“The process of inventory adjustment has just started,”
Alan Greenspan said this week, while in London on his book tour, “and we have a long way to go before residential housing and mortgage markets stabilize in the U.S.”

Greenspan then peered down at his “chance-of-recession-o-meter” and reported it had risen from “slightly more than 1 in 3” to “less than 50-50.”

As if on cue, the pending home sales index came out yesterday… and dropped to a record low score of 85.5 in August.
Economists were expecting a 2% drop from July’s score of 91.4. But the index declined 6.5% — the third biggest one-month fall on record.

Home sales dropping rapidly year over year

Overall, the index is down 21.5% since this time last year — also an all-time record decline. Last week, we reported ‘new home sales’ at seven-year lows. Median prices are falling at a rate unseen since 1970.

The downward path of home prices “will dominate Fed policy over the next several years,”
said Bill Gross yesterday in his latest missive, “as will the lingering unwind of related financial structures and derivatives that have yet to be discovered by the public.”

“If the Fed was so slow to grasp the role that subprime mortgages played in the housing boom and bust,” Gross continued, one has to ask, “do the Fed and the Treasury of today totally comprehend what happens when the nonbanking private system suddenly stops flooding the market with credit?”

We’ll soon find out…

Ironically, much of the housing market mess could have been avoided entirely. A new study from Fannie Mae reveals 50% of the subprime mortgages sold in recent years were purchased by borrowers who could have qualified for “prime” mortgages.

Sure, borrowers would have had to pay higher monthly payments earlier. But they also would have avoided the tsunami of resets that is rifling through the industry now. Among the culprits: mortgage brokers heavily incentivized to steer borrowers with good credit into ARMs that pay higher fees over the long term. Caveat emptor, people.

Deutsche Bank took a page from Citi’s playbook this morning and announced that they too will pay billions for bad subprime bets in the third quarter.
The German banking giant will take charges up to $3.1 billion on leveraged loans, structured credit products, and mortgage-backed securities.

Both Morgan Stanley and Credit Suisse announced layoffs within their home loan divisions.
Together, the firms will fire about 1,000 employees.

The second wave just keeps coming.

While home sales stagger and fall in the U.S., sales in China are entering their own bubble.
From January-August, sales of homes increased a whopping 30.9% from the same period in 2006.

The Chinese government has installed some amazing regulations to cool the housing blaze. Buyers of second homes must produce a 40% down payment. Such purchases will also be charged 1.1 times the benchmark lending rate, up from 0.9. The government also now insists on a 50% down payment for all commercial real estate transactions.

But prices keep rising. Property prices in Beijing were up 12% in August, year over year — 20% in Shenzhen, a booming city outside of Hong Kong.

Markets were dull yesterday. Flat. But one item did stick out. Investment-grade corporate bonds brought in a record $94 billion in September.
The market is on track to raise a trillion dollars in bonds this year, a feat it has never achieved. The record sales, suggest the Financial Times, show that “better-rated issuers are finding ways around the credit squeeze.” We’ll see…

Yesterday we mentioned briefly that currency speculators in the Middle East have been predicting a revaluation of local dollar-pegged currencies. “Frenzied traders bid up the UAE dirham and the Saudi riyal to near record highs as a result,” reports Joel Bowman from Dubai. “Saudi British Bank did its best to calm the waters by saying, ahem, it would only dump the buck, ‘if the dollar weakens at an alarming rate.’”

Now it’s OPEC’s turn: “International banks and analysts have hinted at the possibility of the OPEC changing the price of oil to a currency basket, rather than the dollar,”
says Joel. With Iran all but there… and Venezuela not far behind, we’re not surprised.

“If the dollar were to lose its luster as a reserve currency,” reads a note of concern released by Merrill Lynch, “this could prove disruptive to the global financial system.”

Gold fell to $725 yesterday
, before bouncing up to $733. “As expected,” comments Ed Bugos, covering the gold beat for The 5.

“Looking at the technical charts,” writes Ed, “I was expecting a short-term correction to start when gold reached the $750 area. It would be no surprise to see the market fall and test the new $690-700 support level before lurching higher.”

“If gold rebounds off the $700 mark,” Mr. Bugos speculates, “you might expect it to surge to the $900-1,000 target suggested by the new trends taking shape.”

David Obey, chairman of the U.S. House Appropriations Committee, proposed a surtax yesterday aimed at paying for the war in Iraq.
Under his plan, 2-15% of your income would be taxed to pay the $600-700 billion tab we’re running for the “war on terror.” In other words, for every $100 you’re taxed, $2-15 would be added on to pay for the war.

Obey’s plan was introduced, discussed, and nixed in less than four hours. “Just as I have opposed the war from the outset, I am opposed to a draft and I am opposed to a war surtax,” said Speaker Nancy Pelosi.

“Under the Republican political control of 2001-2006,” writes our Byron King, “Congress was OK with fighting the war in Iraq, but not paying for it. Better to borrow the funds, was the apparent philosophy, and lay the cost off on future generations.”

Pelosi, apparently surprised that she has to pay for the war.

“Now under new management,” Byron continues, “Congress reminds us every day that it is not OK with fighting the war in Iraq, but still refuses to pay for la guerre with new taxes. Better to borrow more funds, is the apparent philosophy, and lay off even more of the cost on future generations.”

Not surprisingly, record levels of Hail Mary fun money is dripping into the ever-expanding bucket of government debt. “Donations to the Bureau of the Public Debt have topped $2.5 million so far this year,”
report the McClatchy papers, “the highest amount since at least 1996.”

“Who on Earth is making these donations?” asks Daily Reckoning blog-man Dave Gonigam. “Someone needs to carry out an intervention with these people, because no matter how much money they’re donating, they are enabling an addict — a government addicted to spending.

“You could donate this money to a battered women’s shelter, or use it to help start a business or just spend it and help keep the economy sputtering along… but right now, you’re doing the single most destructive, worthless thing possible with this money!”

If you have donated money to the bureau, please report to the Desidooru Saloon
immediately. And be prepared to explain yourself.

“I subscribe to several of your publications and find them useful and insightful,” writes a reader. “However [uh-oh], I did not like the tone of your piece on the Navy’s swastika-shaped building

.
It is an abomination and a very unfortunate architectural structure.

“My father was badly wounded during the Battle of the Bulge in World War II. A German soldier shot him in the back after he had already been wounded and was lying facedown in the snow. He was told decades later at a reunion of his outfit, the 75th Infantry Division, that the Germans were checking dog tags, and shot those GIs whose dog tags contained an ‘H’ for the religion of the particular soldier. As you might guess, ‘H’ stood for ‘Hebrew.’

“Under the swastika, the Nazis sought to enslave the world, and murder anyone whom they regarded objectionable, including 6 million Jews. Had it not been for men like my father, who risked and often gave their lives to stop them, these criminals might have succeeded.

“So if ‘Jewish folk’ object to the swastika design of a U.S. Navy building, it should be obvious that we have a reason for doing so. Your attempt to trivialize it was disgusting and offensive. Think about it some more, and then think of the men and women of the Allied forces who fought to protect your freedom. The building unwittingly desecrates their sacrifice.”

“The swastika is an emblem that signifies progress,”
writes another, “peace and prosperity to the Hindus. And Zoroastrians use a saffron paste to paint the swastika on their fire urns before prayer rituals. Zoroastrianism is the faith of the Magis.

“How long are the Jews going to milk this cow? They already have an extremely powerful Israel lobby in Washington, D.C., which calls many of the shots in the governing of this country. This is influence peddling in the extreme. It’s time to suck it up and move on. We never hear such outcries from the average Russian after Stalin wiped out 25 million of them, or from Bosnia, Chechnya, Darfur, Armenia, China (tens of millions at the hands of Mao Zedong), etc.

“And isn’t this an insult to the average Hindu and Zoroastrian who considers the swastika to be a sacred symbol? So now the Navy will spend hundreds of thousands of dollars of our money to appease these pull peddlers, just so the swastika does not show up on Google maps. It’s outrageous.”

Best regards,

Addison Wiggin,
The 5 Min. Forecast