Cramer, the debt bubble, and precious metals

The secondary mortgage market is frozen. There are no bids for anything labeled as ABX, CDO, and CLO. High-yield corporate credit yields have spiked dramatically, widening spreads and increasing the cost of borrowing for companies. As a result, companies may spend less and this could slow our economic growth much more than expected.

That's a calm, cool way to look at recent business developments. Jim Cramer, a Wall Street hedge fund manager who hosts his own show on CNBC, is no friend of calm or cool. Imagine a TV business commentator bellowing the following statements at the top of his lungs, ranting about how Fed Chairman Ben Bernanke is asleep at the wheel:

"HE HAS NO IDEA HOW BAD IT IS OUT THERE. HE HAS NO IDEA. HE HAS NO IDEA. I'VE TALKED TO THE HEADS OF ALMOST EVERY SINGLE ONE OF THESE FIRMS IN THE LAST 72 HOURS AND HE HAS NO IDEA!!!"

"AND BILL POOLE HAS NO IDEA WHAT IT'S LIKE OUT THERE!!"

"THESE FIRMS ARE GOING TO GO OUT OF BUSINESS!!!!!"

"THIS IS A DIFFERENT KIND OF MARKET AND THE FED IS ASLEEP AND BILL POOLE IS A SHAME HE'S SHAMEFUL!!!!"

"WE HAVE ARMAGEDDON"

Here is the video of Cramer melting down. It's scary

http://www.youtube.com/watch?v=cYPtCmdFCrc

Here is the video of Cramer melting down with commentary from iTulip.com. This one at least has its humorous side …

http://www.youtube.com/watch?v=Pd5zAbDKZEg

Doesn't Cramer's statement that big fund managers and heads of financial companies are calling him up and spilling the beans on how bad things are sound like trafficking in inside information? Or maybe I misunderstood him.

Here's why Cramer hates St. Louis Fed President Ben Poole ….

Poole Says Subprime Investors Deserved to Lose Money (Update3)

July 20 (Bloomberg) -- Federal Reserve Bank of St. Louis President William Poole said investors who lost money buying subprime mortgage-linked securities got what they deserved.

"The punishment has been meted out to those who have done misdeeds and made bad judgments,'' Poole told reporters in St. Louis after a speech on the market for mortgages to borrowers with sketchy or weak credit histories. ``We are getting good evidence that the companies and hedge funds that are being hit are the ones who deserve it.[...]

"I find it odd that apparently sophisticated investors in non-prime mortgage-backed securities now claim surprise that many non-prime adjustable-rate mortgage borrowers are facing payment shock because of the increase in short-term interest rates,'' Poole said. ``Mortgage originators persuaded many relatively unsophisticated borrowers to take out these mortgages."[...]

"It is terribly important that we do not have bailouts,'' Poole told reporters. ``If you make some bad bets, you take these losses. That is what investors in these hedge funds should be aware of."

Ex-Fed governor Bob McTeer says it better than I ever could:

"The main fallacy in monetary theory and policy is the confusion of money and wealth. ... Money -- and financial assets easily converted to money -- may not be wealth for society as a whole if the production of goods and services has not kept pace with claims on it. Early spenders may have some success, but inflation will dilute the buying power of others. The bottom line is that real wealth has to be produced; it can't be printed."

Ah, real wealth. Let's look at how gold performed on Friday, the day the market was melting down …

For some time, we've seen gold track the US dollar – falling along with it because gold has become a "speculative investment." But that changed this past week.

Is this a real change in trend? I think so. Gold stocks generally did not perform well on Friday because they are being hammered lower on fears the credit crunch will restrict their business. However, some of our Red Hot Canadian Small Caps stocks help up nicely.

How about financial stocks? Well, let's look at the XLF, or financial sector SPDR …

I would expect that if Wall Street's titans are worth their salt, they're making phone calls all weekend reassuring people that Cramer over-reacted. We could see a bounce on Monday. You might want to sell that bounce.

Not everyone is panicking. I talked to a realtor on Saturday. She says that while the subprime market is officially dead, if you have good credit, you can still get great loans. She said that four banks are fighting over one of her clients, a couple with really excellent credit, and the offers for them have gone down a full percentage point.

The bad news: She also said that Banks are so desperate not to repossess houses that they are refusing to foreclose and are forgiving mortgage debt. They would prefer someone live in the house while they try to sell it and it not be on their books during that time. If the people who "own" the house agree to do that, the banks will let them walk away from upside down mortgages – sometimes forgiving up to $100,000 in mortgage debt.

This is one realtor talking – maybe she's talking through her hat. I don't even know if what she's talking about is legal. If it is, it shows the extraordinary lengths to which banks will go to get out of the subprime mortgage trap of their own creation.

My take: The question facing the Fed is, should it lower interest rates to bail out speculators who bought subprime mortgage debt? Those who say "yes" say it is not just the speculators who are getting hurt. Cramer says 7 million ordinary homeowners who took out adjustable rate mortgages – midwifed by Alan Greenspan, who will go down in history as possibly the most disastrous Fed governor ever – could lose their homes. By lowering interest rates, the Fed will also give those 7 million homeowners breathing room (never mind the speculators) and potentially save the jobs of everyone who works in the home/building industry.

If it were done with severe rules changes so this couldn't happen again, I might be in favor of that. But you know the Wall Street hedge fund managers and predatory mortgage companies would go back to their old ways.

A commentator on thebigpicture.blogspot.com said it better than I could: "Pumping money into a broken system won't fix the system. It's like being dependent on the water flowing through an old and leaky pipe - you can increase the flow of the water and give the illusion that the pipe is sound, but it is still leaking, nonetheless, and the inexorable flow will continue to eat away at the weakest points, creating more leaks, requiring more and more water until....either the pipe breaks open completely (deflation) or a tsunami is required just to provide a trickle to use (hyperinflation). Somewhere along the line, the wise and prudent thing to do would have been to fix the pipe."

And what awaits us next week? Monday could be a bullet train to the Land of Suck.

Look what happened AFTER Cramer's rant …

NovaStar Suspends Funding Immediately
Published at August 3, 2007 in Wall Street and Mortgage News/Insight.
From NovaStar just now:

ANNOUNCEMENT

Due to severe dislocation in the secondary market, NovaStar Mortgage Wholesale is temporarily suspending approval and funding activity on all loan transactions that have not been locked via a NovaStar Lock In Confirmation until Tuesday, August 7th, at which time the policy will be reevaluated. Locked loans and loans with docs out will continue to fund as scheduled. This is effective immediately.

New loan applications will continue to be accepted however will be held until the temporary suspension on loan approvals and fundings has been lifted.

We apologize for short notice and will be reviewing market conditions and updating our policy on a daily basis.

More indepth story here: http://www.kansascity.com/business/story/217888.html

Check out my new gold and energy blog at MoneyAndMarkets.com