It’s that time of year, which means Jill and Dan crack open a bottle of wine, look back on our outlandish predictions for 2009, and have a good laugh. We’re not too proud to tell you when we’re wrong. But were we right on the crucial stuff? You decide. Let’s recap…

1. By the end of [...]]]>

It’s that time of year, which means Jill and Dan crack open a bottle of wine, look back on our outlandish predictions for 2009, and have a good laugh. We’re not too proud to tell you when we’re wrong. But were we right on the crucial stuff? You decide. Let’s recap…

1. By the end of 2009, inflation will be a big problem.
WRONG. Inflation is rearing it’s head but it’s not a “big problem” yet.

2. The U.S. government will behave like deficits don’t matter and spend like an Atlanta Housewife who just caught her husband cheating.
RIGHT. 100% right, so correct it offends EVEN US.

3. Gold, silver, and agriculture commodities will be the best performing asset classes, not guaranteed stellar returns, but will perform better than others. Got corn?
RIGHT. Gold and silver rocked our world. Gold is up 30%, silver is up 40% year over year. Corn is flat for the year. Watch out, agriculture is next.

4. Commercial real estate will implode and create a derivatives storm that makes sub-prime debacle look like a gentle sprinkle.
RIGHT. Comm real estate is imploding, but the government’s stop-gaps have held back the flood that will be seen in the next quarter or two.

5. The greatest bubble of all time, US treasury bonds, will begin to deflate, wreaking havoc globally. Grannies, sell your bonds and buy gold.
RIGHT. Jill’s message to Grannies was ridiculously right. Bonds were at 140, now they are at 115, falling 20%, (btw they have a long way to go). Grannies that sold their bonds and bought gold they would be up 30% and avoided losing 20%. Gold-loving Grannies would be up 60% over their other, less savvy Granny friends clutching their bonds for dear life.

6. Real unemployment (not government reported) will hit levels not seen since the Great Depression. Repeat the daily mantra “I love my job, I am grateful for my job…”
RIGHT. Night quite great depression levels yet, but on real terms unemployment is at 22% and will be 35% before the bottom is in. Check out shadowstats.com for more.

7. The U.S. dollar will hold its strength through the first quarter, but by year’s end will crumble and lose its status as the world’s reserve currency.
RIGHT ON!!! Is Dan a SAGE? Even a dead cat thrown from a plane at 10,000 feet will bounce a couple feet. Expect the next leg down to be brutal. The Grannie with gold will (again) be is pristine shape.

8. The love affair with President Obama will be over by summer as the reality sets in that the government cannot solve our financial problems. Not his fault. At least he still looks good in a bathing suit.
RIGHT. The most unpopular president one year after being elected. But he still looks good in a bathing suit, and his wife dresses well.

9. End the age of “American Consumerism”. Begin the age of “American Frugality and Savings”.
WRONG. The American frog continues to simmer slowly, although frugality is now chic.

10. The emerging markets will begin to re-emerge as they end their addiction to the U.S. Consumer.
RIGHT. Brazil, Russia, China…you name it -  they are on fire and have outperformed the U.S. China is becoming less U.S.-centric, as long as they can kick the dollar we still love them.

11. Two large U.S. Cities will declare bankruptcy.
WRONG. No one has officially declared it, but many U.S. cities are out of money. Watch for the bailouts in 2010.

12. The federal government will be forced to bailout California.
WASH. California, as well as other states are being bailed out by the federal government in unemployment, but the dominoes are beginning to fall. California is not going down without a fight, they are paying their bills in I.O.U’s.

13. People will start growing their own food and replacing their lawns with veggie gardens.
RIGHT. Not only are they growing their own food, but the chicken coop industry is on fire. Cock-a-dooldle-do y’all.

14. Entertainment, and the business of being a celebrity will be going strong.
RIGHT. Hello, Avatar, New Moon, and Jersey Shore.

15. Therapists will be replaced by neighbors and friends.
WRONG, we’re not there yet. Insurance is still paying.

16. Couples will increasingly avoid divorce to save money.
RIGHT, actually we are wrong. They are avoiding divorce because they can’t afford it with homes under water and negative assets.

17. A re-emergence of cheap but brainy entertainment, like playing chess and playing instruments with real people.
WRONG. We’re not there yet. But we can dream, can’t we?

18. People will view visiting the doctor as an unnecessary expense and take steps to control their own health.
WRONG. For the same reasons as #15. We don’t know, actually. We live near Seattle and everyone’s head is still up Microsoft’s ass. Doctors are still thriving here. But we wonder what 2010 will look like.

19. Plastic Surgeons will be offering services discounted 80%, which will attract patients from overseas.
WASH. Prices on Botox, Juvederm and other injectables have indeed gone down to attract more patients. However, the big ticket surgeries are still expensive due to hospital fees, etc. When the dollar really tanks, more than the 12-17% decline we saw this year, we’ll see this happen.

20. Most services (like manicures, haircuts, lessons, and education) will get cheaper, in relation to everything else.
WASH. Some of these services are getting cheaper, but inflation this year has caused some to raise their prices.

As the Obama administration sets out to reform the over-the-counter (OTC) derivatives market, Wall Street is scrambling to protect its own profits and put a preemptive kibosh on any regulation that could reduce the lucrative transaction fees or expose criminal wrong-doing.

But no matter how many regulators gain oversight in the [...]]]> by Jill Keto and Daniel Keto

As the Obama administration sets out to reform the over-the-counter (OTC) derivatives market, Wall Street is scrambling to protect its own profits and put a preemptive kibosh on any regulation that could reduce the lucrative transaction fees or expose criminal wrong-doing.

But no matter how many regulators gain oversight in the derivative markets, how successful the government is at putting in place rules to cage the beast, derivatives are a problem of breathtaking scale that cannot be cleaned up with a quick government fix.

It is currently estimated that there are $684 trillion in outstanding derivatives and another $800 trillion in “shadow” or off-balance-sheet derivatives (which are impossible to calculate because they are not reported), totaling well over $1.4 quadrillion.

This is roughly 27 times the global GDP at $55T, and 7 times aggregate global asset values (of stocks, real estate and private business) at $200T. Obviously, this total amount is not at risk, but the derivatives are based ultimately on underlying asset values or assumptions that if off by even 5%, could create a loss that well exceeds global GDP, and if off by 18% would wipe out global asset values.

Creating oversight now is like mandating that a sprinkler system be installed while the house is burning down, then asking the arsonist if he will choose, and then install the sprinklers. I question what good, if any, will come of the new derivatives regulations at the eleventh hour after the damage has been done, and enlisting the help of the same entities that caused the problem in the first place.

The spectacular scale of the unwinding of the derivatives market, the likes of which we have only seen the beginning, will dwarf the sub prime debacle. The sub-prime mortgage problem was a mere $850 billion. The much larger issue is ahead of us: The $3T commercial real estate CDO problem, followed by the Option ARM and Prime CDO bombs, estimated at $8T. Like a pyramid flipped upside down, balancing on its tip, sits the value of real assets. If the value of those real assets decline even slightly, the remaining portion of the pyramid (leverage) crashes down. This unravelling will take years from which to recover. It is pure fantasy that government oversight at this time will change this.

Surely if AIG was too big to fail, the other financial entities dealing in derivatives will also need rescuing. This will require an unending source of government funds in mammoth proportions as the Federal Reserve continues to buy defaulted derivatives. Since the central banks, including the U.S. Federal Reserve, are not accountable to any government, they are able to swap currency and quality assets for the toxic waste sitting on the books of the public banks.  The toxic waste then disappears onto the Fed’s balance sheet, booked at the price for which they were purchased. However, the purchase price is entirely arbitrary, since there is no market for these derivative products, and determined by the banks themselves. Since there is no visibility as to exactly what the Fed has on its balance sheet, nor whom it purchased those toxic assets from, those bad assets will just sit and fester outside of the inquisitive eyes of the public or any government body.

The toxic asset values are in the trillions.  The BIS now estimates that total derivative banking losses will exceed $4.1 trillion.  This is very conservative, and based on past underestimations, this number will likely surpass $10 trillion over the next year.  The Fed has run out of assets to swap, so their only option is to purchase those assets with currency they print.  If the bad assets were $100 billion, the system could afford this without a major impact on inflation.  However, with the amounts now in the multiple trillions, the impact of “saving” the banks and monetizing all these bad assets will devastate the U.S. economy, and possibly destroy the U.S. dollar.  The Fed is basically forcing the taxpayer, those holding U.S. Treasuries and U.S. dollars, and Joe Public to pay for this.  Once again, the banks will succeed in privatizing profits and socializing losses.

Wondering what to do about your big fat mortgage? Well, who isn’t these days? It’s official. We are now in a recession. There is still no sign of a housing bottom and foreclosures are exploding. Things will likely get [...]]]> Note: This post was originally published in May 2008, and has been re-posted due to spam problems.

Wondering what to do about your big fat mortgage? Well, who isn’t these days? It’s official. We are now in a recession. There is still no sign of a housing bottom and foreclosures are exploding. Things will likely get much worse before they get better

Many homeowners are just throwing in the towel and sending their house keys back to the bank (Jingle Mail). But is this a step you should consider? Let’s examine this option further.

“Foreclosure” sounds frightening, partly because of the unknown. So educate yourself now, and act accordingly, before it is too late. Too many homeowners use up all of their other assets in an attempt to save their home and when they are finally foreclosed upon, are so destitute that they cannot even afford the down payment for a rental. Analyze your financial situation, manage your emotions, and make the prudent decision.

Even the celebrities are being hit hard by the recession and facing forclosures.

As reported on May 1, 2008 in the Wall Street Journal Online. Mr. Canseco, 43, who retired in 2001, told the celebrity TV show “Inside Edition” that it did not make financial sense to keep his 7,300 square-foot home in the Los Angeles suburb of Encino. “Inside Edition” said it had foreclosure documents showing Canseco owed a bank more than $2.5 million on the house, Reuters reports. “I do have a judgment on my home and it to me is very strange because it didn’t make financial sense for me to keep paying a mortgage on a home that was basically owned by someone else,” he said.

This blog article will likely upset the more fiscally responsible types, but I actually agree with Jose Conseco on his actions. The banks this decade were driven by excessive greed and became overly aggressive in their attempts to sell mortgages. Additionally, the mortgage agreements have become so complex that very few attorneys can even understand them. The buyer, who is generally so excited about the purchase, trusts the mortgage broker and just signs where told. Joshua Zumbrun’s article “The Mortgage Industry’s Dirty Secret” in Forbes online puts is well. “The complexity of loan documentation is a major problem. “Trying to describe 100% of the details in legalese and bureaucratese results in essentially zero actual information transfer to the borrower,” says Alex Pollock, former president of the Federal Home Loan Bank of Chicago and fellow at the American Enterprise Institute. It’s a full-employment program for lawyers at closing as well.”

So now the banking industry is looking for a taxpayer bailout to help them out of this huge mess. Yes, many of these homes were bought by frenzied buyers looking to make a quick buck. However, the banks were just as greedily trying to flip securitized mortgages. The laws in every state are very clear and many states are “non recourse”. This means that if you take on a mortgage, the only collateral the bank can pursue is the home and they cannot com after your other assets. Yes, they will threaten and harass you, but in the end, all they can take is your home. If you have a non-recourse loan (see below) and you are sitting in a house that is underwater and can’t pay the mortgage, don’t feel guilty about living rent free for 6 months while you go through foreclosure and save your hard earned money for a rental deposit.
Recourse vs Non-Recourse Loans

The nature of the mortgage and real estate industries is such that there are a multitude of regulations. On the financial side, it is important to understand the difference between a recourse versus non-recourse loan. When a home is foreclosed on by a lender, they eventually sell it and apply the proceeds to the original loan amount. But what if the proceeds don’t cover the original loan amount? In a recourse state, the lender can come after the borrower for the rest of the proceeds. In a non-recourse state, the lender cannot. If you are considering buying a home, make sure you know what type of state you are in.

Here is a general list of non-recourse states:

Alabama
Alaska
Arizona
Arkansas
California (as long as non-judicial foreclosure is used which is the most common)
ColoradoDistrict of Columbia (Washington DC)
Georgia
Hawaii
Idaho
Mississippi
Missouri
Montana (as long as non-judicial foreclosure is used)
New Hampshire
Oregon
Tennessee
Texas (but even in a non-judicial foreclosure, the lender can pursue a deficiency judgment)
VirginiaWashington (as long as non-judicial foreclosure is used which is the most common)
West Virginia

These are states that also allow non-judicial foreclosure, and/or where non-judicial foreclosure is more common and deficiency judgments can be obtained more easily:
Michigan
Minnesota
North Carolina
Rhode Island (lender can seek deficiency judgment)
South Dakota
Utah (lender can seek deficiency judgment)
Wyoming

Now, because you have a mortgage in one of the above states does not necessarily mean that you have the get out of jail free card. Please review your loan documents and I also strongly recommend you consult an attorney who specializes in real estate law. There are a lot of laws to protect the consumer and educating yourself as to your rights will help you greatly in deciding a course of action. If you have refinanced or have a 2nd mortgage, they are usually recourse loans so your options there are more limited, however not insurmountable. Banks are hurting so bad right now that for those that are in distressful situations (ie you have very little assets), you have some good negotiating leverage. From the banks perspective, something is better than nothing.