Phil De Carolis' Blog (Be Sure To Visit www.PhilDeCarolis.com)

The Housing Metrics of Southern California – Seasonal Home Sales, Inflation Adjusted Home Prices, Tens of Thousands Living Rent Free, and the Japanese Experience.

Phil De Carolis — Tue, 02 Mar 2010 15:54:00 GMT

People are realizing the problems in the housing market are simply a bigger reflection of the lingering issues in the overall economy. There have now been a few stories comparing California with the issues being experienced in troubled Greece. JP Morgan Chase CEO Jamie Dimon echoed his concerns regarding California. The markets seem to underestimate how profound the issues are in the California economy. What is more troubling is California is merely a reflection of other states. The Legislative Analyst Office projects deficits deep into 2014 and each year we experience a deficit will require higher taxes or deeper cuts. That is why focusing on jobs is such an important barometer for the improvement of the overall economy. Without one net added job in California people are already counting the next housing boom. The numbers simply do not reflect this assumption.

I want to examine some of the nuts and bolts of the market because this is where the real story is. We know that millions of foreclosures have flooded the market. We can understand how toxic option ARMs have become to the market even years after they were originated. But what does this mean going forward? First, let us examine the median sale price and monthly sales of Southern California over the decade:

Source: DataQuick

This is a fascinating look at the market. Even during the boom we clearly see the seasonal pattern in sales. Each fall and winter sales drop as more people take inventory off the market. Spring and summer overall are bigger sale months because of school schedules, family commitments, and just a general acceptance that this is when more inventory enters the market. But you’ll notice in 2006 that the trend radically shifted. The crash hit and sales plummeted. An interesting phenomenon occurred where the median sale price didn’t peak until the middle of 2007 well into the monthly sale crash. So it would appear that sales would actually lead future prices. So the jump in sales would indicate much higher prices going forward right? Not necessarily. Even with the jump in sales, we are nowhere close to the average sales per month over the decade. I ran the monthly sales number for the past decade and the average monthly sale number for Southern California is:

24,604 Sales

This includes fall, winter, spring, and summer. In January we had 15,361 sales and the last time we had 24,604 sales or higher was back in August of 2006. Prices have come down but the bulk of the drag to the lower side has been in lower priced home sales. Much of this has been driven by foreclosure re-sales. But another important factor to look at is how much are families committing to their monthly mortgage payment? With Alt-A and option ARM products families were able to stretch their budget. Since the bulk of loans are now backed by the government lenders are now at the very least verifying income. Let us look at the monthly mortgage payment over this time:

Source: DataQuick

The above tells you a lot. While the median home price in Southern California is down by 46 percent from the peak the typical monthly mortgage payment is down 52 percent from the peak. People are committing to half the monthly payment amount and this has more to do with the health of the economy. I know many would love to have a $1,170 monthly mortgage for a place in Southern California. This is already happening in many areas but not in higher priced regions like Culver City or other parts of the Westside.

It helps to look at a handful of examples to highlight what is really happening. Let us look at pre-bubble prices in areas that have corrected versus areas that still seem elevated:

Source: DataQuick

Now this data tells us a lot because over the past decade incomes went stagnant. The overall inflation rate for California was 25.6 percent:

So if wages don’t explain this rise in prices and inflation isn’t the reason, can it be that some areas are still in mini bubbles? This is very likely. And this doesn’t apply to the entire state of California. Some areas have corrected fiercely and prices seem to be more in line with inflation and wage increases:

You’ll also notice the difference in overall sale numbers. What on the surface may seem like an enormous crash actually looks like a correction to the inflation adjusted mean. I find it fascinating to see many communities heading back to the 25 to 30 percent inflation rate of California and are somehow finding a bottom in this range. But many areas are still over priced and this will need to adjust either with higher incomes coming from better job growth or further price corrections. Part of what is forgotten when examining the shadow inventory is the fact that these are properties in heavy distress. The L.A. Times ran a piece confirming what we have been talking about for over a year:

“(LA Times) It’s been 16 months since Eugene and Patricia Harrison last paid the mortgage on their Perris home. Eleven months since the notice got slapped on their front door, warning that it would be sold at auction.

A terse letter from a lawyer came eight months ago, telling them that their lender now owned the house. Three months later, the bank told them to pay up or get out by the end of the week.

Throughout the country, people continue to default on their home loans — but lenders have backed off on forced evictions, allowing many to remain in their homes, essentially rent-free.

Several factors are driving the trend, industry experts say, including government pressure on banks to modify loans and keep people in their homes.”

Now this wouldn’t be such a big deal if it were a handful of mortgages. But just look at this mind blowing chart:

Source: LA Times

Mortgages that are 90 days late and a foreclosure hasn’t been filed are up to a record shattering 5.1 percent. Now think about that. How is this a sign that things are good? So we’ve reached a point where simply staying put in your home, rent-free is a strategy being used by banks to deal with the foreclosure crisis. The big losers are the prudent in this country. How many Americans are paying their mortgages diligently, probably needing to take a second job if there is one to be had, just to make sure they pay their bills? Wall Street has the luxury of making disastrous mistakes and yet they are bailed out to the tune of trillions of dollars and offer billion dollar bonuses. Those that over extended are then put in a lottery essentially where some can stay rent free for one and even two years before an eviction depending on when banks get to it. Others are kicked out quickly. Some are put into HAMP. The big issue? No clear uniformity to what is going on. What is wrong with renting? Half of those living in giant Los Angeles County rent. There is this stigma attached to renting a home and massive subsidies for homeownership. This carefully orchestrated play is now being held up even though tens of thousands now are living rent free in over leveraged homes. Housing seemed to work well when it was a boring, track inflation play that if you were lucky after 30 years, you had a place over your head and no mortgage. Since when did it become a rule that every 5 to 7 years you had to “trade up” a “starter home” just so you can progress forward? This twisted logic seemed to make sense because how else were most families going to save $100,000 to $200,000 just for a down payment on a 1,000 square foot home in a decent area? Of course that broken trend is now unraveling.

So putting this altogether, why would anyone want to buy in this current climate? Transparency is really not to be found. What real reform have we gotten after these two agonizing years? Is this reason in itself to buy? The headline data seems to tell us things have stalled but if we look at a deeper analysis, foreclosure filings, those 90 days late and with no foreclosure pending, bankruptcies, and other in the trenches data we realize that the market really isn’t healthy. We have yet to add one net job since the recession started. How are home prices going to go up? So let us assume the next big play is to simply turn ourselves into Japan and go for our second lost decade by putting banks into a permanent zombie position and ignoring problems. Pretending someone in a home that isn’t paying their mortgage is somehow good is probably a clear example of turning our housing market into a zombie market. Yet how is this good for prices? The same arguments were made in Japan and prices went nowhere for over 20 years!

It is interesting that the flurry of buyers jumping into the market have tapered off in the last few months. There was a period of two months where the tax credit and uptick in sales seemed to move a large number of people off the fence. There was a good amount of e-mail during this time. This has now waned significantly. But guess what? Prices are still near the trough. Why? Because incomes are stagnant. Maximum leverage mortgages are gone. Unless you plan on staying put for 30 years and can cover your mortgage comfortably, that future buyer is only going to be able to afford what their household income can stretch with a government backed loan. And looking at that typical monthly mortgage payment for Southern California it isn’t jumping up quickly. In other words, know the metrics of where you’re buying before jumping in.

http://www.doctorhousingbubble.com/the-housing-metrics-of-southern-california-%e2%80%93-seasonal-home-sales-inflation-adjusted-home-prices-tens-of-thousands-living-rent-free-and-the-japanese-experience/

Construction Decline Continues

Phil De Carolis — Mon, 01 Mar 2010 15:58:00 GMT

By SHOBHANA CHANDRA and TIMOTHY R. HOMAN
Bloomberg News

Construction spending in the U.S. fell in January for a third straight month, led by declines in commercial projects.

The 0.6 percent decrease to $884.1 billion followed a 1.2 percent drop the previous month, Commerce Department figures showed Monday in Washington. Commercial building fell 1.4 percent, swamping a 1.1 percent gain in home construction.

Recent home sales figures show the industry at the forefront of the deepest recession since the 1930s will be slow to rebound. Foreclosures that are projected to reach record levels this year may restrain homebuilding, while rising office vacancies will probably discourage new commercial projects.

Story continues below

AP photo

A rebound in housing activity in January was not enough to offset widespread weakness in commercial areas from office construction to hotels.

"We haven't really seen much improvement in housing," Michael Englund, chief economist at Action Economics LLC in Boulder, Colo., said before the report. "Residential construction is still weak. On the non-residential side, builders are hesitant to go along on new projects and banks are reluctant to provide the capital."

Economists forecast spending would decline 0.6 percent in January, according to the median of 42 projections in a Bloomberg News survey. Estimates ranged from a drop of 1.8 percent to a gain of 0.3 percent.

Other figures from the Commerce Department Monday showed consumer spending increased in January for a fourth consecutive month, a sign that the biggest part of the economy may contribute more to growth in coming months.

The 0.5 percent increase in purchases was more than anticipated and followed a 0.3 percent gain in December that was larger than previously estimated. Incomes climbed 0.1 percent, short of expectations and reflecting declines in dividends and interest.

The U.S. economy grew at a 5.9 percent pace in the final quarter of 2009, the best performance in six years and faster than previously estimated, the Commerce Department reported last week. Commercial construction fell at a 13.9 percent pace, while homebuilding expanded at a 5 percent rate, the figures showed.

The contribution to the economy from residential construction may be restrained this quarter as sales of new home slumped to the lowest on record in January. New-home sales, which compete with cheaper foreclosed properties, fell 11 percent in January, the Commerce Department reported Feb. 24.

http://www.pe.com/business/realestate/stories/PE_Biz_W_economy02.3c4f69f.html

Tax Credit Raises Questions

Phil De Carolis — Fri, 26 Feb 2010 18:54:00 GMT

By CAROLE FELDMAN
Associated Press Writer

If you bought a home in 2009, you could be eligible for a tax credit. Figuring out which one can be confusing.

There's one credit for first-time homebuyers and another that primarily benefits homebuyers who owned a home before. But don't mix it up with the first-time homebuyer credit in 2008, which actually was a long-term loan.

There are maximum income levels and maximum sales prices. And vacation homes or rental property don't qualify.

"If you want to spend two hours reading the instructions and translating them and finding out whether you qualify, yes, it's relatively simple," said Jeff Schnepper, an MSN Money tax expert and author of "How to Pay Zero Taxes."

Some questions and answers about the homebuyers tax credit:

Q: How many people are claiming the credit?

A: "In all, 4.4 million households are expected to claim the tax credit before it expires," Lawrence Yun, the Realtors' chief economist, said in December.

Q: How many versions are there?

A: There are actually three.

The first credit, for first-time homebuyers, was really a long-term, interest-free loan that has to be paid back over 15 years. The maximum credit was $7,500 for a principal residence purchased between April 9, 2008, and June 30, 2009.

The second iteration made the first-time homebuyers credit a true credit -- it doesn't have to be paid back -- and raised the amount to a maximum $8,000. It applied to homes purchased between Jan. 1, 2009, and Nov. 30, 2009.

The third change extended the eligibility dates to homes purchased through April 30, 2010. It also added a credit for long-time homeowners who purchased a new residence between Nov. 7, 2009, and April 30, 2010, but at a reduced value -- up to $6,500.

Q: Do I automatically qualify if I purchased a house during those periods?

A: No. To qualify, the house has to be used as a primary residence. If purchased after Nov. 6, 2009, it cannot have cost more than $800,000. If you're a long-time homeowner, you had to have lived in the same house consecutively for five out of the last eight years, though you need not have lived in or owned that house at the time you buy your new home.

For homes purchased after Nov. 6, 2009, the credit also begins phasing out for individuals with modified adjusted gross incomes above $125,000, and for married couples filing jointly with incomes above $225,000.

Q: How do I claim the credit?

A: There's a form, 5405, to fill out. You'll also have to submit a copy of your settlement statement, usually Form HUD-1, with the names and signatures of all parties, the property address, the sales price and date of purchase.

To avoid refund delays, the IRS recommends that long-time homeowners who purchase a new home also provide documents to show they meet the requirement for consecutive years lived in their old house. These can include mortgage interest statements, or property tax or homeowner's insurance records.

Q: Do I have to wait until I file my 2010 taxes to claim the credit for a home purchased before the deadline in 2010?

A: No. "You can choose to claim the credit on your 2009 return for a home you bought in 2010 that qualifies for the credit," the IRS said.

Q: I purchased my home in 2008 and filed for a credit on my tax returns. Do I still have to pay it back?

A: Yes. When Congress did away with the repayment requirement, it did not do so retroactively.

Q: What if I decide to sell the house I got the credit for or convert it to a rental property?

A: You will have to pay back the credit if you don't keep the purchased house as your permanent residence for three years.

http://www.pe.com/business/realestate/stories/PE_Biz_W_homebuyer28.1bdd3f6.html

Will the Pause Refresh?

Phil De Carolis — Fri, 26 Feb 2010 18:45:00 GMT

Commentary By John Brown

The world is currently in the eye of an economic hurricane. The leading edge of the storm, which made landfall in the second quarter of 2008, raged until the first quarter of 2009, and nearly demolished the world’s financial system. By sand-bagging with trillions of freshly-printed paper currencies, fudging accounting rules, subsidizing key financial houses and markets, and calming the masses with half-baked rhetoric, a worldwide collapse was averted.

But the calm is deceptive.

Because of the lull, Western governments have allowed our structural deficits to fester. Now, their spokesmen are predicting sunny skies for the foreseeable future. The Federal Reserve Chairman speaks of “exit strategies” and President Obama asserts that his stimulus package has prevented a second Great Depression. This inability to see past the horizon means our politicians have squandered our final chance to build sturdier shelters in advance of the hurricane’s trailing edge.

Last week, the International Monetary Fund (IMF) announced that it would dump a further 200 metric tons of gold onto the market. With temporary strength in the U.S. dollar and economic recession still threatening in America and Europe, such news should have caused gold to break below key support levels of $1072 and $995. But the price of gold fell only slightly before resuming its upward trend. Why was gold so resilient given the arrival of all this new supply?

As we have mentioned in previous commentaries, gold is not, as is widely believed, merely a hedge against inflation. Gold is also an insurance against catastrophe. Clearly, based on global fiscal and monetary profligacy, we all have rising consumer prices in our future. But before that gets out of hand, the Western world looks to be hit by the second half of the storm that struck in ‘08. Although the Associated Press has officially designated our current environment as “the Great Recession”, by the end of 2010 our economy may be more accurately described as a depression. If so, gold would be expected to plummet in value (along with other asset prices). But this assumes that the economy will behave as if it were supported by a sound currency. That assumption no longer applies, so we must adjust our expectations accordingly.

On this frightening occasion, we are at sea in a currency of paper backed only by the hot air of political bluster and dishonest accounting. Today, for the first time in modern history, it is not just individuals and private companies that face destitution, it is entire nation-states. Furthermore, it is not only minor players like Greece and Italy, but major pillars of the global market like the United Kingdom and the United States.

The re-introduction of the Health Bill in the U.S. Congress, albeit amended, illustrates vividly that Washington’s entitlement regime shows no sign of corrective discipline whatsoever. If, following the papering over of the Greek problem, international investors resume their selling of U.S. dollars and the underlying Treasury securities, the U.S. dollar may lose its reserve status – and the United States will, for the first time in living memory, face the possibility of default.

It may take years for this to happen. In all probability if downgrades are forthcoming, the United Kingdom will be the ‘canary in the coal mine’ and will be marked down in advance of its larger, and more indebted, progeny across the Atlantic. It is likely that such shocks will initially trigger U.S. dollar strength before the panic selling sets in. But what alternatives are there for cautious investors when the world’s reserve currency is no longer safe, and its chief competitors, the euro and yuan, are not stable or transparent? The answer is precious metals. Conservative investors are making this move early, beginning a secular bull market in this asset class.

On the sovereign scale, those countries, possibly including China, India and Switzerland, that are positioned to pull their wealth to the sturdy shelter of gold stand to survive the hurricane, battered but viable. Those countries, like the UK, which have squandered much of their real wealth and productive capacity, will likely subject their citizens to an era of unnecessary privation.

Turkey’s Awakening: Its Gradual Exit From The Western Camp

Phil De Carolis — Fri, 26 Feb 2010 18:44:00 GMT

Taking advantage of the ongoing systemic crisis, and of the weakening of the US and of the Western superstructure over which the latter’s might is based, Turkey has entered a process of fundamental redefinition of its key geopolitical interests. The new priorities ready to break out by 2012 will account for Ankara’s most profound reappraisal since the country joined NATO in 1952. This process illustrates a return to the Kemalist vision of Turkey’s vital interests (1) i.e., different from the agenda set for the country by big powers. It is quite ironical that this evolution is initiated by leaders of religious-oriented party, the AKP. There will be substantial geopolitical, economic and commercial consequences to this strategic shift which challenges the traditional vision of a pro-Western Turkey waiting to join the EU.

Turkey and its regional environment - Source: Comité Valmy

In the Eastern Mediterranean region, the relation with Israel is often a reliable indicator of a country’s relation with the Western camp altogether. Indeed, for more than a decade, the West has been defining itself along the Washington/Tel Aviv guiding line. But, in this regard, in the past few months, Turkey seems to have undertaken to move away from this line which, for many years, it used to follow as closely as possible. The attack on Gaza by the Israeli army in December 2008 is the marking event of this change of tone first, of orientation then. Since then, Ankara has gradually undertaken to move all the way backward along the road to its diplomatic and military cooperation with Tel Aviv. Two recent examples: Ankara’s decision to ban Israeli air force drills from Turkey; and its barring Israel from participating in a NATO exercise in October 2009 (2), soon followed by the announcement that Turkey would hold military exercises with Syria (3). We are far from the military and strategic behavior expected from a faithful ally of the United States and a prominent member of NATO.

However, changes in strategic priorities in the region have been brewing ever since the USSR collapsed, turning Turkey’s decade long and cold war-related dead-end position into a wide open space with huge cultural, economic and commercial potentialities. Since then, under the compliant Turkey, it was possible to catch glimpses of a country growingly reluctant to put the uniform lent by a Western world with regional aims more and more alien to Turkish interests (4). As long as the Cold War went on and the Soviet threat was on the borders, Turkey agreed to be a “Western tower” on the Middle-East chessboard. But since 1989, interests between the Tower and the King or Queen have increasingly diverged, a bad omen for the rest of the game on two aspects:

. on the one hand, Turkey will get increasingly reluctant to comply with Washington’s exhortations, as already suggested by a series of negative reactions (5) which provoked an upsurge of hostility towards Turkey within NATO. Something new is happening: the legitimacy of Turkey’s NATO membership is being questioned by leaders from other NATO member states.

. on the other hand, Washington’s and/or the Alliance’s policy in the region will be growingly hampered by a reluctant Turkey developing its own specific regional strategic approach, possibly opposed to NATO’s. Ankara’s good relations with Tehran (6), far from the ideas of sanction or embargo vigorously advocated by Washington, provide another glowing warning signal.

In short, the Turkey/NATO relationship is about to reach a point of no-return. The Turkish case is another striking example of the general process of disintegration currently affecting the Alliance (a theme already developed in previous GEABs) whose leader no longer has neither the vision nor the means required to control all its members.

Ironically, it appears to LEAP/E2020 that the other component of Turkey’s « anchoring » to the West, i.e. the promise of EU accession, will be the decisive factor in Turkey’s exit from the Western camp. Indeed this unkeepable promise, result of EU leaders’ lack of courage and imagination which led to official entry talks in 2005, will create two important conditions of the new orientation of Turkish foreign policy:

. first, the democratic requirements linked to EU accession have gradually compelled the Turkish military to go back to their barracks and stay there. For decades, they were used to run the country in the shadow of political puppets, dismissing them if necessary when some electoral outcome annoyed them. Thinking of themselves as protectors of Ataturk’s legacy, in fact they were mostly concerned about controlling the country and making the most of the NATO, EU and US manna rewarding their loyalty to the Western camp (7). As they grew weaker, they deprived the West from its most faithful ally in Turkish society. Another example of the irony of History.

. secondly, EU’s obvious reluctance (among the general public in particular (8)) to the perspective, even far in the future, of Turkey’s accession became clear for Turkish citizens in the past four years. Meanwhile, the discovery that the so-called « accession negotiations » (9) were no negotiations at all but on the contrary an obligation for Turkey to comply with the 90,000 pages of EU’s legal, moral, commercial and cultural corpus (the timing of the « acquis communautaire » is the only negotiable thing), has triggered a feeling of rejection among Turkish population of what suddenly appeared as a “colonialism by law”. Little by little, the under-forty Turkish generations began to think that the Europeans didn’t want them and that their country was therefore engaged in a dead-end. This process of awareness is a key phenomenon because it has put an end to forty years of an unchallenged official stance according to which EU entry was the sole desirable future for the country. Simultaneously, the Muslim party in power (who supported the project of EU accession under duress only (10)) gained the support of a non-religious stream of opinion opposed (or at least reluctant) to EU entry.

From Russia (whose nationals flock Turkish beaches) to Central Asia (where Ankara is conducting a proactive trade and cultural policy towards Turkish speaking countries), Iran and Syria, Turkey is quick in building a new diplomacy intended as a synthesis between the political and historical territories of the Ottoman legacy, Muslim religious proximity and its own specific interests as a regional power and crossroads. The combination is played by means of pendulum effects in which NATO and the EU are becoming mere components of Ankara’s diplomatic game, and no longer a basic data (which NATO used to be) or main objective (which the EU used to be).

Americans and Europeans shouldn’t be mistaken! According to LEAP/E2020, there will be no turning back. Since NATO is in a process of disintegration, there is no reason why Ankara should stop going it alone to this intermediary position at the centre of a geopolitical equilibrium involving Russia, the EU, Iran and any influential power between its Southern border and Egypt (Washington, for the time being). NATO’s last loyal allies are the generals of the Turkish army. In ten years from now, around 2020, they will be replaced by younger generations (11) who will agree on seeing their country in the future as a “bridge between East and West”, knowing that a bridge doesn’t belong to any of the banks it connects, otherwise it is no longer a bridge but a dead-end (12).

Turkey at the centre of the energy supply network - Source: JapanFocus, 12/2007

This goes for the European Union too. Even if the political will is now missing, Brussels’ and Ankara’s bureaucracies will certainly go on with the accession negotiations. But they will never be finalized, sinking year after year into the quagmire of general indifference. Indeed an enlargement is only the result of some political will. But the main supporter of this enlargement, i.e. Washington, now has other fish to fry and lacks the necessary influence to overcome the strong opposition of the European general public (they can’t even convince European troops to stay in Afghanistan). As to the EU, no political leader will take Turkey’s entry as a workhorse by fear of losing the election. From Ankara’s point of view, an alternative future to a European Turkey has appeared. If the EU understands that and soon proposes a state-of-the-art strategic partnership to Turkey, this dream will be one of a Turkish Turkey at crossroads between the various surrounding powers. But if Brussels sticks to its accession project, leaving no alternative, it runs the risk to push Turkey in the opposite direction, that of a Muslim Turkey. Ironically, one often gets the opposite of what he strove to get if he fails to take into consideration the dreams and expectations of the concerned people.

In conclusion, according to our team, Turkey’s shift out of the Western camp, itself in decay, far from being a problem for Europe, is only another facet of the global systemic crisis and of the gradual obliteration of structures inherited from the post-1945 world, thanks to which, by 2015, the Europeans could have a Turkish partner, with an appeased identity, able to be a useful intermediary in their relation with the Middle-East and Central Asia.

Turkey: a « Pont Neuf » (13) between East and West

--------
Notes:

(1) Kemal Atatürk, founder of modern Turkey, has indeed imagined and wished for his country to diverge both from its Ottoman past and from decisions set by the big powers of the beginning of the 20th century (UK and France in particular). The fact that he rejected the Treaty of Sèvres and the consequences it had on Turkish territory is meaningful in this regard. In his political will, he also clearly expressed what kind of a thread could link him to any future heirs: “I leave behind no verse, dogma, or arcane doctrine as my moral heritage. Rationality and science are to be regarded as my legacy. (…) Time flows quickly; subject also to flux is the perception or interpretation of happiness and misery by nations, societies, and individuals. In this world, claiming to spell out certain fixed, unchangeable ideas denies both the existence of rationality and science. (…) Thus, those who desire to follow in my footsteps can only assume the role of my moral inheritors if they affirm the primacy of rationality and science.” They could be for instance those who would have the courage to dismiss obsolete recipes.

(2) Source: Reuters, 10/14/2009

(3) We remember Turkish Prime Minister Recep Erdogan’s scene in Davos in January 2009 when he suddenly left the floor because he couldn’t speak the same amount of time as Israeli President Shimon Peres. Source: Tribune de Genève, 01/30/2009

(4) As already suggested by the difficulties met by Washington in persuading Ankara to let them use their Turkish bases for attacking Iraq in 2002/2003.

(5) Like in April 2009, when Turkey opposed to Fogh Rasmussen’s NATO bid as new Secretary General because of his support to Danish media over the caricature crisis. Source: France 24, 04/03/2009

(6) Turkish Prime Minister Recep Erdogan insists on calling Iranian President Mahmoud Ahmadinejad a friend of Turkey and declares that he won’t accept double standards towards Iran on nuclear issues. Source: The Guardian, 10/26/2009

(7) The IMF also played an important role in this regard, as Turkey has been one of its biggest clients for decades, thus enabling the West to run the country by proxy. The country’s exit from IMF’s adjustment programme in 2008 is also the moment when this strategic shift in Turkish diplomacy became visible. As a matter of fact, Ankara is now extremely reluctant to sign any new loan agreement with the IMF. Sources: EurAsiaNet, 07/02/2009; BrettonWoodsProject, 06/17/2009

(8) An increasing proportion among the European elite no longer wishes Turkey to join the EU. Turkey’s recent diplomatic shift has persuaded them that Ankara’s vision of the future is less and less compatible with the EU project. Source : EUObserver, 04/04/2009

(9) For decades, the Turkish elites, never denied by their EU counterparts, made their citizens believe Turkey’s EU accession was a process where each party covered half of the road. In 2005, this idea started to be recognized as a lie.

(10) Traditionally, the pro-Muslim movement in Turkey was opposed to EU entry. But if Paris is well worth a mass, Ankara was well worth a hypothetical enlargement.

(11) In the coming five years, the risk remains that a bunch of worn out generals backed by Washington tries some military coup. But this risk is small and would probably end up like the Russian generals’ coup against Mikhail Gorbachev in 1991.

(12) In fact Turkey is a double-bridge: between East and West, but also between Black Sea and Mediterranean. Moreover, in the 21st century, a bridge will also (especially) be a pipeline (gas or oil), a field where Turkey is also a central player thanks to the Nabucco project whose key is Iran.

(13) The « Pont Neuf » is, as its name doesn’t tell, Paris’ oldest bridge.

http://www.leap2020.eu/Turkey-s-awakening-Its-gradual-exit-from-the-Western-camp_a4361.html

Home Market's Bumpy Recovery

Phil De Carolis — Tue, 23 Feb 2010 18:52:00 GMT

By ADRIAN SAINZ
The Associated Press

Home prices edged up in December, the seventh straight monthly gain and another sign the housing market continues its bumpy recovery.

Prices aren't anywhere near the zenith of the housing boom -- they are down 30 percent from the peak in May 2006 -- and there are worries that the recovery may not last. But prices have been steadily increasing from month to month, climbing almost 4 percent off the bottom in May.

The gradual improvement is important to the nation's economic recovery. For most Americans, their home is their largest asset, so as values climb homeowners feel wealthier and more comfortable spending. And, for homeowners who currently owe more on their mortgages than their properties are worth, rising prices will rebuild equity.

The Standard & Poor's/Case-Shiller 20-city home price index released Tuesday rose 0.3 percent from November to December, to a seasonally adjusted reading of 145.87. The index was off about 3 percent from December last year, nearly matching analysts' estimates.

Home sales data for January, out later this week, are also expected to show gains over year-end levels as buyers took advantage of low interest rates and temporary tax credits.

Anna Piretti, an economist at BNP Paribas, said the price increases are "further evidence that conditions in the house market continue to stabilize."

"While conditions remain challenging in Florida, house price conditions appear to be improving in the Western states, with gains recorded in California, Nevada and Arizona," Piretti wrote in a research report.

Los Angeles was the biggest winner out of the 20 cities with home prices up 1.4 percent on a seasonally adjusted basis in December over November. San Diego was up 1.1 percent and San Francisco increased 1 percent. Analysts attributed the California gains to many investors seeking to scoop up foreclosure properties and buyers taking advantage of cheap prices.

"California is an efficient market," Cameron Findlay, chief economist at LendingTree.com, said. "Buyers are more astute in terms of monitoring market changes and, in general, they will always lead the market out of a recession."

In Denver, prices rose for the 10th month in a row, while prices dipped in key markets like Miami, New York and Chicago.

Some economists fear that demand and prices will fall after two federal tax credits expire in April. And, a Federal Reserve program aimed to keep mortgage rates low is set to end March 31.

"Prices have stabilized and are starting to rise, but forces that will bring them back down are growing," wrote Patrick Newport, an economist with IHS Global Insight.

The Case-Shiller indexes measure home price increases and decreases relative to prices in January 2000. The base reading is 100; so a reading of 150 would mean that home prices increased 50 percent since the beginning of the index.

http://www.pe.com/business/realestate/stories/PE_Biz_W_homeprices24.3c8a313.html

Real Homes of Genius – Pasadena Million Dollar Home or $3,500 a Month Rental? You Decide.

Phil De Carolis — Tue, 23 Feb 2010 16:46:00 GMT

The latest report from First American CoreLogic shows that 11.3 million properties with mortgages are now in a negative equity position. If we add in those “near” negative equity we find that roughly 30 percent of all homes with a mortgage balance are underwater. For California, that number is higher with 35 percent of homes with a mortgage being placed in the negative equity camp. If we ran the numbers for Alt-A and option ARM loans I wouldn’t be surprised to see that number above 70 percent. The market is clearly still in deep distress. As I have stated from the start, we will have no real recovery until job growth enters the picture. This is such an obvious statement but the banking and real estate industry seemed fixated on housing as the panacea to a full economic recovery. Housing and the banking industry led us into this mess to begin with.

I took a look at data from the Employment Development Department (EDD) of California and last year was another record year for California in terms of unemployment claims paid out:

“(EDD) A record high 1.4 million Californians were certifying for UI benefits in November 2009, according to the most recent information available. In all of 2009, EDD paid $20.2 billion in UI benefits that not only helped sustain families during this difficult time, but also helped support local communities struggling to survive the economic pressures.

The prior record of UI benefits paid in a single year was set not too long ago in 2008, when the EDD paid out $8.1 billion in UI benefits to out of work Californians.

That’s a 149 percent increase in the total UI dollars pumped into the State’s economy in 2009 at a rate of about $80 million a day.

The $20.2 billion paid in benefits in 2009 translates into an economic impact of about $32 billion dollars when you look at how UI dollars spent on basic necessities leads to further spending in the general economy. The U.S. Department of Labor estimates the economic multiplier is $1.60 for every dollar paid out in UI benefits.”

Did you get that? In 2008, an already bad year $8.1 billion in UI benefits were paid out. Last year, that number went up to $20.2 billion and we are still near the peak unemployment rate of 12.4 percent:

Source: BLS

I’ve had this conversation with a few colleagues in the real estate industry. Whenever they mention that California real estate is at a bottom I always ask them what industry is going to make up for the million and more jobs lost. They don’t have an answer. Heck, in the 1990s it was all about the tech sector so that was supposedly going to give every Californian with basic HTML coding abilities and a Geocities account a $60,000 a year job with no college degree. When that bubble burst, it then was every Californian was going to work for the real estate industry making $100,000 simply by popping on a suit or a skirt and pushing mortgages or property in the mania of the century. That bubble burst. So what gig is next? Can we at least get some jobs going before we start jumping on another real estate price bandwagon?

One major flaw with the current thinking in the housing market is assuming mortgage rates are somehow going to stay low forever:

Examine the above chart very carefully and enjoy that sub-5 percent rate because that is not going to last. We are at the lower bound. Even if we revert to historical averages of 9 percent, that will absolutely tank the California housing market. Keep in mind that a large part of the above is because of the Federal Reserve buying up $1.25 billion in agency mortgage backed securities debt. That game is quickly ending and this in itself has probably shaved off 100 to 200 basis points. In other words, mortgages are going to get more expensive.

But let us show this massive disconnection with another on the ground example in Pasadena. We’ll even pick a prime zip code in the area. Today we salute you Pasadena with our Real Homes of Genius Award.

Pasadena Dislocation

I decided to pull data on 91105 zip code in Pasadena. A middle class two income area where the median home price is now $657,000 (down 25 percent from last year). So certainly this area has seen a correction but is the correcting over? A good way to measure market metrics is looking at lease rates and home prices for the immediate area. First, let us look at our home for sale:

The above home is listed as a short sale which now seems to be gaining further momentum thanks to programs like HAFA. The home is a 3 bedroom and 2 baths home and is listed at 1,978 square feet. It has been on the market for over 40 days. Let us look at previous sales history:

Last Sale Info:

Sold 08/17/2006: $1,000,000

Not too long ago this was a million dollar home and the current list price is $949,000. So I went ahead and tried to search for a rental in the immediate area. These are hard to find but are extremely illuminating in giving us a sense of whether current prices are too high or low. So I found this home on the next street over:

The rental is a 2 bedrooms and 2 baths home listed at 1,504 square feet. The current asking rent is $3,500. Now let us run some numbers. We’ll assume that you are putting 20 percent down for the home purchase:

20 percent down payment: $189,800

The latest tax data shows the home running $11,381 in taxes in 2009. So we’ll assume the monthly carrying costs:

$4,310 (PI) + $948 (T) + $395 (I) = $5,653 for each monthly payment

I’m assuming for the insurance that you are actually vigilant enough to get earthquake insurance in California (many homeowners don’t even have this). So this is a significant difference. But let us assume you buy this home. And rates increase modestly to 7.5 percent in five years and you plan to sell. What is the future buyer looking at?

$5,308 (PI) + $948 (T) + $395 (I) = $6,651 for each monthly payment

With a modest interest rate increase, the payment jumps up $1,000 to $6,651. This is why we have a lot of correcting to do. Rates are artificially low and many are assuming the current environment is going to stay this way for a long time. It will not. I’ve mapped out these properties just in case you think they are miles apart:

Are these homes exactly the same? Of course not. But this is as close as you are going to get to seeing the insanity in the mid-tier of the market. Now here is the reason ignoring jobs and subsequently income data will lead to additional corrections. Let us assume you gross $10,000 a month in Pasadena and want to buy this home. Can you?

Not even close. Your monthly payment is up to $5,653 and you are netting $6,731. Sure you can up your withholdings but that won’t change the numbers drastically. Your housing payment remains fixed.

http://www.doctorhousingbubble.com/real-homes-of-genius-%e2%80%93-pasadena-million-dollar-home-or-3500-a-month-rental-you-decide/

Treasury Officials Concerned over Option ARM Recasts and Jumbo Loans Issues – Recalibrating the Housing Numbers while 5.6 Million Mortgages are Delinquent. California One Two Housing Punch. 60 Percent of Option ARMs and 45 Percent of Jumbo Loans in Califo

Phil De Carolis — Mon, 22 Feb 2010 16:47:00 GMT

Over the last few months the narrative on the housing situation has morphed into many different shapes. First, it revolved around the need to keep mortgage rates low through the Federal Reserve’s buying of agency debt. The intent was to keep mortgage rates artificially low to stimulate demand. This has propped the market up but the Fed has now taken on nearly $1.25 trillion in mortgage backed securities onto its balance sheet. Next, in the early days of HAMP the program was seen as saving 3 to 4 million homeowners from losing their home. The latest data shows 116,000 permanent modifications which many will re-default in a year or two as new research is showing modified loans have tough times staying current in the long-term.

Another narrative that I have seen take hold is over shadow inventory. Last year as you may recall, a large contingent of those in the real estate industry flatly denied that shadow inventory even existed. Suddenly, shadow inventory exists but won’t be a problem because banks will trickle out inventory in some kind of strategic slow drip plan. This is expected. Back in 2006 and 2007 these people denied any existence of a housing bubble only to be the first in line for taxpayer bailouts when the crisis hit and they had to admit that yes, there was a massive housing bubble. Remember our warnings about those loveable toxic mortgages, options ARMs? Seems like the Treasury is now sounding the horn:

“(Realty Check) Treasury officials today said they are still concerned about a coming wave of foreclosures, many from pay option ARMs and many from the prime jumbo basket, particularly hard hit by unemployment. Only 2/3 of borrowers in the HAMP program are current on their payments. That’s why officials now say they are looking at unemployment options and more incentives to borrowers to keep paying on trial modifications and on loans that are significantly “underwater” with respect to the property value.”

Now anytime the Treasury issues a warning I pause because it is very likely that another bailout is in the works. Option ARMs are the most toxic of mortgages and California by itself has roughly 60 percent of all outstanding option ARMs in the market:

Now looking at the above data, you can understand why the Treasury is worried about this second wave of foreclosures hitting the market. Yet option ARMs were like a bad habit that only went into hiding once the mark to market rules were suspended. These loans are still sitting on the balance sheets of many banks including Bank of America, Wells Fargo, and JP Morgan Chase. And the problem with these loans always revolved around the minimum payment option and their inherent payment insanity:

But what is probably even less reported on is the size of jumbo loans that are concentrated in California. California by itself accounts for roughly 45 percent of the entire jumbo loan market and already 11.3 percent of all jumbo loans in California are delinquent:

Source: Fitch Ratings

So when the Treasury states that they are concerned about option ARMs and jumbo loans they pretty much mean they are focusing their eye on California. The bulk of the loans are here. 60 percent of option ARMs are in the state and nearly 45 percent of all outstanding jumbo loans. Yet as we all know option ARMs are already facing major challenges. Nearly half of option ARMs are already 30+ days late. Yet banks are still holding onto these loans usually leaving the market in a state of purgatory where borrowers don’t pay and banks don’t realize actual values since they would have to claim a $600,000 home is now valued at $300,000. Instead, they choose to do nothing. Somehow for those that now acknowledge the shadow inventory this is somehow a good solution.

California stands to take another major punch as these loans go bad but more of the correction will be concentrated in mid to upper tier markets. In fact, the million dollar home market is already reflecting this change:

Source: DataQuick

Those that claim the upper tier market isn’t correcting clearly are not following the above sales patterns. And this trend holds even truer for the mid tier market where the capital buffer isn’t deep enough to support highly leveraged toxic loans. Even if you remedy the current loans, what then for future buyers? They don’t have access to option ARMs and clearly their income doesn’t support the purchase of high priced homes without access to maximum leverage. It isn’t like incomes dried up overnight. Income has been stagnant for the decade but access to debt, including option ARMs and jumbo loans allowed California home prices to reach astronomical levels because income suddenly wasn’t a factor. All that was needed was the desire to sign on the dotted line. Option ARMs are now gone and jumbo loans are a tiny part of the market since the bulk of loans are being fed through FHA insured loans and other conforming products. In other words, mortgages for high leverage are now all but gone and as the above chart highlights, so are sales in those markets.

People might be frustrated to hear that a bailout may occur with option ARMs and jumbo loans. Unfortunately many of these loans have already been bailed out with the suspension of mark to market. When we run the shadow inventory figures we see the numbers building up like a massive traffic jam. The defaults are occurring they just aren’t reaching the public and ultimately it is the public that loses because prices remain artificially high. I think most of us would be fine if banks used their own money to play around with their toxic mortgages. But right now, banks are wards of the state and they are bleeding the taxpayer dry through keeping mortgage rates artificially low via the Fed and rewriting accounting rules to suspend mark to market. How is this good for the economy? This massive obsession with real estate has led us to this current point. Paul Volcker recently had this to say about the mortgage market:

“(HuffPo) It’s totally dependent, heavily dependent on government participation,” Volcker said Friday in an interview with Bloomberg Television. “It shouldn’t be that way. That’s going to have to be reconstructed.”

And that is the painful process. California is dealing with tons of toxic mortgage waste, much of it still here. If you don’t believe in my argument, maybe you’ll trust the Treasury that is now echoing the same exact warning regarding option ARMs. As I was finishing this article, I saw this in my e-mail box:

“(Realty Check) The money, we assume, goes to help those ineligible for MHA. This one gives $1.5 billion to the hardest hit states (do I even need to list them? — CA, AZ, NV, FL, MI) to “help address the problems facing the hardest hit housing markets.” White House officials describe this as states that have “suffered an average home price drop of over 20 percent from the peak.”

Initiatives may include:

*Measures for unemployed homeowners;

*Programs to assist borrowers owing more than their home is now worth;

*Programs that help address challenges arising from second mortgages; or

*Other programs encouraging sustainable and affordable homeownership.

The press release from the White House says these programs must have total “transparency” and “accountability” for results. The money will come from the TARP and go to Housing Finance Agencies which will then “determine the priorities facing their local markets.

The release goes on to give “illustrations” of some potential programs, including using the funds to help unemployed borrowers bridge the financial gap between jobs, to help “underwater borrowers” by negotiating with lenders to write down principal and to offer incentives to second lien holders to extinguish loans.”

And there you have it. Another bailout. Small in comparison but a bailout nonetheless. There is going to be a point where the market is going to wake up and say, “can you keep bailing things out when you don’t have the money?” Is this even good policy? I have little problem with helping say a homeowner on a 30 year fixed mortgage in California, Ohio, or even Kansas so long as they didn’t participate in the bubble shenanigans and their mortgage debt is under the median nationwide mortgage debt. But to help an option ARM borrower that took on a $500,000 mortgage without adequate income? That should really be a no brainer. The fact that banks will use money for principal write downs is icing on the cake. Suspend mark to market, receive trillions in taxpayer bailouts, and finally to top it off get more taxpayer money to write down the principal. In the end, home prices will still come down because the economy isn’t producing good paying jobs. Then what use are these bailouts? I think you already know.

http://www.doctorhousingbubble.com/treasury-officials-concerned-over-option-arm-recasts-and-jumbo-loans-issues-%e2%80%93-recalibrating-the-housing-numbers-while-5-6-million-mortgages-are-delinquent-california-one-two-housing-punch/

Paper Hangers

Phil De Carolis — Thu, 18 Feb 2010 16:55:00 GMT

Commentary By John Brown

At a time when more and more offices are going paperless, governments in most of the developed world are doing the opposite. Finance ministers from Washington to London, Tokyo, Madrid, and, most pointedly, Athens, are attempting to paper over gaping financial chasms in the global economy by issuing ever greater quantities of currency and debt. But paper can only stretch so far.

The key problem facing the western world is the 80-year decline in central banking discipline. In truth, these banks have become little more than the private piggy banks of their parent governments. Often furtively, central banks have "bought" ever larger amounts of government debt, which has allowed a consequence-deferred spending spree. The result has been decades of apparent economic growth and prosperity.

To close these gaps, it is widely agreed that governments need to curtail spending, but that inclination is nowhere evident. In a television appearance last week, former Fed Chairman Alan Greenspan explained the predicament bluntly: "[Public] spending is untouchable."

It is increasingly evident to ordinary Americans that big government demands big spending, financed by big taxes and big issues of government debt, ultimately cleared by big printing presses. They want it stopped, but the politicians won't budge.

Although this is clearly a problem, some have found a way to bury their heads in the sand. Early this week, Nobel Prize-winning economist Joseph Stiglitz said, "The likelihood of a default is so small, particularly in the United States, because all we do is print more to pay it back." Never does Stiglitz even consider that printing in such magnitude could have a downside. It is hard to imagine a more irresponsible view.

In the United States, the paper cascade has been dizzying. Paper debt from the originators of sub-prime mortgages, like Countrywide, became paper liabilities of larger institutions, like Bank of America, which, in turn, were rescued by yet more paper, issued by the U.S. Treasury. In addition, a growing number of irresponsible states, like California, are looking to the Treasury to issue still more paper, with which to rescue them.

America is not alone. In Europe, governments such as Portugal, Italy, Greece, Spain, France, and the United Kingdom have spent excessively and financed it with paper debt and debased currency. Now, there are urgent pleas for yet more paper to cover the cracks!

There seems to be no end to the amount of paper that politicians are prepared to print to fend off reality. But, in both America and Europe, financial markets and the people are rumbling.

Fifteen years ago, European bureaucrats introduced the euro currency on a fraudulent prospectus. Now, the people of Germany, and even Great Britain (which guaranteed an opt-out on the euro), are being pressured to pay for a bailout of the reckless Greek government. Needless to say, the citizenry is peeved. With additional sovereign bailouts likely, this popular reluctance may turn into civil opposition, if not unrest.

In America, recent Democrat reversals and the growth of the Tea Party movement indicate burgeoning popular discontent. In addition, last week's difficult Treasury auction of 10-year bonds could indicate the beginning of resistance in the international financial markets, as the U.S. government loses both political and financial credibility.

It appears that ordinary people in America and Europe increasingly believe that the paperless society should extend to their governments. Let's hope the politicians come around - before we're buried up to our necks.

Inland Home Price Data Lag Southern California Region Overall

Phil De Carolis — Tue, 16 Feb 2010 18:50:00 GMT

By LESLIE BERKMAN
The Press-Enterprise

First-time buyers and a growing proportion of investors making all-cash purchases dominated Inland Southern California's housing market last month but did not provide enough energy to boost home prices like they did in the coastal counties.

Still, the January median home price of $195,000 in Riverside County showed no year-over-year decline. Although the median price, where half sell for more and half for less, was $1,000 less than in December, January was the first month since March 2007 that the price did not decline from the same month a year earlier.

In San Bernardino County, the median price of homes sold last month was $150,000, which was $4,000 less than in December. Nonetheless, the 7.4 percent decline from a year earlier was the smallest month-over-month median price decline in that county since August 2007.

Story continues below

Click to enlarge

Inland prices seem to be trailing a recovery trend in Southern California as a whole, where the median price of $271,500 was 8.6 percent higher than a year earlier, according to MDA DataQuick of San Diego, which released its monthly report on housing trends.

A dwindling number of bargain-priced distressed homes for sale, however, seems to be suppressing sales even as it is spurring a kind of auction-buying mentality that is helping to support prices.

In Riverside County, homes sales last month dropped almost 5 percent to 3,162, from 3,320 in January 2009, while in San Bernardino County, sales fell 11 percent to 2,252 from 2,532 a year earlier.

Sales also are being fueled, the experts observe, by federal policies to hold down mortgage interest rates, expand FHA financing and provide a first-time homebuyer tax incentive of up to $8,000.

"In more and more markets, including the Inland Empire, the data in recent months has suggested at least a temporary price bottom," said DataQuick spokesman Andrew LePage. He said forces that could cause prices to drop further include another large wave of foreclosures, a double dip recession, a very slow economic recovery or the potential loss of federal government stimuli.

LePage said while Riverside and San Bernardino counties were slammed hardest by the failure of subprime mortgages concentrated in that region, a potential second wave of foreclosures triggered by the poor economy and the failure of other mortgage varieties would be felt more evenly throughout Southern California.

Meanwhile, investors have been snapping up foreclosed houses, particularly in the Inland counties where they are attracted by the lowest priced homes and a strong rental market.

Last month, about 30 percent of home sales in San Bernardino County were to absentee buyers, who include mostly investors and some second-home buyers, according to DataQuick. That was the highest percentage of investor activity in Southern California. Riverside County had the second highest percentage of absentee buyer purchases at 27 percent.

In Riverside County last month 36.2 percent of home purchases were in cash, which is close to the historic high of 37.4 percent in June 1991. In San Bernardino County, cash purchases accounted for 36 percent of sales last month, the highest percentage since DataQuick started keeping records in 1988.

Robert Kleinhenz, deputy chief economist for the California Association of Realtors, said on the face it seems illogical that home prices continue to fall in Riverside and San Bernardino counties despite a severely diminished inventory of homes listed for sale.

He said that may be because investors are buying discounted foreclosed properties from the bank in bulk, and those properties being purchased are not marketed through multiple listings.

http://www.pe.com/business/realestate/stories/PE_Biz_W_dataquick17.3746ce7.html

Second half of 2010: Sudden intensification of the global systemic crisis – Strengthening of five fundamental negative trends

Phil De Carolis — Tue, 16 Feb 2010 14:43:00 GMT

LEAP/E2020 is of the view that the effect of States’ spending trillions to « counteract the crisis » will have fizzled out. These vast sums had the effect of slowing down the development of the systemic global crisis for several months but, as anticipated in previous GEAB reports, this strategy will only have ultimately served to clearly drag States into the crisis caused by the financial institutions.

Therefore our team anticipates, in this 42nd issue of the GEAB, a sudden intensification of the crisis in the second half of 2010, caused by a double effect of a catching up of events which were temporarily « frozen » in the second half of 2009 and the impossibility of maintaining the palliative remedies of past years.

As a matter of fact, in February 2010, a year after us stating that the end of 2009 would mark the beginning of the phase of global geopolitical dislocation, anyone can see that this process is well established: states on the edge of bankruptcy, remorseless rise in unemployment, millions of people coming to the end of their social security benefits, falling wages and salaries, limiting of public services and disintegration of the global governance system (failure of the Copenhagen summit, growing Chinese/US confrontation, return of the risk of an Iran/Israel/USA conflict, wars worldwide… (1)). However, we are only at the start of this phase for which LEAP/E2020 will supply a likely timeframe in the next GEAB issue.

The sudden intensification of the global systemic crisis will be characterised by the acceleration and/or strengthening of five fundamental negative trends:

. the explosion of the bubble in public deficits and a corresponding increase in state defaults
. the fatal impact of the Western banking system with mounting debt defaults and the wall of debt coming to maturity
. the inescapable rise in interest rates
. the increase in issues causing international tension
. a growing social insecurity.

In this GEAB issue our team expands on the first three trends of these developments including an anticipation on Russia’s position in the face of the crisis, as well as, of course, our monthly suggestions.

In this public announcement, we have chosen to analyse the « Greek case », on the one hand because it seems indicative of what 2010 has in store for us, and on the other because it is a perfect illustration of the way in which news and information on the world crisis is moving towards « make-believe news » between blocs and interests which are increasingly in conflict. Clearly it is a « must » to learn how to decipher worldwide news and information in the months and years to come which will be a growing means of manipulatory activity.

Progression of the percentage of net new U.S. debt bought by China, net new U.S. government borrowing, percentage of outstanding U.S. Treasuries owned by China (2002-2009) – Sources: US Treasury, Haver Analytics, New York Times

The five characteristics which make up the « Greek case » into the tree with which one tries to hide the forest

Let’s take a look at the « Greek case » which has concerned the media and experts for several weeks now. Before entering into the detail of what is happening, there are five key points to our anticipation on the subject:

1. As we stated in our anticipations for 2010, which appeared in the last GEAB issue (GEAB N°41, the Greek problem will have disappeared from the international media’s radar several weeks from now. It is the tree used to hide both a forest of much more dangerous sovereign debt (to be precise that of Washington and London) and the beginning of a further fall in the world economy, led by the United States (2).

2. The Greek problem is an internal issue for the Eurozone and the EU, and the current situation provides, at last, a unique occasion for the Eurozone leaders to require Greece (a case of « failed enlargement » since 1982) to leave its feudal political and economic system behind. The other Eurozone countries, led by Germany, will do the necessary to make Greek leaders bring their country into the XXIst century in exchange for their help, at the same time making use of the fact that Greece only represents 2.5% of Eurozone GDP (3) to test the stabilisation mechanisms that the Eurozone needs in times of crisis (4).

3. Ango-Saxon leaders and media are using the current situation (just like last year with the so-called banking tsunami coming from Eastern Europe which was going to carry the Eurozone away with it (5)) to hide the catastrophic progression of their economies and public debt and attempt to weaken the attractiveness of the Eurozone at a time when the USA and the United Kingdom have increasing difficulty in attracting the capital which they so desperately need. At the same time Washington and London (which, since the coming into effect of the Lisbon Treaty is completely excluded from any management of the Euro) would be overjoyed to see the IMF, which they control completely (6), brought into Eurozone management.

4. Eurozone leaders are very happy to see the Euro fall to 1.35 against the Dollar. They well know that it won’t last because the current problem is the fall in the value of the Dollar (and the Pound Sterling), but they appreciate this « whiff of oxygen » for their exporters.

5. The speculators (hedge funds and others) and banks heavily involved with Greece (7), have a common interest in trying to bring about rapid Eurozone financial support for Greece, since otherwise the rating agencies will, unintentionally, pull a fast one on them if the Europeans refuse to dig into their pockets (like the scandalous actions of Paulson and Geithner over AIG and Wall Street in 2008/2009): indeed a lowering of Greece’s rating will plunge this small world into the throes of serious financial losses if, for the banks, their Greek loans are similarly devalued, or if their bets against the Euro don’t work out in due course (8).

2008 comparison of the deficits and Eurozone GDP of Portugal, Ireland, Greece, Spain, France and Germany – Source: Der Spiegel / European Commission, 02/2010

Goldman Sachs’ role in this Greek tragedy… and the next sovereign defaults

In the « Greek case », just like in every suspense story, a « bad guy » is needed (or, following the logic of an old-style tragedy, a « deus ex machina ». In this phase of the global systemic crisis, the role of the « bad guy » is usually played by one of Wall Street’s big investment banks, in particular by the leader of the gang, Goldman Sachs. The « Greek case » is no different as indeed this New York investment bank is directly implicated in the budgetary conjuring tricks which allowed Greece to qualify for Euro entry, whilst its actual budget deficits would have disqualified it. In reality it was Goldman Sachs who, in 2002, created one of its cunning financial models of which it holds the secret (9) and which, almost systematically resurfaces several years later, to blow up the client. But what does it matter, since GS (Goldman Sachs) profits were the beneficiary!

In the Greek case what the investment bank proposed was very simple: raise a loan which didn’t appear in the budget (a swap agreement which enabled a ficticious reduction in the size of the Greek public deficit (10). The Greek leaders at the time were, of course, 100% liable and should, in LEAP/E2020’s opinion, be subjected to Greek and European political and legal process for having cheated the EU and their own citizens within the framework of a major historic event, the creation of the single European currency.

But, let’s be clear, the liability of the New York investment bank (as an accomplice) is just as great, especially when one is aware of the fact that Goldman Sachs’ vice-president for Europe was, at the time, a certain Mario Draghi (11), currently President of the Italian Central Bank and a candidate (12) to succeed Jean-Claude Trichet at the head of the European Central Bank (13).

Without wishing to pre-judge Mr. Draghi’s role in the affair of the loan manipulating Greece’s statistics (14), one should ask oneself if it wouldn’t be worthwhile to question his involvement in the affair (15). In a democracy, the press (1), like parliaments (in this case Greek and European), are expected to take on this task themselves. Considering the importance of GS in world financial affairs these last few years, nothing that this bank does should leave governments and legislators indifferent. It is Paul Volcker, current head of Barack Obama’s financial advisors, who has become one of the strongest critics of Goldman Sachs’ activities (17). We already had the occasion to write, at the time of the election of the current US President, that he is the only person in his entourage having the experience and skills to push through tough measures (18) and who, at this moment, knows what, or rather whom, he is talking about.

With this same logic, on the issue of transparency in financial activities and state budgets and using the ill-fated role of Goldman Sachs and of the large investment banks in general as an illustration, LEAP/E2020 takes the view that it would be beneficial for the European Union and its five hundred million citizens, to exclude former managers of these investment banks (19) from any post of financial, budgetary and economic control (ECB, European Commission, National Central Banks). The mixing of these relationships can only lead to even greater confusion between public and private interests, which can only be to the detriment of European public interests. To begin with, the Eurozone should immediately require the Greek government to stop calling on the services of Goldman Sachs which, according to the Financial Times of 01/28/2010, it still uses.

If the head of Goldman Sachs believes he is « God » as he described himself in a recent interview (20), it would be prudent to consider that his bank, and its lookalikes, can seriously behave like devils, and it is therefore wise to draw all the consequences. This piece of advice, according to our team, is valid for the whole of Europe, as well as every other continent. There are « private services » which clash with « public interests »: just ask Greek citizens and American real estate owners whose houses have been repossessed by the banks!

To conclude, our team suggests a game to convince those who seek where the next sovereign debt crisis will surface: simply look for those states which have called upon Goldman Sachs’ services in the last few years and you will have a serious lead (21)!

-------
Notes:

(1) The recent statements of G. W. Bush’s Secretary to the Treasury, Hank Paulson, about the fact that Russia and China plotted to bring down Wall Street in the autumn of 2008 show the extent of the big global players’ paranoia. Source: Daily Mail, 01/29/2010

(2) During the last four years our team has regularly exposed the anomalies in calculating US GDP. We will make no further comment here on this very « Greek » aspect of American statistics. As to the development of the American economy over the next few months, it is sufficient to note that the Truck Tonnage Index went into freefall in January 2010, just as it did at the end of the first half of 2008. Source: USAToday, 02/11/2010

(3) See the chart below which puts the « Greek problem » into proportion against Eurozone GNP.

(4) For which GEAB has emphasized the necessity for four years, as well as the wide public support (an average of more than 90% according to GlobalEurometre monthly polls) a Eurozone economic governance could count on.

(5) As a reminder here, GEAB N°33 was one of the rare media sources which, in Spring 2008, revealed the dishonest and manipulative aspects of the big fear of a « banking tsunami » coming from Eastern Europe which was supposed to carry away the Eurozone banking system. At the time, the Euro had fallen to much lower levels than those seen today…only to rise again several weeks later. For those who wish to understand the current media position, we suggest a re-read of the GEAB N°33 public communiqué.

(6) The fact that a Frenchman is its head changes nothing.

(7) Source: Le Figaro, 02/12/2010

(8) That said, media manipulation in this area is remarkable. These last few days one has seen/read/heard almost everywhere that huge sums have been bet on a fall in the Euro, some eight billion US Dollars. In fact this « huge sum » is only a drop in the ocean of the world currency markets which turn over several hundred billion USD a day. Source: Financial Times, 02/08/2010

(9) With the same highly constructive regard for the countries where it operates as that which led it, in the United States in 2006/2007, to provoke a fall, for its own benefit, in the value real estate based financial products which it had sold to its own clients.

(10) Sources: Spiegel, 08/02/2010; Le Temps, 13/02/2010; Reuters, 09/02/2010

(11) During Italy’s preparation for Euro entry, he was Director General of the Italian Treasury. Sources: Bank of Italy; Wikipedia; Goldman Sachs.

(12) Very strongly supported by the London and American financial milieux, to which we have already alluded several months ago in one of our reports… and, of course, by Silvio Berlusconi. Source: Sharenet/Reuters, 02/10/2010

(13) His strongest adversary is Axel Weber, current head of the Bundesbank.

(14) What would be surprising is that the European head of the bank making a loan intended to hide a portion of a country’s public deficit, and himself the former Treasury head of a neighbouring country, should not be aware of such an undertaking.

(15) And, considering his past positions, one can only appreciate his sense of humour when he calls for a reinforcement of Eurozone economic management. Source: Les Echos, 02/13/2010.

(16) Which, for the present, satisfies itself by copying articles from the Anglo-Saxon press casting the Greek case in the role of « wrecker of world markets » repeating at length that the Euro will fall… whilst it trades at a level which the same media thought it impossible to achieve only four years ago.

(17) Source: Reuters, 02/12/2010

(18) He belongs to that generation of Americans who built the « post-war US empire », who know its weak points and exactly how it works, contrary to Summers, Geithner and others like Rubin. Our team rarely compliments Barack Obama, but if he continues to listen to the likes of Paul Volcker, he is definitely moving in the right direction.

(19) Our team knows, from first-hand knowledge, that there once was a time, thirty years or so ago, when investment bankers would take action having the long term interests of their clients at heart. This period is long gone and now they only act in their own short-term interests. From this, we should draw the inevitable conclusions and exclude them access to key posts in the public service, rather than try and reform their behavior. If there were child investment bankers (as there are child soldiers) one could, perhaps, hope to save a number of them from their addiction to short-term profits, but for adult investment bankers, it’s far too late.

(20) Source: Times, 11/08/2009

(21) For the private sector, ask Lehman Brothers, AIG…they will confirm its accuracy.

Click Here For The Orginal Article

The Secret of Your Neighbor’s Housing Value. Drilling into Two Blocks in Burbank Highlights the California Housing Bubble History and Future – 15 Homes Including Sales Activity and Median Prices.

Phil De Carolis — Sun, 14 Feb 2010 14:41:00 GMT

Click Here For The Original Link The California housing bubble will go down in the history books as one of the biggest manias rivaling the Florida real estate boom and bust of the 1920s. Yet much can be lost in the raw numbers and each new foreclosure simply turns into another statistic. Within a city block, there is much history that has gone unnoticed in this housing bubble. Many people did not participate in this bubble, even in California. We have a large number of people who bought prior to the bubble but also, there were many that bought at the peak. All this can be found on two blocks. Examining a block can highlight the trials and tribulations of what went on during the grand housing bubble. The exotic mortgages that brought California into the mania are still lingering throughout the market. Today we are going to focus on two blocks in Burbank California. We are going to try to pull sales history, foreclosure activity, and try to really go deep into the data of the current housing market.

First, we are going to examine the 91501 zip code in Burbank:

You might be wondering what is special about this area but really this is a reflection of many areas in Southern California. You’ll notice that I have traced out the two segments we’ll be looking at. In total we will be examining 15 homes on West Chandler Boulevard and a few homes that are on adjacent corners. The majority of homes on these blocks are smaller homes, typically less than 1,000 square feet.

Before we pull data on each home, let us examine the median price of this zip code throughout the bubble:

The median price peaked in 2006 for this area at $720,000. If we look at the latest data through DataQuick we will find that the current median price for this area of Burbank is $485,000. This is a drop of 32 percent over a few years and is actually on the lower range for many areas in Southern California. One of the main questions people now have is whether we are near a housing bottom. Given the large amount of shadow inventory in Los Angeles County and the trend in Alt-A and option ARMs it might seem that some areas still have a way to go before reaching the trough of their correction. Let us now look at Block A traced out in red above in great detail:

Now the above information is fascinating. Many of the homes that have no latest sales data available simply have not sold in the past decade. When I pulled up some of their current tax data the assessed value is so low that this reflects no sale activity in many years. But we do have activity in other properties. First, let us look at the 3210 property listed first. This home is a foreclosure and is currently listed on the MLS:

The home has been listed on the MLS for over six months. We should first refer back to the data gathered above. This home has seen a bit of sales activity in the last decade. The last four sales all occurred in the month of April. The earliest sale on record took place in 1999 and sold for $119,000. The home then sold again in 2001 for $194,500. Four years later in 2005 it sold for $450,000. Finally in 2006 the home sold for $545,000. Did we mention this was a 667 square foot property? So at the peak in 2006 this place sold for $817 per square foot. Like many homes in the California housing bust, it ended up as a foreclosure and this is the latest pricing data:

Price Reduced: 11/30/09 — $425,900 to $414,900
Price Reduced: 01/06/10 — $414,900 to $384,900
Price Reduced: 02/06/10 — $425,900 to $384,900
Price Reduced: 02/12/10 — $425,900 to $384,900

The current price is $384,900 which carries a $577 per square foot cost. The latest sales data for this zip code in Burbank has a median square foot sale cost coming in at $418. If you refer back to the above data, you’ll notice that one column multiplies each property out with the latest median square footage data. This isn’t to say that prices are reasonable but we are simply trying to dig deep into a line of homes in a city block. If we simply multiply the current square footage with the recent median square foot price for the zip code we get a price of $278,806. To come into line with the current square foot median price there needs to be another $100,000 price adjustment.

Four homes on the block have no recent sales activity. One of the homes sold in 2001 for $229,000. Another home sold in 2009 for $420,000 and was slightly larger coming in with 1,040 square feet. That works out to be $388 per square foot. So you can see that even within one block, prices are all over the map but recent sales activity points to lower prices.

This is one issue I have with how homes are valued with appraisals. If you look at the Zestimate you might think that prices are valued too high. During the housing bubble, appraisals kept coming in high because they were reflecting mania activity and using inflated home prices to keep adjusting prices upward. But like the data above, what if homes simply don’t sell for decades? Are you really using good comparables to make a solid value judgment? Then you add in loans like option ARMs that provided homeowners ultimate leverage with no money down. It all became a game of musical chairs. Keep in mind that someone sold the 3210 home for $545,000. That was a win. There were also many winners during this housing bubble, it was a matter of timing the exit correctly (and assuming they simply didn’t take their equity and buy a bigger more inflated property). In other words home buyers in the last decade became speculators whether they acknowledge it or not.

Let us now examine the blue outlined area in Block B:

In this block we have nine homes. Of these nine properties six sold in the 2000s so this area had more activity (and a few more homes). If we look at the highlighted home we see that it sold in 2006 for $615,000 coming out to be $448 per square foot. Two homes sold in 2009. The 3217 property sold for $339,000 and is listed at 836 square feet ($405 per sq/ft). The other property sold in December for $366,000 and is listed at 930 square feet ($393 per sq/ft). So we are seeing a trend to lower prices in this area and this is based on the latest sales data.

There will be more correcting but this won’t impact all owners. Of course those who didn’t sell or didn’t buy in the last decade and plan to stay put might ignore what is going on in the market. Those who bought at the peak are very likely to walk away. And there is a good number of homes sitting in the shadow inventory. I ran a query on this street and found four homes scheduled for auction:

The four auctions are not in the red or blue areas but are very close by. We already have one foreclosure sale in the 15 homes data and you are seeing that only large price cuts will move the property. The latest data for the 91501 zip code is interesting:

December 2009 home sales: 24

MLS listed (non-distress): 37

MLS foreclosures: 4

MLS short sales: 5

Shadow Data

Pre-foreclosure (NOD): 50

Scheduled for auction: 72

Bank Owned: 24

So what can we gather by all of this data? First, the market is extremely volatile in the short term. There is a large number of shadow inventory in this zip code. The trend in price and median square foot price is heading lower. As we know many of the HAMP extensions ended in January and there will be a push for more short sales. Short sales will undercut non-distress MLS listings and push prices lower. It is hard to envision mortgage rates staying low for an indefinite period of time and this will add additional pricing pressure.

When we dig deeper into an area, we can see the housing bubble in a better perspective. I’m sure if you run this analysis for any area in California you will yield similar results.

Fear Takes the Wheel

Phil De Carolis — Fri, 12 Feb 2010 16:53:00 GMT

Commentary By Peter Schiff

Over the past three or four years a strange phenomenon has developed in the global investment markets. With some exceptions, many asset classes, in particular domestic and foreign equities, commodities, and foreign currencies have tended to move in the same direction on a day to day basis. The mega-correlation has lasted so long that most now take it for granted. This leaves investors with relatively simple choices: when to get in to the market in general and when to park assets in cash and U.S. Treasuries.

However, few recall that this pattern is relatively new in the annals of financial history. Fewer still realize the reason for the current anomaly. From my perspective the most logical explanation is fear, which has become global, pervasive, and persistent. Traditionally, when investors fear inflation they buy stocks, commodities, gold, and foreign currencies, and sell dollars and U.S. treasuries. When they fear deflation they sell stocks, commodities, gold, and foreign currencies, and buy dollars and U.S. treasuries. The problem is that right now, no one knows which one to fear. Depending on the news the pendulum swings from one extreme to another on a daily basis.

The natural consequence of an inflationary boom should be a deflationary bust. We’ve had the boom, but so far we have avoided the lion’s share of the bust, or at least the deflationary part. If the government were pursuing a sounder monetary policy, one that allowed markets to function properly, the deflationary scenario would be playing out. While in the long-run this is the correct approach, such a scenario would be very bearish for stocks, commodities and many foreign currencies. If on the other hand, the government fights the recession by putting the inflation pedal to the metal (which is the course they have chosen) investors should look to real assets and certain foreign currencies to protect their purchasing power. But for the most part, that is not happening.

The foreign exchange markets seem to be the center point for this inflation/deflation tug-of-war. After all, if asset prices are falling, cash is king. Since the dollar is still the reserve currency, it is the king of cash, and benefits most from the global deflation scenario. When the dollar rises, treasuries go along for the ride, as investors need a “safe” place to park them. But when the U.S. government reveals yet another staggering deficit forecast, inflationary fears come right back. Hence, a market without a clear direction.

Many look at this dynamic from the perspective of risk appetite rather than fear. They claim that when investors seek risk, they buy risky assets, such as stocks, but when they are risk adverse they seek the safety. But those who fear inflation sell dollars and treasuries not because they seek risk, but because they seek to avoid it.

Of course, if investors felt that the Fed would actually fight inflation with aggressive rate hikes then higher inflation would be perceived as detrimental to stock performance. However, just about everybody realizes that there is virtually no inflation scenario virulent enough to encourage Ben Bernanke and his cohorts to actually raise rates. In actuality, the most feared probabilities are that inflation runs out of control, or that deflation overwhelms the Fed’s efforts to prevent it.

From this perspective regardless of the direction of the stock market, assets are simply being re-priced to reflect one of two very unpleasant outcomes. Those who look at rising stock prices as a harbinger of economic growth are therefore mistaken. These moves more than likely reflect investors growing fear that the U.S. debt levels will swamp the dollar.

Given the extent of the fundamental problems that underlie the American economy, and degree to which government policies are making these problems worse, there can be little conviction that our economy will return to sustainable growth anytime soon. Therefore, attributing stock market strength to inflation fears rather economic strength makes far more sense.

Also, if higher U.S. stock prices really did result from an improving U.S. economy, the dollar would be rising in tandem with stocks. However, every time stock prices rise the dollar falls. The best explanation for this dichotomy is that it is inflation not growth that drives both stocks and the dollar. So rising stock prices do not really indicate a bull market in stocks, but a bear market in the dollar. Those who cannot differentiate between the two will continue to misread the market and the economy.