Despite the recent regulations, the government and Federal Reserve love derivatives. Well, maybe not all of them, but their best friend is the futures market for agricultural goods. Inadvertently, the companies hedging against higher food prices help out the Fed.
Think about it. The Fed prints tons of money and commodity prices rise. But thankfully for the consumer, the impact won’t be felt immediately – food companies have hedged against higher prices months in advance. These hedging strategies help both the shopper and the bottom line. They also help the Fed in its PR campaign.
A company can hedge into the future, but not forever. As commodity prices surge, food companies know that they must soon raise prices. The earnings calls openly announce the next round of price increases; however, none of this is reflected in the CPI numbers. Essentially, higher prices are baked in the cake, but since they haven’t hit consumers yet, the Bureau of Labor Statistics (BLS) doesn’t officially consider them in the inflation numbers.
To be fair, I’m not sure how these hedged prices would be incorporated into the CPI. Still, this technical obstacle doesn’t justify completely ignoring the hedges. Fed apologists often defend the central bank by saying, “We printed a bunch of money, and look, prices didn’t increase. We’re right; you’re wrong.”
This view completely ignores the delay in price increases. And in fact, it’s an inaccurate comparison. If I print money today, I shouldn’t look at tomorrow’s prices to find the effect. Instead, prices six months to a year from now should be compared to the present – and depending on other factors in the market, sometimes even longer.
While occasionally a Fed supporter will make a good argument, anyone who relates today’s consumer prices to the most recent money printing is either a hack or is intentionally trying to mislead the reader. Unfortunately, wisely placed hedges give these writers ammunition year after year as prices will always significantly lag the most recent monetary expansion.
First, Kevin Brekke will report on lackluster performance of housing programs and their possible removal. Then Jeff Clark will tell us of his anti-gold seatmate on a recent flight. And I’ll comment on an interesting discussion on the decision to own a home.
By Kevin Brekke
Recent moves in the House of Representatives to remove two taxpayer-funded crutches beneath America’s housing market are headed for a showdown with the White House. The bills would end the Home Affordable Modification Program (HAMP) and the Neighborhood Stabilization Program (NSP). The Obama administration has threatened to veto the bills if passed.
The assumptions and expectations held by bureaucrats and citizens alike are being challenged by the ongoing and deepening financial crisis. This is particularly true about two long-held and often-heard beliefs: that once a government program is enacted it will never die, and that house prices will always rise. The end of a thirty-year housing bubble has reduced to rubble the stone upon which the latter was etched. The same is rapidly occurring to the former.
Whether decades old or newly incarnated, debt, deficit spending and budget gaps at all levels of government are forcing legislators to evaluate the effectiveness of programs and terminating those that fail to show results. Such is the case with HAMP and NSP.
On March 2, 2011, a subcommittee of the House Financial Services Committee held a hearing on “Legislative Proposals to End Taxpayer Funding for Ineffective Foreclosure Mitigation Programs.” Testifying at the hearing was Katie Jones, Housing Policy Analyst at the Congressional Research Service (CRS).
Her testimony was a straightforward data presentation, absent any analyses or conclusions drawn from the data. In her own words, “As is its policy, CRS takes no position on these legislative proposals or on the initiatives themselves.” In Dragnet-speak, “Just the facts, ma’am.” Let’s take a quick look at both programs.
HAMP became active in March 2009. But like so many ill-conceived government giveaways, there’s always room for more at the tax trough, and the program soon morphed into a multi-pronged monster. By October 2010, HAMP spawned six sub-programs: the Second Lien Modification Program (2MP); the Home Affordable Foreclosure Alternatives Program (HAFA); the Home Affordable Unemployment Program (UP); the Principal Reduction Alternative (PRA); the FHA-HAMP; and the Agriculture Department’s RD-HAMP.
So how did this steaming cauldron of acronym elixir perform?
The Treasury Department, which administers the program, and the White House, program cheerleader, prefer to focus on the program’s “corral” rate, the number of new entrants herded into HAMP, a category they call “trial mods.” We, however, will focus on the success rate.
When the program was first announced by the president, it was claimed that HAMP would help three to four million Americans keep their homes. Here are the actual results since the program’s launch through December 31, 2010:
- 2,867,420 delinquent loans were identified as HAMP eligible.
- 1,751,883 trial plans where offered.
- 1,493,107 trial mods started.
- 607,607 permanent mods started.
- 539,493 active permanent mods.
That’s a rate of conversion from those entering the program at the trial stage into an active permanent modification of 36.1%.
But before we get too excited, the Treasury Department reports that “about” 20% of permanent HAMP modifications are again 60+ days behind on their mortgages within twelve months after the modification was converted to permanent. A rate of recidivism like this is usually seen within a chaperoned population behind tall walls topped with razor wire.
This sad reality means the number of active permanent mods with mortgages that are current will drop to 431,594 in one year, a success rate of just 28.9%.
The NSA is an even bigger disaster. This program is intended to help stabilize communities by funding the purchase of foreclosed and abandoned properties by state and municipal governments for rehabilitation, clearance and demolition, and new construction.
According to Katie Jones’ testimony, the program was allocated $3.9 billion of which $2.16 billion had been dispersed by February 7, 2011. Through January 13, 2011, 19,189 properties had been completed. Factoring in the three-week discrepancy in end dates, that is an average of $112,000 spent per property. Compare that to the median price of $156,100 for a previously owned home sold in the U.S. Obviously, we are getting the best union labor and materials our tax money can buy.
These programs are scheduled to die by the end of 2012. However, the dismal success rate and high unit costs of these programs should condemn them to an early death. In both of these cases, we wholeheartedly endorse euthanasia.
Jeff Clark, BIG GOLD
“Why you write about gold?” my rapper-like airline seatmate asked me. I told him I was a gold newsletter writer when he asked what I did, and that was his response. I wasn’t looking forward to what was scheduled to be a long flight, and I suddenly realized it was about to get longer.
“Well, I think it’s the best form of protection for my assets right now. And I like to write and research, so it’s a good match.” I was giving him a straightforward, mature answer, but I quickly realized I was overshooting.
He raised an eyebrow and studied me for a moment, like he was trying to decide if I had been dropped on my head as a baby.
“Yeah, but… gold?” he replied with an accent I can only describe as a New York gangster turned Hollywood hipster. “It’s over $1,000 for just one pound of da stuff.”
“It’s actually about $1,400 now, and that’s for one ounce.”
“Whoa!” he exclaimed. “That’s crazy expensive.”
“The dollar has a long way down yet.”
He had to think about that. While he did, I turned back to my laptop in an attempt to send a hint. It didn’t work.
“Well, all I know is gold’s in a bubble. At least that’s what my broker said.”
“How much gold does he own?”
“Well, if he thinks it’s expensive now, he must be selling what he had, right?”
“Yeah, I’m sure that’s what he’s doin’.” He paused, scrunching his eyebrows. “Actually, I don’t think he had any gold. You really don’t think it’s too expensive?”
“Every other bubble” – I used my fingers to make quotation marks when I said bubble – “has gone much higher… real estate, the Nasdaq, gold in the ‘70s…”
“The ‘70s! Great music. But I read stocks are better because they’ve gone up more than gold since then.”
“How many stocks do you still own from the ‘70s?”
“Huh? Wait, no, that’s not the point…”
“Well, no. If you want to buy valuables, just buy diamonds. Or artwork. Gold’s too expensive.”
I tried to follow the train of thought. “Well, diamonds are not a monetary replacement.” I doubt he knew what I meant, so… “Diamonds aren’t money. Gold is.”
“How is gold money?”
“Because it’s the best store of value over time. Gold has been currency throughout most of history, even if it’s not now. You can exchange it for any currency, anywhere in the world.”
“But people buy diamonds. They’re expensive, always will be.”
“And they’re rare! That counts for somethin’.”
“Gold is rare. That’s why it’s called a precious metal.”
“Yeah, but it don’t do nothin’, other than a necklace or somethin’ like that. Gold is like that old stupid pet rock – it just sits there.”
“I say gold is more like [rhymes with Niagara]: you can be ready the moment inflation strikes.”
“Ha, you’re funny! Not funny looking, just humorous, you know what I’m sayin’? You ever think of doin’ some writin’?”
I inwardly rolled my eyes, and later used the drone of his voice to help me fall asleep.
What’s clear, though, is that as long as there are segments of our population with this type of belief about the gold sector, I think we can safely say we’re nowhere near the top of this bull market. And perhaps when my seatmate thinks it’s time to jump in will be the clue to get out.
In the meantime, since it was the simile that resonated with my seatmate, we offer these additional ones for all those other Hollywood hipsters out there who just haven’t quite gotten it yet…
Gold is like a lover: Ain’t no sunshine when it’s gone.
Gold is like Survivor: It will outwit, outplay and outlast its paper money rivals.
Gold is like a pocket protector: For geeks only… until geeks rule.
Gold is like reality TV: Boring, until reality happens to you.
Gold is like your spouse when you first met: Beautiful to look at, wonderful to hold.
Gold is like a storm cellar: It will keep you safe when the tornado blows everything else away.
Gold is like your Grandpa: Wise, sound, and been around the block.
Gold is like a translator: It speaks any language.
Gold is like your mother: It’s always looking out for you.
Gold is like a doctor’s diagnosis: It knows when trouble’s brewing.
Gold is like a counselor: It can heal your broken portfolio.
Gold is like the truth: The greater its denial, the greater the need.
Whatever your simile for gold, I suggest owning enough so that it makes a difference to your portfolio as global currencies get inflated into oblivion.
[While gold is good for asset protection, it’s the stocks that will bring biggest profits. Check out the latest issue of BIG GOLD, where our research turned up the gold producer that will outperform all other majors this year. Read how Jeff Clark made 90.4% annual gains for his Mom’s IRA – and his subscribers – and how you can profit today.]
By Vedran Vuk
Here’s an interesting video on Yahoo!Finance of James Altucher from Formula Capital discussing home ownership as an investment. I don’t agree with a lot of his points, but a few are really great insights. Previously, I’ve compared buying a house to investing in the stock market, but Altucher takes it one step further. He notes that buying a house is essentially the opposite of diversifying your portfolio. In very few cases would anyone want to place so much weight on one sector. Second, if an investor wants to play the real estate market, there’s no need to actually purchase properties; the stock market exists for a reason.
Another intriguing point was the use of leverage. One of his interviewers asks what about the people who bought a house for $20,000 in 1970 and made a fortune today. Altucher comes back by saying, well, what if an investor utilized the same amount of leverage to purchase the S&P 500 in 1970. They would have also done really well, if not better.
And third, he points out the risk of owning a home on job mobility. Not only are homes illiquid, but the worse times get, the more illiquid a house becomes. You essentially trap yourself at the worst possible moment. I know a lot of readers underwater on their mortgages are feeling this pain.
However, one of the interviewers makes an interesting point that housing is the only way to get some folks to buy and hold, an interesting thought also.
Well, that’s it for today. Thanks for reading and subscribing to Casey’s Daily Dispatch.
Casey's Daily Dispatch Editor