The Millionth Visitor--You

(and: Stock Market Hat Trick)


I am honored and humbled to note that this small outpost on the World Wide Web received its millionth visitor yesterday. I don't know which of you was the millionth, but in a real sense each of you has that distinction, for without you there would be no millionth visitor.

Of Two Minds is truly a product of two minds: yours and mine.

As you can see from this chart of monthly visits, OTM slouched along for 10 months without many readers. Some noble person submitted some of my entries on the housing bubble to patrick.net (thank you, Patrick, for your support and encouragement) and readership began climbing.



This site's growth is entirely due to you: it is your recommendations, contributions (financial and informational) and commentaries which keep this small corner lively.

There aren't any perfect metrics of value on the Web; some rely on the number of other sites linking to a site, others use hits or visitor counts. (On Technorati, this site is ranked 128,000 or so.) On any metric, OTM is no great shakes on the Web; Chinese actresses and sites on Harry Potter draw millions of visitors each month.

Nonetheless, a million visits is nothing to sneeze at, either, given that I am a complete unknown with zero connections, credentials and marketing. For any writer, the greatest success is having readers; and in this sense I consider this site a major success. No, it will never pull down $10,000 a month in ad revenue, or win any prizes or top any "Top Whatever" list, or receive any recognition--but it is a success because you're here reading this.

Would I rather have a brilliant blog no one read, or this flawed one with lots of smart, experienced, curious, well-informed and fun readers? This one, baby, all the way.

This chart drives me to speculate on why this little effort has attracted so many erudite readers. I have come up with a short list of possibilities:

1. The Mainstream Media has failed to do its job. It is reactive and therefore behind events and reality. We're all disgusted with the MSM for good reason; all through the insanity of the housing bubble, there was rarely a peep from a media slavishly cheerleading the realty and lending industry's hype (not because they bought hundreds of millions of dollars in advertisements, of course). Is "propaganda" too strong a word? I think not.

And now, as the wheels fall off everything at once--Iraq, the economy, the global debt/risk bubble, the housing bust, our health, our deficit spending, our institutions, global oil supply--the media is behind the curve on every issue. As a result, people turn to blogs for proactive skepticism and some attempt to make sense of our world instead of parroting the various Party Lines.

2. Skepticism has been overwhelmed by denial, complacency and/or dogmatism. As a free-lance journalist for the past 20 years, bringing a bit of skepticism to the story is an ingrained habit, as is taking a non-partisan stance, sourcing data and collecting reports from the field. There is precious little skepticism in either the MSM or the blogosphere; the Party Line is trumpeted ad nauseum. The hit on blogs is there's rarely any reporting (pontificating is not reporting); thanks to your input, there is on-the-ground reporting here--from readers.

3. The blogosphere lacks editing and as a result it's a messy time-sink. Many of you ask why I don't allow comments or threads; the reason is that I loathe the content-free, attack-mode foul-mouthed default-setting of anonymous posting, and I also don't have enough time to read dozens or hundreds of mostly parroted/worthless comments, either here or on any other blog. My goal is to provide you with a wide variety of reader opinion, analysis and experience without having to slog through thousands of words of pap.

And another thing; we don't just post links and snippets from other sites. You get original content here, and creative extras like reader Haiku.

4. Most blogs don't actually develop a relationship with readers / contributors. Most "popular" blogs have maintained the pretenses of the MSM: the writer sits in splendid isolation on top the heap and visitors passively read what is laid before them; their only input is the equivalent of "letters to the editor" (post a comment).

Here at OTM, readers are integral to topics and content; many entries are written entirely by readers. When one of you says something better than I can, then I print what you wrote. When your experience far exceeds my own, I share it with everyone else--not as comment 149, but as Paragraph One.

5. Readers here post substantive, important well-thought out essays. On other "big" blogs, the commentators are all credentialed in some way; here, any reader can submit a thoughtful commentary and get it published in Readers Journal. I don't edit to conform to my views; as long as you present a thoughtful case substantiated by data or personal experience, your view is presented as you have written it. (I do modify cuss words out of respect for readers who see no need for them.)

6. We try for a diversity of topics as broad as life itself. Yes, I tend to focus on "big issues" like Medicare, the global economy, etc. because trying to understand our complex, ever-changing world is a most engrossing puzzle, but I have always written about everything which interests me--even when it is old foreign movies no one watches, the height of trees and buildings in Paris, or dumb ad parodies.

I think this "unexpected" quality might be of value--but that's a guess. Maybe the truth is you merely humor all the off-beat stuff here. Sometimes I get tired of the "heavy" issues and just want to write something off the beaten path. So far you've forgiven me. Kroika!

7. We small-fry need every advantage if we are to survive and prosper financially. I am not qualified or interested in offering investment advice, but I do try to offer up charts and commentary which might help you analyze things which you have read elsewhere. Some of you get bored with stock market stuff, which I understand; but the market (in stocks, commodities, futures, options, housing, etc.) is one of the very few avenues open to small-fry. This truth keeps me coming back to investment-related topics. If we understand underlying trends, we can perhaps benefit. Running off the cliff with the rest of the lemmings is always an option, but you would rather not; that's why you're here reading this.

8. This site is free, original content untainted by marketing and advertising. Yes, I offer up my novel here in the sidebar, and if you buy a book here through the Amazon links I get a small referral fee. But you pay no more for the book or DVD than you would otherwise. I receive no money from anyone for content or links here.

Instead, I ask for what I think is far more honest than shoving endless ads in front of you (ads which don't even work, in my view). If you find some value here, then please donate cash. If you're between jobs or a student or strapped for money right now, then it's OK; there is no "premium content" reserved for subscribers. I reject that model because not every reader is able to kick in a few bucks. Your readership is the most valuable asset here, for that leads to reports and commentary which add value for all of us.

The financial contributions from generous readers are important to me. Some 175 of you have donated about $3,800 to the site since March (many have made multiple donations). This works out to about 15% of my annual income--quite a difference, believe me. It takes about 4 hours a day to respond to email, do research, maintain Readers Journal and write the thing; if I were to receive minimum wage from you, the readers and contributors, (1,000 hours a year X $7.65/hour = $7,600) for the maintenance of the site, I would be delighted. If this doesn't materialize, well, no big deal; we all do what we must, and so far this has been very rewarding. I have learned so much from you, readers, and for that I am deeply grateful.

Whatever the myriad reasons for your readership--I am grateful that you include Of Two Minds your list of blogs and sites to scan.

OK, content time. More stock market charts, yikes! The reason I am posting these charts is that they suggest a critical juncture is upon us: the markets will either jump back to their highs and continue the debt-fueled frenzy, or they will plummet to recent lows and beyond--if reality is allowed to poke its beaten head from under the carpet where it has been stuffed for seven long years.

Here is a weekly (long-term) chart of the venerable Dow Jones Industrial Average. Notice the giant wedge which has formed, and the declining MACD and ADX lines. Wedges almost always break sharply up or down; the declining indicators suggest the break won't be to the upside, but that depends on how massive the intervention/manipulation is next week.



And here is the daily (short-term) chart. Note the same wedge is visible here.



As I write this Thursday, the DJIA is up 145 points on the news that McDonalds has sold so much junk food around the globe that it can now enrich its stockholders with a 50% dividend increase. Whoopie, yea for Capitalism with a Capital C! In other news, Citicorp says "BUY GM!" because the flailing automaker might get a break from the UAW on healthcare costs.

Regardless of this astonishingly wonderful good news on the Corporate America front, the wedge formation noted above is still in place. And the Fed meeting early next week will probably provide the excuse for a return to Euphorestra-induced complacency or a shattering drop into the sour depths of actual fiscal reality.

Year after year, the Fed and its troop of cheerleaders in the Treasury, Wall Street and the media has pulled another rabbit out of the hat to amaze and distract the world from the realities of American profligacy and debt chicanery. Can they repeat the performance one more time? They are doing their darndest, that's for sure; the only question is whether the audience is finally tired of the same old tricks.


Contributor James Chaderis: my attempts to thank you via email were returned by your ISP, so allow me to thank you here for your gracious and generous donation. It is much appreciated.


Thank you, Eric R., ($20) for your generous donation to this humble site. I am greatly honored by your encouragement and readership. All contributors are listed below in acknowledgement of my gratitude.


Thank you, readers, for your readership and for your financial support.

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Trade Imbalances and the Dollar


Fed Chairman Ben Bernanke came out and stated the obvious in a speech delivered in Europe: there is a global trade imbalance between the U.S. and everyone else which has to be fixed.

You know the saying: a trillion here and a trillion there, and pretty soon you're talking real money. With a trade deficit of around $750-$800 billion a year, the U.S. has been shoveling dollars abroad in exchange for goods at a prodigious rate.

As foreign holders of these dollars have tried to find a home for their ever-growing mountain of bucks, they've thrown dollars into U.S. Treasuries and other U.S. debt. For their investment in America, they've received a 30% haircut in value as the dollar has depreciated.

Now the political war drums are beating for some quick and dirty fix of the imbalance. Everyone's favorite fix at the moment is a re-valuation of the Chinese yuan, a bit of wizardry of such unlimited powers that even Gandalf would be envious.

But before we jump into that morass, let's look at a chart of actual facts, courtesy of U.S. Census Bureau and the CIA Factbook, two eminently reliable sources:




And of course you know who the bad guys are here, the ones running huge deficits with the U.S. Yes, the villains are:




Japan and Germany. Funny, but no one ever complains about their staggeringly large trade deficits with the U.S.. You have noted, of course, that the stats are "per capita," which skews the data from nominal dollars to populations of the trading nations. I did this to reveal yet again how "factual statistics" can be presented to support various biases/political positions.

According to this chart, we should be screaming for a rise in the yen and the euro, and demanding Japan and Germany buy more American products to offset their deficits.

Here are the statistics (U.S. Census Bureau:)

In millions: (imports from U.S., exports to U.S.)
Imports: Exports: Deficit
59,612.7 148,180.8 -88,568.1 Japan 2006
41,319.1 89,082.0 -47,763.0 Germany 2006
55,185.7 287,774.4 -232,588.6 China 2006


Population: (CIA Factbook)

127,433,494 Japan
82,400,996 Germany
1,321,851,888 China


As I have noted here many times, trade has always been a primary source of national wealth. And as I have also noted many times, the huge profits in this trade aren't being reaped by the Chinese, but by American companies:

Trade War with China: Who Benefits? (April 11, 2007)

Why China Is Being Scapegoated (May 21, 2007)

The Paradox of Plenty: Manufacturing (May 2, 2007)

As for trade having been the source of wealth since ancient times, I recommend the fun-to-read three-volume history classic by Fernand Braudel, The Structures of Everyday Life (Volume 1) , The Wheels of Commerce (Volume 2) and The Perspective of the World (Volume 3)

Could Mr. Bernanke be planning another, less ballyhooed fix of the trade imbalance? Longtime contributor Dorothy S. suggests this could be the case:

"As you well know Bernanke's speech today was about balancing the trade deficit globally (of course what he really means is the US.) His speech was devoid of any mention of interest rates however, he did give us a clue.

Your article today stated that "observers see the dollar dropping to 60 as this is the only way the U.S. can ever rebalance its outsized $800 billion/year trade deficit." If indeed this is the only way to rebalance the trade deficit and according to Ben's speech rebalancing is of the utmost importance (to hell with inflation or maintaining the dollar), then we can assume the Fed will drop the rate on the 18th. (I think it's nice that Ben has finally come out of the closet and admitted that maintaining a solid grip on inflation is NOT the Fed's number one concern.)

Ben does not want an interest rate drop to be seen as "bailing out investors/Wall Street" so he had to come up with something and that something is the trade imbalance. Anyway, I could be completely wrong but that's how I see it."

So the solution to the trade deficit is the willful destruction of the dollar via Fed rate cuts. (Or as Dorothy suggests, at least that's the fig-leaf being offered to justify rate cuts). Lest you think there is no connection between rate cuts and the dollar, then please read this article recommended by longtime contributor J.F.B., who noted that rate cuts in 1987 sent the dollar over a cliff: A Falling Dollar, After All

New correspondent Mark A. recommended this longterm chart of the dollar (in relation to major currencies) from the St. Louis Fed site: Dollar Trade Weighted Exchange Index: Major Currencies



Alternatively, if Mr. Bernanke and Company decide that the dollar collapsing would be even worse than letting Wall Street speculators go belly-up, then they will have to hold the line on interest rates, regardless of the domestic chorus begging for rate cuts.

The operant phrase is here is "on the horns of a dilemma." Anyone who thinks the domestic economy won't pay a price for a plummeting dollar is deluded. Anyone who thinks our trading partners will be delighted to see their trillions in Treasuries and other debt instruments evaporating before their eyes (the net result of a dropping dollar) and the sudden appreciation of their currencies against the dollar is truly deluded.

If the Fed doesn't support the dollar, the gates of a peculiar and frighteningly unpredictable Hell will yawn open to swallow the U.S. On the other hand, cutting rates won't save the doomed speculators or the doomed homeowners who are essentially insolvent. So who in their right mind would cut rates, when it can only undermine the dollar and do nothing to save the bubble-blowers who are heading for bankruptcy?

Who, indeed. We shall see who next week. Will an insignificant quarter-point drop surprise anyone? No. Will it fix anything? No.


Thank you, George T., ($10) for your much-appreciated support to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

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A Culture of Deception and Fantasy


I recently came across two ads which capture the essence of Americans' preference for fantasy over reality and deception over truth.

Here's one which markets a sugary chocolate-laced candy bar as "health snack" based on a bit of oatmeal used to bind the chocolate and the sugar:



This is the epitome of American marketing guile and Americans' desire for fantasy: that eating a candy bar loaded with unhealthy levels of fat and sugar will promote "health" because it contains a very modest quantity of fiber.

This way, harried American parents can give their kids, brainwashed by endless hours of marketing on TV, what they're clamoring for--a high-fat, high-sugar high-salt candy bar--and then slip into the warm comforts of a naive belief that this cleverly packaged, insidiously taste-engineered and heavily hyped product is actually "good" for their kids.

Folks, this is a candy bar, not a healthy natural food. It is a calorie-loaded disaster whose negatives far outweigh its extremely modest "benefits." If you want to give your kids some real fiber, then cook up plain old oatmeal. Throw in some raisins for sugar and iron and some ground flax seed for omega-3 and you've actually got a real source of fiber--and a lot of other nutrients which aren't even tracked on the deceptively minimal "nutrition facts" labels.

And the real food would cost about 30 cents, not $3.

Garbage "food" like this--immensely profitable, deceptively marketed and labeled--is why the U.S. is now a nation of overweight, unhealthy citizens. Today's news is all about children with high blood pressure, caused--are we surprised?--by being overweight.

Is there a cultural connection between the food industry's seductive deceptions and the consumers who willingly lap up fantasies of "healthy" candy bars, and the subprime mortgage mess? Absolutely.

In both cases, a highly profitable product--in one case, mortgages with huge upfront (garbage) fees and deceptively marketed benefits (super-low interest rates)--in the second, candy, pills, high-salt high-fat snacks, sugary cereals and low-calorie (but high-salt and low nutrition) prepared meals--is relentlessy marketed--on blogs and websites which accept ads regardless of the source or content, in the mainstream media (TV, radio, billboards) and of course in the endless pitches and offers which stuff our mailboxes.

But rather than view this glossy material skeptically, Americans bought it all. Rather than read the fine print or nutrition label (as poor a source of data as that is), they signed on for mortgages which soon jumped from 3% to 12%. Why? To get on board the fantasy train of unearned wealth flowing from the housing boom.



The desire for a fantasy world of easy unearned wealth and easy unearned well-being is the connection between the meltdown of our health and the meltdown of our economy.

Marketers of course understand this concept well. Sell the fantasy, market and label the product as deceptively as you can get away with, and the hordes will buy, buy, buy.

This cultural foundation of deception runs very deep. In the Vietnam Era, we had faked body counts, "light at the end of the tunnel," budgets which hid the true cost of the war. And today--well, it's deja vu all over again.

On the financial front, we now know what we suspected all along--that the foundation of the housing and debt bubbles was all lies and deception: puffed-up appraisals, ratings agencies covering up the true risk of the mortgages and derivatives being packaged and sold as "low risk," corporations pulling every accounting trick in the book to goose their quarterly earnings, off-balance sheet liabilities kept off the books, mark-to-model assets worth half of their stated value--the list of lies, prevarications and deceptions is truly endless.

What's the solution? Stop buying the lies and fantasies. Stop voting for politicos who buy into the lies themselves. Don't buy a house at an inflated price. Pay off your credit cards and then cut them up. Don't accept ads and marketing on your blogs. Cancel the cable or satellite TV feed. That's just for starters. You can make up your own list, I'm sure.

Am I disgusted with a culture based on deception and fantasy? Yes. I think we all are, and I know many of you have done the right thing--sold your over-valued house and rented, tossed out your TV (to protect your kids), cooked real meals instead of microwaving salty, low-nutrition packaged food, and paid off debt rather than acquire more.

Bottom line, none of us have to buy into the deception or fantasy. A little skepticism of marketing guile and claims, a little belief that wealth should be earned and conserved, a little control over the flood of cleverly marketed deceptions which pour into our mailboxes, TVs, radios, shopping carts, homes, and computers, attached to "free" email, and nearly every website--these are all things any of us can do. It's a start.


Thank you, vera K., ($50) for your continuing support (2nd donation) to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

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Will Foreign Owners Dump U.S. Stocka and Bonds?


On this, the somber anniversary of 9/11, it is perhaps appropriate to ponder the global nature of the U.S. economy: In particular, the non-U.S. ownership of U.S. stocks and bonds, and what could cause foreign central banks and investors to sell some or all of those assets.

Longtime correspondent and fellow blogger Fred Roper submitted an intriguing article from the U.K., Is China quietly dumping US Treasuries?

The issue is being sharpened by the drop in the dollar, described here on Sept. 8: The Big One Just Hit.

In a weirdly self-absorbed manner, the mainstream media and its countless swarm of analysts are focusing almost exclusively on domestic concerns and Fed rate cuts, as if foreign investors didn't have a $12 trillion stake in the dollar.

(I have seen that amount in print but found no reliable source for such a total. But based on my admittedly limited review of the Bureau of Economic Statistics monumental report Foreign Direct Investment in the U.S.: Country and Industry Detail for Capital Inflows 1994-2006 this does not seem an unreasonable guesstimate.)

This site has many non-U.S. readers. I now ask my U.S. readers to put themselves in the shoes of a non-U.S. portfolio manager who is trying to preserve the capital he/she has been entrusted with. If you reckoned the dollar, having broken a key support level and vulnerable to cuts in U.S. interest rates, might plummet 10% or even 20%, you would be duty-bound to wonder if the best capital-preservation strategy might be to sell all your U.S.-based assets now before they lose 20% of their value.

I know I would. To gamble that the dollar would appreciate in such a precarious time would be a very risky bet.

So how much U.S. stock and bonds do non-U.S. entities own? Let's start with Treasuries, and a chart from Sir Charts Alot:

Please go to www.oftwominds.com/blog.html to view the charts.

For some background on the high foreign ownership of bonds, let's turn to Bloomberg: Foreign U.S. Notes Rise to 80 Percent; Treasuries Irresistible:

"For the moment, at least, financing the U.S. budget deficit may be getting less arduous as foreign investors now own a record 80 percent of the Treasury notes due in three to 10 years.

Legislation proposed last year by North Dakota Senator Byron Dorgan and Benjamin L. Cardin, then in the House of Representatives, called on the administration to respond when foreign ownership of Treasuries reaches the equivalent of 25 percent of gross domestic product. The $2.19 trillion of government debt held abroad was equivalent to 16 percent of the $13.6 trillion GDP as of March 31. "

But Treasury debt is not all the foreign investors own. The Treasury requires foreign ownership of most financial assets to be reported, as detailed in this mind-numbing 63-page document: REPORT OF U.S. OWNERSHIP OF FOREIGN SECURITIES.

While politicos are concerned with the "nuclear option," i.e. China or another large holder dealing the U.S. a crippling blow by selling all their U.S. bonds in one fell swoop, others suggest foreign ownership of U.S. assets is actually less than what might be expected: REPORT OF U.S. OWNERSHIP OF FOREIGN SECURITIES.

"Foreign ownership of stocks and bonds issued in the United States (public and private) now exceed American-owned assets abroad by about $2.5 trillion. Indeed, voracious foreign demand for American securities is widely credited with supporting the dollar and keeping down interest rates in an era of bloated U.S. budget deficits and anemic domestic savings. Yet, ironically, when measured against the benchmark of an ideally diversified portfolio, there is actually substantial foreign bias against holding assets in dollars.

One might expect unbiased foreign investors to hold 45 percent of their equity portfolios in U.S. stocks, because U.S. stocks account for 45 percent of the value of equities traded worldwide. Similarly, foreign investors should hold about 38 percent of their bond portfolios in U.S. bonds, if they diversified according to the relative size of national markets. But their holdings of U.S. securities are far more modest.

Ownership of U.S. equities in foreigners’portfolios ranges from less than 1 percent in 14 countries to a maximum of 29 percent in the Netherlands. The figures are equally dramatic for bonds, with only China exceeding the 38 percent benchmark. Thus, in an important sense, only China is really going out of its way to finance U.S. deficits. "

In other words: in a straightforward asset allocation, a global portfolio manager would put 45% of his/her funds in U.S. stocks, as that is the U.S. share of the global market. The fact that virtually no one is doing so suggests a reluctance to own too many dollar-denominated assets.

Some domestic observers might be tempted to blame politics for this avoidance of U.S. assets, but if you put yourself in the shoes of a non-U.S. portfolio manager, it is rather obviously mere prudence. Take a look at the dollar's stunning drop from 2002 to the present:


If a picture is worth a thousand words, then this chart is worth, say, a million. Or perhaps a billion, or maybe even a trillion. For what it shows is that if a foreign owner of dollar-denominated stocks or bonds had earned a total return of 33% since buying in 2002, his/her actual gain in other currencies (like their own) would be zero.

For any gain less than 33%, the foreign owner lost money. Looking ahead, some observers see the dollar dropping to 60 (on the dollar index displayed above) as this is the only way the U.S. can ever rebalance its outsized $800 billion/year trade deficit. For a full explanation, I suggest reading the book The Dollar Crisis: Causes, Consequences, Cures

If you were the non-U.S. portfolio manager, would you want to wait around for this further 25% decline? Reading the U.S. media, would you really believe the Fed and the Treasury would step up and support the dollar with interest rates increases? Not likely.

Bottom line: the best strategy for capital preservation would be to sell U.S. financial assets before they dropped any further: sell today, tomorrow, and the next day, and put the money in another currency or in oil or gold or cropland or some other commodity/real asset which might retain its value if the dollar does a swan dive to 60.


Thank you, Don E., ($10) for your amazing continued support (5th donation) to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

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The Home ATM (a.k.a. Equity Extraction) Is Broken

First up is astute reader Mark A., writing in response to The Big One Just Hit,

I think you're right. The ground indeed quakes.

If the Dollar has nothing to stand on, I imagine a lot (a lot!) of money will move towards anything-but-the-Dollar. gold comes to mind, but so do other things... Swiss Francs anyone?

A kvetch:

I've seen the "Home Equity Loans" graph a number of times in different places. It's very dramatic, but as presented it's completely inscrutable: 40% of WHAT please? -x% of WHAT? I mean really...

(BTW, I got an email today telling me I was pre-approved for a... home equity loan!)

Thanks for your website."

Thoroughly chastened, I set off on a search for accurate data on mortgage equity withdrawal a.k.a. MEW. I soon discovered the subject is a thicket in a bog shrouded by fog: nobody really knows how much has been extracted or how those trillions were spent.

I have spent endless hours researching this and can now share my map of the bog. The sources of confusion are many.


First, MEW have multiple sources: re-finances with cash above the mortgage being paid off, home equity lines of credit, and either new mortgages on free-and-clear properties or second mortgages.


Surveys which ask what homeowners did with the money are pitifully small--less than 500 homeowners in a study co-authored by former Fed Chairman Alan Greenspan Sources and Uses of Equity Extracted from Homes by Alan Greenspan and James Kennedy (March 2007).


Tracking the money from MEW is insanely complex, and so sources just guess: some guess half the money was spent on consumption, others guess two-thirds.

Any data which is self-allocated like this must be taken with a giant grain of salt. Any MEW "allocation" smells strongly of similar studies in which people are asked how many fruits and veggies they ate that week--and in virtually all cases, the actual amounts are far lower than those estimates made by the consumers who sought to "give the appearance of doing the right thing."

My own suspicion is that virtually all the MEW funds ended up being spent.

Consider an example. Say a homeowner borrowed $50,000 in equity off his primary residence to buy an investment property, i.e. used the cash as a down payment on a speculative real estate purchase, a.k.a. a real estate speculator/flipper. He then states that the MEW was used for "investment."

But then when he flipped the investment property, he spent the $100K proceeds on a new truck, a fancy cruise for the family, and various gew-gaws plus a $50K down payment on a condo. Would the $50,000 he spent end up being counted in the MEW statistics? No. Yet fundamentally the money was extracted from the equity of his primary home.

Here are some resources I found in trying to sort out the MEW mess:

Measuring Equity Extraction (Calculated Risk blog, 5/22/07)

(Click on link or chart to go to Calculated Risk and their larger chart)

Home Equity Extraction Still Hot in Q3 (Calculated Risk blog, 1/20/06)


Estimated gross equity extractions rose 10% from the previous quarter to a seasonally adjusted $990.6 billion (for Q3 2005), according to an update provided to Investor's Business Daily of a September Federal Reserve study on mortgage originations.

For the first nine months of last year, equity extraction totaled $2.6 trillion vs. $2.4 trillion for the same period of 2004 and over double withdrawals during all of 2000.
This means at the height of the housing bubble, Americans were pulling out roughly $3.5 trillion a year in equity. Yet other figures sourced below suggest the total "free cash" was on the order of $1.4 trillion--less than half this number. So apparently the rest was used to pay off existing mortgage or consumer debt.

Here's another excellent depiction of the entire equity-extraction cycle:

The Greenspan and Kennedy papers on Equity Extraction from Housing (1990-2006) - A graphic exposition

Greg Ip at the Wall Street Journal filed this report:

Home-Equity Extraction Eases (Wall Street Journal Economics Blog 6/12/2007)


"In the first quarter (of 2007), 'home equity extraction' net of fees fell 8% to $449.6 billion at a seasonally adjusted annual rate from the fourth quarter, the lowest since the fourth quarter of 2003 well below the peak of $863.7 billion in the third quarter of 2005. CHS: note that the data on the Calculated Risk entry from other sources places the peak at $990 billion;' clearly, it is an inexact number.)

Homeowners extract equity from their homes either by selling their home at a capital gain and spending some of the proceeds, taking out a home-equity loan, or refinancing their mortgage and taking cash out in the process.

Such extraction soared with rising home prices and falling mortgage rates earlier this decade, and has since slowed as first mortgage rates edged higher and then home prices stopped rising and home sales fell. The drop in the first quarter was principally due to a sharp, 82% decline in the growth of home equity loans; equity extracted through the sale of existing homes rose 9%, and equity extracted through cash-out mortgage refinancing eased 5%, according to seasonally adjusted data."

Economics prof Greg Mankiw's Blog (8/31/07) offers this chart and data from the Greenspan report:

Free cash generated by equity extraction

2000......553.4 billion dollars
2001......626.9
2002......756.0
2003....1,000.8
2004....1,165.1
2005....1,423.1
2006....1,126.2

Free cash generated by equity extraction: As percent of disposable income

2000...7.69%
2001...8.37
2002...9.65
2003..12.26
2004..13.42
2005..15.75
2006..11.83

(CHS note: doesn't it seem that an extraordinarily large percentage of recent income was generated by MEW?)

(Source: Federal Reserve

(source: Sources and Uses of Equity Extracted from Homes Alan Greenspan and James Kennedy (March 2007)

If you're not confused yet, here are some (low-ball) numbers from the New York Times and a detailed, no-punches-pulled report from the Federal Reserve Bank of Dallas:

Economic Letter—Insights from the Federal Reserve Bank of Dallas (11/06)

And for a summary, here is scathing one from the Asia Times, 11/21/06):


In 1999, total outstanding household debt was $6.4 trillion. As of the end of the second quarter of 2006 total outstanding household debt was $12.3 trillion.

Household debt has increased by almost as much since 1999 as the sum total of all debt accumulated by all households across the preceding 220-year history of the US. In 1999, household mortgage debt stood at $4.4 trillion. At the close of the second quarter of 2006 it had more than doubled to $9.33trillion. In 1999, consumer credit outstanding was measured at $1.6 trillion.

The last six years have hosted the most stupendous extraction of inflated household wealth in history. Across the 22 quarters from 2000 through the second quarter of 2006 disposable personal income increased by $2.3 trillion. However, disposable personal income as a percentage of household net worth fell. Rising house values contributed more than personal income increases largely derived from these rising house values."

According to the conservative Greenspan/Kennedy data, $6.6 trillion was extracted as free cash from 2000 -2006. That is 8.4% of the entire U.S. GDP in that time period.

Here are the GDP data (real, not adjusted, in billions)
2000 - - - - - - 9,817.0
2001 - - - - - -10,128.0
2002 - - - - - -10,469.6
2003 - - - - - -10,960.8
2004 - - - - - -11,685.9
2005 - - - - - -12,433.9
2006 - - - - - -13,194.7
total: 78,689.9

source: Bureau of Economic Analysis

Is the Home ATM broken? Well, if home equity loans declined 82% even before the current credit meltdown, how much money do you reckon is being extracted this month? Some number closer to zero than to $100 million is probably a good guess.

Other readers checked in with some excellent comments and links on the weekend entry (The Big One Just Hit) which I highly recommend reading: Readers Journal commentaries 9/10/07.

Please go to www.oftwominds.com/blog.html to view charts and links.

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