I started thinking about my recent post and tried to play the devil’s advocate to see if I could counter my Bearish soul. While out for a walk, I actually came up with more reasons to be nervous.

To continue from Dow 6500 in 6 months…

1. Oil - What does a oil price rise do to the beaten up consumer? Around where I live the price has risen from $1.96 to $2.49 and this is during a recession when everyone is cutting back. I know that the weakness in the dollar isn’t helping to bring oil down, but what if oil spikes and we get gas at $3.75 to $4.25 again? I seem to remember lots of reports tell us “XXX billions are being put back in the consumers wallet” as gas fell from $4 a gallon to $2, so isn’t the inverse true? Isn’t this a new tax the consumer “has” to pay in order to function?

2. The 10 year - Starting to spike, this is unbelievably bad news for Mr. Bernanke and the “green shoots” in the housing market. If you had people starting to dip their toes in the real estate water when rates were around 4.5% to 4.75%, they are going to run for the hill if we start seeing 5.25 to 5.75%. Their goes your curious buyers…

3. The Treasury Auctions - The government bond market is on a roller coaster right now, at historic highs and then whipsawed back. If China and other central banks only want to be in 2 year and 5 year debt, who wants the 7 year? I guess we will find out today. If the yield spikes on the 7 year in order to get buyers, what the *@#@$%! is it going to do to the 30 year. How bad will budget projections be off if their “assumed interest rates of debt” are off by 2%? Wow.

4. Obama and the Unions - I don’t want to start a political fight here and I know Obama is a very emotional figure for some, but his kowtowing to the unions is getting ridiculous. You are suppose to start running for re-election 2 years before you are up, so it would be 2010 for Obama. He needs the union vote for re-election, well, let me re-phrase that, he might not actually NEED the union vote, but he really, really would like to lock it up. He is just handing concessions over to the UAW and other unions are a blistering and ethically questionable pace.

5. States want Federal Guarantees - The state of California want a Federal guarantee on its debt issuing in the future. What happens when 49 other states want that? Now the Federal government will have to guarantee the munibond market? This can’t be done, we don’t have enough high speed money printing presses to even do this if we wanted to.

6. Year over Year Taxes Collected Down 34%. - What does this do local and state workers? Absolutely crushes them. How many more program cuts and layoffs will have to happen when over 1/3 of your projected revenue is gone. Talk about a nice stream of people hitting the unemployment office and losing their benefits, this will be ugly. Not to mention the “spike’ in Federal hiring has a lot to do with census hiring and they are only temporary jobs.

The more I think about this mess, the more depressing it gets. The story we are suppose to believe is that we can transfer our personal debt from our Mastercard and Visa bills to the government (ie lower private and consumer debt, skyrocketing government debt) and all is well? So I will work hard to lower my Visa and Mastercard bill, and then pay out the savings, plus more, when my taxes are due? Huh?

This is classic “robbing Peter to pay Paul” scenario. It can’t work, it is a shell game right out of the streets of NYC. You can’t get out of debt by just printing more money and paying the bills. Every action has a consequence and you can bet your bottom dollar (if you still have one, it is only worth $.58 now) that these chickens will come home to roost someday. We are just putting off the inevitable day of reckoning. If we just had a Time Machine to tell us when this would happen, we would all be billionaires.

Now, do I want to sound like Jim Rogers and move my family to China and start teaching my kids Chinese? No, but he is right about (paraphrasing) “No society in the history of the world has ever gotten out of recession by printing more and more money and devaluing their currency. Weakening a nations currency HAS NEVER worked out in the long term in helping that nation”.

No one knows for sure what will happen and it what time period. We can all only make educated guesses, sometime we are right, sometimes we are wrong. I just don’t like the macro-level look at what our economy, currency, and taxes are doing right now and what is says about our future.

Home prices plunge almost 20%
accelerated during the first three months of 2009, according to a report issued Tuesday.
The S&P Case-Shiller National Home Price index, a bellwether of real-estate market direction, plunged a record 19.1% during the quarter compared with the first three months of 2008. That followed an 18.2% drop last quarter.
The Case-Shiller 20-city index dropped 18.7% year-over-year, also a record. It fell 18.5% during the last three months of 2008. This index has plummeted 32.2% from its July 2006 peak and has fallen 32 straight months.
The national index covers almost all homes sold throughout the United States and is reported quarterly while the 20-city index reports sales in 20 major metro areas and represents a cross section of the national market. The 20-city index comes out every month.
“Declines in residential real estate continued at a steady pace into March,” said David Blitzer, chairman of the Index Committee at Standard & Poor’s in a prepared statement. “All 20 metro areas are still showing negative annual rates of change in average home prices with nine of the metro areas having record annual declines.”

Unreal..how can it fall 18.5% last year, so you lost almost 20% of your home value, and then fall ANOTHER 20% to start this year? So if your home was worth $100, it was then worth $73.50 during the free fall, and now it is worth $58.80??

How can you refinance? There is no equity left, completely wiped out 10 years worth of “your home value will go up 5-8% a year”…

The loss of real estate value is breathtaking when you consider all the loans and equity people took out of their homes for other purposes…it will be a domino effect of massive loan losses at banks.

As you know I am a bear, I am scared now. I think we will retest and break through the lows of the last stock market dive. No one knows for sure, we can only make educated guesses and see what happens…

1. There isn’t enough printed money in the world to cover all the debt being issued for bailouts…ie. We don’t have enough money to pay for this mess on the planet now
2. There has never been a recession that you can just spend your way out of and take on huge debt..this is just what the US consumer did to get to this point, now the government, which is a representation of us, is doing the same.
3. Printing money at these levels will eventually lead massive dilution of the dollar. This will either cause the dollar to become a laughing stock of a currency and/or no longer the safe haven for the world
4. Our debt becomes less appealing with each passing day the printing presses work overtime
5. Real estate has yet to find a bottom (see above)
6. Commercial real estate is the next big problems for banks, followed by consumer loans such as credit cards and car loans.
7. Prime mortgages are starting to default at a staggering pace (see recent WSJ article), these are people with good credit and normal loans.
8. Unemployment, no matter who’s number you believe is, is going up from its already high numbers…see “mass layoffs” article by Tyler Durden
9. Corporate earnings are going to get squashed with a shrinking consumer, making this rally technically unsustainable.
10. North Korea is getting ready to start a Pacific Rim war, not great for news for the emerging markets as well as Japan.

Just my two cents, Dow 6500 in the next 6 months….

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