Wednesday, August 25, 2010

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.


getyourselfconnected said...

I have stopped commenting on the metals as too many people just get too wound up over them. That said I will be playing paper silver after opex this week; I want to have it by September to hold through the fall (season).

Jeff said...


The inflation/deflation debate has been roaring in the blogosphere.

I think it's because so many are so scared right now.

The deflationists are starting to rethink their positions the longer gold holds up.

Gold should be at like $500 if it traded in correlation deflationwise with how bonds are trading.

This has their whole thesis screwed up.

CT-Hilltopper said...

Regarding your previous post:

I've been calling this a depression from the get go.

The fact that there are many people in the mix calling it a depression now with me simply scares the living shit out of me.

I've often told people here around me that the only difference between this depression and the last one is that in this one the food lines have been replaced by food stamps, and the "brother can you spare a dime" poverty has been replaced by 2 years of unemployment and welfare.

There's another difference. Back in those days, Americans were tough and resilient. They lived off the land, and could look after themselves. People today...

Jeff said...


I thought of you as I was writing that post. I thought you would like that one)

I totally agree with u. This is a stealthlike depression. The only eye opening thing I have seen was the section 8 panic in atlanta.

watching 30,000 people fight for 500 section 8 homes was quite frightening.

We will see more as conditions detiorate.

Just a matter of time.

Anonymous said...

Both the inflationists and the deflationists need to take a step back before they tell us what happens in a "mad max" situation.

In a mad max world, I see an inflationist starving to death, sitting perched atop a mountain of gold...if he is lucky, maybe he can trade it all for a sandwich.

In a mad max world, I see a deflationist freezing to death, sitting perched atop a mountain of dollars...if he is lucky, maybe he can convince some homeowner to take it all as a heatsource, in exchange for taking the deflationist in for the night.

Short of a "mad max" situation, where we have some semblance of a functioning government, I can see the inflationist and the deflationist arguments. However, in a true "mad max" situation, probably the #1 thing to hold is guns and ammo.

Jeff said...


Couldn't agree more. Owning a farm would help too.

The gun makers are booming right now. Have a buddy who sells steel to them. They can't make em fast enough. Been thinking of buying one myself actually.

Herb said...

Food stamps are another form of welfare for farmers and cattlemen. If it wasn't for food stamps poor people would go back to eating rice and beans and skip the $5 box of sugar smacks for breakfast.

With bonds you always get your principle returned correct?

Jeff said...


Not exactly when it comes to principle.

You always get your principle back but it can vary just like a stock.

Lets say you invest 10k in a bond that yields 2%.

If yields rise to 4% then your principle drops just like a stock would because your yield is not attractive.

In this scenario your principle might be worth 5k plus your yield.

This is why the flight to treasuries is so scary. Investors are piling into long bonds knowing that they could get slaughtered if rates rise.

Scary times.

Anonymous said...

"Jeff said...

If yields rise to 4% then your principle drops just like a stock would because your yield is not attractive.

In this scenario your principle might be worth 5k plus your yield."

If I may, I think Herb was asking what happens if you hold to maturity, (i.e. do you get your principal back then).

Jeff said...


It all depends on where rates are and when you bought the bond.

Your return can vary greatly.

Here is the best explanation on YTM(yield to maturity):

"If an investor buys a bond in the secondary market and pays a price different from par value, then not only will the current yield differ from the nominal yield, but there will be a gain or loss when the bond matures and the bondholder receives the par value of the bond. If the investor holds the bond until maturity, he will lose money if he paid a premium for the bond, or he will earn money if he paid for it at a discount. The yield-to-maturity (YTM), or true yield, of a bond that is held to maturity will have to account for the gain or loss that occurs when the par value is repaid.

When a bond is bought at a discount, yield to maturity will always be greater than the current yield because there will be a gain when the bond matures, and the bondholder receives par value back, thus raising the true yield; when a bond is bought at a premium, the yield to maturity will always be less than the current yield because there will be a loss when par value is received, and this lowers the true yield."