"Instead of the house dragging us down, it's become a life raft... [Foreclosure has] really been a blessing," Alex Pemberton told the New York Times. Pemberton stopped paying the mortgage on his Florida house last summer. But he's still living in his house. He's using the extra cash to invest in his business, take the family out for steaks, and even gamble at the Hard Rock Casino.
And just like failing financial institutions blame short sellers, Pemberton blames the lenders for his inability to afford his mortgage... "They're all crooks."
Pemberton's mother, Wendy Pemberton, has been in default since spring 2008. She refinanced several times to pay for things like a new roof. "The longer I'm in foreclosure, the better," she said.
Another deadbeat, Jim Tsiogas, is in foreclosure on his home and two rental properties. Like the Pembertons, Tsiogas could afford reduced mortgage payments. But he prefers to save his cash... "I need another year," he said, "and I'm going to be pretty comfortable."
It's sickening, but we encourage you to read this New York Times article. The people outlined represent much of what's wrong with the United States. They have no sense of responsibility to honor the commitments they've made. They don't understand a mortgage, or any loan for that matter, is a privilege. If you don't understand the terms of the loan, don't borrow the money. If you can't afford the interest payments, don't borrow the money. It's simple. But scumbag entitlement makes these people think it's OK to squat on property they don't own... They're even hiring attorneys to extend their squatting periods. The attorneys just ask the lenders to prove they own the mortgage in question (most of these mortgages have been sliced and sold across the world). One Florida attorney has 350 clients in foreclosure and is signing up 10 new clients a week. Not only are these people welching on contracts, they're also gumming up our court system. And the problem is growing...
Now, 1.7 million U.S. households are in foreclosure. The average borrower in foreclosure has been delinquent for 438 days before getting evicted, up from 251 days in January 2008. More than 650,000 households haven't made a mortgage payment in 18 months. In 19% of those cases, the lender hasn't begun action to repossess the property (double the rate last year).
While the behavior of these borrowers is disgusting, you can't call them out without also naming the horrible idea that brings such people out of the woodwork. The horrible idea is 30-year fixed-rate money. This hardly exists anywhere and then only due to massive government interference in the debt markets. It's ridiculous you can borrow money for 30 years at all, let alone at the sub-5% rates prevailing today. The fact that lending is less profitable than it should be is one reason we're deluged with financial innovations like securitizations and CDOs. This system of handing out 30-year fixed-rate mortgages has become a self-perpetuating cycle of mass financial delusion. It can't end any way but badly, although ending it would go a long way toward reducing the risk of future bubbles occurring.
Ray Dalio, founder of the $75 billion hedge fund Bridgewater, recently told Barron's he doesn't believe we'll see inflation because "the printing of money will offset the deflation that is coming from the weak demand for goods and services due to weak credit growth." But in the same interview, Dalio also says, "Governments always print money." He believes governments with independent currencies (U.S., U.K., Japan, etc.) will continue printing money to pay off their debts and stimulate the economy.
Government money printing is why we'll never see a true deflation, at least not one that lasts long. As soon as things get gloomy, Helicopter Ben drops a few tons of Benjamin bills on the market. While folks like Dalio may be right in the short term, inflation is inevitable, though perhaps not imminent. Dalio is clearly conflicted on this topic, as gold is one of his fund's largest positions. Gold is no longer a mere "inflation hedge." Now, investors realize gold is simply the only real money in the world. While the world's currencies are devalued, Mr. Market places a higher value on gold.
I don't completely agree with Dalio. I have little doubt we'll continue to see the destruction of the collateral behind our banking system. There are simply too many houses and too few buyers. Housing affordability measured in the usual way is virtually meaningless today. If housing is so affordable, why isn't anyone buying? My mortgage broker tells me he sees few buyers who aren't stretched to the limit of their buying power... yet another reason why so few deals are closing.
As homes are appraised down to reality, and banks take writedowns on the corresponding loans, real money creation power is destroyed. That's deflationary. But you can't stop there. You have to ask what comes next. The more money-creation power is destroyed in the banking system, the greater the incentive to print money to fill the void. That's where the danger of a hyperinflation comes in. Normally, the Fed prints a little money, and the banks lend and deposit it, multiplying each new Fed dollar several times. That's how money is created under normal circumstances.
But with the collateral behind the world's biggest debt market still declining in value, the Fed will have to print enough to counteract the waning money-creation power. That means it will really have to open the spigot wide and let 'er rip. Inflation is inevitable, in my view. The more deflation we see, the worse the inflation on the other side of it will be. Fed Chairman Ben Bernanke made his academic bones with the thesis that the Fed didn't print enough money in the Great Depression. He's said he'll drop the stuff from helicopters if need be. What more do you need to hear?! I hope you own some gold.
New highs: none.
We're still sorting through the hundreds of e-mails we received about Friday's Digest... We'll have more good feedback tomorrow... feedback@stansberryresearch.com.
"Okay, now I'm fed up with all the Obama put downs. The left spent eight years labeling Bush as 'stupid' and 'dumb' and I thought that was bogus. Now, the right is calling Obama, 'stupid' and 'dumb' and this is bogus too. These gentlemen have accomplished some things in life. you cannot be 'stupid' and get through these Ivy League schools like both of these guys have. You also cannot be 'stupid' and get elected president (with the dubious exception of Ron Reagan). As arduous as our election process is no one can possibly fool most of the people most of the time. If these men were ask intellectually deficient as their critics profess, then they never would have been elected. What you all are really saying that anyone who disagrees with you on any issue is 'stupid' and 'dumb,' and by definition, that's ridiculous!
"Look, when it comes to Macro economics, I'll take on anyone on your staff (including you) and I could easily make you look foolish. I don't agree with every thing that the Obama administration is doing, but I didn't agree with the Bush administration either. Rather than constantly criticizing our leadership, we need to come to the understanding that a house divided can not stand! We need to begin to look at our positions as positions of advisors – because we live in a free country we have the right to express our ideas and then let the great court of public debate and history prove us right or wrong. Beyond that, let's cut out the insults (which are really unproductive) and stick to ideas and insights!" – Paid-up subscriber Sheldon Bright
Ferris comment: We'll have to agree to disagree on the election process. Those able to get elected are by definition the worst candidates for public office.
As for the phrase "our leadership," speak for yourself and the other sheep. Politically speaking, grown men and women don't need leaders. We need qualified public servants and nothing more.
On the subject of macroeconomics, don't write checks your intellect can't cash. Bring it. What insight do you have to offer that would make us look so ridiculous?
"One inconvenient truth about income inequality, capitalism does not do well without a market able to buy its goods and services. I don't know about what's fair or who deserves or doesn't. What I do know is that America would be in much better shape today if our budget would of been in balance coming into this depression." – Paid-up subscriber Tim Sager
"Once again, the Off the Record call was truly fascinating yesterday afternoon. As I pondered the content of the call last night and reviewed my notes, it occurred to me that just the value of this one service is probably greater than the entire price I paid for my Alliance membership. How would one even begin to calculate the value of having that much expertise in a particular company on the telephone for an hour?
"Even though the investment opportunity discussed is currently outside the suggested maximum 'buy' price, the information acquired will serve me well now and in the future. Even after all these years of association, the value you provide continues to amaze!" – Paid-up subscriber Ken McGaha
Ferris comment: Thanks for the kudos, Ken. And hang in there. With the volatility we've seen lately, it wouldn't be a surprise if the stock price retreated a little and gave you a chance to buy. I agree this particular opportunity is one of the best we've ever found. If anybody else would like access, we've posted a transcript and a recording of the last call on our website. To learn more about Off The Record, click here...
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
June 1, 2010