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A Catch 22 situation is one in which (def; Wikipedia) "a situation an individual has to accomplish two actions which are mutually dependent on the other action being completed first. Catch 22 situations are sometimes called the chicken or the egg problems."
As far as the Market, Economy and Bernake are concerned, how the current problems are handled will have dramatic implications for the stock market.
For example;
Yesterday, Bernanke said that the US economy is "slowing", and "inflation" is "rising". Whoa! This sounds like the 1970's all over again. Here's the way I see it;
1) If the fed cuts rates, inflation will rise, and the dollar will fall.
2) If the fed raises rates, home borrowers with Adjustable Rate Mortgages will be injected with a fatal dose of financial lethal injections to their ARM's.
Yesterday, Bernanke said that consumers with Adjustable Rate Mortgages "could refinance". But, can they really? The problem is that many home-borrowers are saddled with debt, and could not come up with the minimum down payment for a conventional mortgage. Also, over the past two years, new home purchases were made at the top of the market.
When a new appraisal is ordered by the lender, housing values will be lower than they were 1-2 years ago. This means that in addition to the down payment, the borrower has to bring to closing the difference between the amount owed (original purchase price), and the new appraised price (if any).
In 2005, I began warning investors about the eventual collapse of the real estate market. In an article entitled "It's a Left Hook!" I said;
The uppercut (not expected until 2006-2007), and final knockout punch, will happen when real estate speculators begin to run for the exits, and attempt to unload their speculative real estate before their properties come up for closing. This running for the exits may be due to a spike up in longer term interest rates and a simultaneous unwinding of leveraged Treasury Bond positions held by hedge funds.
Here are a some more warnings that I issued before the real estate situation got worse;
June 17, 2005: I received yet another important contrarian indicator the other day concerning the real estate bubble. I know this guy who is notorious for chasing trends. In early 2000, he was ready to pop the cork on a new bottle of Dom Perignon to celebrate his entry to the $1 million dollar club just prior to the collapse in the market. Unfornately, his assets were cut in half.
Recently, he got another idea. Buying real estate with his IRA assets. I don't know when the real estate market is going to cave, but if track records are any indication, it cannot be too far off.
July 7, 2005:Today's newest bubble stocks (homebuilders) continue to put on a stellar performance. I am not sure if normal buying or short covering is driving the homebuilders higher but the sector continues to outperform the broad indexes.
July 26, 2005:As is the case of most "bubble mania's", experts are born by the minute. PT Barnum said it better, There's a sucker born every minute. In fact, one of my old coaching mentors once told me that people are basically "selfish, egotistical, and full of crap" (especially when they're making money in the midst of a bubble).
Speaking of bubbles, I read some startling information on the current real estate (bubble) situation from a guy that actually has a clue at Merrill Lynch. If you want to see the entire article, go to the July 25th issue of Barron's and turn to page 6. Check this out.
August 2, 2005:To add fuel to the fire, insane consumers still believe they are real estate experts. The rise in real estate prices have lured investors into a 1999 NASDAQ sense of security, and in turn, consumers have been supporting their Paris Hilton lifestyles by borrowing against their home equity.
The "can't lose" mentality in real estate have led consumers into ramped real estate speculation. It has been reported that 50% of homes purchased in Las Vegas was for investment purposes. I know investors here along the coast of Florida who are overextended with " 20% letters of credit" on condos who have no intentions of going to closing on those properties. Not only that, if the market went south and they were forced to close, they couldn't.
Sure, the insanity can continue for a little while longer, but the easy money that Alan Greenspan gave consumers is slowly being taken away.
I think you're getting the picture. There are several warnings I gave in 2005-2006, and if you want, you can look them up by looking through the "Archives" on the website.
The next leg down for the stock market is when military actions begin against Iran. I am looking for oil prices to soar, and the stock market to give us our 10%++ correction.
The American Free Press is reporting that "Adm. William Fallon, President Bush’s new commander of military forces in the Middle East, is looking for an “incident” that would excuse a U.S. attack on Iran, according to sources within the Pentagon, Congress and the White House."
Well, it looks like Adm. William Fallon has his excuse.
