April 2006

Today Al-Qaeda number two al-Zawahiri was calling insurgents to overthrow the government of Pakistan.

After this and many other proves, does anyone still believe that Saddam and Al-Qaeda were not natural enemies and the Bush' claim of the opposite was not a lie, blatant lie?


I heard recently a discussion on Bloomberg radio expressing the outrage of various politicians (and radio hosts) over corrupted oil companies who must be punished for price fixing and stuff like that. I can imagine the radio studio walls all sticky from saliva. 

For that I can say – folks! why don't you change your attitude? The $3 gas? Man, this is cheap! You will tell your grand-children who will pump for $15 how cheap it was. Enjoy the life, drive your big car all around, drive packed with all kids and women! Just relax and be happy!

And I want to note the voice of reason coming from uncle Ben. I like the guy more and more.

And for everybody else: stop drawing pictures like that:

It's not inflation adjusted and useless. The properly adjusted picture is here: 


We are still quite far from the old price records. 

Today Ben Bernanke pretty explicitly said that rates will be raised one more time in May and paused in June.  Wow. We never had such a level of transparency from Greenspan. We never knew what will happen next week with him…

I expect the real estate problem to become so ugly by the end of summer so I don't think we'll get much more hikes after June. Good to get long in the treasuries now, unless we expect China to dump. 

The most important thing to understand in bubblonomy is that money do not disappear. When one bubble bursts, someone lost money, someone earned, but there are always some money to feed the next bubble. Bubbles have the period of infection, when they are unstoppable.

After dot-com bubble burst, it was just another year or two before money started to feed the real estate bubble. It probably did not burst yet, but just give it few more weeks. The Florida real estate looks horrible, sooner or later it will spread over.

New home sales

Here's a great chart. So construction spending continues like a drunken sailor at port. While New Home Sales have clearly become the laggard. I would say, there is no denying the inevitable with higher interest rates, laggging wage growth, and escalated housing costs. Not a time to be buying a new house, I say if you are new to the market, wait a few more years and when real estate isn't the most talked about item, build a nice relationship with your local banker and let him know when he can't take the pain of his inventory on his books you will be ready to buy. Same game happened in stocks. Reflation game is nearly over for Real Estate. 


For the first time in years, the median price of new homes is below last year. Look at the unsold real estate inventory graph:

Unsold real estate inventory

And finally, the mortgage application graph, the indication of future purchases, which is down 19% from last year and already below 2003:

So the bloodbath in real estate is coming soon, but there is a next bubble already – natural resources and gold! This one is still years from burst, and likely the money from real estate will soon go there. If you believe that oil and gold can go up forever, look again at this chart:

When bubble-forming will stop? Never. What to do? Understand it and profit from it.

This post could surprise many of my anti-Bush friends, but I claim that Bush will end the war in Iraq sooner than later.

First thing to understand is that Bush has almost no strategic politics on his own, he's left to decide only tactical questions and methods to do things. He's a puppet in fat cats hands and he's not smart for his own policies anyway. Essentially, in the first days in his office, he was visited by his fellow "Skull and Bones" friends executives of Exxon, BP and Shell and told:

Listen Bush. We need a war with Iraq and we stand for our business. You screw yourself and you do it, but keep your own fingers dirty. You can claim that Saddam has some ties with terrorists or WMD, you may let terrorists to blow up few buildings in Manhattan, but keep your ass away from us when you do that. Dismissed.

Nobody else made a sound against it, because most of other big guys are pretty neutral to war. Who cares?

Not anymore. The recent developments in interest rates and inflation point to lose-lose situation in the capital markets. Let read the good illustration of the problem:

First, suppose that Citibank gets money from its depositors at a floating rate, and lends to mortgage borrowers at a fixed 6%. Now GM issues bonds yielding 7%, and enters a swap with Citibank, in which Citibank pays GM 5% fixed in return for floating. (Specifically, both parties agree on some notional principal, say $100 million, and each makes payments to the other, determined by multiplying a fixed or floating interest rate by that principal amount. The market for this sort of transaction is huge).

Well, now GM is paying an actual interest rate of floating + 2% (pay 7% to bondholders, get 5% from Citibank, pay Citibank floating). Meanwhile, as compensation for the credit risk it has accepted all around, Citibank earns a fixed 1% margin regardless of interest rate movements (pay depositors floating, get 6% from mortgages, pay 5% to GM, get floating from GM). Neat. And since Citibank is federally insured at the depositor level, and too big to fail at the institutional level, Uncle Sam is now a counterparty that effectively shares the risk in the case that GM or homeowners default. Similar transactions serve to swap risky corporate and mortgage borrowing into safe government agency paper issued by Fannie Mae and Freddie Mac.

Now make no mistake, there is little question that bank deposits and agency debt are safely backed by the U.S. government and that this is a good commitment. However, the holders of stock in banks or mortgage companies like Fannie Mae and Freddie Mac may not be so secure. It's just excruciatingly difficult to perfectly match risky assets and liabilities at extremely high levels of leverage. Ask Long Term Capital. Indeed, were it not for accounting rules that allow Fannie Mae to keep balance sheet losses out of earnings, it would be clearer to investors that last summer's 5-month duration mismatch cost Fannie nearly a year of earnings. Similar derivatives-related issues are at the core of Freddie Mac's recent difficulties.

In short, further increase of interest rates can trigger a catastrophic reaction on financial markets, but it will be no better if the inflation starts. So, to avoid too much of economics and jump straight to conclusion, there is no other way to solve the situation than to dramatically cut federal expenses, and the simplest way to do that is to stop the war. Now we have some other (not from Skull and Bones) executives to visit Bush and say: "Mister Bush, we urge you to cut federal budget costs by huge margin. We expect you to finish deploying your solution by the time we schedule to meeting to discuss Congress campaign contributions."

After this strange things start to happen. The US withdrawal from Iraq is discussed. President is talking about alternative fuels (helps Saudi to pump more). L.A. Times Editorial calls for Cheney's ouster. Expect more like that and understand that this is very big money who are speaking. And Bush has to listen.

Thanks transparent greed for letting us to know that Rove is indeed the next target. It's amazing how many people from Bush inner circle are under criminal investigation. Surely, America is still a free country. In most places in the world the president would just stop all those investigations.

To answer this post, I want to point to my older post. Cheney managed to out the whole CIA cover company, Brewster-Jennings & Associates. If that's not a crime – then what's a crime?


At the least, a dummy company ought to create the appearance of activity, with an office and a valid mailing address, he said. "A cover that falls apart on first inspection isn't very good. What you want is a cover that actually holds up . . . and this one certainly doesn't."

Some in the real estate industry believe something was amiss, if not illegal. "It's almost like out of a spy novel — the tenant that wasn't there," said Griffin, who once oversaw management of the tower. "And they picked a nice address."

The collapse of Plame's cover could compromise any other operatives who claimed to work for Brewster Jennings. Although former officials wouldn't confirm that Plame's cover company used the Arch Street address, they offered no other explanation of the phantom tenant.

In a recent magazine's article Forbes published that the flattening yield curve and mortgage risk exposure is eating into regional banks profits. And North Fork Bank was chosen to illustrate that. Indeed, today report shows that NFB profit fell by 19%. The bank is selling mortgages out to reduce its exposure, but that eats into profits.

In a related note, I want to point to a wonderful article on real estate bubble:

As with most economic issues of national and global significance, their percussive consequences are rarely felt in most people's pockets until months or even years after an event has unfolded. Often, the possibility of such negative personal effects are denied or rationalized until all is lost and past inaction is regretted.

Do you know what is filling the bubble at this stage? As this article points out, 70% of Americans believe that there is a house bubble and housing prices will drop soon, but only 30% think that this price decline will hit their own house. In other words, we are all insane optimists, believing that whatever happens, only other people will be in trouble, not us. Who are those "other people", then?

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