Clearing the Confusion Around Money

There was an interesting discussion last week at the end of this post, part of which centred around the true nature of money.

The true nature of money is not as we are led to believe by those who control the money. In fact, it’s really quite different to what we are led to believe, and the conspiracy theorist in me thinks that’s exactly the way the system has been designed – a massive fraud, perpetrated on a population kept deliberately ignorant through misinformation.

The first, and broadest History of Money I read was here. It goes on a bit, but take some time out to read it because it is completely fascinating. I particularly like the piece about the creation of the Federal Reserve, low down on the Part 2 page…

[The Federal Reserve] is not Federal and it has doubtful reserves. The name is an open deception designed to give this private bank the appearance that it is operating in the public’s interest, when in fact it is run solely to gain private profit for its select stock holders. It came into being as the result of one of the slickest moves in financial history. On 23rd December 1913 the house of representatives had past the Federal Reserve Act, but it was still having difficulty getting it out of the senate. Most members of congress had gone home for the holidays, but unfortunately the senate had not adjourned sene die (without day) so they were technically still in session. There were only three members still present. On a unanimous consent voice vote the 1913 Federal Reserve Act was passed. No objection was made, possibly because there was no one there to object.

Charles Lindbergh would have objected. “The financial system has been turned over to… the federal reserve board. That board administers the finance system by authority of… a purely profiteering group. The system is private, conducted for the sole purpose of obtaining the greatest possible profits from the use of other people’s money.”

Louis T. McFadden would have objected. “We have in this country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board… This evil institution has impoverished… the people of the United States… and has practically bankrupted our Government. It has done this through… the corrupt practice of the moneyed vultures who control it.”

Barry Goldwater would also have objected. “Most Americans have no real understanding of the operation of the international money lenders… The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and… manipulates the credit of the United States.”

Most Americans would object if they knew. The Federal Reserve is the largest single creditor of the United States Government, and they are also the people who decide how much the average persons car payments are going to be, what their house payments are going to be, and whether they have a job or not. The three people who passed the Federal Reserve Act in 1913, knew exactly what they were doing when they set up this private bank, modelled on the Bank of England and the fact that THE BANK OF ENGLAND had been operating independently unopposed since 1694 must have given them a great deal of confidence.

Things are not all they seem in the banking world. The Fed was created on the QT, while most law-makers had gone home for Christmas. It is a private institution, along withe the Bank of England and most other national banks. And, contrary to popular belief, banks do not simply take money in on the one side, lend it out on the other, and make profit from interest in the middle.

No! Banks create money from nothing, on a daily basis.

Closer to home now, and bang up to date, is the Positive Money campaign, which is really starting to gather momentum now. They’ve had early day motions taken to the floor of the House of Commons, pushing for simple yet radical reform of the banking system; they have some very senior bankers and politicians on their side; and in the video below, Ben Dyson presents the full picture.

Again, it’ll take perhaps 90 minutes of your day (including Part 2) but it’s well worth it.

Good News / Bad News Wednesday

The Good News

It emerged last week that the number of new tenants registering for rental accommodation through the Countrywide agency chain increased by 20% in May, compared with April. The May numbers were also 28% up on May 2010.

This is great news for landlords. The falling property values are currently being more than compensated for by low interest rates (which now look set to continue for another year or so) and a growing demand for rental property, which is leading to higher rents.

The Bad News

Clearly, the flip side of this is that some tenants are getting themselves into financial difficulties and are unable to keep up with rental payments. The number of court orders to evict tenants is up 9% in the last year, and look set to rise further. The number of tenants in severe rental arrears is up by 13%., around 74,500 people.

That said, this is only 2.1% of rented properties in the private sector, so it’s not too bad, at least not at the moment.

Four (Financial) Horsemen of the Apocalypse

For today’s missive, I’m grateful to Teeka Tiwari from Tycoon Report. This is a section of a recent post – you can read it in it’s entirety here. It is a little US-centric, but it applies to us here in the UK and Europe, too. In a globalised world, we’re all sharing the pain!

There are four key events on the horizon — four Horsemen, if you will — that are getting ready to rip you apart from your money, from your home, from your retirement, and from your security …

HORSEMAN #1: Fed Money Printing Devaluing the Dollar

Back on April 20th I asked the question, “is Ben Bernanke a Traitor to his Nation?”  This question seemed to inflame my readers both pro and against the concept of Bernanke being a bad guy.  But think it through before automatically rejecting this idea.

Bernanke either has to be complicit in the devaluing of the dollar, or he has to be an incompetent.  There is no middle ground here, friends, it is one or the other.  The ugly naked truth is that Bernanke is committed to killing the dollar.

Why Kill the Dollar?

This is a back door way of defaulting on your debt, and it’s exactly what happened in Germany after World War I, when the German central bankers started devaluing the Deutsche Mark in order to meet their war reparations debt.

Will we see post World War I German style inflation here in the States?

While unlikely, I can’t say it is completely out of the question.  If I had told you 10 years ago that Lehman Brothers, Bear Stearns and Merrill Lynch would be out of business, that GM would file for bankruptcy, and that AIG would essentially go belly up, you would have called me insane and would NEVER have read another word I wrote.

Think about that — don’t shoot the messenger, I have no axe to grind against Bernanke.  I’m sure in his private life he is a very pleasant man … this isn’t personal.  It is an unvarnished appraisal of the unspoken truth that lies behind Bernanke’s actions.

Truth is seldom pretty, or neat and tidy, but there are a million other sources that you can read if it’s only the “pretty” news that you are after.  I trade my own money in the market every single day, and I cannot afford the luxury of a more socially refined view.

The motives of the men and women who run the world that we live in are far darker than you could ever imagine.  Men and women of great power will always, always act in their own best interests, while cloaking it in your best interest.  That, my friends, is exactly how we got hoodwinked into allowing the Federal Reserve to come into being back in 1913 … but that’s an article for another day.

HORSEMAN #2: Debt

In times gone by, the overlords would simply compel the peasants to work for nothing, providing only the land to live on.  Their tools were fear, death, horrific punishment, and absolute authority.

Today, their primary weapon has changed.  Today they bind us through the bonds of DEBT.  Easy access to credit is both the carrot and the long sword held by the moneyed barons of today.  While the overlords of ancient times are gone, they have been replaced by a hegemony of corporations.

The sadness of this, though, is that many of us are willing participants in this bondage.

We cannot continue to abdicate our good sense and sense of self worth just for the sake of a few pieces of silver.  And that, my friends, is what cheap, easy to access credit is: The promise to pay tomorrow what I buy and consume today.  It is an illusory dream that has ensnared millions within its narcotic grip.

What is the Exact Nature of This Hallucination?

The great fraud perpetrated upon the masses has been the trading of real personal wealth for the symbols of wealth.  We have been confused into believing that the car we drive, or the watch we wear, or the clothes on our backs, equal wealth.  Nothing could be further from the truth — it is just another part of the great hallucinogenic cloud that has enveloped our country for more than 50 years.

Each day we trade our future financial security away for another hollow symbol of wealth.  Real wealth can only come from living beneath your means, from consuming less than you earn, and investing the rest for a profitable return.  Real wealth cannot be acquired by owning the right brand names!

In the pursuit of this hallucination, our country, both on a national and personal level, has seen its debt explode.  At some point this debt overload will cause interest rates to skyrocket, as the world wakes up to the fact that America cannot pay its bills without first printing more greenbacks.

An immediate impact you will see in your life will be more of your paycheck and/or business income eaten up by taxes.  Your social security, pension payments and medical benefits will all be cut.  This is absolutely unavoidable, and if you are living beyond your means or you have extensive debt, you will be devoured by this series of events.

HORSEMAN #3: China Labor Costs Rising

For years now, the emerging markets, China chief among them, have been instrumental in keeping the costs of goods down all across the world.

It’s a fair assessment to say that, because of China’s very low labor costs and non-existent pollution and labor laws, they have been effectively exporting deflation.

Prices for manufactured goods have been shockingly low for decades now.  In fact, electronic goods have been rapidly dropping in price while rapidly improving in quality and features since the late 1970′s.  But all of that could be under assault as the average Chinese worker starts to demand a better standard of living.

The last time we saw this phenomenon at work was in the 1970′s when Japan, which had been the low cost manufacturer to the world, went through a great social change.  All of a sudden, Japan started to see dramatically higher labor and regulatory costs wreak havoc on their cost structures.  Profit margins across the globe came under pressure, business ground to a halt, and stock prices got devastated.

HORSEMAN #4: Inflation

Whenever a nation spends more than it takes in, and then attempts to pay those debts by printing more money instead of embracing spending cuts, inflation always results.

And not mild inflation, but massive, retirement eating inflation is always the result of this policy of “print now, pay later”.

There are several reasons why this has not yet shown up as extensively as one would imagine that it would or should.  The first is that global growth has been in the dumps for several years now, and this has helped put a lid on the price of everything.

The second reason is that the numbers at the government level are, for the lack of a better word, actively “massaged”.  Things like food and energy are not counted, as if they did not matter.  But ask yourself this: Outside of your rent/house payment, aren’t your two biggest bills food and energy?

In fact, we can already see the politicians sweating the inflation picture as they desperately try to manipulate oil prices down by “strategically” releasing 60 million barrels of oil.  We’ve also seen attempts to massively manipulate other commodities lower in the futures market, as the CFTC (the body that governs the futures market) has acted very aggressively to pump up margin requirements to try and contain runaway commodity prices.

Over the last 10 years, commodity prices have skyrocketed while the value of the dollar has plummeted.  And while this relationship of a weak dollar and strong commodity prices can invert from time to time, the bigger long term trend of a weak dollar and strong commodity prices will be with us for many years to come.

————————————————–//////————————————————–

So what to do?

Well, Teeka goes on in his article to advocate trading ETFs. That’s not my world, but property is, and I would say that buying property remains  one of the best investments for the long term. Yes, I think house prices have further to go (downwards!). Against that, we’re in a buyers market now, and will be for some years now. Plus, rents are rising, and yields are rising.

Whatever you choose to do with your money, just don’t leave it in the bank or under a mattress – it’ll just erode away there before your very eyes.

Greece: The Boil That Europe Won’t Lance

In a recent op-ed piece called Distressed Greece, Delusional Europe, Paul Krugman makes the point that…

“…default would be very inconvenient, both as a practical matter and in terms of prestige. Therefore, default must not be considered a possibility, even though it has long been obvious that nondefault is not an option.”

He says that using the European Stabilisation Fund to continually bail out Greece is utter madness; the fund was set up to help countries facing a temporary cash squeeze by providing them with short-term liquidity. What’s going on with Greece is clearly neither temporary nor short-term – the country is bankrupt pure and simple.

The latest plan, announced by President Nicolas Sarkozy of France, is for the French banks, who have the greatest exposure to Greek sovereign debt, to roll over a majority of their Greek bonds maturing in 2011-14 for 30 years in exchange for guarantees.

Nicolas Sarkozy - married to an ex-supermodel...

“We won’t let Greece fall. We will defend the euro, because it is in all of our interests,” Mr Sarkozy said.

The Irish, of course, being in a deep hole themselves, are keeping a close eye on the situation – what plays out with Greece over the coming weeks and months could have an impact on their own plans for returning to the private debt markets in 2012.

Sarkozy has stressed that the plan for the banks is voluntary, saying…

“If it had not been voluntary, it would have been seen as a default, with the risk of a cascade into a huge disaster.”

Which takes us right back to what Krugman is saying – let’s keep kicking this can down the road, and do anything, as long as it can’t be called a default.

But for how much longer?

While we wait to see what happens next, here’s Farage in full flow in the European Parliament…

What Happens When Interest Rates Start to Rise?

Interest rates here in the UK are sitting at an all-time low, and have been there for a record-breaking length of time – we’re now into the 28th month.

The talk of when they will start to rise again was getting quite loud in early Spring, with estimates being sometime this summer. Now, there are still a lot of predictions around, but due to the economy not growing as much as predicted, the most popular seems to take it out to next summer now, perhaps to August 2012.

My personal portfolio manager at Mortgage Express has visibly relaxed recently!  Earlier this year, she was urging me to create an exit strategy.

This was in my best interests, of course – she was concerned that if the value of my portfolio fell into negative equity, at the same time as rates started to rise, I’d be unable to remortgage away from MX. And I’d want to remortgage away because, now they are nationalised and looking to unwind their entire mortgage book, they’ll deliberately become increasingly non-competitive. But it was also in their interests, as they want to wind the mortgage book down as soon as they can, and they want people like me out of the door and away down the road to another lender.

As it is, they’re charging me 1.75% across the board, so I don’t want to go anywhere just yet!

We shouldn’t relax too much, though. Even if the first rate rise is a year away, that year will be gone soon enough…and then what?

I’ve been suggesting since the start of the crisis that there are a lot of ‘amateur’ landlords that will be in difficulties when rates start to move. By amateur, I’m not being disparaging in any way. I just mean people in full time employment, or in retirement, who saved up enough to get one or two rental properties during the boom years. What I suspect a lot of them don’t have is either a) a substantial cash cushion in the event of extended voids, blown-up boilers, or a monthly shortfall between rent received and mortgage paid, or b) significant spare income each month to cover such eventualities.

When rates start to rise, a lot of these people will struggle to keep up. Many of them will have their properties repossessed. And these repossessions will then, in the normal course of events, hit the market via auctions. My fear has always been that such a glut of available properties will drive prices down harder and further than we saw in 2008 / 2009, which will then push more people over the brink.

It’s not just investors. It’s ordinary homeowners, too.

Richard Banks, CEO of UK Asset Resolution, the state company that runs the £80 billion  of mortgages bailed out by taxpayers during the banking crisis, said last week,

“You can see if you don’t do something about [higher rates], you can see a tsunami”

As the UK’s fifth largest lender, as a result of all the nationalisations, and with 750,000 mortgage customers on his books, he’s right to be worried. (In fact, I’m one of his customers, as the bits of Bradford & Bingley that weren’t taken over by Santander / Abbey were nationalised, and Mortgage Express were a part of B&B).

What choice do the lenders have, then, other than to repossess?

My friend Jason (who gets two mentions in this post – can you spot the other one?) once said to me that repossession is a harsh and brutal process that has no place in any Civilised society. At the time, we were talking about all the options that could be presented to a struggling homeowner that don’t involve throwing a family out onto the street with all their belongings carted off to storage.

It now turns out that the Americans may be onto something.

For the past four years, they’ve been toying with the idea of having lenders give the option to homeowners who are about to lose their homes (they foreclose over there, they don’t repossess…) to stay in the property as tenants, paying market rates.

This is hardly a new idea. I’ve done sale and rent back deals myself, until the FSA stamped on the market a couple of years back. It can still be done, through the better licensed SRB providers, but even those guys are struggling with FSA rules, and accessing sufficient funds to keep up with demand.

This Is the FSA Logo

This is Definitely NOT the FSA Logo

The question is – could we borrow this idea from the Americans?

From a consumer point of view, it’s sounds great. You get behind on your mortgage payments and, rather than get turfed out by the bailiffs, you get to stay on as a tenant. Of course, you lose ownership of your home, but at least you don’t lose your home. The deal lasts initially for five years, which gives you plenty of time to come up with a Plan B.

There are downsides to it, of course.

The biggest one the Americans have been wary of is the ‘moral hazard’. It could send out a message to all homeowners that this is an easy, quick-fix way out, and could therefore be open to abuse. There’s also the “unintended (?)” end result that the banks – or, in the case of UK Asset Resolution, the UK government – get to hold onto all those properties and, in effect, become a massive landlord that owns great swathes of UK housing stock.In a similar way, Freddie Mac and Fannie Mae are both owned by the US government, which makes the US government the largest holder of mortgages by a long way.

Do we want our government to be our landlords?

Is this a way of muscling in on the property investor market through the back door? Or is it a way of returning to the pre-Thatcher days in the UK where the government did own large numbers of houses, for the good of the wider community? Or is it simply a way of avoiding the pain, both at a individual and family level, and at a broad economic and market level, of mass repossessions once rates start to rise?

UK House Prices Slip Further

Amongst the virtual blizzard of price indices that are around now – Halifax, Nationwide, Assetz, Land Registry and so on – Hometrack is probably one of the more widely respected.

In their latest release, they reveal that prices have slipped by 3.7%, after another 0.1% fall in June. (You’ve got to be impressed with an index that releases figures before the month is even over!)

However, their director of research, Richard Donnell, is not too pessimistic about the implications of these figures…

“Low transaction volumes, low mortgage rates and forbearance by lenders limiting the number of forced sales have all played their part. While average prices have slipped back by 1 percent, sales volumes have increased off the back of higher demand and greater realism over achievable prices”

 

Elsewhere, mortgage rates are falling across the board – to their lowest levels in 23 years – as the swap rate improves, and the prospect of a rate rise recedes into the distance…

Project Funding via the 70/30 Route

Our post from June 13th, which lays out the process of raising funds via an SBLC, remains one of the most popular, in terms of the number of people who read it each day. Partly as a result of this post, we’re working with two new clients on this funding route at the moment, with several others currently considering it as an option.

However, there’s no such thing as a ‘one size fits all’ when it comes to project funding, and of course, the SBLC route is not for everyone. The primary alternative that we offer is the 70/30 route although, as we’ll see in a moment, the name we chose for it is becoming increasingly misleading.

This funding route is U.S. based, and offers loans particularly to projects that have a humanitarian slant to them.

The loan comes in two parts…

• 30% equity (provided by the American investors) at 0% interest, repayable in full after 5 years (up to a maximum of 8 years), with a pre-agreed profit share percentage on repayment.

• 70% loan at 3% p.a., over a period of 5-30 years, with the option to defer the first payment for 24 months, and sometimes up to 36 momths.

When I said the name is a bit misleading, I refer to these proportions. My colleague is putting through a $70m proposal at the moment that has attracted no fewer than nineteen funding offers, and with a couple, the split between the two elements is 85/15, rather than 70/30.

The loan takes the form of a drawdown facility, which means the Client only takes what they need, as and when they need it, in accordance with the business plan.

The American funders do require the loan to be granted to a Special Purpose Entity (SPE) (which is the same as an SPV in Europe) based in Delaware, wholly owned and controlled by the Client, the cost of which is borne by the borrower.

Process Overview

1. The Client provides an Executive Summary of the project, plus an Initialisation Fee of £2,200, for which we which will take the project through General Approval and Pre-Qualification.

We only take forward projects that we are confident will receive funding, so this Fee is fully refundable if the project does not get through General Approval and Pre-Qualification.

2. Project gains General Approval.

3. The Client provides a ‘ready, willing and able’ (RWA) letter and a signed fee agreement (usually for 3% of the loan, payable on completion).

4. The Executive Summary then goes through Pre-Qualification with the funders resulting, if they like it, in a Pre-Qualification Letter (PQL). This is valid for 14 days.

5. The Client receives the PQL and will be asked to sign a pre-written Letter of Intent (LOI), which has to be returned within 14 days, before the PQL expires. The Client will also receive an offer to set up a Special Purpose Entity (SPE) in Delaware, which is part of the requirements laid down by the funders.

6. Having signed and returned the LOI, the Client will then be invoiced for the SPE set-up. This must be paid within 14 days.

The cost of the SPE depends on the amount of the loan required.

• 0.5m USD – 2.0m USD $8,400.00
• 2.1m USD – 9.0m USD $9,400.00
• 9.1m USD – 32.0m USD $13,400.00
• 32.1m USD – 70.0m USD $16,400.00
• 70.1m USD – 140.0m USD $21,400.00
• 140.1m USD – 200.0m USD $26,400.00
• 200.1m USD – 270.0m USD $31,400.00
• 270.1m USD – 350.0m USD $36,400.00
• 350.1m USD – 450.0m USD $41,400.00
• 450.1m USD – 500.0m USD $46,400.00
• 500.1m USD – 600.0m USD $51,400.00
• 600.1m USD – 700.0m USD $56,400.00
• 700.1m USD – 800.0m USD $61,400.00
• 800.1m USD – 900.0m USD $66,400.00
• 900.1m USD 1,000.0m USD $83,400.00
• 1.0bn USD and above will be quoted separately

(The bulk of this cost is lawyers fees, who set up the SPE in a very specific way, in accordance with the wishes of the funders. This is why an off-the-shelf SPE that you can buy online for $700 simply won’t cut it).

7. Once the invoice is paid, the SPE will be set up, and the Client will submit the full business plan for consideration. The funders allow themselves 60 days to complete due diligence on the project, and their due diligence comes at a further cost to the Client of between $15,000 and $38,000, depending on the size and complexity of the project.

8. On full approval, the funding line will be opened, and the Client can start drawing down, as per the business plan. The 3% arrangement fee must be paid as soon as full approval is granted, and can be built into the first tranche drawn down.

The entire application process generally takes 3-4 months.

The biggest issue clients have with this route are the upfront fees, particularly the cost of setting up the SPE. These must be paid before receiving any written confirmation that funding is available to them. However, we generally get told verbally at LOI stage that funding is in place for the project, and we’re getting an ever-increasing number of projects through this route now. This is giving us more traction in the marketplace, and giving more comfort to prospective clients for whom this route is an attractive, viable alternative to the SBLC.

If you think this might be a funding route that could serve your project, fill in the form below, and we’ll see what we can do for you.

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