World Markets Simplified

Imagine a world where people of all ages could purchase homes for a fair price. A world where prices were set between a willing buyer and seller. If the buyer needed a loan, the buyer would go to a bank or lender of choice and negotiate their terms, the number of years, interest rate, and down payment needed. This world is called the free market, where sellers are restrained from raising prices too much because of a finite pool of buyers and buyers who have a finite amount of money. If a free market was once again adopted by the people of the United States, we might actually be able to return to an ownership society where people value other people's private property in all places of the economy, not just housing. Unfortunately, that is not the world we live in. 

We live in an upside down centrally planned government manipulated economy that enriches the powers that be and enslaves the rest of us, most Americans that we know are by definition, indentured servants. 

Now, before we get into our analysis of the housing market, let us first define a sustainable recovery. In our opinion, a sustainable and desired recovery is where the above mentioned is true, a market driven price, not a government manipulated price that enslaves its citizens. So, in our world because the government has caused such great imbalances, in order to have a real housing recovery, we need to first allow housing prices to collapse. Only a housing crash will make homes affordable and give us a sustainable housing recovery. 

Right now we have the government (taxpayers) either funding or backing 90% of home mortgages. We have the Federal Reserve artificially suppressing interest rates by setting the Fed funds rate near zero and printing money to purchase U.S. bonds. We also have the mortgage tax deduction which is an absolute scam, everyday average Americans actually look down on paying off a house, they see the mortgage deduction as a huge benefit of owning a home. 

Of course the banks and the government have rammed so much propaganda down our throats it's no wonder people are so excited to spend an extra dollar so that they can receive 30 cents back. All interest deductions are a scam in order to get people to pay the banks more money because remember, if you are talked into buying more than you can afford, what is the first thing your mortgage broker or realtor will say to you, "don't worry if the payment is a little higher than you can afford, remember, all the interest is tax deductible." Of course this attitude and perception only adds to the government manipulation of higher home prices. 

Now we know that we are potentially offending a lot of people right now, but please note that the government definition of home affordability is helping you afford the payment to the bank. The free market would never allow something as ridiculous as a 30 year loan, no money down, and everyone in every area paying roughly the same interest rate when receiving a loan. These type of government created and supported injections into the housing market has created an unsustainable housing market that has taken decades to build.

In 2008, we saw how disastrous government involvement of making homes more (payment) affordable can devastate the lives of its citizens and the perception of their wealth. Even after seeing a top in a government driven housing market, the government has decided to continue to use taxpayer dollars in order to try and prop up prices. Last week Fannie Mae requested an additional 6.2 billion from the treasury, Fannie Mae has already stolen over 100 billion in taxpayer dollars. Currently, taxpayers are also guaranteeing loans all the way up to $729,750, amazing isn't it! How many people can afford that type of home, not many, yet millions are being forced to pay taxes so that the banks can sleep at night knowing that if they make a bad loan, they won't have to suffer the consequences. 

The entire government created housing market is literally imploding on itself as we speak. According to the census bureau, 13% of all homes in America are vacant. No wonder new home sales are down 88% from their peak, we overbuilt homes due to the fake wealth effect of easy government backed money. We have so many foreclosures in this country that the average foreclosure is now 17 months, two years ago it was 11 months, and in many states just 4 years ago it took less than 6 months. 

New home sales are a bit misleading, did we expect anything less from government data? New home sales is actually only counting new home sale's contracts entered into. Never do they account for cancellations, which recently have been reported as high as 35%. Foreclosures for 2011 are expected to rise to a new record of 20%. We know we are in a recovery, but if you look at demographics, housing, inflation, fraud, unemployment, and government debt, the green shoots in the economy start to look more and more like the green shoots in a diaper. 

Right now 28.4% of homeowners are upside down. In places like Phoenix where investors swarmed during the peak in order to buy a home that is located literally in the middle of a desert, 68% of homes are upside down. Now in our opinion, both these numbers need to be a lot higher in order to actually see a real sustainable housing recovery. Once people walk away from these homes, housing prices should begin to fall some more which will cause more people to walk away until housing becomes truly affordable. It doesn't make us any happier in saying this than it does when a Doctor has to tell you that in order to cure you, the therapy will be somewhat discomforting. 

Right now America's housing market is like someone walking around with a broken leg, but is forced to try and run. The government gives them special crutches, pain medicine, and even special padded shoes, but the fact remains the leg is broken. Until this person allows their leg to heal, they will never be able to run correctly. Our housing market is expected to break records for foreclosures this year. So far we have seen price declines at their fastest pace since 2008, yet we still have artificially low interest rates, government programs, and tax schemes. Our markets are not functioning right because they are dependent on low interest rates set by central planners and the government forcefully stealing money from one group of people in order to help others purchase over priced homes. 

Most have heard by now that Mexico disclosed that back in Q1 it bought 93.1 tonnes of gold, increasing its total gold holdings from 7.1 tons to a whopping 100.2 total tons, a stunning move which was disclosed to have been done "in line with prudent diversification principles of reserves management." However, what is less known is that many other central banks, chief among them Russia and Thailand were also waving the shiny yellow metal in between January and March. And just as importantly, from the World Gold Council, from where this update comes: "The latest statistics show no significant selling by the signatory central banks in Year 2 of the third Central Bank Gold Agreement (CBGA3)." So no central banks sell, yet the daytrading retail public knows better. As for the key question of whether China is adding to its meager holdings of 1,054 tons, which put it behind the GLD, not to mention France and Italy, there is no update. Recall, however, that when China announced an addition of +454 tonnes of gold in April of 2009, this indicated stealthy purchases of the metal in the 2003-2009 period. In other words, China is very likely accumulating gold and the next update will likely come some time in 2015.

As of the IMF's May release of its International Financial Statistics, several countries have reported additional purchases of gold. Notably, Mexico reported to the IMF that it acquired 14.8 and 78.5 tonnes of gold in February and March, respectively. This was a significant increase in its gold holdings, raising Mexico's position in the table to the 34th largest holder of gold with 100.2 tonnes. In its press release, the Banco de Mexico indicated that its acquisition of gold was in line with prudent diversification principles of reserves management. Indeed, Banco de Mexico's acquisition of gold was likely motivated by a need to diversify its rapidly expanding foreign reserves, which increased from approximately $75 billion to $120 billion between Q1 2007 and Q1 2011. 

Additionally, Thailand also reported an increase in its gold reserves of 9.3 tonnes in March, raising its total gold holdings to 108.9 tonnes. This follows an acquisition of 15 tonnes in July of last year. Finally, Russia continues to regularly add gold to its reserves, adding 22.5 tonnes between January and March. Russia is the 8th largest holder of gold.

China, a country with fastest growth, is trying to fight against inflation since last year unlike US where still free money is flowing to stimulate struggling economy. It announced a raise in a bank reserve requirements in effort to curb inflation fifth time during 2011. Early hikes didn't work though and prices still rose at highest pace than analysts have predicted. 

If the definition of insanity is doing the same thing time and time again while expecting different results, China's inflation policy is officially insane.

But this time China—and a lot of gullible people outside of China—are convinced raising reserve requirements will work.

The reason is that the top priority of Chinese government officials is not really fighting inflation—it's creating jobs. China's leadership aims to create 25 million jobs a year because it fears that unemployment could be politically destabilizing.

In order to maintain the pace of job creation, the Chinese government engages in all manner of chicanery, most of which have short term benefits but are economically destructive in the long term.

The most destructive, of course, is China's currency rate manipulation. The Chinese government manipulate the exchange rate for its currency against the dollar, rather than let rates float according to supply and demand. This keeps Chinese exports cheap, which creates jobs in Chinese manufacturing.

But the way China keeps the exchange rate in place is inflationary. The central bank goes into the market and buys dollars, replacing them with yuan.

In other words, the currency control is kept in place by the government printing press. This cannot help but create inflation.

This is a monetary treadmill to inflationary hell.

The demand for gold in China has exploded in the first half of this year, no doubt because sophisticated Chinese investors—many of whom have deep connections to the government—understand that as long as the currency peg is in place, China won't be able to effectively fight inflation. Prices will rise, assets bubbles will form, investments decisions will be distorted, until the policy of monetary expansion stops.

China's leaders have been allowing the yuan to appreciate against the dollar.

Currently, you can get 6.5 yuan for each dollar—a level not seen since 1993. But this level is still inflationary, which is why prices keep going up in China.
( Source: CNBC)