Three Storms Brewing

There is a risk in writing articles on a continuing basis that point out invalid and inconsistent information being supplied by the administration.

One quickly is tagged as a malcontent or of being partisan to a point of not seeing anything positive.

I understand it and take the risk.

I admit that I never wanted Mr. Obama as my President. For that matter, I didn't want Senator McCain either but, I would have accepted him and could get behind some of the policies he said he favored.

That now being said, we have to look out on the horizon and see the next storms that are headed our way and if nothing else, get prepared so that if and when they hit, we have something left.

Here are the three storms I see brewing on the horizon.

1. Another hit to the credit markets and the financial system.

The housing market collapse is viewed as the primary cause of the subprime meltdown, but, the truth of this collapse had at it's core an overleveraged lending environment wildly driving up prices paid and valuations of all things related to housing.

Around that particular grain of the economy we had the Wall Street crowd layering all types of instruments that noone seems to be able to explain and which to date no one has found a cure for the systemic toxicity they represented.

One thing we do know is it has taken close to $1 trillion dollars in the US alone to hold that leg of the stool up and generations yet to be born will have to find a way to pay that debt off.

But, there are the other legs of that same stool that are in a similar position and pose equal or greater risk to the financial markets if, for no other reason that it has cost so much to prop up the housing leg of the stool.

Those legs are commercial real estate and consumer credit. Together they equal or exceed the size of the housing leg of the stool.

Commercial real estate went through the same leveraging and dramatic if not dizzying upward pricing spiral as did the housing market and the same types of loans and instruments were happily and gleefully structured into this market.

Many property owners are going to start facing the same uncomfortable calls and letters from lenders that homeowners have been receiving and will find, much to their pain, that the same problems homeowners faced when trying to deal with the covenants of their loan documents and the corresponding spike in interest rates and the resulting payments they would be facing and the inability of refinancing their loans because values had plunged and banks were not making the same types of loans they once were, the only option was to give the keys back to the lender.

That same scenario is about to start being played out across the country. In a small way, it has been going on since the bubble burst it is only because of the attention to the housing market that not too much has been made of it up to now.

But, the clouds are now easily visable on the horizon and they are dark and looming large!

Beginning in September of this year well over $2 trillion dollars of commercial property loans are going to be at the point where they have to be repaid or refinanced and the properties do not have the values to enable them to be refinanced for what is owed on them.

Additionally, due to the economic collapse, many properties have lost significant numbers of tenants and so even if the values were still there, the revenue streams to support the debt are not.

This is going to put substantial new pressures on banks and lenders at a time when they have not yet recovered from the storm of the housing market/subprime collapse.

This same scenario in a different fashion has also been playing alongside of the housing and commercial real estate market debacle in the consumer credit markets.

With the rising values of their houses and the banks creating what in effect was ATM access to the "equity" the homeowners had, 60% of American homeowners plundered that "equity" and went on a spending spree unseen in modern times. Everything from a second (or in some cases a third) vacation homes, upsized cars and boats, vacations to anywhere, and on it went.

Prior to the collapse, the continuing rise in housing values made it easy to manage. Rather than paydown the debt and recover some of the home "equity", the lenders came up with the enticing program of "we will leverage you even further and let you have even more access to the "equity" in your home because, in the last two months your home value has gone up by 10% or more so, sign here and check the box that says you want the debt from now rolled over to them to add on top of the new funds they will provide against the increased "equity" of the home. This went on and on to a point where the debt load was virtually at 100% of the stated value of the homes and now they are facing the calls and letters from the credit card issuers who provided the ATM cards and many calls are not answered because the owner of the house where that "equity" resided has been foreclosed or lost his/her to dispose of and try to recover what is owed.

No one has yet given an honest assessment of what that number is or exactly how far into this legs' collapse we are but we do know that American consumer debt soared to an historic level in the last decade and that pile of debt is well over $ 7 trillion dollars. The percentage of default on this particular leg of the stool is likely to increase due to the income loss of the people currently unemployed and those yet to be unemployed or underemployed as this crisis continues.

2. Interest rate increases and a spike in inflation.

No matter how things are cut and to what level you believe that the economy is recovering and we have "seen the bottom", one fact remains and forms the second storm.

With the current fiscal deficiet and what is seen to be the level the US will have reached in the next 4 years (in excess of $10 trillion dollars!) pressure on interest rates is going to become more and more a factor in the economy of the country.

We have already seen a dramatic spike up in the spread between the short end of the yield curve and the long end. To the uninitiated this may not mean much, quite honestly, many who should know the significance of this do not but, just so you are aware, this is an indication of pending future inflation and a vote of no confidence in the US long term debt.

In effect, purchasers of US debt are shifting to the two year or less segment of the market and that has produced a spike in the back end of the yield curve (10 years and out) against which the majority of loans are based.

This fact alone is a huge risk and at the end of the day will cost the US economy dearly and could choke off any meaningful recovery and worse.

The burden of debt service the US has now and will have into the next generation(s) is rapidly reaching a point where it will require over 25% of the total gross domestic product of the US!

This is what has some experts sounding alarm bells about the triple A rating of US debt and is driving the more open discussion by other countries about an alternative currency for international trade.

China has already begun to reduce it's purchases and holdings of dollar instruments and has openly chastised the administration for its' fiscal condition. The country has been increasing the level of purchasing gold which is a subtle shift away from the dollar and a hedge on the inflationary pressures likely to be felt on the remaining holdings.

There are still enough of us left that remember the last spike in interest rates where prime reached over 19%, something that would be more catastrophic today than it was then, and it was pretty bad then. This time around the risk is greater because of the current condition of the economy and the potential for this issue being part of a convergence of other events that together could plunge the economy into a death spiral.

The level of new taxation (hard and soft taxes) that this administration is planning and will have to impose will be of a level that will hinder economic development, job creation within the business community and will reduce the standard of living for virtually every American.

With this burden on the economy one could predict with a high degree of certainty that whatever benefits the "stimulus package" had will not materialize anywhere in the real economy of the US but only in the media devised reports of the values being acheived.

The "green shoots" we keep hearing about, even if real, will not reach maturity with the pressures of rising interest rates and inflation combined with the kinds of taxes that will be layered onto virtually every aspect of American life and economic activity.

Example: Mr. Obama claims that so far the stimulus has saved or created 150,000 jobs and the media sing the praises loud and continually. But, if we just look at last month's statistics, we "only lost" 353,000 jobs in May! In my math, that works out to a net loss of 203,000 jobs to be added to the already almost 10 million already lost.

That produced a 34% drop in IRS tax receipts so far this year and we are not finished yet. Many of the States are in worse condition and are cutting back services of every form and increasing costs on everything from traffic tickets to birth certificates.

Where I live these costs have more than doubled just this year and some critical services (emeregency response and fire fighting to name two) have been pared back more than 30% and there is still a budget deficiet of several tens of millions of dollars yet to be found.

We still have the GM and Chrysler job losses to come, plant closings that will pressure more communities and municipal budgets, California's pending bailout or bankruptcy and what will most certainly be negative impacts from the great pretender's healthcare reforms.

All of this give current calculations of US debt rising to well over $12 trillion dollars by the end of Mr. Obama's current term. And that is if they stop now, which I hope you know will not happen.

Look at his latest escapades and narcistic use of his power.

Date night in New York at a cost of yet undisclosed amounts.

A trumped up visit to France following Cairo's apology stint and the entire Obama clan being whisked off from D.C. to Paris for the weekend.

All at a time when some families who voted him into office are scrapping together coins to try and pay for the next meal.

Please don't get me wrong. A president does enjoy a certain status with which comes privelege but, a true leader would not be doing things like this at a time like this. If for no other reason than to spare himself and his Party the potential attacks that should rightly be brought by the opposition.

But, he is above that thought process, feels unassailable and is arrogant enough to basically thumb his nose at any critic or opposition because "he the man".

The GM executives and the bankers were all roasted big time in every paper and on virtually every news program for their "arrogance" for going to Washington to ask for billions in bailouts while flying in on private jets, as well they should have been.

But, now we see a pretender as President doing even worse. He is compromising future generations with TRILLIONS of dollars of debt burden and feels that he can spend taxpayer money for date nights and weekends in Paris.

Folks, we have a presidency that is even worse than the Wall Street crowds' arrogance and extravagance and no one is saying much about it.

You better start!!

3. Geopolitical risk.

While it may seem proper and a means to security to continue apologizing and denegrating American actions to Mr. Obama and his media crowd, it is not at all positive to the security of the country and in truth the rest of the world.

What is happening with every "apology tour" Mr. Obama plans is a furthering of evidence to those we should be concerned about that American might is all but snuffed and the restraints that many nations and groups have had to practice out of concern of American determination to defend itself and to act in a preemptive manner should enough of a threat be perceived or evindenced are not as necessary at this time.

North Korea has certainly determined that there is not much to fear from the administration and I am certain that all of you know that Iran watches every test with glee and a view of the future they can anticipate as regards their march to obtaining a nuclear capability.

I believe that Hugo Chavez also watches with a certain gleem in his eye and some money in his pocket. Especially now that he has a new friend in Mr. Obama.

After the Cairo speech the parents of the generations being born in Europe and the US today should start planning on getting courses in Arabic and looking for the proper translations of the Qur'an they will have at home because the only view the Muslim world can have, especially the radical portions of that "peaceful society" Mr. Obama declares we have a duty to protect and defend along with ourselves is that America is ripe for picking and now is the time for the harvest.

Now that we won't use measures at our disposal that helped to keep additional attacks from being launched successfully, that terrorists are no longer labeled as terrorists and given access to the rights of domestic criminals, and most astounding, can be released into the very country or countries their leadership wants to attack, whatever prayers of thanks they offer most certainly will include the name of Mr. Barrack Hussein Obama--not hard for them to do, he is their brother!

So, in the midst of the greatest financial and economic crisis of modern times, with the US economy hobbled and looking like it will be kept so for decades, an attack here or elsewhere of enough significance could produce the culminating event of the end of American economic and democratic influence around the world.

If you or I were living in countries where people are still held in tyranny and looked at what is taking place in the US today, we would think twice about following that example and model of what democracy delivers.

We cannot suffer for much longer with the situation we have unfolding each and every day. We can see that just in these last 139 days we have reached a fiscal slide that will take decades to manage if things just stopped where they are now let alone where we are headed in the next 139 days (a nationalization of health care, many tens or hundreds of billions more dollars to be spent on bailouts and "stimulus" to name just a few) and where we as a Nation will be at the end of the 4 years this inept, unprepared, socialistic and spineless administration has been granted.

We are still living in the midst of the first storm that has hit and not doing too well, these are formed and on the horizon and headed our way.

Get ready, it is not going to be very calm for sometime.

And for those of you who look at the market to determine if the economy is improving, forget it. The market at the moment is being played and traded by all the money managers who have to do something with all the funds that they have on deposit and against which they earn fees and bonuses to get some type of return above the Treasury bills they put everything into starting last year and it is now June with September and December getting closer every day. Nothing more than this and what you are seeing is a rally in a bear market that is temporary until these guys can get a level of return they can use to justify their charges to their clients.

They will get out or run as these storms get closer.

Someone had to say it. I just did!