Sunday, May 05, 2013

Let’s Do the Math

Here’s a quote from Bloomberg.com September 13,2012:
The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment.
The Federal Reserve is buying 40 billion of real estate loans per month. The median price of a home in the US for December of 2012 was $180,000. Figure the banks want a 20 percent down payment. That comes out to 36K with a loan amount due of 144k. Take the 40 billion dollars and divide that by $144,000. That figures out to 277,778 home mortgages purchased per month. Just to kick this dead horse one more time multiply that amount by 12 months. The grand total is 3.3 million homes. The total number of homes sold in 2012 was 4.96 million. It kind of looks like the Federal Reserve holds a hell of a lot of home loans; almost 3/4ths of everything written last year. Of course, I must admit that I thought there was something seriously wrong with my pocket calculator when I first ran the numbers.

The biggest problem for a bank, is loaning money long term at low interest rates. Depositors don’t put their saving in a bank for 30 years; they move it around to get a better rate. Banks have no desire to finance 30 year home loans at these rates, when they can service your Visa card loan at 18 percent. They'll write the loans and sell them to the secondary market, and guess who's buying them? The Federal Reserve, in theory, can finance the loans and wait out the full 30 years for repayment and not lose a dime on the deal.

There comes a point where the Federal Reserve has to choose between becoming the financial institution of choice for our real estate market, or get out of it. If and when they exit, interest rates should jump a couple of percent. The neat thing at this transition, a larger portion of the people holding real estate will have “skin in the game.” Most of the liar loans will be off of the books.

What will happen to the real estate market when the Federal Reserve stops buying home loans? Who will step in to provide financing? This implies a future rise in interest rates. A significant rate increase could trash the bond market. And of course the interest paid by us on the national debt would go up accordingly.

Ben’s not traveling to Jackson Hole this year for the meeting of the world’s financial wizards; he has a “previous engagement” which I find hard to believe. Tim Geithner already left at Treasury (very silently) and his replacement has noticeably kept his mouth shut. Bernanke not showing up at Jackson Hole, and Tim leaving, kind of suggests a reshuffling of policy for the world bank which they were the head of, and controlled. Several countries are repatriating their gold from our shores. Nobody has yelled "fire" yet, but this looks like an obvious move towards the exits.

How do we interpret the actions of Tim Geithner and Ben Bernanke? Is there a policy change underfoot that key people disagree with? The only thing that bothers me is the annual 3.3 million home loans the Federal Reserve bought to save our real estate market from ruin. And if you read the papers, real estate sales are picking up --gee, I wonder why? --and for how long?

32 comments:

Anonymous said...

Jim,

have you heard of the term, "don't fight the FED"? apparently not because you continue to think we operate in a free market, get with the program, we don't. And thus, swim with the currents instead of against it!

dearieme said...

The low interest rates on cash and bonds will incline young people to buy houses and older people to buy equities.

Perhaps it should be called Bernanke's Sodastream policy.

Joseph Oppenheim said...

real estate sales are picking up --gee, I wonder why? --and for how long?<<<<<

Personally, I could care less. I look at a home as a consumer item, first, with investment potential just secondary...the only factor is if it is affordable (for me, only if I could buy for cash)...and, of course using the RE cardinal rule....location, location, location.

The last several years created a golden opportunity....short sales, plus tax exemptions for them, prices about 30% below all-time highs, even more, about 50% when inflation is factored in. Plus, cash is king.....banks prefer cash buyers on short sales.....can get homes much cheaper than those who buy with a mortgage, etc.

As for when interest rates go up, don't care. When that happens, just makes bonds a great buy.

Jim in San Marcos said...

Hi Anon 9:27

I don't see how your remarks relate to what I wrote. If anything, I'm warning the "fish" about the baited hook being offered by fisherman Ben.

Jim in San Marcos said...

Hi derieme

You're right, the older people are taking more risk in buying equities. Bonds pay nothing to speak of.

The young people around here aren't buying houses, they're moving in with mom and dad.

I think that "Sodastream" does strike a chord, "young and innocent and easily lead." The wisdom gleaned from the INTERNET may be the unknown quantity that changes the way that used to work. Let's hope so.

Jim in San Marcos said...

Hi Joseph

Your a smart shopper.

dearieme said...

"The young people around here aren't buying houses, they're moving in with mom and dad". The young people around here move off to London, which is where the jobs are. So they look to buy, with suitable "help" from The Bank of Mum and Dad.

Joseph Oppenheim said...

Old news, Jim. Just eventual demand. A positive. Indicator that the boom has a long way to go.

Joseph Oppenheim said...

Sorry, Jim. SEAnswer wasn't to you. Dearieme, lots of young moved back with parents, just future demand.

Anonymous said...


If you weren't fighting the FED Jim, then your blog wouldn't be called depression of 2006.

It would be called the boom of 2013 and its eventual crash in 2020.

Jim in San Marcos said...

Hi Anon 1:42

It amazes me that you think that there is going to be some massive crash noise to signal a great depression.

Right now we are in the greatest recession since the last depression and its a hell of a lot worse than the Great Depression.

The bottom could drop out any time. IMHO by the time 2020 rolls around, we should be the road to recovery.

AIM said...

Jim,
The USD is the only game in town. Not only the reserve currency but not the international currency. As the EU continues to fall apart and as Japan collapses, capital will move to the USD in a flight to safety. 40% or more of the USD is in foreign hands (which is why Bernanke can't cause the high inflation he wants... he can't control the money supply or make it go where he wants). The USD is going to become stronger and stronger and then push the US into a deeper depression. The USD will be the last to peak and crash and that is when the fun begins. Probably will happen around 2015 or 16. This is Martin Armstrong's opinion.

AIM said...

Ooops!

I meant to write... NOW the international currency not NOT.

Most everyone is going to continue to trade in and keep their reserves as USD. They don't want yen or euros or anything else. The USD is king until it peaks and crashes in the near term.

Heavenly Prepper said...

Here is an idea, buy silver! Don't hold fiat FRN's. Even though AIM is on to something about the US being "last" to crash, last could be two days, two weeks, or two months after the first big domino falls - but who knows? Anyway, I will be doing a video this week on why silver is better than investment real estate but until then, maybe you can start your silver stack by winning this free silver 1 oz coin (and shameless plug)...
http://www.youtube.com/watch?v=0v99_Ep9XBw
Cheers.

Jim in San Marcos said...

Hi Hevenly Prepper

Here is a link that ought to scare the hell out of you: Fake Silver Coins

You can get a lot for just a dollar or two and guess where it all comes from? -- China.

Jim in San Marcos said...

Hi AIM

I see the scenario the same way. Let the other countries banks fail first and if we are the last one standing, we can forget about whats on the books for the banks in other countries. Whatever they held would be worthless.

The only trouble I see, is that everyone world wide wants our currency and is investing in T-Bills. It doesn't look like we can have it both ways.

Heavenly Prepper said...

Jim,

You have a legitimate point on the fake silver. This is why it pays to be educated though. I have 4 different non-invasive tests, that can be conducted in under a minute that will determine the authenticity of real silver. Not that hard, just takes time to learn is all. I will post a video with the four tests in the near future for any/all to check out. Secondly, if you buy from only reputable dealers and not ebay & craigslist your odds of getting fake silver are quite small.

AIM said...

Heavenly Prepper: this is not a commercial blog for people to promote their or anyone else's businesses.

It is to discuss our economy, state of affairs, current events, possible solutions, and so on.

Please desist. Thank you.

AIM said...

Another point to consider... people and savers that are still holding onto cash and not going into the stock market for yield are currently looked down upon as ignorant, sitting ducks (mostly by the inflationist camp).

It may turn out that "cash is king" will still have its day as things continue to unravel in our country. Further possible deflationary pressure on assets and negative effects from the unintended consequences of government and Fed actions, etc. could create a major buying opportunity in the not too distant future. And, those savers that are bright might finally make their move into private assets that then protect their wealth better than anything else might. There will be a swing in the people from public assets (bonds) to private assets when things devolve further. A race for tangibles when the USD starts it final plummet away from any semblance of decent purchasing power.

A good example would be the real estate market. You have hedge funds, Wall St. and other institutions currently on a spree buying single family homes in volume from the banks (REOs) for their "own to rent" program. The problem with this is it is causing appreciation in housing (which is artificial and making the public think that the Obama/Bernanke recovery is actually on its way, so prices are now going up and there is now a glut of rentals starting to build, and rents are thus dropping! As this continues the hedge funds will recognize that they are not able to get the yield on "own to rent" that they promised their investors. They will all start dumping the properties and this will cause property values to plummet. Another 10-20-30% drop in housing prices will create a bargain basement sale for all of these "stupid" investors and savers who have been on the sidelines in cash.

Time will tell.

Luke Smith said...

And if oil prices collapse?

Anonymous said...


economy is coming back!!!

yes we'll have a depression eventually, but will i be alive to care...rather not find out and enjoy the times and prepare for the worst.

you jim, you only prepare for the worst and refuse to see the gains.

to each his own, cheers.

Jim in San Marcos said...

Hi Anon 1:29

I can't figure out how you arrive at the view, "The economy is coming back."

The Federal Reserve is spending 80 billion a month on real estate food stamps and unemployment benefits and that's all off-budget.

If you read between the lines of what I write about, there is a lot of opportunity at hand now or in the near future.

Great Depressions are never verified by a government in power, rather by historians in retrospect years after the fact. Announcing a depression will not sell newspapers or get you re-elected to political office. Sadly depressions only become real when the citizens stop believing the optimistic rhetoric spouted by government sources and newspapers.

Jim in San Marcos said...

Hi Heavenly Prepper

I agree with AIM that your plug was not apropos. But I would be interested in a video of those 4 non obtrusive silver tests. The only non intrusive test I can think of is the bell sound from ringing a coin on your finger.

I do hold silver as a better store of value than gold at present, but I would consider neither one an investment, they pay no dividends or rent when contrasting them to real estate.

Heavenly Prepper said...

AIM (and Jim)

I'm not sure I am clear on the policy here. If I post a link from some random author on the internet, it is good research for others to check out. But if I post a link of original content I created, and am giving away free of charge to any who CHOOSE to click on the link - that is off-limits? I am not a business, and I am not promoting a business, I just believe in an abundance mentality. I don't make any money creating videos on YouTube and in fact I am giving away real money. I am promoting ideas; something I thought was encouraged here. While someone can make a good argument in a paragraph of text, sometimes a video really hits home. My goal is to get people thinking about real tangible assets, among other things. So I will link my next video of the 4 tests for Jim, and if you want me to stop posting links after that, obviously it is your blog so I will do as you wish.

Jim in San Marcos said...

Hi Heavenly Prepper

AIM (An Inquiring Mind) has been a loyal reader for years.

Sometimes humor written by one person doesn't come across a humor when read by another.

You-tube videos have a definite reason for existence on the internet. I use them to help me replace my brakes, replace leaky faucets and a dead garbage disposal, not to mention various laptop repairs.

I do believe that you will run into more of a problem trying to keep your audience using you-tube as a medium instead of a blog. 90% of the people that click on this blog are here less than 15 seconds. Many bloggers mistakenly make the assumption that what ever they write, people read.

The only rule on posts that I enforce, is being respectful to the other posters. Feel free to post your link on non obtrusive silver tests (you're guaranteed at least 15 seconds of my time and maybe more).

As a side note, we sure picked a bad time to discuss silver, as a store of value :>( The rush is on to buy stocks! Take care.

AIM said...

Heavenly Prepper:
Sorry if I misunderstood you or your motives. I thought you were attempting to hawk your services or products on this blog. I have no problem receiving other peoples' ideas or knowledge. Just don't want them interfering or distractin readers of the blog by attempting to make money through a blog that has a purpose of being a forum for sharing ideas and information.

I'm just a reader. I can't enforce anything. Jim told you his only rule, so we are all good as long as we don't violate that.

Joseph Oppenheim said...

Jim, when was the last time you thought the economy was doing well?

Jim in San Marcos said...

Hi Joseph

The economy was doing fine from 1982 until 2005.

The thing that bothers me, is that knowing something is wrong, doesn't necessarily lead to a solution.

Anonymous said...


To the theoretical types....

ask yourself, which is better hedge for safety, when it comes to our currency, usd.
$5billion in Gold or a $5 billion dollar aircraft carrier?

Those that think gold is the only backing to currency are not modern thinkers. you can back currency with any tangible asset, yes, even an aircraft carrier. and with an aircraft carrier, you can do a lot more ;)

Opp, Jim doesn't like to include any economic data that goes against his thesis of a depression. when you are a hammer, everything looks like a nail....

Anonymous said...

1. I am not sure why Jim is being told (scolded?) that the economy is great. Is it not true that any depression can be hidden by monetary expansion and an infinite debt ceiling? If so, where does the depression really start and end?
2. May I offer one other investment consideration besides gold and silver; buy a restored antique bank safe and load it with quality firearms and ammo. You will not lose any of your investment, and you may even need it someday.

Joseph Oppenheim said...

Yes about gold vs aircraft carrier, except more important is much more. Globalization has changed everything. More wealth is pouring into the US because of great assets at bargain prices and a military and capitalism which protects it, despite booms and busts. Booms and busts both reward the wise. Financial crashes just take longer to recover for all.

Heavenly Prepper said...

Anon at 2:57 asked about $5 billion in gold or an aircraft carrier. The aircraft carrier will win because it is the military force that we use to secure our position on the world stage - not our gold. On a personal level, I'd rather have the gold.

Anyway, Jim here is my video I mentioned about the 4 ways to test your silver - is it real or fake: http://www.youtube.com/watch?v=THhs4imnYno

I also did a video on which is riskier silver or the dollar. I bet you don't need to watch the video to speculate on the conclusion!