the Kimono Traders! If I were a long term betting man, I might consider placing a short position for these pairs when the time is right. I still believe that AUDUSD will see parity next year before all hell breaks loose and she goes down for the count. Wishful thinking? Yes!

The USD will continue to be doomed until we get rid of Bush and elect someone who has a humble foreign policy. No matter how much I like Ron Paul, and will vote for him, the reality is that he might not win the Republican Primary. Any other clown we elect as President in 2008, whether Democratic or Republican, will likely to continue business as usual. That means more saber rattling, more stupid wars on terrorism, waterboarding at your local Chuckee Cheese, printing more money, bailing out more hedge fund managers and banks, and further weakening our USD. Could 2008 be the year we say, “not worth a Greenback?”

Real Estate will continue to spiral lower in 2008 as the next wave of ARM’s will reset and add more foreclosure properties to the bulging house inventory we already have. I thought we might see a bottom at the end of this year but I’m leaning more to 2011 now. I’m still out there hunting for another investment property but the average Joe owner is still way too optimistic with his prices. Poor guy, he’s going to get creamed in 2008.

Gold. What can I say, I’m leaning really heavily to that shiny metal and I plan on trading the XAUUSD alot next year. We’re sure to see it take out its old high and I’m willing to guess even $1000/oz by year’s end, even sooner if we do something stupid like invade Iran or help fight a civil war in Pakistan.

Stocks? I’m treading very lightly here but my guess is that the Fed will drop interest rates further, my target is down to 3%. When Ben is done cutting, I suspect we’ll see more air in the stock market and higher gains. The markets will trend higher, possibly take out the old highs, and then stop like it did this year. I’m still heavily in cash and bonds and slowly working new money into the market. The question remains is, are we in a recession, entering one, or will the Fed just tell us to never mind that man behind the curtain? Only time will tell if I turned into a permabear or not.

All my year end thoughts don’t sound to optimistic because they aren’t for the good ol’ USA, but they are for other countries. The trick is figuring out how to make money and profit from stupid economic and political policies and I hope to continue doing that in 2008! Despite my ups and downs, this year, it was a great year for m! I was blessed with my second child, a happy family, good work, and had good investment returns. I was very fortunate this year and I hope that 2008 will be even better.

Here’s to wishing all my readers a great 2008! May you be fortunate and lucky in the coming new year. God Bless.

PS: I plan on posting in the evenings starting in ’08!

It looks like the Spanish Real Estate market is the next victim of the “decoupled” USA economy.

Spain is suffering collateral damage from the collapse of the U.S. market for mortgages to the riskiest borrowers and the swoon in U.S. real estate. Spanish banks have exceeded their European peers in tightening lending standards, prompting a plea from the Prime Minister José Luis Rodriguez Zapatero – facing national elections early next year – not to strangle growth.

This, of course will have consequences for the EU who may be forced to cut interest rates in the face of higher inflation to stablize markets dependent on credit.

“The end of Spain’s ‘fat’ years will hit the whole region,” Ralph Solveen, an economist at Commerzbank in Frankfurt, said. Spanish economic growth is outpacing the euro region for the 13th year, in part because of the spending boom spurred by soaring property prices. Consumer debt surged to 130 percent of incomes in June, from about 70 percent in 2000. With home values rising by 176 percent during the same period, construction has accounted for one in every five new jobs. The current-account deficit demands €2 billion, or $2.9 billion, a week to finance. [via IHT]

A foreign country like Spain, who should’ve been “decoupled” from our economy, sure sounds a lot like a “mini me” version of the United States. You can’t fart nowadays without having some global impact, and to think that the world’s largest economy could simply decouple itself from the rest of the world is idiotic. If that were true then why did we have this “coordinated action” (aka intervention) yesterday by several global banks?

Is it me or do I see cracks in the foundation of the house of financial cards?