September 9, 2009 - The next chapter in the great deleveraging… Americans shed record amounts of debt
- Bank balance sheets, new mortgage data daunting… Alan Knuckman on why the stock rally might still forge ahead
- Another Chinese bigwig disses the dollar… Byron King on the implications for your gold investments
- Patrick Cox with the one worthy takeaway from the Van Jones debacle
 The great deleveraging has entered a new chapter. We Americans shed $21.6 billion worth personal debt in July, excluding mortgages, the Fed quietly announced yesterday. That's the largest monthly deleveraging (measured in dollars) in American history.
Factor in the last 12 months or so, and the trend is clear: Not only are Americans getting rid of debt, but they are doing so at an accelerating rate. 
In other terms, July's decline marked a 10.3% annualized rate of debt dumping, the biggest since 1975. We're proud of the Average Joe… like any addiction, weaning off easy money isn't easy. We've had to do it ourselves, personally and professionally, and it's not exactly fun. But we suspect this is lousy news for banks and retailers. As we've forecast numerous times in these pages, most creditors are currently drumming up plans for the recovery -- not bracing for a long slog of continued credit deleveraging and default. Here's one example: Wall Street expected a consumer credit contraction of $4 billion in July. Off by more than a factor of five, it's safe to say the men behind the curtain are just a bit out of touch. And we hasten to add July's record deleveraging included a healthy chunk of the "cash for clunkers" program. You know… that "stimulus" where the government gave you $4,500 to get rid of your working car in exchange for a new car and $15,000 of debt.
 How much further could this credit contraction go? Heh, here's the above chart, zoomed out a couple decades:
 "The U.S. financial system is still in the early stages of working through an enormous balance sheet problem," says Dan Amoss. "Banks and other financial intermediaries lent trillions of dollars to borrowers under mistaken assumptions about the future. Credit losses must be recognized and absorbed…
"Lending loosely to borrowers under mistaken assumptions about the future, or more simply a 'credit bubble,' is very destructive to any economy. It feels great on the way up, but always ends in tears. Entrepreneurs make capital investments and hiring plans in order to fulfill this illusion of sustainable demand -- the temporary demand that comes from those who borrowed against tomorrow's income to boost today's consumption. Even worse, those whose jobs depended on the credit bubble borrowed against their future income -- which is now gone, or much lower -- to spend or overpay for a house. It all adds up to what could be the scariest cycle of credit losses in history."
 One example of Dan's thesis: The interest only mortgage. We began blowing the whistle on these hilariously crazy mortgages back in 2008. Today, First American CoreLogic and The New York Times teamed up to track these loans… where the borrower only has to pay interest on the principal for a set period. The idea is that -- of course -- the housing market will appreciate at 10% a year. By the time the interest-only period expires, the buyer can sell at a profit or refi.
Not exactly the way things have panned out, eh? Here are some details of the study published today: - There are currently 2.8 million interest-only mortgages, worth a combined $908 billion
- In the next 12 months, $71 billion of 'em will expire, forcing the borrower to pay much larger monthly installments toward the value of the principal
- In the year after, $100 billion more will reset
- After the halfway point of 2011, another $400 billion will follow suit.
That falls in line with the now famous Credit Suisse chart and our housing expectations… not only is the housing debacle not over, there's a chance we haven't seen the worst of it yet.
 That's a problem for tomorrow, says the stock market. After a 0.9% rise for the S&P on Tuesday, the rally is hesitantly creeping forward today. The S&P opened up 0.3%, to 1,030.
 "Bearish investors need to be afraid," advises Alan Knuckman, one of our resident traders. "Further market rallies are positioned to punish those who have been stubborn enough to fight it to this point. A push to test 10,000 in the Dow seems almost certain and a move to the original breakdown point at 1,200 in the S&P seems a realistic goal."
 So what has traders buying today? There are rumors of good news from the Fed's Beige Book this afternoon. Also, mortgage applications jumped 17% last week, says the Mortgage Bankers Association.
 Could the Chinese be buying up those new mortgages? Maybe not yet, but China's sovereign wealth fund leaked yesterday that it is eyeing distressed U.S. real estate. The $300 billion China Investment Corp. is rumored to be in talks with U.S. private equity firms, looking to pick up U.S. commercial real estate on the cheap. They are also supposedly interested in the government's Public-Private Investment Program (PPIP), where they could be financed by Uncle Sam to buy mortgage-backed securities from troubled U.S. banks.
Heh… we might lend money to China (already our biggest creditor) so they can buy our homes (which we can no longer afford) so that our banks (which the government owns) can stay in business. It's a mad world.
 We can't fault anyone for selling the dollar. The dollar index is down another couple tenths of a point today, to a new 2009 low of 76.9. But like yesterday, most of the pressure is coming from rising stocks and risk appetites -- not economic fundamentals.
 "If they [the Fed] keep printing money to buy bonds, it will lead to inflation," bemoaned Cheng Siwei this week, the former vice chairman of the Chinese Communist Party. "After a year or two, the dollar will fall hard. Most of our [Chinese] foreign reserves are in U.S. bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen and other currencies."
Heh, could it get any more straightforward than that? "Gold is definitely an alternative," he continued, "but when we buy, the price goes up. We have to do it carefully so as not to stimulate the market." "We have direct testimony," concludes Byron King, "from a high-level cadre that China, while cautious, is a key driving force in the gold market. It's buying. The implication is that the Chinese will not overbuy gold, which may be why the yellow metal has hovered just below the $1,000 mark per ounce in recent weeks. At the same time, it's more than likely that China will buy gold whenever there's a price dip. "The significance is that the Chinese seem to be prepared to establish a floor under any correction in gold prices. This limits the downside for well-positioned gold miners, like those in the Outstanding Investments' portfolio." Want the tickers? Find 'em here, along with Byron's latest special report on precious metals investing.
 But all of the news above is of little concern to the mainstream press. They're saving the headlines for President Obama's address to Congress tonight and -- of course -- the resignation of Van Jones. His story, especially over the last week, isn't our beat, but our tech analyst Patrick Cox sent over one worthy takeaway:
"A single unpaid blogger, not the mainstream media, was responsible for Jones' resignation," Patrick reports. "A blogger who goes by the name of Gateway Pundit discovered that Jones had signed a petition that, in essence, accused the Bush administration of either perpetrating or willingly failing to prevent the Sept. 11 terror attacks. It was the final straw. "During the long noisy buildup to Van Jones' involuntary resignation, not one word about the controversy appeared in the paper pages of The New York Times and many other MSM outlets. Only now are those who depend on these old media outlets even hearing Jones' name; and it is often in stories that infer that he was somehow smeared. "It is a remarkable state of affairs when important news and objective fact are being discovered and reported by a lone individual using nothing but his computer and an Internet connection. Meanwhile, old media are losing money and firing reporters daily. "This is the power of technology. We will continue to see this sort of disruption across the board, but this specific lesson concerns old media. Few of these old media institutions are capable of adapting… "When we finally emerge from this government-created fiasco, it will be a far better and more profitable world. As old institutions crumble, new ones will be born, and we'll invest in the best of them." Want to follow along? Check out the latest emerging technology that has Patrick pounding the table, right here.
 Last today, gold and silver are hovering just below yesterday's levels. Just like the last time around, gold met heavy resistance at $1,000, and thus sells for $998 as we write. Silver, while well below its crisis high of $21, got stopped around $16.80.
 "I am sitting on the sidelines as far as gold is concerned," a reader writes. "Quite simply: gold tanked after the stock market corrected last year, and I believe the same is in store for gold when the stock market corrects again. All the reasons to buy gold NOW are valid, but why not wait until we get the long-awaited correction to our stock markets here in the United States?"
 "Gold was again unable to close above $1,000," adds another. "This is a very serious portent for lower prices, in my opinion. Of course, I only have been in and out of the gold market since 1964, so I am sure there are lots of more experienced investors than me out there. Besides, if it crashes, then I can buy more and add to my hoard."
The 5: Both good points. If you're trading gold, we can't be of much help… you're better off working with a pro like Alan Knuckman. His Resource Trader Alert readers have pocketed gains of 100%, 80%, 148% and 214% trading gold and silver -- just in 2009. But for the long haul, as we mentioned Friday, all of our editors are still holding onto their gold and gold stocks. That method has done just fine over the last decade… no sense in messing with it now. Cheers, Ian Mathias
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