Government Cutbacks
England announced a cut of 490,000 bureaucratic jobs to control runaway government spending.  The same thing is happening all over Europe as countries impose fiscal discipline to control budget deficits.  Even Cuba has moved to cut back hundreds of thousands of bureaucrats to reduce its deficits. The United States stands alone in the world with a program to spend and tax its way to prosperity.

Foreclosure Mess
The recent foreclosure moratoriums that have hit the banks seemed to come out of nowhere.  In actuality, they have been a number of years in the making.  The problem is twofold.  One of problems was with the mortgage foreclosure process.  The other was with the actual mortgages as they were securitized by the banks and Wall Street.  The mortgage moratorium began with GMAC mortgages as they announced a slowdown in foreclosures to double check the foreclosure process.  It was followed by Bank of America that announced a foreclosure moratorium as well.  Interestingly, these banks were the two that were most susceptible to government pressure to slow down the mortgage foreclosures.  A foreclosure slowdown was something the Administration was hoping to accomplish to stabilize the housing market.  Soon after, other banks began to announce either foreclosure moratoriums or slowdowns.  Then things began to go wrong.  Suddenly, the whole real estate market was in question as people questioned how good their mortgages were and whether it was safe to buy anything.  A foreclosure moratorium was not even put in place during the Depression.  The whole housing real estate market was in danger of freezing up.  Things began to spin out of control.  The banks and the Administration quickly reversed course resuming foreclosures to protect the veracity of the home mortgage system in the United States.

The longer term problem with the foreclosures is that the banks were using people who signed off on the foreclosure documents that had not reviewed the paperwork correctly or were missing documents.  In the past when a mortgage was foreclosed on, a local bank representative went down to the courthouse in person and had a lawyer file the documents using the originals.  Today, many banks are using foreclosure mills and MERS (Mortgage Electronic Registration Systems) to file much of the paperwork electronically, which at times is at odds with past courthouse practices due to the volume of foreclosures.  As these problems come forth, we will see a slowdown in the foreclosure volume and this will further drag out the overhang of more than one million homes that are in danger of foreclosure.  At the present time, most homeowners are not foreclosed on until 16-18 months after they have quit making their mortgage payments.  This foreclosure problem will further delay the housing recovery and make it harder for people to get mortgage loans in the future.

A much longer term problem is that some banks may not have been properly securitizing the home loans they sold to investors.  As an example, the loan portfolio could have been sold as having 15% subprime loans in the portfolio when it actually had 35% subprime loans that quickly soured.  Bank of America has a particular problem with this through its Countrywide Mortgage purchase.  Unlike bank purchases by other banks, they did not get a guarantee of loss limits on their purchases from the Federal Reserve, Treasury or the FDIC.  Therefore, they are on the proverbial hook for any potential losses.  These losses could come from putting back the mortgage securities to Bank of America by the original buyers.  The situation has been made worse now that the New York Federal Reserve Bank and PIMCO are suing to put back mortgage securities at big losses to Bank of America.  We believe that other banks could have losses as well.   We have seen numbers as high as $47 billion for the banks.  Money banks can ill afford to lose; we believe that financial stocks will continue to be under pressure.

Currency: The New Tariff?
In a recent MaxOut Savings Report we wrote about the dangers of a currency war.  These concerns have become more pronounced as the countries around the world have engaged in a round of currency devaluations to boost exports and stabilize their economies.  These currency devaluations have the danger of becoming what tariffs were to the world economy in the 1930s.  In 1930, the US passed the Smoot-Hawley Tariff Act, which raised US tariffs on numerous imported goods, to protect the US economy.   Other countries swiftly followed with tariffs of their own and a trade war began.  World trade began to falter and it took decades to come back.  The lesson was learned and to this day tariffs have been rejected because of the damage they caused in the Depression.  Our concern is that a currency war could be taking the place of tariffs.  If a currency war continues, it could lead to a severe drop off in world trade much like we saw in the 1930s with tariffs.  If China does not move to allow its currency, the yuan, to appreciate materially higher, it will result in a currency war.  We see Japan, Europe, Canada, Australia, Brazil and India all having a harder time competing against China with the yuan/dollar peg.  We want to watch over the next couple of months to see if a currency war will take down global trade.  Right now, every country is fighting for jobs for its people.  The recent G20 meeting over the weekend has done little to mitigate our fears of a currency war.