Post by unlawflcombatnt on Mar 10, 2007 2:36:56 GMT -6
Peter Schiff is the President, Founder and Chief Global Strategist for Euro Pacific Capital. He is widely acknowledged as a expert in international markets, and in global economic strategy. He is a speaker at all the major investment conferences. He is regularly featured on CNBC and Bloomerg TV , and often quoted in the Wall Street Journal, Barron's, New York Times, the Financial Times, Investors Business Daily, and many others.
Below is an article by Peter Schiff on subprimes and the economy, titled
Look Out Below
Look Out Below
"With last Tuesday's 500 point intra-day dive in the Dow Jones, it appears that the current rally has finally run out of steam. Though the fall of Chinese stocks may have provided the pin, the selling on Wall Street has nothing to do with the price of stocks in China. If you listen closely you might just here the sound of air hissing out of a bubble.
Despite the Dow's nominal new highs set in February, I still maintain that we are in a stealth bear market. If the Dow was priced in Euros, Swiss Francs, Coffee or Gold (or anything besides the non-inflation adjusted Dollar), it would be nowhere near the level it traded at in January of 2000. There are many reasons to suggest that the long term trend for U.S. stocks is down rather than up. Recent data clearly shows that what is left of the U.S. manufacturing sector is already in a recession, and the home building sector is set to implode. With home prices and corporate spending in decline, a recession in the general economy cannot be too far off. Goldilocks is about to mauled by three very angry bears.
If a recession is in the cards, some may wonder why last week's stock sell-off came with equal declines in gold bullion and a nearly 7% drop in gold stocks. Typically, gold benefits from a recession-fueled flight from stocks. However, the market still incorrectly believes that a global economic slow-down will be negative for gold. The reality is just the reverse. As central banks around the world, particular the Fed, will attempt to combat any slow-downs with additional inflation (i.e. rate cuts and money supply expansion). Such conditions are bullish for gold. On Tuesday, skittish investors headed for Treasuries, and bond yields fell substantially. But in an inflationary environment Treasuries will be among the biggest losers. One day the markets will figure this out, and major drops in the stock market will cause investors to sell bonds as well, with the safe-haven money fleeing into gold instead. When this day arrives, those not properly positioned in gold and foreign assets, will not be able to make the necessary adjustments in time. If you have not done so already, make them now.
More surprising than the Dow's sharp decline, or the media cheerleader's efforts to convince investors to "buy the dip," were new policy decisions unveiled by Freddie Mac regarding sub- prime mortgages. The shocker: Freddie will no longer buy loans where there is a "high likelihood" that borrowers cannot meet their monthly payments and which are "highly vulnerable to foreclosure." Talk about closing the barn door after the horse!
Is this an admission that Freddie Mac formerly bought loans that they knew were likely to end in default? They also announced that the higher standards would not go into effect for several months. Therefore until that time they will apparently still buy loans that they know will likely end in default. In addition, by limiting the change in policy to sub-prime loans, it appear that Freddie Mac intends to continue buying prime loans where borrowers cannot meet their month payments and which therefore are also highly vulnerable to default. I guess Freddie Mac wants to make sure all of the horses have left that barn before it attempts to shut that door as well. Incredible.
When asked on CNBC why the agency had waited so long to impose tougher standards, the head of Freddie Mac explained that when home prices were rising, Freddie Mac did not think it was their place to prevent sub-prime borrowers from profiting from the boom. He went on to state that he did not want to substitute his judgment with respect to future real estate prices for those of millions of homebuyers. In other words, since people were making piles of money making bad bets on real estate prices, Freddie Mac did not want to turn down the action. So even though they knew speculative buyers were lying about their incomes and assets to purchase houses they could not afford, Freddie Mac did not want to rain on everyone's parade. So instead of acting responsibly, they simply kept the party going, held their noses, and bought the loans anyway. Unbelievable!!!
Anyone who thinks these problems will be confined to the sub-prime market is delusional. All the same abuses occurred in prime mortgage lending as well. Zero-down, negative amortization, adjustable rates, and no-documentation loans, were not unique to the sub-prime market. There are plenty of speculators with good credit who committed to mortgage payments they could not afford in order to catch a ride on the real estate gravy train. Since sub-prime loans were clearly the most vulnerable, they are the first to blow up. However, as millions of sub-prime buyers will now no longer have access to the real estate market, and the homes that they own go up for sale, many in foreclosures, real estate prices will drop sharply. When that happens, prime loans will unravel just as quickly as their sub-prime counterparts.
Predictably, all of the mainstream market pundits, including Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson, are claiming that there is no evidence that the sub-prime problems are spilling over into the prime market. In the first place, even if they do not spill over, the problem is huge. In the second place, the spill over process takes time. It's only been a few weeks. It reminds me of Wall Street's initial reaction to the first blow-ups in the dot coms. First they said that the sell off would be contained to the real crazy companies that went public late in the game. It would not effect the "blue chips: like Yahoo, Ebay, or Amazon. Then they said only the "B to C" companies would fail, but not the "B to B." (In case you forgot the lingo, B to C meant business to consumers, and B to B meant business to business.) Then they said, OK it's an internet thing, surely it will not hurt tech in general, like Cisco or Intel. Then they said its just tech, it will not spill over into the over all stock market. Get the picture. We have all seen this movie before and we know exactly how it ends."
Below is an article by Peter Schiff on subprimes and the economy, titled
Look Out Below
Look Out Below
"With last Tuesday's 500 point intra-day dive in the Dow Jones, it appears that the current rally has finally run out of steam. Though the fall of Chinese stocks may have provided the pin, the selling on Wall Street has nothing to do with the price of stocks in China. If you listen closely you might just here the sound of air hissing out of a bubble.
Despite the Dow's nominal new highs set in February, I still maintain that we are in a stealth bear market. If the Dow was priced in Euros, Swiss Francs, Coffee or Gold (or anything besides the non-inflation adjusted Dollar), it would be nowhere near the level it traded at in January of 2000. There are many reasons to suggest that the long term trend for U.S. stocks is down rather than up. Recent data clearly shows that what is left of the U.S. manufacturing sector is already in a recession, and the home building sector is set to implode. With home prices and corporate spending in decline, a recession in the general economy cannot be too far off. Goldilocks is about to mauled by three very angry bears.
If a recession is in the cards, some may wonder why last week's stock sell-off came with equal declines in gold bullion and a nearly 7% drop in gold stocks. Typically, gold benefits from a recession-fueled flight from stocks. However, the market still incorrectly believes that a global economic slow-down will be negative for gold. The reality is just the reverse. As central banks around the world, particular the Fed, will attempt to combat any slow-downs with additional inflation (i.e. rate cuts and money supply expansion). Such conditions are bullish for gold. On Tuesday, skittish investors headed for Treasuries, and bond yields fell substantially. But in an inflationary environment Treasuries will be among the biggest losers. One day the markets will figure this out, and major drops in the stock market will cause investors to sell bonds as well, with the safe-haven money fleeing into gold instead. When this day arrives, those not properly positioned in gold and foreign assets, will not be able to make the necessary adjustments in time. If you have not done so already, make them now.
More surprising than the Dow's sharp decline, or the media cheerleader's efforts to convince investors to "buy the dip," were new policy decisions unveiled by Freddie Mac regarding sub- prime mortgages. The shocker: Freddie will no longer buy loans where there is a "high likelihood" that borrowers cannot meet their monthly payments and which are "highly vulnerable to foreclosure." Talk about closing the barn door after the horse!
Is this an admission that Freddie Mac formerly bought loans that they knew were likely to end in default? They also announced that the higher standards would not go into effect for several months. Therefore until that time they will apparently still buy loans that they know will likely end in default. In addition, by limiting the change in policy to sub-prime loans, it appear that Freddie Mac intends to continue buying prime loans where borrowers cannot meet their month payments and which therefore are also highly vulnerable to default. I guess Freddie Mac wants to make sure all of the horses have left that barn before it attempts to shut that door as well. Incredible.
When asked on CNBC why the agency had waited so long to impose tougher standards, the head of Freddie Mac explained that when home prices were rising, Freddie Mac did not think it was their place to prevent sub-prime borrowers from profiting from the boom. He went on to state that he did not want to substitute his judgment with respect to future real estate prices for those of millions of homebuyers. In other words, since people were making piles of money making bad bets on real estate prices, Freddie Mac did not want to turn down the action. So even though they knew speculative buyers were lying about their incomes and assets to purchase houses they could not afford, Freddie Mac did not want to rain on everyone's parade. So instead of acting responsibly, they simply kept the party going, held their noses, and bought the loans anyway. Unbelievable!!!
Anyone who thinks these problems will be confined to the sub-prime market is delusional. All the same abuses occurred in prime mortgage lending as well. Zero-down, negative amortization, adjustable rates, and no-documentation loans, were not unique to the sub-prime market. There are plenty of speculators with good credit who committed to mortgage payments they could not afford in order to catch a ride on the real estate gravy train. Since sub-prime loans were clearly the most vulnerable, they are the first to blow up. However, as millions of sub-prime buyers will now no longer have access to the real estate market, and the homes that they own go up for sale, many in foreclosures, real estate prices will drop sharply. When that happens, prime loans will unravel just as quickly as their sub-prime counterparts.
Predictably, all of the mainstream market pundits, including Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson, are claiming that there is no evidence that the sub-prime problems are spilling over into the prime market. In the first place, even if they do not spill over, the problem is huge. In the second place, the spill over process takes time. It's only been a few weeks. It reminds me of Wall Street's initial reaction to the first blow-ups in the dot coms. First they said that the sell off would be contained to the real crazy companies that went public late in the game. It would not effect the "blue chips: like Yahoo, Ebay, or Amazon. Then they said only the "B to C" companies would fail, but not the "B to B." (In case you forgot the lingo, B to C meant business to consumers, and B to B meant business to business.) Then they said, OK it's an internet thing, surely it will not hurt tech in general, like Cisco or Intel. Then they said its just tech, it will not spill over into the over all stock market. Get the picture. We have all seen this movie before and we know exactly how it ends."