Great Depression Online Archive Issue:

Midyear Review

Great Depression Online
Long Beach, CA
July 11, 2008

Inside This Issue You Will Discover…

*** Midyear Review
*** The Worst is Yet to Come
*** The Vocation of Fools
*** And More

Midyear Review

With half the year now behind us we thought it appropriate to take a moment and look back at where we’ve been so we can better consider where we’re going.

For the first six months of the year the DOW is down 14%, the S&P500 is down 12%, and the NASDAQ is down 13%.  By just stuffing money in your mattress you would’ve beat the market by an average of 13%.  But that’s still not very good.  For, on a global basis, your money in the mattress would’ve lost 5.2% of its value as measured by the dollar index.

Taking a quick look at several key commodities we see that… 

Oil’s up 49.6%.  Gold’s up 13.2%.  And corn’s up over 64.4%.

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For the average consumer this has been a painful state of affairs.  The value of his largest investment – his house – is shrinking as are his stock market investments…all while the cost of fuel and food are increasing.

It was for this very reason that we found the following tidbit from earlier this week to be all the more disturbing…

The Worst is Yet to Come

“As home prices decline and Washington struggles to end the economic malaise,” began Charles Duhigg for the New York Times, “Wall Street is starting to send a sobering message: The worst is yet to come.

“One of the strongest warning signs came Monday, when shares of the nation’s most important mortgage companies, Fannie Mae and Freddie Mac, plummeted.  After falling almost continuously over the past month, in just one day Freddie Mac tumbled another 18 percent, and Fannie Mae lost 16 percent amid concerns that the companies would need to raise billions of dollars in fresh capital.

“Fannie Mae and Freddie Mac are the nation’s largest buyers of home mortgages, and traditionally the government’s backstop for the housing economy.  But with Monday’s plunge, each of these giants has now lost more than 60 percent of its market value this year.  The declines, along with a falling stock market and growing unease about the possibility of more red ink at big banks, reflect a growing conviction consensus among investors that the current housing slump will last longer, and prove more severe, than initially feared.”

How much longer?  And how much more severe?  We don’t know.  But the vaporization of wealth that’s already occurred is breathtaking…

“Worldwide, banks and brokerages have written down the value of the assets they hold, notably those linked to mortgages, by more than $400 billion since the beginning of last year.  In April, the International Monetary Fund said total losses for banks, insurance companies and investment funds may reach $945 billion, and some forecasters say the bill could be even higher.

‘“The economic story has gotten worse and worse and worse, and every financial institution seems like it’s in freefall,’ said Steven D. Persky, chief executive at Dalton Investments in Los Angeles, which manages about $1 billion. ‘It’s not clear at all when this ends.”’

And it’s not clear at all who will be left when it does end.

The Vocation of Fools

For, on the very next day, we found that…

“Time is running out for IndyMac Bancorp, one of the faded darlings of the subprime era.

“On Tuesday, IndyMac, one of the nation’s largest independent mortgage lenders, faced what amounted to a run on the bank,” reported Eric Dash, for the New York Times.  “As depositors rushed to withdraw money, IndyMac’s share price, already in a free fall, spiraled even lower.

“The stock, which fetched $50 in 2006, at the height of the housing boom, plunged 38 percent to 44 cents. In two years, more than $3 billion of shareholder value has been wiped out.”

And what did they do to merit such a damaging share price revaluation?  For starters, they behaved like complete and utter jackasses.

“As home prices soared in recent years, IndyMac carved out a lucrative niche in so-called Alt-A mortgages. Such loans, made to people whose credit is just above subprime, usually do not require borrowers to provide proof of savings or incomes.”

Loaning money without verifying savings or incomes is the vocation of fools.  What came next was as predictable as night after day for any individual who bothered the half second to engage in the lost art of thinking.

“…when the housing bubble burst, many Alt-A borrowers were unable or unwilling to pay their mortgages. Wall Street banks, which fostered the growth of subprime lending by bundling the mortgages into securities, balked at buying more loans. IndyMac lost $184 million during the first quarter, and it expects to post an even bigger loss for the second quarter.”

The great housing bubble ballooned from the fraud of cheap money and inflated the delusions of a population.  For a brief moment in time something truly magical happened…it was possible to get something for nothing.  And then it wasn’t.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  By the time the great housing bubble implosion is done the dollar will be a frail shell of the value it still clings to today.  Protect yourself and acquire instance diversification outside the dollar now.  High Yield International can help.  Learn more here: The Falling U.S. Dollar.

 

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