This has been a monumental month for me.

My son Jackson turned 5 years old. We are finally done dealing with the Federal government on our three-and-a-half year journey through the Vaccine Court for our son’s vaccine injury. My sister got married to an awesome guy, Joe Kuta, my fantastic new brother-in-law. My wife and I found out we were going to have a daughter, Zoe Marie, this September. We already knew we were having a baby, but we just found out it was a girl. Barack Obama has clinched the Democratic nomination.

Indeed a month (roughly – some spillover into June – hence the delay in my article) of triumph and victory across many levels. I revel in this good fortune and am overjoyed by the great things that have occurred recently. I find myself buoyed by tremendous optimism about many things. I feel that the future has great potential and the years in front of us are bound to be better than the devastation of the Bush administration. It should be of no surprise to any readers of my articles that I believe that the Bush presidency is the worst thing that has ever happened to America and the wreckage of his policies will take years to undo, to the extent it is even possible. Perhaps then the greatest reason for optimism is the short time he has left to further mess things up, his waning influence in the world and in Washington as well as the promise that literally every viable option in front of us is a better alternative to Bush.

I am however very troubled by the work ahead of us socially, economically and politically and despite my optimism about many things, I worry about our future. I worry about the future for my country and my family. What sort of future will my children and future generations have as they set about living their lives in this country? What types of debris and foul wreckage will be left to them to clean up and how will they be able to do it? How will America recover so much ground lost in terms of international standing, basic infrastructure and economic health?

These are all daunting tasks we face. We face them together, and while there is reason for hope and optimism, the best first step is a frank and honest assessment of where we are and what needs to happen. I say this because one of the stressors in my life is the built-in inaccuracies of the financial markets, particularly as it relates to real estate and mortgages. The current system of financial reporting is one designed to fool and mislead, and indeed paint a better picture than actually exists. If we are to make any real progress on matters related to our country’s needs and interests, it starts by stripping away the artifice of false reporting and misleading numbers so that we can judge where we really are and be able to realistically move forward to common goals.

One of the elements of this disguise is the process of issuing and relying on low-ball estimates on our economic numbers. Every month there are a number of critical economic reports that display an element of our nation’s economy and how it is doing. Each month, analysts are entrusted to estimate these numbers in order to get a gauge of where we are and how we are holding up. Investors of all stripes and nations and marketplaces of every conceivable type rely on these estimates and factor them into their pricing. A common practice lately has been to pitch low-ball numbers designed to be worse than they expect them to be, in order to create mini-false rallies when the news comes in better than the estimate. This is total nonsense, but it is happening every month.

Prior to the release of the last GDP report as an example, analysts were estimating that the number would indicate a .6% growth. The actual number came in at .9% and this “better than expected” result caused a rally on Wall Street. The rally was not based on good news, but on better-than-worst news. Total nonsense when you consider that a .9% GDP is actually a negative number when weighed against the rate of inflation. In other words, the news is horrible, but because they pitched a number that was far worse than that, an overbought stock market actually improved on terrible news.

Given that government estimates inflation at a rate of less than 2% (highly laughable – this strips out “volatile food and energy costs” in large part because they “fluctuate too much) stagnant purchase patterns would result in a increase of a little less than 2%, but even with this inaccurate number (inflation rate), this represents negative GDP by a significant degree, the working definition of a recession. The fact that GDP is not negative on its own has somehow become the focus, further obscuring the worth of the numbers being pitched.

Similarly, for months we have been hearing about the economic stimulus checks that are supposed to help revitalize the economy. Last week we heard from the International Council of Shopping Centers who said that thanks to the economic stimulus checks, we had a giant rebound in May and that Chain-stores rose 3% over last year. That’s great right?

Not so much. When you dig into these numbers, you see a very different picture. Discounters like Wal-Mart posted strong gains, as did wholesale clubs such as Costco, which rose 4.6% minus fuel sales, drugstores, which were up 3.2% and discounters were up 3%.

Meanwhile, specialty clothing stores posted an average of a 6.5% drop, department stores were down 3.5%, and the bad news continued on nearly all fronts that weren’t related to discount chains, wholesale chains, or pharmaceutical sales. Anyone with any intelligence would read this report for what it is: terrible news. People are unable to buy the things that keep the economy afloat, and because they have less money, they are spending more of it on drugs, discount items, and bulk purchases. This is not the sign of economic strength….it is a sign of national desperation. To look at these numbers as a positive is willful blindness. Bear in mind also that Costco and Wal-Mart are major sellers of groceries and food, which has seen unconscionable price increases in the last year, and that this too is factored into their numbers.

If you take these numbers for what they really mean, rather than good news, it looks more like time to hit the bunker.

Todays report is Retail Sales. People are elated on Wall Street with what they say is a 1% increase in May sales numbers over the previous number. Strip out auto fuel and it is .8%. This is also the first month with the awesome power of the stimulus checks and this is what we gain from this? ,8%? That isn’t awesome it is ridiculous. Particularly when the quieter announcement of a 2.5% increase in the cost of imports from the same government agency and for the same time period. The real gains seem to have come in the areas of food and building and gardening products, which of course makes sense since food has seen wild icost ncreases and building products are expensive to ship due to their weight and the cost of fuel. Anyone who doesn’t see the increase at the cash register for these items simply doesn’t shop for them.

Speaking more to the issue of housing and finance, the tactic is the same. May had numerous news agencies talking about the end of the credit crisis and how the turnaround has begun. In fact, nearly every day, one can turn into a local news source to find opinions that refute basic facts of the economy. Part of it is indeed the idea of “perception is truth” and the hope that spin spurs spending, but you can no more expect a desperate family to spend money they don’t have than you can squeeze blood from a turnip. Used to be that they used credit to help fuel this spending pattern, but evidence is showing the real effects of that source of false funding drying up. It was great while it lasted, but most people did not actually count on the possibility that they could one day be held accountable for this pattern.

Is it possible people think that the problem is somehow smaller on a national level than it seems on the anecdotal discussions of individual families trying to make their monthly budget? Oh man…

The World Bank, as conservative an institution as any that exist, has estimated that the total shakeout of the sub-prime related global losses will exceed $3 trillion. Considering we have seen financial institutional write-offs total less than $1 trillion thus far, that is a very daunting figure. In fact, that would indicate that we have over 2/3rds of the way to go before we are through. How could we be at the end of the credit crisis if this is the truth?

This is merely the sub-prime portion of losses they are discussing. This does not trickle down to ANY ancillary costs of the losses such as the impact of the job losses in the industry, the loss of individual equity and wealth, or the like. They are relating to you the woes of the lenders, not the woes of society. This is also before the problems that will inevitably have to work through with secondary housing credit and revolving credit, which are both lion-sized portions of the total consumer debt valued at over two and a half trillion dollars.

If the pain is easing, why does one financial company after another continue to write down big losses even after denying they were in trouble for weeks preceding their earnings reports, as Lehman Brothers did this week. Each month, more major executives from global banks and investment houses are shown the door with generous severance packages for their role in the process as Wachovia did last week. All this while lending has stalled to a near crawl with tightening restrictions, and some of the most onerous rule changes are yet to take effect. Meanwhile, there is absolutely no restrictions on the various false statements and patently incorrect advice that is given by lenders who operate as they do very much out in the open.

The write-downs from the sub-prime industry occur when people foreclose, but also when they short-sell. Short sales are increasingly common. It is when a bank agrees to be paid less than their outstanding debt to sell the home and move on. The problem has been for some time that banks are pennywise about these matters, and very, very pound foolish. Just like the bloated company that still has countless bad loans on its books, banks continue to cling to the notion that they didn’t REALLY lend too much on a particular property, which is why they can say with a straight face that a $500,000 home is a bargain when there hasn’t been a single comp to justify it in over a year. Who told them this? The least expensive broker they could find, who is living up to their fee with commiserate expertise and acumen.

Improving matters is a call for different and wider spread regulation. Now there is talk that there should be a unified regulatory framework that would, amongst other things, force regulation on brokerage firms in much the same way that there is regulation on banks. Yeah. You’ve done a bang-up job with them, so why not?
How about some actual enforcement? How about not always going after the smallest players in the scheme? Where is the accountability for the primary investors? Secondary investors? What about the ratings firms that viewed bond instruments that were literally packaged no-doc, poor-credit loans on over-valued property, as AAA+ investments? By instituting further regulations in an industry that actually has a relationship with its regulators that involves financing their deals, (such as the Fed orchestrating and underwriting the Citi takeover of Bears Sterns) as an acceptable relationship is pretty gosh darned funny, until you actually remember that it is real.

Still, as bad as that is, it gets worse. While the banks are saying they are urging control of brokerage houses in a way that equalizes the regulatory processes for each type of company, try suggesting to a bank that they should be regulated and controlled the way in which mortgage brokers are regulated and controled and they will have a very different tune to sing. If they were required to reveal their profit in a deal as a broker is, or were required to follow the HUD rules in the same way as brokers are, let alone the way they will soon be, it would put a lot of holes in the theory that working with a lender directly is a cost saving process.
As marketers can constantly reprove: you can not regulate honesty.
Before we start assigining more responsibilities to the Fed, it is perhaps advisable that they learn how to do their primary function better. They are the guardian against inflation by the way. It is unbelievable that it has taken this long for the Fed to start sounding off that maybe, just maybe we have a wee bit of a problem with the old inflation issue. Possibly.

Dear oh dear. Mind you these are supposed to be monetary experts. The professionals. The inflation police and it isn’t as if we got to nearly $140 a barrel oil, $4+ gallon gas, super-devalued US dollar overnight. While it took us 17 months to see our short-term rates rise by 3.25% percent in the most recent period of rate increases, it only took the current Fed administration 7 months to drop us that much. This is the same Fed that was cautioning not to expect instant turnaround from the rate drops. THis is their excuse for why their rate cuts have not had an apparent affect for the positive on the economy. Hmmmmmm……perhaps it is dawning on them now that we are only at the beginning of the inflation curve and that the same lead times will apply.

So what the heck should we do?

I may not know everything but I know a few things. Here are three simple things that I would consider very important to do one’s part to help get ourselves and our country back in shape.

1 – Register to vote and vote.

I assure you, the folks that are happy with the way things are right now are registered and they are voting. The idea of not voting out of protest is willing disenfranchisement. You can be the change that you seek, but only if you agree to do the bare minimum. Voting is the bare minimum.

2 – Look at your finances.

Better yet, have someone who knows what they are doing help you with this. It could be me, it could be your CPA, it could be a financial planner, a wise relative, or a counselor. This means that you need to know that you are not living beyond your means without a plan to recover. It means you need to make sure your mortgage is the best it can be for your situation, that you are earning what you should be on various accounts, that you are not over-or under-insured, that if you are un-insured, there is a plan in place, and that you are conducting yourself in a way that is benefiting your life, not complicating it. If you don’t know who to talk to, or what the conversation should even be, give me a call to see if I can help, or if I can make some recommendations of people that can help you. The economy is changing every day and no matter what your personal situation looks like today, it is better to know where you stand and have some idea for what to do next.

3 – Be vocal and participate. I am trying to let my alderman and congressmen and senators and presidential candidates know about the things that matter to me. They don’t always or even often listen, but they can’t ignore groundswells of participation, and it all starts with a single voice. We all presume that someone else is that single voice, but often no one does anything.

As a consequence, I am no longer shy about expressing my views in any setting because they are uniform and true throughout my dealings. I don’t have to censor myself or worry about what I said to someone because I just tell the truth and say what I believe. Those that don’t like my views have equal warning not to do business with me if that is their desire. Some people are just the opposite and consider it a benefit to do business with a person or company that shares a value system or similar interests and beliefs. In the end, I believe that being quiet, going along, not questioning and not participating perpetuates what we have, and to me, what we have now is completely unacceptable.

As I said, I feel optimistic. I feel optimistic that we can change things for ourselves, and our children. I think we can make this a better country.

In fact, I know it and I am very excited.

On an unrelated note, one of the bands I play in, Replica Republic is releasing our new LP. Yes vinyl. Further to that, we are having an actual party, not just a show, a genuine party! And you, yes YOU are invited.

This is not only our first appearance of the year, but Dan Yoder’s last appearance with the band. We are sad to lose Dan and will miss his awesome bass playing, but he os heading to Miami to start up a new City Year chapter…

So what better way to send this guy off than with a record release party? We rented out a storefront on Clark, just north of Wrigley Field for the day, and will be providing a bounty of refreshments, art, and entertainment. (And we have a vinyl record to sell).

More importantly, Mauricio Pineada, Ross Felten, and Tim Zeiss will be decorating the walls with their art work. In addition to the free show, free refreshments, and free art, we will be accompanied by the amazing and talented DJ Carrie Weston.

WHAT: RECORD RELEASE SHOW featuring special guest DJ Carrie Weston ..

WHEN: SATURDAY, JUNE 2I FROM 9PM TIL WE ALL FALL DOWN

WHERE: 3824 N. CLARK, CHICAGO 60613

(2 blocks north of wrigley field)…

This place is weird

People, I just wanted to let everyone know we’ve got this thing covered. We’re good. I mean, we are totally straight. This economy stuff… not even a problem. Got it handled.

You see, we have been hard at work here in the inner sanctum figuring out ways to avert a crisis and get the ship righted. You know, before we slide into recession, which no one should be talking about anyways. You see if you talk about it, it will happen. That’s the problem with these reporter types…always… reporting stuff, and agitating and egging on and asking questions and whatnot. Look, how well not reporting stuff gets it out of the headlines and people forget all about it….it’s uncanny.

Collapsing bridges? Anyone? Hello? Scooter Libby? Rendition? Iraq?

(Ooooooh yeah, in fact, that’s a pretty important one to keep out of the headlines…..the war……because we don’t want anyone equating the expenditure of trillions of borrowed dollars possibly having an adverse affect on the health of the economy. Nonsense.)

Anyways, I digress…..

You see, we have it pretty well settled at this point. First off, we’re going to finance the purchase of an investment bank that made a couple of little boo-boos investment-wise, on the public dole and orchestrate a sale (without any regulatory or anti-trade hurdles of course) to the nation’s third largest bank for over $250 MILLION DOLLARS!

Man that’s a lot!

(grumble grumble grumble)

OK, ok ok …..ONE BILLION DOLLARS! Deal. Done.

So, as if that were not the most amazing move in financial history, we’ve also taken the DRASTIC step of also lending directly to these investment houses. Great idea, right?
You see, they are really suffering badly from the SUBPRIME LOANS they made and the even larger positions they took in the AAA+ rated bonds backed by the SUBPRIME LOANS that others made. So we’ve got to cut them a break, you see?

Plus, these are the professional money managers. THE EXPERTS. I mean if you can’t trust your money to THE EXPERTS who can you trust, right? They will know exactly what to do with this money to make it GROW. So this will then unfreeze the credit market. Because now they can get money cheaply so they can start lending again….it’s like…..trickledown economics squared.

So we’re going to be giving them direct access to the discount window. That ought to solve that problem. What’s next….

Oh yeah, here’s the other thing. They’re kind of…..off on those SUBPRIME LOANS. Yeah, not doing so well with those lately, so they’d kind of like us to buy them off of them. But see…that’s cool. We’re good..we’ll buy them. No prob. That’s what we’re here for bro. We got your back man. See this is sorting out like a charm….

Then here’s the biggie, we’ve got these awesome REBATE CHECKS coming to you! That’s right man! You probably got one of our $42,000,000 mailings about it….it’s going to be so AWESOME! YEAH! Spend man spend. That’s the solution.
You see, we’ll spend our way out of this. It’s going to be freaking phenomenal. We had to borrow that money too, so it will actually be due later, with interest, but it will so be worth it when you see what a great deal this is for our economy. Because it is awesome to do this for America. WE are awesome because we love America and if you love America and you are awesome too, you will go out and spend your money to help these poor corporations that are suffering in ways you have only dreamed of.

Speaking of which, there are few other things we’ve seen to just to make sure it’s all covered. The pepper on the eggs as it were.

First of all, inflation is like so, not a problem. So like shut up already. You shouldn’t eat so much eggs and dairy anyhow! And how many times have we said it is crucial for you to use more ETHANOL! Besides everyone knows that the economy has nothing to do with inflation. We’re muck more concerned about what it means to the markets. We’ve got to protect those markets.

Therefore we have been slashing rates like a used-Geo dealer. That will make it even more awesome for America!

Banks will pass this on to you at a three point margin so just make sure you go back out and help spend our way out of this little bump on the road to economic paradise. Go back out and run up those credit cards and equity lines to help you cover the various things you can’t afford because you want to be awesome for America too and that will be thing to do because your rate is lower! And we’re going to lower taxes too!

And this time we are really really REALLY serious about all of these problems we’ve been hearing about. We’ve taken important steps to ensure that the vulnerable will be heaped on at the expense of the guilty in order to ensure proper market liquidity. We’ve analyzed the situation for examples and have determined that the lax underwriting standards, time-bomb mortgage products and an entire secondary trading market of junk bond-status commodities are not to blame.

No actually, it’s mortgage brokers.

So we are going to come down on them harder than a freaking ton of bricks to make sure they don’t submit any of these loans to the lenders that offer them. There aren’t really any brokerages that are big enough to stop this, so this is like a done thing. Don’t even worry about it. We’ve got it covered.

Then we’ll sail through some massive mergers since the climate is right because everyone knows that when companies get bigger they have more power and they pass it on to their clients and everyone wins. Trickledown economics again you see.

The rest of the changes with teeth will take so long to argue about, the next administration’s people can worry about that. I’ve got stuff to do, so I’d love to help you with that, but I don’t want to.

So in short, it is all good. It is in fact, all quite awesome.

Happy April Fool’s everyone.
__________________________________________

For April Fool’s, the markets are in perfect disarray. Because of more massive write-downs by UBS and Deutsche Bank everyone has decided we are at the end of the credit debacle. Yes I am serious. That is what is going on.

Lehman Brothers is taking the steps to ensure investors it isn’t likely to face the same fate as former rival Bear Stearns by offering 3 million convertible preferred shares to raise capital so it won’t be caught off guard in a run on the bank.

Bonds are taking it hard as stocks are rallying and while we are down significantly for the day, we just bounced off a support level found at the 50 day moving average and the pattern with big boom days on Wall Street has recently been immediately countered by severe losses, so I am cautiously floating ahead of Friday’s jobs report. I also feel that there is false optimism that we are over the worst of the credit crunch. The announcement on Friday by Treasury Secretary Paulson does absolutely nothing to ease foreclosures, or prevent any of the mechanisms that the Treasury concurs lead to our current predicament. Furthermore, I feel that the other shoe no one is talking about, secondary credit is in many ways a potentially worse crisis for lender. There is over $1.5 Trillion in equity products leveraged against homes that are worth ever less in a declining market.

In other words, I think much of this rally and belief that the worst is behind us is false hope unsupported by the fundamentals, let alone the potential pitfalls we haven’t even really explored yet. Wall Street should cheer however in seeing that the Fed and Treasury appear poised to bend over backwards to protect investor profits, in this case ahead of consumers, so I guess that there might be some reason for the rally after all.

Still, I’d float, with the ability to move quickly if needed into a locking position. My bias shifts a little if you have a pending purchase closing quickly, in which case, you may wish to protect the gains we’ve had over the past few sessions, some of which we’ve given up in the last 24 hours as stocks soar.

Take care all…..

Wow. The wilder things get, the less time I have to write. The less I write, the more stuff happens. The more stuff happens, the more people write me to ask me to write. So I am now writing and I have a lot of catching up to do.

Which, if I do, will result in more writing you don’t read. The crazy thing about writing on a topical matter such as economic conditions or interest rates or securities or anything else that changes at a moment’s notice, is that it is hard to write in generalities and have any of it matter to anyone. If you are a daily writer, it is one thing, but trying to stay abreast of everything and manage 2 or 3 other careers and a company is not really conducive to the topic matter. Therefore, I start a lot of stuff that by the time I get to write again is too dated, or off topic based on newer report releases and changes in the terms and price and condition of my precious Fannie Mae 30 Year 5.5% bond. Speaking of which, this is up 112 bps at this moment on the day.

(That is my segue that will result in me not explaining any of the recent past. You like?)

Volatile isn’t even the word. How about nauseating? The 5.5% most recent sale was at $100.12 at 2:58 CDT, Wednesday March 12, 2008. We’ve passed this exact threshold 6 times since Halloween with a high sale of $102.28 and a low sale of $97.43 just this past Thursday. I can’t keep up. It is ridiculous. What is worse is that there are abrupt changes in our rate sheets that make you literally rub your eyes wondering what the living hell just happened.

Just the other day I was quoting ARMs in the lower range of 5% without points for an A-plus borrower who would see no more than a .15% differential in rate and APR. Today, they might have to pay over a point to get to a rate available on a 30 year fixed.

Why? Ripple effects.

The most recent columns I have written dealt with the liquidity crunch and my concern with our monetary policy. You think things are bad now, imagine the same but worse when your dollar is devalued to the point where the only that goes up is the number of dollars you need to buy everything.

Since I wrote the last column, the general consensus amongst those that are supposed to know has shifted from a “we might be teetering on the edge of recession” to a majority opinion that we are in the midst of one. The technical factors are actually not met yet, but that is because people are HELLA STUPID and look forward without looking back. For that matter, I am not so sure how much looking ahead there is going on as opposed to looking off into the sky.

Arguing about whether there is or is not a recession ignores the fact that you can’t steer a ship as big as the U.S. economy quickly. Every move has generations of unanticipated lasting side effects and it creates tremendous momentum to change direction. The greatest momentum still requires time to react. Imagine a giant cruise-ship turning as hard as it can. On board, people on the boat itself would be flying off their feet with the sudden change in direction. Looking at the affair from land, the general effect of watching matters would appear achingly slow as the giant hulk turned in the water against the force of its own enormity.

It has driven me bonkers listening to people take snapshots of today and snapshots of 1978 or our most recent few recessions and remark how different they looked then where we are now. It is not as if overnight we woke up in 1978 and we had an oil crisis, high unemployment, no job growth and terrible inflation. We got there in course.

So to ignore the fact that we are tumbling down a very bad path is a highway to ruin. So the Fed is not ignoring it. But what is worse than ignoring something is piling on to the problems. Yesterday the Fed tried a new technique aimed at boosting credit availability in this time of stagnant lending amidst slow growth. It provided $200 Billion to banks and lenders to draw on in the form of a new economic instrument called the Term Securities Lending Facility (TSLF) which will allow lenders to sell off mortgage-backed securities in a frozen market. The Fed is saying, we will buy these securities from you and give you treasuries with true cash value in exchange so you can go out and lend.

It is a big risk because if more of these loans go bust, the Fed is left holding the bag. Since the Fed is supposed to be the monetary cop and not a bank, and are in fact considered the nation’s “Lender of Last Resort” it is a big gamble that they believe in the actual asset value of the mortgage-backed securities that lenders couldn’t unload.

Their willingness to bust a move on this front has 30 year fixed rates benefiting, and ARMs retreating to unbelievable high rates. In some cases, people could have gone to sleep expecting a 5.25% 7-ARM and woken up with a 7 Year ARM that would have cost 2 points to equal the current rate of a 30 Year-Fixed.

This is complicated, but one of the main reasons that this is happening is that the Fed’s move is a big boost to the beaten-and-abused mortgage-backed securities which support the long term rates of the 30 year fixed mortgage product and similar fixed vehicles, while causing great weight on the Treasuries that are being given in exchange for these debts from lenders that utilize the TSLF to unload their mortgage-backed assets. No lenders want to be at the table at a margin call on these securities at the same time that they have been struggling to balance their portfolios. Lenders only have so much capacity for higher risk vehicles like Hybrid ARMS (Any ARM product with an adjustment period of a year or longer) so they have almost uniformly priced them to levels that forces people into other products.

The Feds move yesterday puts Treasuries in a heightened sell-off and what you get is more urgency to avoid products tied to their giant downside, namely ARMs. So was this a good move by the Fed? That depends on whether you feel the Fed has a stronger duty to protect against inflation or spur growth. Consider the following:

- The dollar is at the lowest level it has ever been against the Euro, currently trading at $1.00 US per 1.549 Euros.

- US Consumer debt is at the highest it has ever been in history. Credit Card debt is now estimated at over $1.5 trillion. Incidentally, that is still less than the cost of the Iraq War thus far. Imagine that. The war could have paid every American’s credit card balances.

- The price of gas is on a trajectory towards $4.00 gallon average as the price of crude busts $110 a barrel.

- The cost of corn is up 60% in the last year, eggs 20%, milk25%….

- We are one of the only world economies currently cutting interest rates, further devaluing our dollar, and doing so at a time when energy and food costs, the leading indicators of inflation (since everyone must eat, and everything (EVERYTHING) is transported) are increasing faster than at any time in recent history.

This is in addition to the fact that the Fed has cut rates by 2.25% and is expected to lower rates another .5% (50 bps) at their meeting next week. Every time it happens, I am flooded with calls from people who expect that it means that it is a good time to refinance, when in fact, in every single rate cut, we have lost ground on the benchmark bonds that really track long-term mortgage rates, including a dramatic drop of over 260 bps in the 13 days following the last Fed meeting and rate cut.

The Fed’s move is a very big gamble. I have heard some recent arguments that suggest our trip out of the downturn may be lead in large part by foreign money flooding into the US economy as it takes advantage of the weak dollar for more purchasing. “It’s so crazy it just might work” is a pretty risky monetary policy, but I think that is what that thinking amounts to.

If you have a loan in play right now:

If you have the stomachfor it, or have a longer term lock period, you may wish to float further to see how the craziness unfolds. We are comfortably above support of the 200 day moving average and our ralley today has us above the 100 day moving average, and busting through the 25 day moving average could boost the bond price further. If you are risk-adverse, lock now and take advantage of the gains thus far.

On a totally separate matter, the first of Big Shoulders’ Realty’s Chicago Neighborhood Bike Tour is this month. This is a chance to tool around on your bike in order to get to know different sections of our city, this time focusing on the Portage Park neighborhood. We just hope to enjoy a nice ride with you and introduce you to the area, not on anything related to selling real estate. Meet us on Sunday March 30, 2008 at 1:00 PM at the entrance to Portage Park at the northeast corner of the intersection of Central Ave (5600 West) and Irving Park Road inside the entrance to the park. There is no cost to join, but you will be asked to sign a liability waiver (but of course!) and asked to wear a helmet and not act like a yoyo. This is designed to be a fun time, not a race, so come on out to learn a little bit about one of the neatest little corners of our city and get some exercise too.

OK…..see what I mean? It is now Thursday morning, 10:04 AM. My most tracked Mortgage Backed Security is down 47 bps despite more bad news, this time from the retails sector. Why? Bad news for the Carlyle Group who could not meet a margin call on an enormous portfolio of nearly fully leveraged mortgage backed securities. The flood of money into treasuries was abated in large part by traders grabbing super-cheap Mortgage Backed Assets as Carylye Group struggled to maintain footing in what is turning into the most volatile market for “fixed income” ever.

Gold crossed $1,000 an ounce this morning. Short term closers should consider locking ahead of a re-price for the worse. Crazy times given the Dow Jones Industrial Average is also trading down over 200 points.

I think my head is almost ready to explode.

This, being the result of what might be the most frustrating time in my career and the feeling that this is just the beginning. I am at my wit’s end trying to keep pace with the changes in the industry, ethically represent my clientele, and figure out how to somehow still make a living in the process. While this is happening, I can turn on CNN and see a talking head presented as an expert on the matter, tell millions of people across the nation patently false information about how mortgage rates are derived. Then the Chairman of our Federal Reserve yesterday testified before Congress that the risk of inflation was concerning, but less important than spurring growth at a time when Oil is literally over $100 a barrel, gold is nearly $1,000 an ounce, platinum over $2,000 an ounce, we have our highest Federal Deficit in our history and the highest trade deficit in our history and yesterday marked the worst the US Dollar has ever traded against the Euro.

Are you serious? This is our monetary policy?

The Fed’s number one job is to be the guard against inflation. THEIR NUMBER ONE JOB! It is not to make Wall Street profits healthier and that seems to be its current agenda. What they are doing now is somewhat akin to having a Federal Reserve who is dressed up as firemen, but get to the fire to battle with kerosene and bellows. I am seriously concerned that this sort of thinking will ratchet up inflation to levels that will equal calamity. Stagflation is a real danger if the current path is followed. This is when you have slow-growth, low employment and high inflation. Sure sounds a lot like what we have going, doesn’t it?

Remember that most of the data that is accumulated from reporting is skewed to be favorable. Jobless reports no longer count people that have been out of work for a certain amount of time. Major benchmark reports that show tremendous slowdown in growth while also displaying greatly increased consumer and producer costs are mostly averaged indicators with months of downstream time behind the report. This means they are behind the times reporting what is really happening, so if it shows things getting bad, they are already much worse than the report says while you are reading it. It’s like reading a monthly periodical to decide how to be an active trader in any marketplace….your data is so old as to be irrelevant.

What isn’t irrelevant is the drastic trends. These are not slowly changing systems, these are precipitous changes across the board. Higher grain costs, higher fuel costs, higher production costs, higher debt service, etc. The tightening of credit has been so drastic as to make it absolutely impossible for those in desperation to change their position. This is a real mess people. It is a good time for us to consider our long-term position and deal with these realities on our own since we obviously cannot rely on those that are elected and appointed to do so.

This is a very good time to assess your financial position. Investment, planning, employment, monthly budget, mortgage and debt….the whole ball of wax. I say this because just like other leading indicators, the reality of our economy may be well worse than the news. It is scary how many people began the refinance process with me over the last two months that have not been able to proceed for a wide variety of reasons.

Values are down and affecting gobs of transactions. The number of people that bought in the past 5 years that did so at less than 20% down represents a healthy chunk of the current mortgages out there. Many of these folks did so with income incapable of sustaining their debt load, low credit scores, risky products and a “it can never go down” mindset about Real Estate. Second lenders are eager to rid themselves of their high-LTV second loans and equity lines of credit, so we are seeing an increase in lenders refusing to re-subordinate (see below) their loan to allow consumers to refinance into lower rate first mortgages. Deals that are set to close are being reconditioned for every conceivable reason, and lenders are asking us to constantly tweak appraisals to reflect every growing concern they have about their value portfolio.

At its end, many people that were recently able to refinance, today are not able to do so. Every day I work brings new memos from lenders eliminating product lines, restricting LTVs and basically making life harder for everyone. Regardless of what rates are doing, the banks are reluctant to part with their money. The credit is very inexpensive for the gilded borrowers that still qualify for their loans, but the reality of the industry is that the lending side is a real bear these days. In recent weeks, we have seen some of the most tumultuous rate movements and corresponding bond trading in the history of the marketplaces being tracked. The news machine jumped on a story of refinance and mortgage applications rising to unprecedented levels in January, yet they are mostly mute at the truth of the matter…..the majority of the applications will not close because they have yet to be underwritten, and as values are looked at, subordination requests are denied, stated borrowers have to now produce income and asset documentation, and the credit crunch becomes real.

Mortgages are security instruments that places a lien on your home from the lender. The first mortgage is the larger debt and has primary lien position should there ever need to be recourse such as foreclosure. The second lender has second lien position. If one wants to refinance the first loan without refinancing the second loan, the second lender must agree to stay in second position, because otherwise, they move up to the next position once the primary lender is paid off. Therefore, a second lender can kill a deal with a new first lender simply by not agreeing to re-subordinate their loan in an attempt to force the person out of the loan and get the deal out of their portfolio.

In a more micro-view of things, Initial Jobless Claims came in far worse than expected today. The fourth quarter GDP report came in below expectations at .6% showing a substantial slowing of the economy. As can be expected, stocks are taking all this terrible news badly and are trading down. Meanwhile, bonds are boosted due to the flight to quality and Ben Bernanke’s dove-ish testimony on inflation. His testimony continues today with questions from Congress, but the real headlines were made yesterday. President Bush also will address the nation regarding the housing crisis later today and comments from either Bush or Bernanke are certainly capable of moving markets.

Initial jobless claims came in at 373,000. The four week moving average is 360,500. That is very bad. How bad? We are just below the 362,000 average we had during the last two recessions.

Gulp.

Rate floaters can continue to float as we enjoy a 180 bps gain (!!!!!!!!) on the Fannie 5.5% 30 Year Bond. Still, the market volatility should have everyone on a heightened sense of caution and ready to act. Remember last month, when the window shuts, you can lose a finger trying to get your hand in their before it closes. Currently, the Fannie Mae 5.5% 30 Year bond is up 59 bps on the day. Man.

I apologize for the lack of recent communication….busy busy busy. I was very flattered to have received actual REQUESTS for more updates. Wow! I did get my first Unsubscribe (sigh) but I also got 12 subscribes! Double Wow!

Take care everyone. No head exploding please.