Corporations are Walking Away: Why Can't You?

I wanted to start off with a great Tech Ticker tonight that discusses why it's OK to "walk away" from a house:



My Take

The Tech ticker guys make some excellent points here.  No one should feel guilty if they decide to walk away.  Big business is now doing it it so why shouldn't you be able to?

The double standard that Wall St tries preaches when they tell us that we have "morale" obligation to pay back the loan is absolutely ludicrous. Where were their morals when they goosed you into over paying for the asset in the first place?

The reality here is you are simply making a prudent business decision.

You were sold a bill of goods by everyone involved in selling you the house in the first place.  This included the appraisers, the banks, the Realtors, and the regulators.

The whole housing bubble was nothing but a giant fraud.  This no longer needs to be proven.  The evidence is everywhere.  Everyone was in on the scam from the banks all the way down to the ratings agencies who gave this "bubble" mortgage debt "AAA" debt ratings.

If you are one of the 25% of the borrowers that made a huge mistake and bought at the top, then you should really sit down and think about whether or not you want to spend the next 30 years paying off a mortgage on an asset that might be worth 50% less than what you paid for it.

I mean think about it:  How much sense does that make especially if you are struggling to make the payment every month?

Remember:  The banks are to blame just as much as you are because they gave you the money to do it in the first place.  They are too blame just as much as you are because they allowed you to do it!

The fact that the whole market collapsed is not your fault and you shouldn't be penalized for it for the next 30 years!

Of course their are other factors that you need to consider if you decide to walk.  I suggest that you sit down with a real estate/BK attorney or a financial planner to discuss the ramifications of making this decision.

I was one of the lucky ones who sold in 2005 and it was nothing but pure luck because because I had to move to take another job. 

However, if I found myself in a situation where I was badly underwater, I would walk away in a heartbeat.

Look at it this way:   This probably the best way to get back at Wall St for destroying our economy and then using our tax dollars to resurrect themselves.

If your economic security has been taken from you during this process then it's all the more reason to pull the plug on the mortgage. 

Payback is a bitch and I wouldn't shed one tear for any of the banks if the home owners who were scammed by the banksters all decided to shove it up Wall St's behind by deciding to walk away.

The Bottom Line

A few tidbits on the markets.  Today was a pretty ho hum session.  Silver is really starting to break out.  Gold was strong today also.

I think many investors who are now loaded up to their necks in bonds after the huge treasury rally are now looking for ways to diversify out of the dollar.

I would not be surprised to see the metals do well as a result.

The big fear right now for many investors at this point is the dollar.  The way I see it they have every right to be.   They are also afraid of their treasury holdings because they are all priced in dollars.

Why are they afraid?

If inflation then everyone(including the banks) that loaded up on bonds on the longer end of the curve will automatically get vaporized.

All you have to do is look at what happened to the banks that were loaded up on these bonds during the early 1980's when Volker took rates up to double digits:

Basically if you look above, you were absolutely murdered if you bought the long end of the bond curve in 1977 and early '78. 

1977 dated 30 year bonds at a 4.5% yield don't look very attractive when you could buy ones during the 1979-1981 time frame that yielded double digits.  

This is why I believe it's nuts to see everyone running into 30 year bonds that yield only 3.5%.  If we see just one bout of inflation then the holders of this paper will slaughtered in two ways: 

1.  Let's for numbers sake say Inflation rises to say 10% annually:  You are guaranteed a 6.5% loss on your principle each year with a 3.5% yield in such a scenario.

2.  The Fed will likely raise rates to quell inflation which will then increase the yields on treasuries as they sell off.  The value of the actual 3.5% yielding 30 year bond then collapses because you can buy newly issued bonds at much higher yields.

In my opinion this is why you should ONLY buy bonds on the short end of the curve.  Don't get sucked in to trying to chase a measly 3.5% yield.  The risk of inflation might not be here now but it likely will be 5 years from now or even sooner for that matter. 
This is why I have been tending to "tune out" all of the deflation chatter recently.

Many deflationists claim that gold is useless in a collapse because it cannot be easily used if we collapse.  Some refer to it as nothing but a doorstop if Mad Max hits. 

They also correctly point out that the dollar usually rises and has more value during deflation because assets come down in price which gives the dollar more bang for its buck.

This is all well and good IF the dollar survives.  I tend to look at the other side of it.  What if it's the dollar collapses or becomes worthless? 

The way I see it:  The dollar is nothing but a piece of paper with ink on it that's backed by a country that is technically bankrupt instead of being backed by something of actual real value such as gold.

Am I supposed to feel safe holding this green paper stuff? HA!...Yeah OK!.  Call me a skeptic. 

Let me be the first to say that I am no gold bug.  However, I do own both gold and silver because there is no guarantee that the dollar is safe.

In fact, I could very easily see the dollar collapse.  If we see a QE2 I fully expect the dollar to get smashed. 

How can the dollar hold it's value when the government is creating trillions of them each year?

To be fair they are technically "cleansing" the dollars by selling treasuries.  However, when you really think about it, who is buying the treasuries if we do another QE2?  The government!

Technically we will  essentially be financing ourselves under the "QE" scenario.  How on earth the dollar holds its value longer term in this situation is beyond me.  I have never seen such a total cluster(you know what I mean) in my whole entire life.

The people left standing when this depression is over are the ones who are diversified.  This is not investment advice but I do believe that one must protect themselves from both inflation and deflation because we are going to see both before we get through this.

Please be careful out there and stay nimble!

Disclosure:  No new positions taken at the time of publication.