Get Out While You Still Can

Nobody likes the guy who calls for sobriety in the middle of a wild party, but we need some people with their finger on the monetary trigger to see what's going on here.

Last week, I took some huge losses, which comes with the territory. I have been trading futures for years, and sometimes you win - sometimes you lose. This time I lost because I made the errant assumption that the people that make America's monetary policy couldn't possibly be this stupid. In fact, they took stupid to a whole new level.

First, the sheer comedy of the situation. The FOMC watched the Asian markets crash last week and saw American creditors shaking in their boots. They (FOMC) meet in secret overnight and announced, just prior to the market open, that they have slashed the overnight bank rate by 75 basis points. They haven't slashed the rate that much in two decades. This causes banks to keep their mortgage rates artificial low compared to the actual risk they have been exposed to. Anyone that may have had their ARM adjusted upward gets a temporary reprieve. This is tragically comical on a few levels. It wasn't funny for me so much - I had bet that the rate cuts would be either too little or too late to stave off the immediacy of the situation. The fix here would be worse than the problem, so I figured the market was due for a bit of bitter medicine. I was wrong. The funny (or ironic) part of this, is that the people that were supposed to ease the situation and become heroes had just virtually guaranteed that they will be squarely to blame when the eventual shakeout comes. This time, there will not be any guesswork to determine the culprit. Even the amateur economists and hacks perpetuating the market's artificial inflation will be able to see it.

At some point in the very near future, a new wave of American "homebuyers" that can not afford to refinance their homes and pull out liquidity will run out of money again, and we'll be in the same spot - only worse. Banks may not raise their mortgage rates, but they are definitely wary enough to stop giving out money to people who can not pay it back. The banks are in business to make money. Since consumer spending accounts for two-thirds of the economic spending in the US, and salaries have been flat for several years, most of the spending is from liquidity extracted from refinancing based around rising house prices. The banks are shooting themselves in the foot if they don't raise rates now to adjust for the risk they carry, and the fed is setting a screen on the banks so they can't calculate the risk -- because the economists at the banks are Keynesians that can reason out a way for the fed to inflate us out of the problem. When the banks get into trouble because the market has not shaken out the bad debt, mortgage rates are going to skyrocket. Two months after that, home sales will be virtually non-existent. Anyone who could buy a home will be trapped into one they already have, and everyone on the outside will not be able to afford the interest penalties factored into the cost of a mortgage.

You're going to see a lot of "for sale by owner" signs in your neighborhood. It just might take some more time. This monetary policy punishes anyone who has been responsible. Anyone who saves money has their dollar devalued, and anyone who bought a house they can afford gets to stand by while the government subsidizes that big house your neighbor can not afford. For the majority of Americans who overextended themselves, they will come to find that a big house is not a natural right and the market will do what it does over the long term: it will knock on your door to collect and balance the books. It always happens.

When it does, you'd be wise to be on the outside looking in. It's not a bad idea to make sure you are not exposed to the whims of bankers and politicians. The common man that is in their debt is not, in any way, a free man.