As we have been forecasting for the last two years, the second wave of mortgage defaults and foreclosures will hit the economy this year. Not only will we have failure in prime loans and option-arm loans, but we are faced with a new crop of subprime and ALT-A loans put into motion by Fannie Mae, Freddie Mac, Ginnie Mae and FHA. In addition, we find it of great interest that the FHA is changing the rules to purchase homes. That, of course, means less homes will be purchased.

The incidence of unemployment may be lessening, but it isn’t going away. Those of you who keep your ear to the ground know that real unemployment is 22.5% and in cities like Detroit it is somewhere near 45 to 50 percent. This is the result of free trade, globalization, offshoring and outsourcing. No city in America has been deprived of their livelihood more than Detroit. Yet, this is only the beginning. If allowed to continue 30 percent more of our jobs will be allowed to leave America, making our country an economic basket case over the next 20 years. The $25 billion that our federal government is about to loan to the states will help keep unemployment paying out and save some 40 states from going into bankruptcy. That will keep some Americans going but not for long.

Foreigners are buying less and less US dollar denominated assets, specifically Treasury and Agency bonds. As an example, Russia is buying Canadian dollar denominated assets. We ask how does the US fund its debt and its growing debt? The administration is planning for some sort of exchange of retirement funds for a government guaranteed annuity. That is so they can fund their enormous debt domestically as Japan has done for almost 20 years. Who would want to have a government guaranteed annuity from a bankrupt nation? It should also be noted that these retirement plans are still vastly under funded. What will happen if the Dow again revisits 6,600 and these funds’ assets again fall 40 percent? The collateral behind any annuity would be almost cut in half. We will have to see what the government comes up with but any kind of voluntary plan would in time become a mandatory plan. The funds may well be funneled to insurance companies, so they can take part of the action, but they will be buying Treasuries and Agencies with those funds, you can take that to the bank. One of the rumors floating about is that a new 5 percent tax will be foisted upon what is left of American taxpayers, in the form of forced savings, which would be in the form of an annuity. The need for funds to run the government is advancing by more than 10 percent a year, as government becomes bigger and bigger. We see no abatement in Marxist, socialist or fascists in government in their desire to spend to make government ever bigger.

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