Recession Warning Clouds Continue To Grow

Everyone breathed a sigh of relief last week when the Federal Reserve decided to take a break from their campaign to raise interest rates. As is usually the case with the Fed, they are late to the dance. The stage is set, now we just sit back and watch.

One of the most reliable indicators of future recession is the yield curve. It has been negative for better than a month. Based on historical evidence, that gives a better than even chance of a recession in the next 12 to 18 months. My bet is on sometime in 2007.

Now further evidence is coming to light. First, a chart provided by John Mauldin at Thoughts From the Frontline (http://www.2000wave.com/gateway.htm) shows us a pretty strong correlation between the housing market and the S & P 500. Chart 2 above tells the story.

Another disturbing piece of evidence is in the copper market. For several years now copper has been on a tear. Most folks knowledgeable in the ins and outs of the copper market will tell you that the price of copper is closely tied to the strength or weakness of the housing market and does a pretty good job of predicting the economy.

Marc Farber recently posted this chart of copper, which shows that copper is on the verge of a breakout. It could be up, but with the other indicators we have talked about this morning, the chances are that the breakout will be down and so will our economy.

See chart 1 above.

Finally, to kind of put some closure to all of this happy news, let me quote John Mauldin, who in my estimation is the most levelheaded analyst in the business. Here is what he says about the coming recession:

"But I find it interesting that so many are so adamant about the possibility of a soft landing. Soft landings are about as rare as a white buffalo of western B-movie lore. Everyone claims to have seen one or know someone who has, but actually finding one is difficult.

We have seen 16 periods in the modern era where we have ended a Fed tightening cycle. Only one resulted in a soft landing."

Hard landing here we come. Prepare accordingly.

How About Jericho?

I am not much of a regular television fan, but the premise of the new CBS show Jericho caught my interest. For those of you who haven’t heard about it, it is the story of a small Kansas town, (looks to be Western Kansas) and what happens when an apparent nuclear strike on Denver cuts the entire town off from the rest of the world. They later discover by way of a telephone answering machine message that Atlanta was also bombed.

What I found amazing is the idea that a nuclear war did not destroy everyone in America. As most of you know, that is the official line when our leaders discuss the subject of nuclear war. The idea of complete destruction is behind the Mutually Assured Destruction doctrine that we used to threaten Russia with. It is also the reasoning behind the discontinuation of our country’s civil defense program.

After doing research on the subject what I have found is that if you live in or near a large metropolitan area you are pretty well assured of destruction. If, however, you live in a smaller community you will not be vaporized. Now you may not survive the chaos, or you may freeze or starve to death, but you will not die as a result of the blast.

You can actually check out this fallout map that was taken from the Oak Ridge Laboratories and get an idea for how safe your home is from fallout.

http://www.parowanprophet.com/Nuclear_War_Comes/fallout_map.htm

It is kind of amazing that the powers that be (PTB) didn’t put pressure on CBS about the airing of this show as it refutes the standard party line that we have been led to believe for the last 30 or 40 years.

What I will be watching for in future episodes of Jericho is how they handle the issue of wind blown fallout. Since they are close enough to Denver to see the mushroom cloud, they will be forced to deal with fallout in the next couple of days depending on prevailing wind patterns. That will indicate how realistic the show really is.

Check it out. It might cause you to reevaluate your emergency preparations.

Do You Have Gold?

Just a quick tidbit of news that caught my eye this week. It seems that there is an organization located in Indiana known as National Organization for the Repeal of the Federal Reserve Act and the Internal Revenue Code (NORFED). This organization has been minting and selling gold and silver “liberty Dollar” medallions. Last week the U.S. Treasury Department issued a warning to purchasers of these coins that using them, as money would be considered a crime.

Here’s the catch…the U.S. Treasury has no authority to determine if an action is a crime or not. That would come from a different branch of the government. It seems that someone at Treasury kind of panicked about this whole thing and is trying to put a halt to NORFED’s selling of these medallions. This has done nothing to halt the sales of these coins. In fact, Mike Johnson, the executive director says that interest and sales are up.

As it turns out, a Federal Reserve spokesman says that as long as the coins don’t say “legal tender” there is nothing illegal about them. He also states, “there is no law that says goods and services must be paid for with Federal Reserve notes. Parties entering into a transaction can establish any medium of exchange that is agreed upon.”

So, there are a growing number of people purchasing these coins, with over $20 million in circulation, and many of them being used in bartering situations for goods and services. People like them because they are not tied to the U.S. government and so they retain their value, unlike Federal Reserve Notes, which have lost 95% of their purchasing power since 1913.

At some point, if this trend of using alternative money continues, you can bet that the government will have to step in to preserve tax revenues. We may see another executive order outlawing the ownership of gold, similar to what Roosevelt did to prop the dollar up back in 1933.

If our government continues on their current course of destroying our currency, the day could come when you pull into a gas station in some out of the way town and the owner refuses your “reserve notes” and demands payment in something a little more substantial.

Think about that while you sip on your second cup of coffee this morning.

Low Risk Way to Play the Real Estate Market

I promised that I would give you a safe way to play the real estate market, just in case you think it still has legs left. (I don't, but we can always hope.)

Let's say that the latest figures coming out on new home starts and existing home sales have spooked you and you have decided to sell you fairly new expensive home and pocket any equity you may have. I hope you have some because if you don't it means you have an adjustable rate mortgage or an interest only mortgage or some other new breed of mortgage product which spells financial doom in a down market.

So you sell your home, pocket the cash, and now you are kicking yourself, because the market has not crashed and you feel like your missing out on even more profits. Here's what you do...you shop around for a nice home in a nice neighborhood. Say something in the $250,000 range. You find a seller who is wanting to downsize or has been transferred out of town and really needs to sell right away. You approach the buyer and offer a lease with an option to buy.

Here's where this strategy pays. If you live in a hot real estate market, then I can almost guarantee you that home prices have outpaced rents. That means that you will be able to rent this house for less than the monthly payment would be with a modest down. Instead of a down payment, you offer a non-refundable earnest money deposit equal to two months rent. You ask for a lease term of three to five years and a fixed selling price and you negotiate that a percentage of your rent money be applied to the purchase of the house. Now your housing is cheaper than if you purchased, if the market continues to appreciate in your area you will pocket the profits, and if the market collapses, you simple walk away from the deal and you are only out your deposit.

And you have conserved your equity for the day when real deals will abound. Nifty eh? It might take a while to find the right seller and the right property, but it is well worth the reduction in risk to your overall wealth.

What are you waiting for? Start looking.

The Real Estate Bust Is Here

We have talked about the coming real estate implosion for over a year. If you have read my free report, “Five Things You Must Do Now To Protect Your Investments,” you know that one of the things I recommend is converting your home loan to a fixed rate mortgage. If you haven't read my report, you can get your free copy by sending a blank email to investoralert@freefollowup.com.

The reason it is so important to have a fixed rate loan is because interest rates have been going up for over a year now. Folks who bought expensive houses using interest only loans or adjustable rate mortgages are in for a huge shock. Some of those loans will be adjusted this year and payments in some cases will increase by 40 to 50%.

As a result, a large number of defaults are starting to hit lenders. This will only exaggerate the problem.

According to lenders, we will see a 10-20% tumble in home prices nationwide. In some areas it will be worse. Two out of three lenders say that there is a bubble in the real estate market. Five out of ten lenders say the bust is here now.

The National Association of Realtors now predicts that sales will drop this year for the first time in years.

These groups are people who make their living from a booming real estate market. They are not the ones who you would expect to sound the alarm and yet they are doing that now. I would guess that their estimates are on the optimistic side because of their positions in the industry.

That could mean that things could turn out much worse. You do not want to be on the wrong side of this market. Now is not the time to trade up or purchase speculative property. Now is the time to sit back and wait for bargains.

If you have purchased a home recently that is stretching your budget, it might be a good idea to look at selling your home and putting any profits in the bank. Where would you live? In most areas of the country, the cost of renting is cheaper than ownership right now. (A sure sign of a bubble) Imagine renting for a year and buying back your dream house for 30% or even 40% less than you originally paid for it. It could happen.

Afraid that you might miss out on further appreciation in the market? Well, I have a way for you to play the game without all of the risk. I'll cover that strategy next time so come back soon...

Inflation or Deflation Revisited

That is the question after all. I have discussed this issue before. Several times in fact. Starting back in August of last year. It seems in reviewing my comments, I favored some sort of high inflation followed by deflation as demand dries up.

Today, as I look at what the Fed is doing with the money supply, it seems that we might miss the big bout of inflation and go straight to deflation. Here's why:

The Feds have been shrinking the money supply lately. Reduced supply of money, reduction in the cost of goods. They have also been raising rates steadily. The Fed's public comments state that they are trying to keep inflation in check, but I believe a big part of their strategy has to do with getting interest rates to the point where, when the next recession hits, they will have some wiggle room to lower rates again. It's hard to lower rates when they are already at 1% or below. Just ask the Japanese.

Of course in the process of raising rates, they are walking a tightrope with the housing market. If rates go too high, they will cause a slowdown in the housing market. And a slowdown in housing will create a ripple effect throughout the economy.

It seems that the slowdown has started. House prices in Denver, one of the “hot” markets, has dropped 18% in the last two years. In fact, pending sales of homes dropped 7% to their lowest point in three years. The National Association of Realtors has warned in a Bloomberg article on Thursday that U.S. housing prices may fall for the first time since 1993.

Why is the housing market such a concern? Because so much is riding on house prices. For the past 10 years, Americans have used their homes as ATM's, pulling equity out at regular intervals and purchasing new cars, boats, stock, and all sorts of consumer goods. When house prices start to fall as they have in certain markets, the money machine dries up. Add to that the fact that experts estimate that 25% of all mortgage loans are some form of adjustable rate or interest only loans.

That means that as interest rates rise, so do house payments. A combination of rising house payments and dropping home values is a dangerous mix in the current economic climate. As home sales slow, and foreclosures rise, consumer spending will drop. It becomes a cascading effect and it will slow the entire economy. Remember, consumer consumption is responsible for about 70% of the entire Gross National Product.

With all of this news, it becomes very likely that we could actually bypass the hyperinflation stage and go straight into a deflationary recession or worse. And don't for one minute think that “helicopter” Bernanke will be able to print enough dollars to encourage more spending and more debt. The Japanese reduced interest rates to zero and still could not reverse the deflationary trend in their country.

So with that in mind is gold still a good investment? I believe so. While the price of gold may drop when compared to dollars, it's purchasing power will actually increase. Hard currencies are the only currencies that cannot be manipulated by the government.