Nowadays, we’ve got an insolvent financial system and a meddling government…but we’ve also got a questionable stock market rally too (one driven by the unprecedented volume on bailout stocks, might I add). Throw in growing Chinese demand and jewelry-buying season in India, and you just might be looking at a foothold in the US$1,000/ounce range.

“My forecast for gold in 2010 is $1,250 to $1,350 an ounce,” says our Investment Director Eric Roseman, “I think we’re long overdue for a major break-out north of $1,000 that will easily crack the March 2008 all-time high of $1,033 intraday.”

Source: Global Investor: Gold Breaks $1,000/Ounce

Despite a few brief months of rational behavior last year, the markets are given to obeying only their own reality. Something that Cornelius Luca – Editor of The Money Trader – picked up on last week…

“The U.S. jobless data was worse than expected,” he said in reaction to last week’s unemployment news…

“The unemployment rate climbed to 8.9% in April, the highest since late 1983. That was as forecast. More importantly, if we include laid-off workers who have given up looking for new jobs or have settled for part-time work, then the unemployment rate would have been 15.8% in April! And the nonfarm payrolls were bad in April and MUCH worse in the previous three months due to massive revisions!”

“But still, the DJI is marching higher! And the European and commodity currencies are marching higher as well. Even the GBP, which was battered on Thursday, is recovering.”

“So, the U.S. Dollar should remain under pressure through the end of May. Any bounce early next week should be used to go short at better levels.”

But even if you’re using this heady rally to lock in some nice, quick gains…then there’s one particular asset you should be watching like a hawk…

Ten-Year Treasuries: A Rally-Stopper

You see, the housing bubble remains a ticking time bomb.

Mainly because – as you can see in the chart below – there are still tens of billions worth of mortgages waiting to reset. When these loans reset, they click over to a new interest rate and payment, depending on prevailing market rates.

And as we all remember from the subprime blowout in 2007/8, significantly higher mortgage rates can lead to a bloodbath on these loans.

Back in 2007 – when few saw this coming – that eventually led to a full-blown market crash, insolvent banks, a credit freeze, US$14 trillion in bailout spending, and a flight to safety like almost nothing we’ve seen in living memory.

Now, that mortgage implosion threatens to repeat itself. Why?

Well, you may or may not know that ten-year Treasuries serve as a kind of benchmark for determining mortgage rates. It makes sense…Treasuries are seen as one of the safest investments out there. So if Treasury rates start to rise, then you should be charging more for mortgages and other types of loans as well.

And that’s exactly why the Fed’s focusing so much energy on keeping Treasury yields as low as possible. As long as these mortgages reset at all-time lows, the threat of Option ARM mortgages going “subprime” is minimized.

But it’s one big Catch 22…

If Ben keeps Treasury yields low – in turn keeping mortgage rates low – then he can minimize the damage caused by the whole universe of Adjustable Rate mortgages. If he can do that, he can convince investors that it’s safe to get back in the water…to start investing again.

But if he succeeds there, then money comes flying out of Treasuries…driving prices down and yields up (exactly what we’ve seen since the rally started in March.). If those yields reach high enough, then we have another mortgage crisis on our hands.

That’s why Ben broke out the “Quantitative Easing” in March. Essentially so that he could have his cake and eat it too. But as you can see in the chart below, QE – as it’s called – isn’t quite having the desired effect.

Rates Creeping Up On Rally

Knowing is Half the Battle

So even if the rally continues – and it looks like smooth sailing on the horizon – you should be keeping a close eye on Treasury bonds. Simply put; Treasury yields over the coming months and years will determine whether we see another mortgage crisis in the near future.

What’s more, it won’t necessarily take another major mortgage crisis to push the markets back into a decline, “We’ve got a heavily leveraged economy that’s still in the process of unwinding credit and toxic securities that’s now facing a serious threat from rapidly rising longer-term interest rates,” our Investment Director, Eric Roseman, surmises, “This is not a normal bear market. Sharply higher rates are now in the process of derailing this fragile bear market bounce.”

But there could also be some opportunity in today’s Treasury prices…

“Though I’m certainly bearish on Treasury bonds, especially long-term T-bonds,” Eric goes on, “I’m starting to consider short-term Treasury paper up to five years. This segment of the yield curve offers yields up to 2.16% and selling around $98, or a modest 2% discount to par. Six months ago prices were rich and yields barely 1.5%.”

“In a world that’s gone hog-crazy for risk following the worst crash since 1937, I find myself hunting for conservative investments that pay regular dividends or income. The big decline in Treasury bonds should be viewed as an opportunity to park some money ahead of the next shock later this summer or fall. In that event, yields will come crashing down again and T-bonds will rally.”

Yours in Personal Sovereignty,
Matthew Collins

Source: Keep an Eye on This ‘Rally-Stopper’…

And closer to home, toxic drywall has become the scourge of South Florida.

It’s particularly bad in St. Lucie County. They’re now saying thousands of homes could possibly be contaminated…that the nearly-toxic levels of sulfur might have seeped into the foundation, meaning the homes will need to be demolished.

And the rest of the U.S. housing market is just as shocking. The free-fall in home prices is still accelerating. 20% of American homeowners are underwater on their mortgages…some 11% (and maybe more) of all the homes in America are unoccupied and unsold…

But most Americans still don’t recognize the biggest mistake they made during the boom…

And That’s Confusing Real Estate Speculation With Real Estate Investment

It didn’t even occur to me until just a few weeks ago.

I was watching a presentation from Frank Trotter of EverBank, and it gave me a renewed bearishness for housing. As one of America’s few responsible bankers, Frank has an intimate knowledge of the U.S. housing market…and since his bank isn’t holding a boatload of “toxic assets,” he tells it like it is.

He insisted that houses are not investments; they’re utilities. Buying a house for US$150,000 in 1975….then selling it for ~US$850,000 in 2005…sounds great, but after inflation, you only made about 1.5% a year.

That’s a nice little gain, but not on an investment. The house required upkeep…the lawn had to be mowed…you can look at the 1.5% as a return on your time.

And yet, as Frank answered questions following his presentation, the audience asked questions about when…and where…they should be buying houses. “Is it a good time to buy in Austin?” they asked…

And I realized that we’ve all been fooled. Hoodwinked you might say.

You see, the bubble saw prices rising like a rocket ship; and anyone with a piece of the action stood to make a ton of money. Even I watched the shows on TLC – saw a few nervous, amateurish homeowners flip a house and clear US$100,000 – and I was fascinated. “If they could do it…” we all thought.

But that was during the bubble. And as prices fall across the board, so do the profits to be had from speculation. And just because houses might start to seem cheap doesn’t mean the market’s in for the same kind of rising prices we saw in recent years. In other words; speculation is dying a pretty quick death in U.S. housing markets.

And indeed, most bubble-based “investment” really turned out to be speculation. These deals exposed “investors” to a heap of leverage…and as the old saying goes… “Leverage makes poor men rich, and rich men poor.”

But at the same time, falling prices are making true Real Estate investment more and more attractive, as houses and apartments reach crucial rent ratios and rates hit all-time lows.

So what is true Real Estate investing?

It’s All About Cash Flow!

And in some ways it’s easier…and far safer…than any form of Real Estate speculation.

Our Executive Editor – Justin Ford – has been investing in Real Estate for years. He’s taught courses and seminars on the subject…made a bundle off of cash-flowing properties…organized deals for other investors…and he knows firsthand the profit potential of true real estate investment.

And unlike most people, Justin still sees mortgages as a great way to build your wealth with relative safety. In a recent conversation with some of the younger members of our staff, Justin laid out a scenario where Real Estate investment could make them a fortune by the time they reach their 50’s…

“Go out and buy some houses selling for ultra cheap prices,” Justin says. “Buy at 4 to 5 times annual rent. You’ll be able to pay management, all expenses and debt service, allow for 10% vacancy and put a few dollars in your pocket every month. But make sure you get a fixed rate. Because the mortgage will then “kill off” the balance through amortization.”

“So buy a house today for $50k that was worth $125k at the peak”

“Have it professionally managed. 30 years from now, the mortgage will be zero. If you throw the extra cash flow at the principal, you’ll probably pay it off in 20 years or a little less. You’ll own the $50k house, free and clear.”

“And if it goes up just 1% or 2% a year on average (and it could go up a LOT more than that thanks to inflation) your $80k or $100k is yours free and clear. And you put in just $15k to buy it. (That’s $10k down payment and $5k closing costs and reserves.)”

“So you turn $15k into $50k, plus get net income in a scenario where there is ZERO appreciation for decades. Highly unlikely…given the major correction is probably more than halfway over (some homes, after all are selling for less than replacement cost, even if you got the land for Free!)”

“Add to that all the money pumping out of DC,” Justin concludes, “…and the prospect for inflation, including housing inflation, in the next five years or sooner is strong.”

We’ll be going into more detail on Real Estate investing in future A-Letters. But one thing is certainly clear; with the stock market still up for grabs and many other investments still suffering, true Real Estate investment could be one of the best profit opportunities at these levels…one that pays a steady cash-flow and gives you a real, tangible investment for your money. It’s at least worth considering.

Matthew Collins

Source: The Biggest Mistake We Made During the Housing Boom

This from Sovereign Society:

In a previous A-Letter, we talked about the three attributes necessary to make a portfolio successful in this kind of market. One of those attributes was yield…something that’s become easier to find as equity markets take more and more of a beating. But you have to be careful, because yield isn’t always the mark of a high-value investment. Sometimes it can be the siren’s song that lures you – and your portfolio – onto the rocks.

Doubting Those 16% Yields

On October 7th, Investment Director Eric Roseman wrote to you about Real Estate Investment Trusts (REITs), one of investors’ favorite asset classes, “One of the biggest casualties of the global financial crisis is the big bust now underway in REITs, or real estate investment trusts. Until mid-2007, U.S. REITs dominated global investment performance in the post-2000 tech stock “bubble” era with eye-popping 25% annualized returns.”

If they’re new to you, then think of a REIT as an index fund for real estate. Instead of holding a bucket of commodities or currencies, REITs – as their name implies – hold a variety of real estate titles and allow shareholders to profit from the appreciation of said real estate. And since 2008 was a bad year for real estate, you can imagine how these trusts are faring today.

Since peaking in 2008, Real Estate Investment Trusts have fallen in value by as much as 70%, and many investors are wondering whether it’s time to start picking up the pieces. And with distributions as high as 16% or more on some commercial-property-based REITs, it can be a pretty tempting proposition.

Having already declined 70%, wouldn’t you expect that a rebound might be in the works? Not necessarily…

Commercial Real Estate goes “Subprime”

Most Commercial Real Estate (CRE) in the U.S. is financed and developed by large REITs. And conversely, many REITs are dominated by CRE holdings, so one could say their fates were relatively intertwined. So what’s in store for CRE?

Close watchers of the mortgage market and insider experts have been warning about problems in CRE since before the subprime bubble gained critical mass. And as the subprime mess started to unfold, they continued to warn of the hazards in CRE loans.

To be sure, the underwriting standards weren’t as lax as they were for subprime paper, but there are different psychological factors at play here too. While a homeowner is likely to fight tooth and nail to keep a roof over their heads, small business owners are more likely to throw in the towel when they know they’re faced with a losing proposition. Some can set up shop at home, consolidate their operations, or even just sell off for fear of losing even more – like their house – in such a terrible marketplace.

That we’re already seeing a “terrible marketplace,” is painfully clear. In the words of one anonymous web-poster, Q4’s retail sales “jumped off a cliff, hit the ground and started digging.” The Baltic Dry-Shipping Index – an esoteric indicator of the levels of total demand, measuring the total number of containers shipped overseas – sustained a horrifying and unprecedented 93% drop this past autumn.

Businesses & consumers are already starting to gear up for the worst. Granted, you might not be able to call it “Depression Mentality” just yet, but “Bubble-based Optimism” is wearing off quickly. As a result, the CRE sector is rapidly deteriorating.

CoStar – one of the best sources for information on CRE – is reporting an alarming rise in the number of CRE loans being moved into “special servicing.” According to CoStar, this is “generally an indication of a delinquency or failure to pay off a mature loan.”

Looking at data like this, you can’t help but think CRE – and in turn, the REITs holding Commercial Real Estate – have still got a ways to go before putting in a bottom. Despite the fact that they’ve already taken a serious blow in the last year and some of the trusts are yielding double-digit dividends, it’s likely still too dangerous to go bottom-fishing.

But Eric believes there might be some handsome deals for individual investors on the way there, “The United States can expect more government auctioned foreclosures in 2009, and that means big bargains for speculators and investors alike. Banks are desperate to remove non-performing loans from their clogged portfolio of real estate deals.”

We’ll give all this a few months to unwind and then re-visit it mid-year. Eric believes that the U.S. REIT sector could lead the rest to recovery. It’s also possible that real estate could lead market recovery in general. If that’s the case, then REITs could offer a windfall opportunity to cash in on a recovery, or even just a short-term bounce. Just not yet.

Source: WARNING: The 16%-yielding Asset that You Should NOT Invest In

This from The Sovereign Society:

Your bank is a counterfeiter, as facilitated by the Federal Reserve System and permitted by the government that allegedly represents you.

The lie of fractional reserve banking is at the heart of our ‘banking’ system. And its acceptance as fact or necessity by the world’s populace is the basis on which most other economic lies and myths gain so much credibility.

To understand why we’re in so much trouble right now, and why the privately owned Federal Reserve Banks are to blame, one must understand fractional reserve banking, and why it amounts to little more than counterfeiting.

King Edward II, Goldsmiths and “Legal” Counterfeiting

For all of history through to the 1800s, goldsmiths were the world’s primary bankers. It made sense in those hard money days to keep your gold with the fellow who molded it into coins and acted as the community’s central cash register.

So here we have the goldsmiths…guardians of bullion and protectors of everyone’s wealth. I’ve personally always seen this as the primary function of a bank.

But just guarding money and issuing certificates for it…I suppose it just didn’t pay as well as it could. That and you always end up with a huge pile of cash (gold) that’s just sitting around and not really doing anything other than backing promissory notes. So the goldsmiths got crafty, and at this point they became the bankers we know today.

They started issuing more certificates than they could back in gold, allowing them to collect interest on the physical gold collecting dust in their shop… gold that already belonged to someone else. But weren’t there already certificates attached to that gold? Of course. But the bankers believed those certificates wouldn’t all be cashed in at the exact same time, so they could get by and no one would ever be the wiser.

This is the critical point in our story, and at few points in history has the difference between right and wrong been so very clear.

The value of goldsmith’s notes was in the gold behind them. So when they issue a new note backed by…well backed by nothing other than the supposition that they’d have enough inventory to pay it off if it fell through…they were engaging in wishful thinking, at best. Ladies and gentlemen, I give you irrational exuberance. At the very core of our banking system.

But how could the goldsmiths get away with such blatant counterfeiting? Didn’t anyone realize that they were pulling wealth from thin air, that they were trading worthless notes for valuable goods? Well, the governments knew. Why didn’t they do anything to stop the goldsmiths?

Put clearly; it wasn’t in the interest of the world’s ruling monarchs to stop them. King Charles II of England had his own con game going with the bankers…one where they traded him physical gold for sticks of wood (I’m not kidding at all…we’ll be covering government debt next week.)

So by complying with the government’s con games and ponzi schemes, the goldsmiths earned themselves a back-scratching from the world’s monarchs, received in the form of Fractional Reserve Banking.

The Whole World Falling for the Same Tricks…500 years later

And so we arrive at the modern-day. The Dollar is the world’s reserve currency, making us in some sense the world’s goldsmith. And we have a Federal Reserve System – composed of privately owned member banks – that represents how cloudy and convoluted the relationship between governments and banks has become in the last half-millennium.

But somehow, the world economy keeps falling for the same scam.

You see, the Federal Reserve controls not only the interest rate at which banks are allowed to lend, but the fractional reserve ratios they’re required to keep (as a percentage of their reserves).

Let’s backpedal for a second here… make it even simpler. An institution composed of banks and their representatives is in control of not only our money supply, but the amount of new money (in the form of loans issued) that banks are allowed to ‘counterfeit’ and the interest they’re required to charge on those conjured-from-nowhere dollars.

Interest rates – when the decision is left to the borrower and the lender – represent the time preferences and assumed risk of borrower and lender. Like the price of any other good, the interest rate of a loan ideally represents a compromise for both parties in terms of time and risk.

But when the government intervenes with a mandated interest rate (like Greenspan’s sub-zero “liquidity experiment”) those decisions to lend and borrow are often made with little or no consideration to time and risk. Since the money is cheap, free, or the government might even be paying you to take it, incentives are changed across the board.

And then fractional reserve banking comes in. Since the banks only have to keep a percentage of their reserves – a ratio set by an institution they own…making them essentially self-governing – these ridiculously low interest rates spur the banks into a lending frenzy.

Lending to and from each other, commercial interests and private parties, the banks go hog-wild. Without the restraint of reasonable lending costs, they lend as much credit against your money as humanly possible, flooding the economy with fresh dollars that never existed before.

Euphoria takes over. Of course housing prices will continue to go up when the pool of dollars chasing those houses is growing so rapidly…that’s just common sense. But many of us bought into it, in some way or another. And that’s what makes the coming correction so painful.

The M3 Chart:
Ever wonder why the government dropped it a few years ago?

Because of the one-two punch of mandated interest rates and fractional reserve banking, an epic amount of bad business decisions are inevitably made. That’s a simple truth of economics… no matter who tries to ignore it.

But what can I do?

Well, it’s pretty easy actually. Just don’t believe all the hype, take everything with a grain of salt, and make your own decisions. I’m not telling you to protest at your local federal reserve bank, I’m just saying you should use reason and that you shouldn’t take most things at face value.

Like when the keepers of our national pocketbook – and thereby our national sovereignty – are run by the very banks they’re supposed to govern, and those banks (whose original purpose was to guard the money of the people) have a balance sheet that looks like this:

You should be asking questions.

When our government gives a US$25 Billion bailout to Citigroup (NYSE:C), and then the company’s market capitalization is listed at around US$20 Billion shortly before the company is taken over… you should certainly be asking questions.

When Detroit’s CEOs fly to Washington in separate luxury jets, and they beg for US$75 Billion in bailout money for companies with a combined market capitalization of less than US$10 Billion…you should be asking questions.

There’s a heist going on out there… and plans are afoot. Through the careful control of information sources, those in power can control the actions of the masses. But you don’t have to be a part of the masses.

To make the difference and speak out on the part of personal sovereignty, The Sovereign Society’s Chairman John Pugsley has assembled this comprehensive report to tell you about a few of their most dangerous and pervasive of lies. I urge you to have a look.

Regardless of whether you voted for the current President. Regardless of whether or not you like or even trust our country’s political and economic systems. You need to give this special information enough of your time to understand the grim situation you could be facing. Not just for your sake, but for the sake of the Sons & Daughters of America, now being laden with years and years of debt.

Source: Fractional Reserve Banking a.k.a. Counterfeiting