Signs Hyperinflation Is Arriving, by Gonzalo Lira


This post is gonna be short and sweet—and scary:

Back in late August, I argued that hyperinflation would be triggered by a run on Treasury bonds. I described how such a run might happen, and argued that if Treasuries were no longer considered safe, then commodities would become the store of value.

 

Such a run on commodities, I further argued, would inevitably lead to price increases and a rise in the Consumer Price Index, which would initially be interpreted by the Federal Reserve, the Federal government, as well as the commentariat, as a good thing: A sign that “the economy is recovering”, a sign that “normalcy” was returning.
I argued that—far from being “a sign of recovery”—rising CPI would be the sign that things were about to get ugly.
I concluded that, like the stagflation of ‘79, inflation would rise to the double digits relatively quickly. However, unlike in 1980, when Paul Volcker raised interest rates severely in order to halt inflation, in today’s weakened macro-economic environment, that remedy is simply not available to Ben Bernanke.

Therefore, I predicted that inflation would spiral out of control, and turn into hyperinflation of the U.S. dollar.

A lot of people claimed I was on drugs when I wrote this.

Now? Not so much.

In my initial argument, I was sure that there would come a moment when Treasury bond holders would realize that they are the New & Improved Toxic Asset—as everyone knows, there is no way the U.S. Federal government can pay the outstanding debt it has: It’s simply too big.

So I assumed that, when the market collectively realized this, there would be a panic in Treasuries. This panic, of course, would lead to the spike in commodities.

However, I am no longer certain if there will ever be such a panic in Treasuries. Backstop Benny has been so adroit at propping up Treasuries and keeping their yields low, the Stealth Monetization has been so effective, the TBTF banks’ arbitrage trade between the Fed’s liquidity windows and Treasury bond yields has been so lucrative, and the bond market itself is so aware that Bernanke will do anything to protect and backstop Treasuries, that I no longer think that there will necessarily be such a panic.
But that doesn’t mean that the second part of my thesis—commodities rising, which will trigger inflation, which will devolve into hyperinflation—will not occur.
In fact, it is occurring.

The two key commodities that have been rising as of late are oil and grains, specifically wheat, corn and livestock feed. The BLS report on Producer Price Index of commodities is here.

Grains as a class have risen over 33% year-over-year. Refined oil products have risen just shy of 13%, with home heating oil rising 18% year-over-year. In other words: Food, gasoline and heating oil have risen by double digits since 2009. And the 2010-‘11 winter in the northern hemisphere is approaching.

A friend of mine, SB, a commodities trader, pointed out to me that big producers are hedged against rising commodities prices. As he put it to me in a private e-mail, “We sometimes forget that the commodity markets aren’tsolely speculative. Most futures contracts are bought by companies whouse those commodities in their products, and are thus hedging their costs to produce those products.”

Very true: But SB also pointed out that, hedged or not, the lag time between agricultural commodities and the markets is about six-to-nine months, on average. So he thought that the rise in grains, which really took off in June–July, would hit the supermarket shelves in January–March.

He also pointed out that, with higher commodity costs and lower consumption, companies are going to be between the Devil and the deep blue sea. My own take is, if you can’t get more customers, then you’re just gonna have to charge more from the ones you got.

Coupled to these price increases is the ongoing Currency War: The U.S.—contrary to Secretary Timothy Geithner’s statements—is trying to debase the dollar, so as to make U.S. exports more attractive to foreign consumers. This has created strains with China, Europe and the emerging markets.

A beggar-thy-neighbor monetary policy works for small countries getting out of a hole of their own making: It doesn’t work for the world’s largest single economy with the world’s reserve currency, in the middle of a Global Depression.

On the contrary, it creates a backlash; the ongoing tiff over rare-earth minerals with China is just the beginning. This could easily be exacerbated by clumsy politicking, and turn into a full-on trade war.

What’s so bad with a trade war, you ask? Why nothing, not a thing—if you want to pay through the nose for imported goods. If you enjoy paying 10, 20, 30% more for imported goods—then hey, let’s just stick it to them China-men! They’re still Commies, after all!

Furthermore, as regards the Federal Reserve policy, the upcoming Quantitative Easing 2, and the actions of its chairman, Ben Bernanke: There is an increasing sense in the financial markets that Backstop Benny and his Lollipop Gang don’t have the foggiest clue about what they’re doing.

Consider:

Bruce Krasting just yesterday wrote a very on-the-money précis of the trial balloons the Fed is floating, as regards to QE2: Basically, Bernanke through his WSJ mouthpiece said that the Fed was going to go for a cautious, incrementalist approach, vis-à-vis QE2: “A couple of hundred billion at a time”. You know: “Just the tip—just to see how it feels.”

But then on the other hand, also just yesterday, Tyler Durden at Zero Hedge had a justifiable freak-out over the NY Fed asking Primary Dealers for their thoughts on the size of QE2. According to Bloomberg, the NY Fed was asking the dealers how big they thought QE2 would be, and how big they thought itought be: $250 billion? $500 billion? A trillion? A trillion every six months? (Or as Tyler pointed out, $2 trillion for 2011.)

That’s like asking a bunch of junkies how much smack they want for the upcoming year—half a kilo? A full kilo? Two kilos?

What the hell you think the junkies are gonna say?

Between BK’s clear reading of the tea leaves coming from the Wall Street Journal, and TD’s also very clear reading of the tea leaves by way of Bloomberg, you’re getting a seriously contradictory message: The Fed is going to lightly tap-tap-tap liquidity into the markets—just a little—just a few hundred billion dollars at a time—

—while at the same time, the Fed is saying to the Primary Dealers, “We’re gonna make you guys happy-happy-happy with a righteously sized QE2!”

The contradictory messages don’t pacify the financial markets—on the contrary, they make the markets simultaneously contemptuous of Bernanke and the Fed, while very frightened as to what they will ultimately do.

What happens when the financial markets don’t really know what the central bank is going to do, and suspect that the central bankers themselves aren’t too clear either?

Guess.

So to sum up, we have:

• Rising commodity prices, the effects of which (because of hedging) will be felt most severely in the period January–March of 2011.

• A beggar-thy-neighbor race-to-the-bottom Currency War, that might well devolve into a Trade War, which would force up prices on imported goods.

• A Federal Reserve that does not seem to know what it is doing, as regards another round of Quantitative Easing, which is making the financial markets very nervous—nervous about the Fed’s ultimate responsibility, which is safeguarding the U.S. dollar.

• A U.S. economy that is weak to the point of collapse, where not even 0.25% interest rates are sparking investment and growth—and which therefore prohibits the Fed from raising interest rates, if need be.

• A U.S. fiscal deficit which is close to 10% of GDP annually, and which is therefore unsustainable—especially considering that the total U.S. fiscal debt is well over 100% of GDP.

These factors all point to one and the same thing:

An imminent currency collapse.

Therefore, I am confident in predicting the following sequence of events:

• By March of 2011, once higher commodity prices reach the marketplace, monthly CPI will be at an annualized rate of not less than 5%.

• By July of 2011, annualized CPI will be no less than 8% annualized.

• By October of 2011, annualized CPI will have crossed 10%.

• By March of 2012, annualized CPI will cross the hyperinflationary tipping point of 15%.

After that, CPI will rapidly increase, much like it did in 1980.

What the mainstream commentariat will make of all this will be really something: When CPI reaches 5% by the winter of 2011, pundits and economists and the Fed and the Obama administration will all say the same thing: “Happy days are here again! People are spending! The economy is back on track!”

However, by the late spring, early summer of 2011, people will realize what’s going on—and the Federal Reserve will initially be unwilling to drastically raise interest rates so as to quell inflation.

Actually, the Fed won’t be able to raise rates, at least not like Volcker did back in 1980: The U.S. economy will be too weak, and the Federal government’s balance sheet will be too distressed, with it’s $1.5 trillion deficit. So at first, the Fed will have to let the rising inflation rate slide, and keep trying hard to explain it away as “a sign of a recovering economy”.

Once the Fed realizes that the rising CPI is not a sign of a reignited economy, but rather a sign of the collapsing dollar, they will pursue a puerile “inflation fighting” scheme of incremental interest rate hikes—much like G. William Miller, the Chairman of the Fed from January of ‘78 to August of ‘79, pursued so unsuccessfully.

2012 will be the bad year: I predict that hyperinflation’s tipping point will be no later than the first quarter of 2012. From there, it will accelerate. By the end of 2012, I would not be surprised if the CPI for the year averaged 30%.

By that point, the rest of the economy—unemployment, GDP, all the rest of it—will be in the toilet. By that point, the rest of the economy will no longer matter: The collapsing dollar will make 2012 the really really bad year of our Global Depression—which is actually kind of funny.

It’s funny because, as you know, I am a conservative Catholic: I of course put absolutely no stock in the ridiculous notion that “The Mayans predicted our civilization’s collapse in 2012!”—that’s all rubbish, as far as I’m concerned.

It’s just one of those cosmic jokes that 2012 will turn out to be the year the dollar collapses, and the larger world economies go down the tubes.

As cosmic jokes go, all I’ve got to say is this:

Good one, God.

Gonzalo Lira’s  Blog
http://gonzalolira.blogspot.com

 

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The Obama Foreclosure Relief Package What it Contains and How to Determine If You Qualify, Expertforeclosurehelper.com


Official presidential portrait of Barack Obama...

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On Wednesday, February 18, President Obama unveiled his administration’s latest attempt to stabilize prices in the housing market and help stop the rising tide of foreclosures. Will this plan be any better than the half-dozen that the Bush administration passed? With a $275 billion price tag, we should expect the foreclosure problem to be resolved, but this latest bailout act seems to be just another way to avoid helping homeowners.
As with the FHA Hope for Homeowners Act, Obama’s newest plan is simply out of the financial reach of many homeowners. The requirements are quite strict, which should have been no surprise when the president announced a longer list of people who would not be helped by the plan than who would receive assistance. But taking hundreds of billions of dollars away from homeowners, employers, and everyone else to avoid helping people will not promote economic recovery.
As the government spreads pain and misery around the economy, redistributing poverty from the banks to the rest of us, homeowners may not want to put too much hope in this latest plan. But for those interested in having another government-sponsored program to stop foreclosure, the following is a list some of the requirements to qualify for the plan.
To qualify for a foreclosure refinance loan from the government at a fixed rate of around 4-5% for 15-30 years fixed, all of the following requirements must be met:
  • The loan must be a conforming loan under Fannie Mae and Freddie mac guidelines.
  • The mortgage must be owned by either of the Government Sponsored Enterprises, Fannie Mae or Freddie Mac.
  • Alternatively, the loan may have been sold by Fannie Mae or Freddie Mac in a mortgage security.
  • The homeowners are not currently behind on payments or have a history of on-time payments.
  • The homeowners must continue to pay any second mortgage on the property even after the refinance.
  • The first mortgage on the house must not be more than 5% of the fair market value of the property, or it must be written down to that amount. For example, if the house is worth $100,000, the first mortgage may not be more than $105,000.
Looking at this list of requirements, it will become apparent that many, many homeowners will not qualify for this program with current housing market declines. Borrowers with 80/20 loans whose home values have fallen under the amount due on the first mortgage will have to keep paying on the second mortgage, as well as either pay down the first or have the bank agree to reduce the balance due.
And this program is voluntary for banks who have not received federal bailout money from the Troubled Assets Relief Program (TARP). While most of the big banks have received funds, many smaller regional banks have not — and these banks may not be willing to write down the value of their loans by 10-20%. Writing down the value of bad mortgage securities is what has caused so many paper losses on bank balance sheets already; it is inconceivable that many struggling banks will want to admit to even more.
There is also a second part of the bailout plan that may allow homeowners to qualify for a government-guaranteed mortgage modification program. This involves the bank modifying the loan to be within 38% of the borrowers’ gross income and the government stepping in with money to help reduce the payment to 31%. The requirements for this part of the plan are the following:
  • The mortgage must be conforming under Fannie and Freddie guidelines — jumbo loans are not permitted.
  • This program must be done on a principal residence — investment homes, second homes, or vacation properties do not qualify.
  • The homeowners must be in danger of default on the loan or have already defaulted. In danger of default can be a mortgage where the payment is more than 31% of the borrowers’ gross (before tax) income.
  • The lender must be willing to modify the mortgage to reduce the homeowners’ monthly payment to 38% of their gross income or less.
While the new bailout program gives banks more incentives to negotiate with borrowers, it may not give enough to convince banks to change their normal business practices and dedicate more resources to helping homeowners. As mentioned above, participation is voluntary, except for banks that have received TARP money and Fannie Mae and Freddie Mac, which are under government conservatorship.
Does the plan go too far? Some critics point out that using taxpayer money to bail out failing banks or failing individual borrowers will only create more moral hazard in the future. Once debts are paid back or discharged and banks loosen up lending, there will be a strong incentive to reinflate a housing bubble, especially in the presence of low interest rate targets set by the government. A new bubble and collapse will send all of the same players back for more government bailouts.
Or does the plan not go far enough? Other critics point out that this is not nearly enough money that the government is taking away from taxpayers to bail out the housing market. Property values fall for everyone in areas hard hit by foreclosure, so it is in everyone’s best interest to do whatever it takes to prevent more foreclosures, or so the argument goes.
In either case, the full details of the plan will be released on March 4th, which gives all of us a week to contemplate how the government’s latest bailout plan will save the housing market. Unfortunately, previous plans have failed to assist many borrowers, and this plan seems to offer little in the way of really novel proposals. For most homeowners facing foreclosure, it will probably be best to keep looking at other options, in addition to considering receiving mortgage assistance from the federal government.
The ForeclosureFish website has been created to provide homeowners in danger of losing their properties with relevant and importantforeclosure help and advice. The site describes various methods that may be used to save a home, such as foreclosure loans, mortgage modification, filing bankruptcy (Chapter 7 or 13), and more. Visit the site to read more about how to save a home, what options may be applicable in your situation, and how to recover afterwards:http://www.foreclosurefish.com/

Fha Loan Limits Get More Flexible, Thetruthaboutmortgage.com


Logo of the Federal Housing Administration.

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A FHA loan requirement that the sum of all liens not exceed the maximum geographical loan limit has been eliminated, according to a Mortgagee Letter from HUD.

Previously, the sum of all liens (first and second mortgages) could not exceed the geographical maximum mortgage limit for both purchase and refinance transactions.

In other words, even if the first mortgage was below the maximum loan limit, an associated second mortgage could push it beyond the limit and disqualify the loan from FHA financing.

For example, in Los Angeles county the maximum loan amount for a FHA loan is $729,750, meaning a loan of that size wouldn’t qualify for FHA financing if it had a second mortgage behind it.

Going forward, only the FHA-insured first lien is subject to this maximum loan limit.

However, FHA still requires that the combined loan amount of the FHA-insured first mortgage and any subordinate lien(s) not exceed the applicable FHA loan-to-value (LTV) ratio, which is generally 96.5 percent.

The FHA has made a number of changes recently to improve its balance sheet, including the introduction of a minimum credit score requirement and higher mortgage insurance premiums.

FHA loans accounted for a staggering 37 percent of all first mortgages in 2009, up from 26 percent in 2008 and just seven percent in 2007.