2009 Economic Forecast:

The market damage to the U.S. consumer is the biggest factor that's going to spread economic pain across the globe. Remember when inflation pervaded every money decision we ever made or thought about making, every retirement plan or business model? Remember when inflation was factored into our leases, our employment contracts, our budgets, our investment programs, even our staff wages?
Now, all of that is changing and it's doing so dramatically! Suddenly, the polar opposite of inflation is taking hold in America: Deflation!

Shell-shocked consumers are killing retailers: Nordstrom announced that third quarter earnings plunged, then slashed its forecast for the year by 25%. Third-quarter same-store sales dropped throughout the industry: Down 12% at Kohl's and Saks Fifth Avenue, and down 15% at Neiman Marcus. J.C. Penny reported that its profits fell for the fifth consecutive quarter and net income has fallen 53% from this time last year.

Greek shipping prepares to sail into economic storm The Greek shipping industry, the world's biggest merchant fleet, is bracing itself for combined effects of the economic crisis and a huge oversupply of ships. Shipping rates on dry cargo have plummeted more than 90% in a matter of months. International Herald Tribune/Reuters (19 Nov.)

Berkshire shares see largest drop in more than 2 decades Berkshire Hathaway, the company headed by iconic Warren Buffett, saw its stock price plunge 12%, its biggest drop in at least 23 years. It was the eighth consecutive daily decline after Berkshire reported a 77% decline in third-quarter profit. An investment adviser said there is nothing wrong fundamentally with Berkshire, but some investors see the company as a proxy for the economy as a whole. Bloomberg (19 Nov.)

Here's what we can expect for the majority of 2009:
· Stocks will hit lower lows
· Emerging nations will weaken dramatically, and
· Risk-aversion will win the battle over risk-taking

Libor drops, but private lending remains paralyzed The Federal Reserve and other central banks managed to drive down interest rates on short-term lending, but that is not bringing private money back into commercial-paper and money-market lending. Instead, private financial institutions are struggling to bolster their balance sheets and reduce leverage, effectively turning central banks into "lenders of sole resort." Financial Times (12 Nov.)

U.S. foreclosures up 25% in October over last year U.S. foreclosure filings increased 25% in October compared with the same month last year, indicating a slowing of foreclosure activity. But RealtyTrac CEO James Saccacio said the number understates the severity of the problem. The net effect "may be merely delaying inevitable foreclosures," he said. Bloomberg (13 Nov.)

Foreclosures still exploding: RealtyTrac reported that foreclosures soared 25% in October. By the end of 2008, more than one million bank-owned properties will be crushing real estate values nationwide.

U.S. unemployment reaches 25-year high The number of workers claiming unemployment benefits hit a record high this month. Last week, new claims saw a spike of 32,000, the highest since the Sept. 11, 2001, terrorist attacks. Individuals receiving aid hit 3.9 million during the week that ended Nov. 1, the most since 1983. Reuters (13 Nov.)

Unemployment skyrocketing: The Labor Department reported that jobless claims soared to 516,000 last week, 52% higher than this time last year ... about the same as they were the week after 9/11 ... and more than at any other time in 19 long years.

Default risk rises for synthetic CDOs Analysts said $103 billion of synthetic collateralized debt obligations are vulnerable to catastrophic losses, based on defaults involving underlying derivatives. Defaults by Lehman Brothers and other institutions already touched off $24 billion in synthetic CDO losses. JPMorgan Chase said there is about $757 billion of synthetic CDOs outstanding that are tied solely to corporate-debt derivatives. Financial Times (13 Nov.)

Developed economies fear deflation to come Rich countries are worried that deflation, likely to take hold in earnest next year, could accelerate into a 1930s-type spiral. They fear that convergence of high leverage and falling prices could launch "debt-deflation," in which accelerated debt repayment dries up demand, leading to price cuts. That in turn drives up the real cost of debt, spurring further repayment. The Economist (13 Nov.)

The G20 is comprised of the world's major developed and emerging economies: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, United Kingdom, and the U.S.

In a statement issued after the meeting, the G20 said,
"Against this background of deteriorating economic conditions worldwide, we agreed that a broader policy response is needed, based on closer macroeconomic cooperation, to restore growth, avoid negative spillovers and support emerging market economies and developing countries."

Financial crisis forces Paulson to change his tune When Henry Paulson arrived in Washington, he was one of the most successful bankers on Wall Street and highly skeptical of government intervention in markets. Now, as Treasury secretary, Paulson has changed his stance and is dealing with the global financial crisis through a series of substantial federal intrusions, urging politicians and bankers to participate. "My thinking has evolved a lot to the point where I've seen regulation up close and personal," Paulson said. "I've realized how flawed it is and how imperfect but how necessary it is." The Washington Post (18 Nov.)

The good news and the harsh reality is that the economy is cyclical. Busts follow booms. They have for hundreds of years and they always will. But even though busts are healthy over the longer term, they're painful in the short-term. This is where we are today, painful as it is, and the fork in the road ahead is between:
a) deflation and depression or
b) hyperinflation and destruction of our currency

We are in deflation now, but the government-fueled inflation wave is sure to follow, tsunami anyone, but right now:

Pure fear chases investors to U.S. dollarDespite a runaway deficit and an economy slipping into recession, investors still turn to the U.S. dollar as a safe haven, possibly aware of the fact that at the end of most U.S. recessions, the dollar is worth more than it was at the beginning. The dollar has been rising against other currencies for some time, and economists think the trend may continue. Spiegel Online (27 Nov.)

Therefore, the mighty U.S. dollar's bull run is far from almost over.

Cash becomes king as financial crisis spreads What started as a subprime-mortgage meltdown has evolved into a global financial crisis that is forcing companies of all shapes and sizes to cut their work forces. Businesses are seeking a resolution to their problems, and the most attractive fix appears to be cash. Those with cash may not only survive the economic downturn but could also thrive, if they are able to use that cash wisely. The Economist (20 Nov.)

The deflation road is extremely arduous, but ultimately leads to recovery. The hyperinflation road can provide a temporary palliative, but it ultimately leads to the destruction of our society and culture.

Rising U.S. dollar triggers emerging-market inflation A soaring value of the U.S. dollar on currency markets is ratcheting up inflationary pressures and depressing foreign investment in emerging markets. The chief currency strategist at the Bank of New York Mellon proposed creating "an unbiased party" to develop benchmarks for evaluating currencies and forming regulations for managing them. If nothing is done about the volatility of currency values, he said, emerging markets may end up getting hit harder than major markets. FinancialWeek (15 Nov.)

China replaces Japan as biggest U.S. debt holder After years of accelerating purchases of U.S. debt, China has taken over Japan's spot as the biggest foreign holder of Treasury bills, notes and bonds. China's investment in U.S. debt rose from $541.4 billion in August to $585 billion in September, while Japan's holdings declined from $586 billion to $573.2 billion. Meanwhile, U.S. investors sold a record $38 billion in foreign bonds. Financial Times (18 Nov.)

If you owe the bank $10,000, you’re in trouble. But if you owe the bank $1 TRILLION, the BANK is in trouble!

Hedge funds see trouble for 5th consecutive month The Eurekahedge Fund Index marked a 4.5% drop last month, with investors pulling $62.7 billion from the $1.65 trillion hedge-fund industry. Citigroup expects the figure to fall to about $1 trillion by the middle of 2009. Bloomberg (19 Nov.)

The next major bank to fail could be Citigroup, the nation's largest. In addition to its other debts, its 185.1 million in credit card accounts globally are especially worrisome as default rates skyrocket.

“The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance." Cicero , 55 BC

Fed announces facility to boost consumer lending The Federal Reserve announced the establishment of a facility aimed at helping consumers and small businesses with credit needs. Under the Term Asset-Backed Securities Loan Facility, the Federal Reserve Bank of New York will lend as much as $200 billion to holders of specific AAA-rated, asset-backed securities that are collateralized by small-business, credit-card, student and auto loans. The Fed also announced a program through which it will purchase direct obligations of Fannie Mae, Freddie Mac and Federal Home Loan Banks, as well as mortgage-backed securities guaranteed by Fannie, Freddie and Ginnie Mae. Bloomberg (25 Nov.) , Reuters (25 Nov.)

Analysis: Fed action may be easing of unwanted credit: The Federal Reserve's $800 billion program to loosen up the flow of credit to consumers could end up having little or no impact on the economy because consumers are increasingly afraid to borrow money that they might not be able to pay back, and banks do not want to make loans that will not be repaid. Economist Michael Darda described the Fed's effort to revive consumer spending through the purchase of consumer debt from banks as "spitting in the wind." Bloomberg (26 Nov.)

U.S. economic data raise probability of deeper recession In the third quarter, the U.S. economy shrank at its quickest pace in seven years as consumer spending hit a 28-year low, according to recent data. U.S. home prices continued to fall, and corporate profits fell for a second consecutive quarter. "We are in the early stages of one of the worst recessions in the postwar period, even factoring in a massive stimulus program," said Nariman Behravesh, chief economist at IHS Global Insight. Reuters (25 Nov.)

1)Already the Fed has pledged $7.2 trillion of your money. Bloomberg News and The New York Times reports that the U.S. government is prepared to lend more than $7.4 trillion.
·$200 billion to nationalize the world's two largest mortgage companies, Fannie Mae and Freddie Mac;
·$25 billion for the Big Three auto manufacturers;
·$29 billion for Bear Stearns;
·$150 billion for AIG;
·$350 billion for Citigroup;
·$300 billion for the Federal Housing Administration rescue bill to refinance bad mortgages;
·$87 billion to pay back JPMorgan Chase for bad Lehman Brothers trades;
·$200 billion in loans to banks under the Fed's Reserve Term Auction Facility (TAF);
·$50 billion to support short-term corporate IOUs held by money market mutual funds;
·$500 billion to rescue various credit markets;
·$620 billion for industrial nations, including the Bank of Canada, Bank of England, Bank of Japan, National Bank of Denmark, European Central Bank, Bank of Norway, Reserve Bank of Australia, Bank of Sweden, and Swiss National Bank;
·$120 billion in aid for emerging markets, including the central banks of Brazil, Mexico, South Korea and Singapore;
·Trillions to guarantee the FDIC's new, expanded bank deposit insurance coverage from $100,000 to $250,000; plus ...
·More trillions for other sweeping guarantees.

How much is that?

·That's half the yearly output of the entire U.S. economy.
·It's equal to $25,507 for every single man, woman, and child in the United States.
·In the more than 200 years the U.S. has been a nation, it has racked up almost $10.7trillion in public debt. Now, in just a few months, policymakers have added contingent and direct obligations equal to almost three-fourths of that amount.

How the heck we were going to pay for this stuff?

The truth is the U.S. government is going to have to flood the market with a wave of Treasuries the likes of which the world has never seen. And just like any other market, the bond market reacts to supply and demand.

Already the government has spent $4.3 trillion bailing out Wall Street. According to CNBC, as of last week, the Federal government had already spent but not necessarily distrubuted $4.3 trillion in bailouts, from $900 billion for the Term Auction Facility ... to $112 billion bailing out AIG ... to $540 billion backing up Money Market funds ... to $700 billion for the Treasury Asset Relief Program (TARP), and more.

$4.3 trillion — that's more than America spent on World War II, adjusted for inflation.

The overall, long-term impact of what the bailout will ultimately cost should be very negative for the U.S. dollar, but because of the fear factor, that’s not happening ... and when inflation returns along side consumer confidence that should be very bullish for gold.

Yet, meanwhile the economic news continues to sour:

U.S. has been in recession almost a year, economists say The National Bureau of Economic Research confirmed that the U.S. economy officially slid into a recession nearly 12 months ago. "We will rewrite the record book on length for this recession," said Allen Sinai, president of Decision Economics in Lexington, Mass. "It's still arguable whether it will set a new record on depth. I hope not, but we don't know." Both Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson pledged to revive the economy using all of the tools in their arsenal. ClipSyndicate/Bloomberg (02 Dec.) , International Herald Tribune (02 Dec.) , Financial Times (01 Dec.)

Cost of protecting debt against default hits record high Concerns about a recession and the world economy sent the cost of protecting bonds from default to an all-time high this week. Weakening manufacturing figures throughout Europe, the U.K., China and the U.S., as well as slumping equity markets, have hit credit default swaps. The iTraxx Crossover index reached a record high of 934 basis points. Financial Times (01 Dec.)

Capital injections won't help lending, panel chief says Elizabeth Warren, chairwoman of an oversight panel created by Congress to evaluate the Troubled Asset Relief Program, said pouring capital into banks is not going to get credit markets moving again. She said banks do not want to loan because potential borrowers are becoming less creditworthy day by day, and injecting cash into banks "isn't going to fix that problem." The New York Times (01 Dec.)

Yields of U.S. long-term debt plunge to record lows Plummeting capital markets touched off a rush to safety by investors and drove U.S. government long-term debt yields to record lows. Yields on 30-year and 10-year bonds fell to the lowest levels since the Treasury started selling them. BusinessWeek/The Associated Press (01 Dec.)

Let's apply this market dynamic to lessons learned from a Golden perspecitve...

This five-year chart shows the comparative performance of gold, the CRB index, which tracks a broad basket of commodities, the S&P 500, the Dow Jones Industrial Average and the U.S. dollar. Over a five-year period, gold has doubled. At the same time, the rest of these investments are down.

On October 10, in inflation-adjusted, honest money terms, the Dow hit about 2,550.
When you start looking at asset values in both nominal and real terms as reflected by the price of gold — only then will you truly understand what's happening today.

You are witnessing the greatest redistribution of wealth in the history of civilization — from savers to debtors ... from creditors to borrowers.
Gold will eventually triumph, ultimately and eventually from systemic currency devaluations related to inflation. And your best chance of financially surviving this economic crisis is to understand how it's going to impact your investments and why it's going to happen, (and I hope I am doing my part).

Hello, the economy just lost a half-million more jobs and retail sales have just suffered their worst plunge in 35 years. However, one all-important investment that has not only survived, but actually thrived is the United States dollar. Currently, because of deflation, prices are falling on virtually everything —commodities, farm land, homes, automobiles, consumer goods, even labor. And because of fear, investors are going to shy away from risk (credit), seeking the safety of cash. Result: The dollar's purchasing power and value will continue to go up.

Recognize that the U.S. government alone has embarked on the most expensive financial rescue operations of all time. The U.S. government alone has spent, lent, committed or guaranteed $7.8 trillion, fourteen times its biggest-ever federal deficit. European governments too have jumped in with another $2 trillion; China, $586 billion. Can you see where this is going?

They're bailing out bankrupt banks, broken brokerage firms, insolvent insurers and any company they deem essential to the economy. Aready the grand total of $7.8 trillion and counting is eleven times more than the hotly debated and widely opposed $700 billion bailout package passed just 4 months ago. And that excludes a new bailout for Detroit, and a new $500 billion stimulus package expected early next year from Obama’s administration, plus hundreds of billions for at least 19 states running out of money for unemployment benefits.

At this time because of fear, the U.S. dollar, in short-term Treasury securities, is now your single best safe haven for your money, even at zero interest because a bird in the hand is worth two in the bush (no pun intended).

Flight to safety pushes yield of T-bills below zero The implied yield on three-month U.S. Treasury bills swung briefly to negative 0.01% on Tuesday, with buyers essentially paying the Treasury for holding its debt. This marked the first time since 1940 that the yield on three-month bills went negative. A Morgan Stanley economist said the demand for cash was "extreme" and described the resulting negative interest rate as "absurd." International Herald Tribune (10 Dec.)

Fed expected to cut interest rate to almost zero The Federal Reserve is anticipated to take the benchmark federal-funds rate down to 0.5% at its meeting Tuesday, marking the lowest figure for the bellwether rate since the central bank began keeping records in 1954. Having exhausted almost all opportunities for interest-rate cuts, the Fed is expected to search for other tools to cope with the steepening economic downturn. Reuters (14 Dec.)

Due to today’s deflation, the dollar's purchasing power is improving rapidly with each day. Due to a global flight to quality, the dollar's exchange rate is rising sharply against nearly every currency in the world. And due to the massive deflation and capital flight still ahead, the bull market in the dollar is just beginning!
The government-inspired rally on Wall Street is your signal for this phenomenon. All your assets are going to deflate and it's now time to sell if you have a short term investment horizon (5 years or less).

A Year Later and Deeper in Debt: Just over one-year since the credit crunch began, American taxpayers are now on the hook for an estimated $8 TRILLION in total spending and "commitments" by the government in its desperate attempt to prevent a total meltdown of the financial system — yet stocks continue to tumble, banks refuse to lend, and the economy keeps sinking!

By and large, the stock market selloff that we have witnessed so far has been mainly due to investor concerns over housing and the Wall Street financial crisis — but not the result of any recognition that Main Street America could be in store for a deep and painful recession too. If anything, recent data tells us that our current economic slump is only accelerating.

Chief financial officers gloomy about next year: Among the world's chief financial officers, those in the U.S. hold the darkest views of the economy for 2009, with pessimists outnumbering optimists 9-to-1, according to a survey by CFO Europe magazine. European officers were found to be only slightly more optimistic. Financial Times (09 Dec.)

Professor: House prices could drop below prebubble level Martin Feldstein, an economics professor at Harvard University, said housing prices still have to drop 10% to 15% to reach the prebubble level, but he warned that they could get a lot worse before things get better. It is the fear that prices could "overshoot" and continue falling that makes banks and other financial institutions afraid to lend to one another, he said. Bloomberg (09 Dec.)

You may ask again, why?

Because the U.S., the European Union and Japan — which together consumed 48% of the world's oil in 2007 — are in the first simultaneous recession since World War II.

One out of ten households is already delinquent or foreclosed on their mortgage.

Four out of ten families owe more than their homes are worth. Foreclosure rates are now at their highest levels in recorded history.

Commercial vacancy rates are skyrocketing.

And here's the clincher: The impact of surging unemployment is just BEGINNING to kick in.

Just one of these signals would be enough to raise alarm bells. All three coming together spell one, five-letter word for real estate stocks: CRASH!

U.S. government on pace to post record $1 trillion deficit The U.S. deficit could reach a record $1 trillion this budget year. The projection comes after the federal government hit an all-time-high deficit in November. The figure for the fiscal year that started Oct. 1 could also be a record high in terms of percentage of the economy in the post-World War II era. BusinessWeek/The Associated Press (10 Dec.)

China's trade volume marks stunning drop An analyst described China's plummeting trade figures -- down 2.2% down in November from a year ago -- and imports -- a 17.9% decrease -- as "a shock." Consequences for the rest of the world could be quite grave because China has been for some time the engine driving the economy. The Economist (10 Dec.)

U.S. House modifies pension rules to cope with downturn The U.S. House of Representatives placed a moratorium on the deadline for retirees withdrawing funds from 401(k) plans and eased requirements for companies fully funding pensions. Both measures were intended to prevent undue hardship for retirees and employers caused by falling asset values. The Washington Post (11 Dec.)

Well, the Treasury Department recently sold $30 billion worth of four-week bills. And like any debt instrument, T-bills usually pay interest. So you're guaranteed some kind of return if you hold them to maturity.But these bills? They were sold at a 0% yield.

The government racked up $455 billion in red ink in the fiscal year that ended September 30, 2008. And recently, we learned that the 2009 deficit is ALREADY at $401.6 billion — just two months into the new fiscal year!

At this rate that's another potential $6,539 of debt for each and every person in this country — in just one year on top of the already $25,507 for every person from the 7.4 trillion in recent bailouts.

And government really has no idea on how much it will take to restore confidence. Remember in September when Secretary Paulson literally drops to his knees begging Congress for a $700 billion rescue package ... and just six weeks later his entire plan is washed away by events, even if it had been quickly distributed, which it hasn’t. In this month alone, Chairman Bernanke, dropped interest rates to virtually zero, Wall Street rejoiced with a grand rally ... and, just 48 hours later, the entire rally is gone. President Bush bequeathed $17.4 billion to Detroit, and the Dow surged ... and just seven hours later the entire rally is gone AGAIN, every point wiped out. Meanwhile, auto sales, retail sales and technology sales are collapsing globally. Factories are being shut down. Entire nations are sinking into a black hole.

Listen to what, Karthik Ramanathan, the acting assistant secretary for financial markets at the Treasury, said this month:

"Recent market estimates have suggested $1.5 trillion in net marketable borrowing in fiscal year 2009, with some raising the possibility of net marketable borrowing in excess of $2 trillion. While this uncertainty remains, it is our responsibility as debt managers to act as transparently as possible meet these borrowing needs in the least disruptive manner."

They have no idea, and then there is the question of oversight, is that an oxymoron?

Madoff case raises questions about effectiveness of SEC
The Securities and Exchange Commission and the U.S. Department of Justice launched lawsuits against Bernard Madoff, investment manager of Bernard L. Madoff Investment Securities, for allegedly running a $50 billion "Ponzi scheme." Madoff's arrest is raising questions about the SEC's oversight abilities. Observers said the SEC needs to review businesses that it oversees more frequently. MarketWatch (15 Dec.)

It’s hitting home and yes the Federal Reserve knows it, they reported that, in the third quarter alone, American households have suffered ...
$647 billion in real estate losses
$922 billion in stock market losses
$523 billion mutual funds losses
$128 billion private business losses, plus
$653 billion losses in life insurance and pension fund reserves!

That's a $2.8 TRILLION in wealth loss overall — four times more than the Treasury's entire $700-billion bailout program in just one quarter.

Finding these numbers too large to believe?

Will the trillions MORE that Washington throws at this crisis bring inflation back? The short answer is yes, (long-term), however, meanwhile this deflation will continue to be so massive that no amount of Fed funny money stands a chance of preventing it.

Despite the government's Herculean efforts, the bottom line is that DEFLATION is happening right here, right now, right before our very eyes...

Expert: Economy lucky if it reaches bottom in 2009 Damage suffered by the world's economy this year was so enormous and widespread that the most that central banks and governments can hope for is to stop things from getting worse and start building the foundation for a comeback in 2010, experts said. "We will be very lucky if we reach the bottom in 2009," Harvard University professor Martin Feldstein said. Bloomberg (15 Dec.)

Do you see what is going on? The destruction of wealth is so large and swift; the government rescues, are relatively so small and slow.
More evidence of deflation:

1.U.S. consumer prices falling at an annual rate of 12%, CPI report revealed consumer prices plunged by a bone-chilling 1.7% in November alone. If it continued at that pace for a year, it would be a 20% deflation — fully twice the plunge in consumer prices we were seen during The Great Depression nearly 80 years ago! Suddenly prices are plummeting — not just for real estate, but also for automobiles, appliances, clothing and gasoline, while retailers and others are stepping up their discounting to move goods and sell services.. The CPI has fallen by the most since the government first introduced this index in 1946.

2.U.S. producer prices, the best future predictor of consumer prices, are falling at an annual rate of 26.4%

3.Commodity prices slammed by as much as 70% from their peak! The price of oil has plunged 73% ... copper has fallen 66% ... lead and nickel are down 73% ... platinum is down 66% ... and wheat is off 64%.

4.Core consumer prices, which exclude volatile food and energy prices, were unchanged in November. In the past three months, they have risen at an annual rate of just 0.4%.

5.A devastating plunge in GDP that has taken place just now in the fourth quarter, estimated at an annual rate of minus 8% or worse.

Yet despite this widespread acknowledgement, government and nearly every authority still tries to persuade you to keep your money in the stock market.

Financial experts on NBC Nightly News tell millions of viewers that, as long as they've got plenty of years to live and recoup losses, they should continue investing most of their 401k or IRA in stocks. In Time Magazine, the New York Times, the Wall Street Journal and virtually every newspaper in the country, similar advice is liberally dispensed.

We are obviously living in risky times. So why would you want to double the whammy by putting your money in obviously risky investments? Yes, I know, your broker, your financial planner — even some of your best friends — are telling you to stay in the market and over time, they are right; but are they right - right now?

If they fooled you once, shame on them. If they fool you again, shame on you!
If ever there was a time when stock market investing is too risky, this is it. Wait for consumer confidence to show some life.

Yields of long-term Treasuries hover near record lows Longer-dated U.S. Treasuries came close to hitting record-low yields Tuesday, after data from the Consumer Price Index showed that the rate of inflation is plummeting. Yields on 10-year Treasury debt briefly slid to 2.47%, setting a 50-year record. FinancialWeek/Reuters (16 Dec.)

Sixteen months into the official recession and the Fed's efforts have so far failed, despite cutting interest rates more than five percentage points. In yet another example of the deepening recession, the Commerce Department said new home building dropped 19% in November, another record monthly low.

"The Fed gets an 'A' or 'A-minus' for effort and not very good marks for results," said Alan Blinder, a Princeton economist and former Fed vice chairman. Clearly, we got into this mess because everyone — from banks to companies to consumers — have too MUCH debt and are now scared to death, cancelling purchases, hoarding dollars like there’s no tomorrow.

Here’s the key: The cheap money the Fed is providing can buy some things. But it cannot buy CONFIDENCE!

Commentary: U.S., Japan use same solutions for different issues
The U.S. has an account deficit and high debt, while Japan has an account surplus and low debt. Yet the biggest and second-biggest economies in the world are converging toward zero-interest rates and quantitative easing as foundations for their recoveries. Economists warned that there is no assurance that either the U.S. or Japan will succeed. FinanceAsia.com (19 Dec.)

Isn't the Fed submitting prudent savers to total abuse by slashing the returns they can earn on their savings accounts and Treasuries?

What about the hundreds of billions of dollars of additional debt our country is taking on? The first trillion-dollar deficit in U.S. history?

What if the economy and asset prices are going to get where they're headed ... no matter what the government does? Do you think Japan’s policy has worked? I think not. The steps that Japan took included about $1.35 trillion at today's dollar-yen exchange rate. And yet, it was all for nothing. The economy still suffered a "Lost Decade" of deflation and lackluster growth.

What if we spend all this money and end up with nothing to show for it — except for a multi-trillion dollar bill that we'll be paying for the rest of our lives? Or as the CFA Journal explained:

"Keynesian 'pump-priming' in a recession has often been tried, and as an economic stimulus it is overrated. The money that the government spends has to come from somewhere, which means from the private economy in higher taxes or borrowing.”Just this month, we saw oil prices crack below $35 per barrel — down more than 75% since August and proof positive that this deflationary spiral is growing more intense.

And also this month, we saw the U.S. dollar take off like a rocket to the moon — blasting higher against the euro, the pound, and virtually every other currency on the planet.

The dollar will climb sharply through most, if not all, of 2009. Why?

1.Deflationary forces impacting the global economy appear too strong to be counteracted by Fed policy in any reasonable amount of time. In other words, the stimulus isn't going to bring back a recognizable boom. The recovery process will take some serious time.

2.The global economy is shifting quickly, and the rest of the world is lagging the U.S. downturn. When stabilization of financial markets and the U.S. economy does finally occur, there's a good chance the U.S. will be looked upon more favorably than many other comparable players in the global economy.

3.Even the government's slow-to-change, lagging index of inflation — the CPI — has caved in to deflation, And there are plenty of other reasons why:

·Unemployment is rising...

·The credit crunch has made it almost impossible to qualify for loans...

·IRAs and 401(k)s have been chopped in half... if not more...

·And real estate continues to get clobbered on all fronts. New home sales dropped 2.9% in November. That was the worst sales rate since January 1991, and down more than 35% from a year earlier. Existing home sales plunged 8.6% for the month, with single family sales hitting the lowest level in more than 11 years. While dramatic cutbacks in housing starts have led to a decline in the raw number of new homes on the market, sales have dropped so much that we're seeing little net progress overall. Case in point: There were 11.5 months worth of new homes on the market based on the November sales pace. That was only slightly below October's 11.8 months, which itself was the worst reading ever (Census data goes back to 1963).
On the existing side, we have more than 4.2 million homes on the market — far above the 2 million to 2.5 million considered normal. That's good for 11.2 months of over supply.

As far as pricing is concerned, you won't find any comfort in the latest figures either. New home prices were down 11.5% from a year earlier, the second-biggest decline ever. Existing home prices dropped 13.2%, the most on record. The median price of a used home is now hovering around $181,300, meaning we have wiped out every penny of gains generated since February 2004.

Until fundamental equilibrium is restored in the housing market — until we work through the vast inventory of houses — home prices aren't going to stop falling.

In fact, expect further declines throughout 2009.

The next shoe to drop:

·With credit tighter, commercial real estate sales and prices are now following home prices lower. The final numbers haven't been added up yet. But it appears that commercial sales plunged by about 70% between 2007 and 2008.

·Meanwhile, the Moody's/REAL Commercial Property Price Index dropped 2.4% in October, the tenth month out of the last 14 where it declined. Prices are now down more than 11% from their late 2007 peak. National Association of Realtors just forecast that office vacancy rates will rise to 16.4% by late 2009, from 12.5% in 2007, while retail rents will drop by 7.3%.

Another problem: according to research firm Foresight Analytics LCC, “$530 billion of commercial mortgages will be coming due for refinancing in the next three years — with about $160 billion maturing in the next year. Credit, meanwhile, is practically nonexistent and cash flows from commercial property are siphoning off."

But the lesson from the residential industry is that all these bailouts merely ease the symptoms of this crisis somewhat, without curing the underlying problem.
Expect commercial real estate fundamentals to weaken in 2009, loan defaults and foreclosures to climb, and prices to fall - no matter what Bernanke & Co. do in Washington.

AIG may have trouble repaying taxpayers for bailout American International Group is getting about a third less from the auction of Hartford Steam Boiler than it paid for the insurer eight years ago, raising doubts about whether AIG can come up with the money to pay back its rescue loan from the U.S. government. If the sale accurately represents how the market is valuing AIG assets, "it's bad news for the American taxpayer," said an analyst at Fox-Pitt Kelton Cochran Caronia Waller. Bloomberg (23 Dec.)

Number of U.S. homes sold posts biggest drop in 20 years U.S. prices on resale of houses plummeted 13% in November, the biggest decline since records were first kept in 1968. The National Association of Realtors said it is probably the biggest drop since the 1930s. Marking the largest decline since 1989, the number of sales for single-family houses fell 7.6% from October. Bloomberg (23 Dec.)

For 2008, loan volumes plunge 44% while bonds lose 27% Loan and bond volumes dropped in 2008 to lows last seen at the height of the dot-com bust in 2000. Dealogic figures show that syndicated loan volumes dropped 44%, while bond volumes slid 29%. During the past year, U.S. banks went through significant changes, including bankruptcy, rescues and mergers. The year also included establishment of government-guaranteed bank debt, an asset class that has had significant impact on markets. Financial Times (22 Dec.)

Analyst expects record for underfunded U.S. pensions Standard & Poor's analyst Howard Silverblatt projected an all-time record for underfunding of U.S. pensions for 2008, totaling about $257 billion. He said stock-market losses devastated portfolios, and any pension-fund manager "who came remotely close to breaking even" is quietly celebrating survival in one of the worst markets in modern times. FinancialWeek/Reuters (23 Dec.)

Please, I'm not pointing this out to sound like Mr. Grinch. It's just that retail sales represent two-thirds of U.S. gross domestic product (GDP). So investors should be very worried that this retail and commercial real estate weakness is going to push our economy into an even deeper recession

The Good News?

I hate to leave you on such a gloomy note, what with New Year's festivities right around the corner. So let me wrap up with this: Falling asset prices will eventually restore TRUE, intrinsic value to real estate. Education and food will be more affordable.

This decline will get home prices back to levels that make sense when compared against incomes and rents. It will make it so home buyers can purchase affordable homes at reasonable debt-to-income ratios, using traditional 30-year mortgages instead of all the junk loans. The U.S. economy and financial system has begun a noticeable period of cleansing: Stocks, real estate, and many commodities are getting pounded into the ground. Therefore, you can chock up at least a small victory to the market process.

The Federal Reserve, the Treasury, and our politicians don't seem to share these sentiments. Rather they favor reckless bailouts, out-of-control stimulus packages, and unabated aid. Nevertheless, there's a tight correlation between currencies and stocks: As risk ebbs and flows, the buying of U.S. dollars ebbs and flows ... in an opposite direction. And the flight to safety combined with a deflationary environment should lead to a short-term bull market for the U.S. dollar.

Beyond 2009, the U.S. economy may show signs of a recovery. Whereas competing, developed nations will continue to wallow after a much longer monetary and fiscal response time from their governments. This growth differential could very easily be another short-term shift in favor of the U.S. dollar and spell bad news for the euro. However, having said that, beware of the relationship between peak oil (2004) and the credit bubble that has ensued. Don’t be caught picking up starfish (Treasury Bills) on the ebb without a full awareness of the tsunami effect, for the massive inflation wave is building off shore and wouldn’t that be good news for the credit imbalance or trade deficit with China? Have a HAPPY Golden NEW YEAR!

What Can Dentists Do To Protect Themselves?

I know the economic news is bad, how low can it go? The pain we have experienced in these past few weeks cannot continue, but that doesn’t mean we have seen the bottom or that stocks cannot fall from here. And history agrees.

Have a look at the average P/E ratio of the entire S&P 500 index over these three periods of market meltdown:
Period Average S&P 500 P/E Ratio
1977-1982>>>>>>>>>8.27 times
1947-1951>>>>>>>>>7.78 times
1940-1942>>>>>>>>>9.01 times

Compare that to what used to be an average P/E ratio of around 20 times and it's pretty apparent that stocks could fall much, much further than they already have, if they haven’t already by the time of this writing, just by returning to the lows they historically hover around during downturns. It would be useful to know what the average P/E ratio of the S&P 500 was just prior to these three market meltdowns. However, we do know about how much debt the government has had relative to GDP at the time of the Great Crash of ’29. Prior to the 1930s, the total debt in the U.S. was between 150% and 160% of GDP. Now it's close to 350% of GDP and it includes derivatives which it barely did prior to the 1930s.

How can you best protect yourself? Make sure you look at the P/E ratio going forward into this market and watch consumer sentiment.

Now, assuming earnings stay flat, and there is lots of evidence of that:

Manufacturing falls to lowest level in 26 years
The Institute for Supply Management said the index of national factory activity fell to 38.9 in October, the lowest in 26 years. Any reading of less than 40 is considered extremely weak. Economists were expecting 41.5, down from 43.5 in September. "It means we're in a recession, it's as simple as that ... a pretty solid manufacturing recession," said Robert Macintosh, chief economist at Eaton Vance. Reuters (03 Nov.)

Over one million jobs have been lost in the last 12 months. In September, another 159,000 jobs, in October 250,000 jobs disappeared.

Revisiting those historically low P/E levels could easily mean a decline from here, but how much further will it go, a DOW 5,000? When the Dow Jones Industrial Average touched its nominal low of 7,884.82 on October 10th, it had already lost 77% of its value when looked at from a real inflation-adjusted equivalent using 1977 dollars, or about a DOW 2,550. Also, on October 10th, 87% of all stocks on the NYSE hit new 12-month lows.

That kind of downside breadth exhaustion, where more than 50% of NYSE stocks hit 12-month lows at the same time, has occurred only four times — in 1962, 1966, 1970, and at the crash low of 1987.

Each one of those data points was at or within a few weeks of a major bottom.
When looked at in these real, inflation adjusted terms, this also means that the bulk of deflation is already past us. That’s good news for commodities. Of course, I’m not making any recommendations. I'm just taking a long look at history.
As difficult as it is right now, following the "this too will pass" philosophy really does work. The majority of stocks -- are worth much more than a measly 8 - 10 times earnings. The only thing that pushes the average stock to such scary levels is an overdose of panic and that is exactly where we are today.

The next few years are likely to be extremely volatile with all the markets, including real estate as we see-saw between greed and panic in the irrational market dynamic we are in.

What will the Dow Jones Industrial Average look like today? What percentage will it be off its high? In the 26 bear markets since 1900, it has declined more than 50% only twice -- 90% in 1929 and 52% in 1937. (In the tech wreck of 2000-2002, investors lost 78% of their money invested in the average Nasdaq stock.) And then, taking a deep breath and another long look at history, it goes up!

But with the recent increase in the money supply, isn’t that always inflationary? What is happening to gold? The answer is that inflation was yesterday’s problem, today’s is deflation and all that changed in October when global recession became evident and that eliminated any upward movement of prices. Money has to be spent in order to be inflationary, but with so much new money entering the system won’t that contribute to growing the economy? That is the hope and yes, when that happens it will be inflationary and then gold will go up, but that’s looking more long-term, after the panic subsides, meanwhile it is scary out there. Prices for commodities have collapsed, precious metals have experienced the biggest drop in 25 years. As global markets collapse, investors rush to exit for US dollars leaving European and UK banks the most exposed to the emerging economies debt obligations given that 45% of developing world loans originated from Europe relative to only 9% originating from the US and Japan. This bodes well for US currency strength going forward.

BRIC hard hit by crisis; funds see plummeting share prices Investors in funds specializing in BRIC -- Brazil, Russia, India and China -- have taken huge hits throughout the economic crisis, seeing the funds drop 60% or more in share prices. Analysts said BRIC will remain a principal engine of global growth for the medium and long term, but investors looking for short-term gains would do better buying U.S., U.K. or European equities. Telegraph (London) (21 Oct.)

Wall Street, Washington dictate course of global markets
Trading on a global level begins each day in Asia and the Pacific Rim, but more than ever, Wall Street and Washington are the driving force. "The data very nicely and scarily show that the U.S. is dominating the behavior of investors around the world," said Frank Nielsen, executive director of MSCI Barra. "There has been no decoupling of markets at all during this crisis. It all seems to be driven on the basis of what happens day to day in the U.S." International Herald Tribune (03 Nov.)

Global capital flow has shifted direction due to the deterioration of credit and is moving towards less risky assets, and surprise, it is not gold – it is US treasury bills, (not bonds).

Remember back to 1989 when Japanese consumers, after being crushed by the stock market crash and watching real estate investments crumble, weren't interested in borrowing anything at any rate – well, that’s where we are at right now. The fear is that people shun borrowing, lending and investing like they did in Japan. The lesson from Japan, is that it doesn’t matter how much money you throw at the problem, until people start rationally investing in a risk taking approach, nothing moves. In Japan's long bear market, which stretches from 1990 to the present, investors have lost 82% of their money from peak to trough in companies that make up the Nikkei average.

What does this mean for the US dollar? The US dollar has entered a multi-year bull market. The US dollar is the Imperial Currency around the world for investment, backed by the US military and a 14 Trillion dollar economy, nearly 3.5 times larger than China’s. This recent crisis has confirmed this and that for the short-term, relative to gold, it is very valuable paper because investors around the world have put their faith in it as the big elephant in the room. Therefore, the US dollar is King! As the dollar goes up, the value of oil goes down. When global markets are growing and money is flowing, then investors will seek the risk return of developing economies and then the commodities demand will resume.

But until then, why can't the U.S. government simply create more inflation, print more money to pay for it? Because if U.S. government issues bonds to borrow money. It depends on you, or the market on investors, to buy the bonds to loan the government the money, to finance the U.S. government. The U.S. government needs you to hold the U.S. bonds you've already bought. Plus, it needs you to buy more new bonds to finance all the new spending and deficits. In order to raise this money for the government, it must retain your confidence, your trust. To do that, it cannot run the printing presses or destroy your money. Instead, it has to let the deflation and depression run its course. And the biggest question of them all is, do you think the government’s manipulating the currency, writing new laws, and changing the banking structure — will be a match for the power of the markets; consumers, investors and bankers?

Market turmoil ironically boosts long-suffering dollar
In an ironic twist, the currency of the country that created the credit crunch is now a haven for frightened investors, driving the dollar up in value by 15.5% against a basket of currencies since Aug. 1. As stock markets plummeted again Wednesday, the dollar achieved significant gains against its European counterparts, with the pound falling to $1.6242, a five-year low, and the euro dropping to $1.2843, close to a two-year low. International Herald Tribune (22 Oct.)

Gold falls to less than $700 per ounce but rebounds slightly
Gold futures fell $20.50 on Thursday and closed at $714.70 an ounce on the New York Mercantile Exchange. At one point during the day, the metal fell to less than $700 an ounce. The decline was likely because of the rising U.S. dollar and massive fund sales. MarketWatch (23 Oct.)

Turmoil resurrects U.S. dollar as world's reserve currency
The financial crisis has seen investors voting with their cash and buying U.S. dollars, indicating that reports of the dollar's death as a reserve currency were greatly exaggerated. Investors quickly understood that the U.S. is the only nation with the political will to act quickly and the government and private-sector infrastructure to implement necessary policies. Reuters (28 Oct.)

China launches $586 billion economic-stimulus plan
Days before Chinese President Hu Jintao is set to meet with Group of 20 leaders in Washington, the country's State Council announced a spending plan that allocates $586 billion through 2010 to stimulate the economy. Hu is expected to be under greater pressure to play a bigger role in battling the global financial crisis. China plans to spend the stimulus package on projects including roads, airports, railways and the power grid. ClipSyndicate/Bloomberg (10 Nov.) , The Times (London) (10 Nov.) , International Herald Tribune (09 Nov.) , The Wall Street Journal (subscription required) (10 Nov.)

Treasury's change to tax policy boosts banks, angers lawmakers
While Congress debated the White House's proposal for a $700 billion banking rescue, the U.S. Treasury quietly changed tax policy that resulted in a $140 billion windfall for American banks. Lawmakers did not immediately notice the sweeping change made to more than 20 years of tax policy, but some were furious when the change came to light. "Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no," said George K. Yin, the Joint Committee on Taxation's former chief of staff. "They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks." The Washington Post (10 Nov.)

Fed won't say which banks got $2 trillion in emergency loans
Bond investors said secrecy from the Federal Reserve regarding its $2 trillion in emergency loans to banks -- including its refusal to identify the banks, the assets being accepted as collateral or the methodology used to value those assets -- is crippling the ability of financial markets to recover. Fund managers said this lack of transparency is a serious problem because "the market is very nervous and very thin." The nation's biggest banks declined to comment on whether they borrowed from the Fed. Bloomberg (10 Nov.)

Asset-backed lending dries up, shuts out commercial mortgages
Regional banks and insurance companies, the primary sources for commercial real-estate finance after credit markets froze, have completely stopped lending for this market, analysts at RBS Greenwich Capital Markets said. Thawing of short-term markets was a welcome first step, but "it is a baby step" that does little for commercial real estate, analyst Lisa Pendergast said. Bloomberg (07 Nov.)

Using probability theories, you are better off using stocks, over bonds to earn an inflation-adjusted return of investment to meet your retirement goals. While this is statistically true, it doesn’t mean it is individually true for you, it depend entirely on what your investment horizon is, market performance when you remove your money, and on how long you live.

The irony here is that the longer you work, the less time you have for retirement. The reality before this current crisis was that 80% of dentists could not afford to retire at age 65 in the same standard of living that they have grown accustomed to. The moral to this story is that you had better like dentistry, because in all likelihood, you are going to need to keep working.

What other markets can you consider? Already, in 2008, one in ten American homeowners has defaulted on their mortgage or lost their home in foreclosure. Nearly two in ten about 7.63 million properties, or 18%, had negative equity in September, according to a report by First American CoreLogic; that means they owe more than their home is worth, many of whom haven’t even begun to pay off the principal in no-money-down, interest only first mortgages that were “given” away.

Experts see danger in near-doubled "underwater" mortgages
About 12 million U.S. homeowners find themselves "under water" -- owing more money on their mortgages than their homes are worth -- compared with 6.6 million at the end of last year. Economists see this as a serious threat at a time when unemployment is rising. Reuters (21 Oct.)


What’s different this time than in 1929 was that the stock market crashed first, then the housing market. People didn’t borrow money to own their homes back then and there were no variable rate mortgages. The big question ahead is what will be the “fair market value” for homes going forward? Where will the bottom be? If the US sinks into depression, then that phase of the housing crisis where home prices rapidly sink in value hasn’t even happened yet, let alone what is going to go on in commercial real estate.

Another irony is that debt is the fuel for expansion by speculation. With debt, prices can be increased beyond sustainable levels ultimately because of greed. We have seen this kind of boondoggle before with the Dutch Tulip mania of the 1630s, South Sea land bubble of the 1700s, and the stock market panics of the early 1900s before the Federal Reserve banking system was established. It’s ironic that it is this same Federal Reserve Banking system combined with deregulation (loss of prudent oversight) that most directly contributed to this mess. Mortgages represent only 42% of the private-sector debt problem in the country; the other 58% comes from consumer debt and corporate debt. An astounding 40% of houses and condos were bought as second homes or investments.

So, today Americans are under huge pressure to sell their homes and second homes due to their other financial burdens ranging from their credit card debts to job layoffs. To make matter worse, Wall Street bundled up their mortgages (their promises to pay often based on no down payment, no income, no proof of assets, and interest-only payments for a few years…) and then resold them as securities that could be traded much like stocks and bonds. These securities, in turn, were bought by banks and investors in the U.S., Europe ( who intern invested in the developing economies around the world with the money assured from these same faulty mortgages, now repackaged as a CDOs, Collateral Debt Obligations), and Asia. To put this in perspective, European banks' exposure to emerging market loans is roughly six times as large as the United States' exposure to subprime mortgage-backed securities. Hence, the makings of the global credit crisis.

IMF running out of money to rescue emerging economies
The International Monetary Fund is burning through its $200 billion reserve fund so quickly that it may have to ask the West for more money or exercise its rarely used power to issue "special drawing rights." The drawing rights allow the IMF to create liquidity by acting as if it is the world's central bank. This was done briefly after the fall of the Soviet Union but has never been systematically used as a policy tool in a financial crisis. Telegraph (London) (27 Oct.)

To give you an idea of the size of this transfiguration, the total amount of mortgages transformed into these CDO securities: $4.8 trillion, that is 60% more than the total value of all the stocks in the Dow Jones Industrial Average. Phew! Then, in just one year — 2006 — $2.4 trillion in new mortgage-backed securities were created, more than triple the amount of just six years prior. Between 2005 and 2008, for example, Fannie Mae (a government mortgage corporation) purchased or guaranteed at least $270 billion in subprime mortgages — high-fee loans to high-risk borrowers. That was more than three times as much as it had bought in all its earlier years combined. So, I guess the speculators showed up in 2006 and bid up credit default swaps (new derivative securities that function like insurance on these bundled bad equity home mortgage loans, CDOs, except you don’t have to experience any loss to benefit from, for example, Lehman Brother’s downfall who you “insure” against this happening to benefit). There is not enough accountability in the system, no oversight.

Newest estimate of default swaps smaller than thought
Data from the Depository Trust & Clearing Corp. provide a clearer picture of the size and nature of the market for credit-default swaps than was previously available. The company said in the first of a series of weekly reports that there is $33.6 trillion in credit-default swaps outstanding on corporate, government and asset-backed securities. The figure is substantially lower than earlier estimates that ran to $50 trillion or more. The New York Times/DealBook blog (04 Nov.)

How do dentists protect themselves in today’s economy with unethical and unregulated markets? First, don’t blame yourself and don’t look back, the world has changed, look at what is happening now. Second, don’t count on the government to save the day, whether though social security, increased oversight, or tax relief. Third, don’t underestimate the depth, speed or duration of this “correction”.

Rating agencies "drank the Kool-Aid," Moody's CEO says
Raymond McDaniel, CEO of Moody's, told Congress that in the run-up to the financial crisis, the three major credit-rating agencies -- Moody's, Standard & Poor's and Fitch Ratings -- were trapped in a race to the bottom, forced to lower standards to maintain market share. Rep. Henry Waxman, D-Calif., chairman of the House Committee on Oversight and Government Reform, said that race was lucrative for the rating agencies in the short run but disastrous for the global economy in the long run. MarketWatch (22 Oct.)

Greenspan says crisis "found a flaw" in his thinking
Alan Greenspan, former chairman of the Federal Reserve, told a congressional committee that he made "a mistake" in thinking that self-interest would force banks and other financial institutions to protect shareholders. He said he wrongly assumed that lenders would carry out proper surveillance of their counterparties. On the other hand, Greenspan said the kind of heavy regulation that could have prevented the economic crisis would also have damaged growth in the U.S. Financial Times (23 Oct.) , The Wall Street Journal (subscription required) (24 Oct.) , BBC (23 Oct.)

What do I mean? Well, this latest rally is sure to be a dead cat bounce but if I am right there are likely to be a few between now and year end. On Thursday, we learned that the U.S. economy actually shrunk in the third quarter; that consumer spending, the discretionary income consumers have available, had plunged to the lowest level since 1947. Not until consumer confidence returns can you expect to be safe in the markets, until then, these are and will be very interesting times.

U.S. consumer confidence falls to all-time low
As the financial crisis settles in, the U.S. is seeing its lowest consumer confidence since the Conference Board index was created more than 40 years ago. It fell to 38 in October from 61.4 in September, far less than the 52 that economists predicted. Consumer spending accounts for about 50% of the country's GDP. Financial Times (28 Oct.)

U.S. economy slides on decreased investment, spending
The U.S. economy contracted in the third quarter to a 0.3% annual rate of growth, the most drastic slump the country has seen in seven years. Contributing factors include decreased consumer spending and lower business investment. "The mortgage meltdown is far from over; the economy and financial markets are still reeling from it," said Janet Yellen, president of the Federal Reserve Bank of San Francisco. Reuters (30 Oct.)

MasterCard says Americans chop spending, avoid luxury goods
According to SpendingPulse, a data service of MasterCard Advisors, Americans cut their spending by a lot in October, especially avoiding goods costing more than $1,000. Sales of specialty apparel, women's apparel, footwear, electronics and appliances all fell, and luxury items saw a serious slump. "If you take out the purchases above $1,000, the sector is really down about 10%," said Michael McNamara, vice president of MasterCard Advisors. Reuters (05 Nov.) ct.)

Study suggests election will have little impact on markets
Although politicians do have some influence on the economy, analysts said it likely will not matter much whether John McCain or Barack Obama is in the White House. Instead, they said, stock markets can only rise in the coming year. Many studies have examined the relationship between presidential elections and stock markets. A study by Robert Johnson, managing director of the CFA Institute's Education Division, Northern Illinois University professor Gerald Jensen and University of Wisconsin professor Scott Beyer suggests that the real influence comes from the Federal Reserve's monetary policy. The Associated Press (03 Nov.)

Business groups brace for more regulation
Business groups are preparing for more regulation regardless of who comes out on top of elections in the U.S. on Tuesday. At the same time, they are warning that more regulation could hurt, not help, the already-battered economy. "The pendulum never stops in the middle," said Bruce Josten, chief lobbyist for the U.S. Chamber of Commerce. MSNBC/The Associated Press (02 Nov.)

How do you ensure you won’t run out of money during your planned retirement?
Well, that depends upon when your planned retirement is? If it is within the next 5 years, you are better off out of the market in short-term US treasury bills, sell on the rallies. Your exit timing relative to the markets is another key, otherwise, to best protect your self - keep on working! And remember you are more than what you do, - keep on “being”!

If you are in it for the long-term, remember what history has shown us as to America’s constant growth, and realize, that this growth must continue in the capitalist system, with implied built-in inflation due to this growth which until now, managed between 2-3%, seemed like “the golden point” to avoid run-away inflation and still stimulate enough growth to manage a favorable return, as the history of the stock market attests. So, in this best-case scenario, stay invested, keep your head down, and keep working. And remember, the US economy is a 14 Trillion dollar economy; China’s economy is a 3 trillion dollar economy, and there is a world of difference in magnitudes of scale between them, something that will keep the US economy dominant long into the foreseeable future.

If you find comfort in both my arguments, “stay invested vs. convert to US treasury bills”, then consider, converting 50% of your equity and bond portfolio to cash (US Treasury Bills) selling on the rallies.

The Fed, indeed all central banks' attempts to re-inflate asset prices, should soon begin to have an impact on markets. There is a meeting this week, organized by Bush to call together all the central bankers and decision makers together to re-new the financial system. The rules could change again, as I suspect they will like they did back when the Bretton Woods Conference met previously, in 1944. They took the dollar off the $20/ounce of gold standard, and created the World Bank and the IMF. Then again in 1971 the US went off gold standard entirely and became the world’s currency, the dominant economy involved in all growth economies, and backed by the US military… So, we were a bigger global economic force in the ‘70s than today, however we are still the elephant in the room, and as the elephant goes, so goes the rest of jungle.

G-20 leaders plan to speak with united voice on crisis
At the Group of 20 summit in Washington this week, world leaders will strive to stand united about dealing with the economic crisis. Many observers said their actions may not be as united as their rhetoric. The French want to establish a regulatory regime, but the Americans are wary of the concept. The British are seeking to make the International Monetary Fund more powerful. The Russians oppose the idea. G-20 ministers met in Sao Paulo, Brazil, during the weekend to prepare for this week's meeting and to discuss a global economic-stimulus package, but they did not approve a final plan. The Wall Street Journal (subscription required) (10 Nov.) , International Herald Tribune/The Associated Press (09 Nov.)

The key to working out of this credit crisis at this meeting is coming to an understanding that debt defaults cause deflation; and deflation causes debt defaults. In this crisis, however, it could be competitive interest-rate hikes that emerge as a catalyst for depression. They will do, however, what they can do to lower interest rates. What’s more, in this summit of summits, they need to convince billions of consumers, millions of investors and thousands of bankers around the world to take on more risk!

But how far can all of this go, in the past 2 month we have spent 2.7 trillion in unplanned rescue funds.

Your decisions in the coming weeks could make the difference between a successful career or a lifetime of struggle; I hope I have stimulated you to have a plan, and be prepared to act prudently while being agile. Change is happening so fast with this crisis; just the size of it is mind-blowing:

Just look at how far the U.S. Treasury and Federal Reserve have already gone out on a limb to fight the debt-and-deflation spiral. They’ve loaned, invested, or committed:
1.
$2.7 trillion to bail out the financial crisis, (total rescue money announced), but it’s still not enough.
2.
Based on the Federal Reserve's Flow of Funds report, there are now $52 trillion in interest-bearing debts in the U.S.
3.
Based on estimates provided by the U.S. Government Accountability Office and other sources, it's safe to assume that there are also at least $60 trillion in contingency debts and obligations now starting to kick in — for Social Security, Medicare and other pensions.
4.
Separately, the Bank of International Settlements reports that the total value of debts and bets placed worldwide (derivatives) is $596 trillion in derivatives worldwide (all outside the purview of any established exchange). And so you can see how the leg bone is connected to the hip bone, and how these original US sub-prime mortgages amounted to so much bad debt that began by affecting the original home owners, then the banks, then Fanny Mae, then the Insurance companies got involved on this debt and finally the derivative securities, A.K.A. Collateral Debt Obligations which fueled the speculation and manipulation used by powerful hedge funds and investment houses.
5.
As all this is happening in the background, for the first time, the Federal Reserve's balance sheet exceeded $2 trillion as the central bank continues to lend huge sums of cash to financial institutions to keep short-term funding markets alive. The Fed's balance sheet grew from $1.953 trillion Oct. 29 to $2.058 trillion Wednesday. Banks pulled back on direct borrowing from the Fed's discount window, but the industry remains dependent on the lender of last resort. CNBC/The Associated Press (06 Nov.)

Now, in response to massive government bailouts, and the re-writing of the rules of the game, we’re witnessing a temporary easing of the credit markets, and investors are hoping the worst is over. The market recovery cannot last very long in this environment, and as the global recession takes its toll on financial companies, it’s likely to be followed by a larger, still more powerful wave of debt collapses, for another swoop downward.

If you don’t like this ride, ask yourself, do I really want to participate in another? With all this market volatility right now, surely we have entered a downdraft crisis. Remember, in Oct of 2007, we were in the 1400s; that was one year ago? Have we already corrected to a near bottom? Regardless, the real question is whether or not you think all this financial wizardry is sustainable going forward? Do you think bigger is always better for an economic return, what about a societal return? Who do you want to be beholden to the tax payer or the shareholder? And is what you see in your community positive and healthy? If you are as confused by all this as I am, maybe you might want to consider taking some time away from the markets, and just sit on some cash (Treasury Bills) and wait it out to see if the economic storm of the century establishes itself or not, to see if there is something the governments can do to, to encourage consumers to direct it back out to sea again.

Meanwhile, assuming you get out on a rally and there should be a few rally opportunities between now and the New Year, I offer, it’s better to have a bird in the hand than two in the bush. How to protect yourself in these far from certain markets; how about taking 6 months out, just to see how this all unfolds?

Fannie, Freddie, officials create program to help homeowners
Fannie Mae, Freddie Mac and officials in the housing industry worked out a program to reduce monthly payments for hundreds of thousands of homeowners to 38% of their income, sources said. The parties involved used a combination of interest-rate reductions, extensions and reduced principals to get to the level, which is considered an affordability threshold. The effort is an expansion of initiatives by the Hope Now Alliance. Bloomberg (11 Nov.)

Treasury close to second rescue for Fannie Mae:The U.S. Treasury is on the verge of injecting as much as $100 billion of fresh capital into Fannie Mae, only three months after the government took over the corporation. The Treasury is worried that mortgage rates will soar if Fannie is forced into liquidation, making it enormously difficult for the housing market to climb out of its worst slump since the Great Depression. Analysts said a Treasury infusion for Fannie and Freddie Mac would boost market confidence and eventually help loosen up the mortgage market. Reuters (10 Nov.)

Survey suggests longer, deeper recession in U.S. than expected
A survey of 49 economist by Blue Chip Economic Indicators points to contracting GDP in the U.S. well into 2009, with Britain and Japan also experiencing deep recessions. The economists' median forecast calls for U.S. GDP to fall by 2.8% in the final three months of 2008 and by 1.5% in the first quarter of 2009. They expect feeble a GDP growth of 0.2% in the second quarter next year. MarketWatch (10 Nov.)

Investors factor in slowdown, drive oil close to 20-month low
The price of oil fell to a midday low of $58.55 on Wednesday in Asia as decreased consumption of gasoline and other oil products sank in. Commodity strategists said it is obvious that global growth will be "pretty awful" next year and not much better in 2010. Slowing demand for crude in China is a big factor for slumping prices. BusinessWeek/The Associated Press (11 Nov.)

Understanding The Gobal Financial Crisis Upon Us

Bank losses on Fannie, Freddie stock apparently underestimatedAccording to a survey conducted by the American Bankers Association, nearly one-third of U.S. banks hold preferred stock issued by Fannie Mae and Freddie Mac. Nearly all $36 billion of such stock was cleaned out when the Federal Reserve took the mortgage giants over. "The negative impact on banks -- particularly Main Street community banks -- is far greater than regulators first thought," Edward Yingling, CEO of the ABA, wrote in a letter to the Treasury, the Federal Reserve and other banking regulators. Financial Times (23 Sep.)

SEC's Cox says "voluntary regulation doesn't work"Securities and Exchange Commission Chairman Christopher Cox said during a Senate Banking Committee hearing Tuesday that "voluntary regulation doesn't work." He said he is seriously concerned that no government agency has regulatory authority over investment banks. He wants the SEC to be granted authority to require disclosure statements as well as power over products such as credit-default swaps. InvestmentNews (23 Sep.)

Analysis: Privacy in market for credit-default swaps led to problems: No one truly knew the volume of trading in the market for credit-default swaps, possibly leading to overinsurance in the sector. That, in turn, fueled the financial crisis. "The pressure to hedge has led the most liquid contracts to overshoot, in effect pricing in absurd default risks and recovery rates," according to a Financial Times analysis. Financial Times (23 Sep.)

To fund those deficits, we're going to have to borrow an ASTRONOMICAL amount of money. The Treasury just held a record $34 billion sale of 2-year Treasury Notes. That was followed by a $24 billion sale of 5-year Notes, the biggest such sale in more than five years. Those numbers will only go higher with time.

White House, Congress agree on rescue proposal President George W. Bush's administration and congressional leaders came to terms on a $700 billion rescue plan for the financial system. The House and Senate will likely vote on the legislation this week. Many of the plan's mechanics were left to the Treasury, including how much the government would pay for toxic assets and which assets would be bought. The Treasury has 45 days under the bill to issue guidelines regarding those procedures. Read the draft proposal. ClipSyndicate/Bloomberg (29 Sep.) , The New York Times (28 Sep.) , Financial Times (29 Sep.)

In fact, Congress is raising the federal debt ceiling to a whopping $11.3 TRILLION to account for this additional borrowing.

The likely impact: All the additional supply will drive bond prices LOWER and interest rates HIGHER. Heck, 10-year Treasury Note yields have already surged from around 3.4% to almost 3.9%. That will blunt the impact of the bailout by driving financing costs higher on all loans whose rates are benchmarked to Treasuries. I’ll bet they will be lower interest rates soon to counter act this unwanted effect. (Bernanke lowered them on Oct 21st.)

Rescue plan defeated on Capitol Hill; Dow falls 777 points Despite pleas from President George W. Bush and leading lawmakers from both parties, the U.S. House of Representatives voted 228-205 against the $700 billion rescue plan. The development sent markets plunging -- the Dow dropped 777 points -- and left leading lawmakers scrambling. Only 65 Republicans, or about a third of those voting, supported the plan, while 140 Democrats, about 60%, said yes, although many voiced concerns. Both presidential nominees, Sens. John McCain and Barack Obama, supported the bill. ClipSyndicate/Bloomberg (29 Sep.) , International Herald Tribune (29 Sep.) , The Economist (29 Sep.) , The Wall Street Journal (subscription required) (30 Sep.) , Bloomberg (30 Sep.)

U.S. financial ills spread to Europe and beyondAbout a week ago, European leaders rejected calls from U.S. counterparts to join their economic-rescue effort. Now Europe is facing a financial crisis nearly as dire as the American situation. The turnaround of events shows just how quickly problems are spreading. "In this day and age, a bank run spreads around the world, not around the block," said Thomas Mayer, Deutsche Bank's chief European economist. "Once a bank run is under way, it doesn't matter anymore if you have good loans or bad loans. People lose confidence in you." International Herald Tribune (01 Oct.) , Reuters (01 Oct.)


Lack of confidence sends Libor to record levelWhile stock markets around the world suffer steep declines, the overnight dollar Libor surged to 6.88%, an indication that lenders are concerned that money they lend to other financial institutions may never been seen again. "The reason Libor is so elevated is a lack of confidence between counterparties in the financial sector," said Charlie Diebel of Nomura. The situation forced central banks to inject billions into the system. Telegraph (London) (01 Oct.)


Manufacturing contracts faster than expectedThe measure of American manufacturing activity marked its first significant decline of the economic downturn. The index of the Institute for Supply Management has been hovering for most of the year on what economists call "the boom-bust" line." "The headline ISM has plunged into recession territory," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. The New York Times/The Associated Press (01 Oct.)

Credit-card debt may be next to slap finance sectorInnovest StrategicValue Advisors predicted that credit-card debt is the next wave to crash against the financial sector, saying banks will charge off $96 billion in delinquent accounts in 2009, twice the forecast for 2008. Gregory Larkin, senior banking analyst for Innovest, said all of that bad credit is going to surface rapidly, and he predicted that credit-card charge-offs will mimic those of mortgages. MarketWatch (30 Sep.)

SEC extends ban on short salesTo give Congress more time to pass the $700 billion economic-rescue plan, the Securities and Exchange Commission extended the temporary, emergency ban on short selling in nearly 1,000 stocks. The ban will continue until three business days after the rescue package is enacted, if it gets approved. But the ban will not last past Oct. 17. Reuters (01 Oct.) , Financial Times (02 Oct.)

FDIC seeks unlimited-borrowing authorityThe Federal Deposit Insurance Corp. asked Congress for temporary authority for unlimited borrowing. The request was in the U.S. Senate's bailout legislation. The 451-page bill would raise the limit on federal bank-deposit insurance from $100,000 per depositor to $250,000. Reuters (01 Oct.)

Commercial paper sees biggest weekly drop since 2001Data from the Federal Reserve show a stunning $95 billion drop in commercial-paper investment, the biggest weekly reduction in six years. The shrinkage in commercial-paper financing raises fears of serious cash-flow problems for corporate borrowers and banks. Freezing of the market is hitting even highly rated companies, including General Electric and AT&T. Financial Times (02 Oct.)

"Ghost of deflation" haunts marketsAs banks tighten credit, commodity prices plummet and asset values decline, the world may be turning from the dangers of inflation to the risk of falling into a vicious deflationary cycle. "The ghost of deflation could be dragged out of the closet again in coming months," said Joerg Kraemer, chief economist at Commerzbank in London. David Owen, chief European economist at Dresdner Kleinwort in London, agreed, saying, "We are certainly more worried about deflation than inflation." Bloomberg (06 Oct.)
U.S. plans bold moves to shore up financial system

The U.S. Treasury Department plans to invest as much as $250 billion in banks and guarantee newly issued bank debt for three years to battle the financial crisis, officials said. The Federal Deposit Insurance Corp. will guarantee all deposit accounts that do not earn interest. Capital injections will come from the $700 billion rescue package approved earlier this month. President George W. Bush is expected to announce the plan Tuesday. ClipSyndicate/Bloomberg (14 Oct.) , International Herald Tribune (14 Oct.) , Bloomberg (14 Oct.)

Economic slowdown clamps lid on runaway commodity pricesWorld prices for wheat and corn have dropped 40% since spring, oil is down 44%, and metals such as aluminum, copper and nickel have fallen by a third or more, as financial panic brings the commodity bull market to an end -- at least for the moment. This sudden about-face is the brightest news on the horizon for consumers because it puts money into their pockets at a time when they really need it. The New York Times (13 Oct.)

The world is on notice.

Several of the world's Central Banks launched a determined and coordinated attack against the widening global financial crisis by lowering short-term interest rates in unison last week.
The Federal Reserve Bank, the European Central Bank, the Bank of England, Canada, Sweden, Australia, and Switzerland all cut short-term interest rates by a half percentage point.
Across the Pacific Ocean, the People's Bank of China, Australia, South Korea, Hong Kong, Singapore, and Taiwan cut interest rates, too.

This is the first time that central banks have moved in unison since the September 11 terrorist attacks, and I think it is just the start of global government efforts to keep the global economy from further deterioration. Then, over this past weekend, we saw additional coordination from the U.S. and European Central Banks: The Fed, the European Central Bank, the Swiss National Bank, and the Bank of England all saying they would provide unlimited U.S. dollar funds to financial firms.


2 kinds of investors

Academics and economists deal in a world populated by rational investors. Unfortunately, we live in a world populated by behavioral investors. Rational investors look at the turbulence in today’s markets and calmly evaluate the potential risks and rewards of remaining invested. Rational investors do not confuse certainty with safety. They recognize that, although the principal value of funds invested in Treasuries and CDs may be certain, after factoring in taxes and inflation, the return they receive on their “safe” portfolio they realize that it may fall woefully short of what they need to maintain their standard of living in retirement.

This is not so for behavioral investors. They see the frightening headlines and are bombarded minute by minute on the radio, television, and internet with financial crazy making. The result is all too often a growing panic that leads them to seek the mythical “safety” of dumping stock and running to cash. Which one are you?

A bit of perspective

If the Central Banks were our kids, we'd be taking their credit cards away. They are spending us into the poor house!

Sure, Wall Street is at the rotten root of this crisis. Their toxic debt is poisoning the global economy and financial system. But there's plenty of blame to go around.

It makes you wonder just how big that $700-billion bailout package will need to be, now that they've expanded it from buying toxic debt to buying preferred shares in banks. All this new spending is in addition to the $1.8 trillion in total government bailout money since the financial crisis started.

Maybe we won't get those higher prices in gold right away, because investors are scared of deflation.

On the other hand, throwing trillions and trillions of dollars at the system is inherently inflationary.
Do you think Beijing thinks that the dollar's status as a reserve currency is soon going to be history. Just like the pound sterling lost its status as the world's reserve currency in the early 20th century.
Beijing's bank is overflowing with money. In fact, at nearly $2 trillion, China has the largest foreign reserves of any country in the history of the planet.

That's why they're going to back the yuan with gold ... loads of it. China has already started purchasing small amounts of gold.

Economists say U.S. housing market nowhere near bottomHome prices across most of the country are likely to continue falling through the end of 2009, economists said, and in some markets may keep falling even longer, depending on how bad the slowdown gets. In the hardest-hit states such as Arizona, California and Florida, the story is the same: More houses are going up for sale while escalating interest rates on mortgages, falling wages and rising unemployment are putting pressure on an already-diminished pool of possible buyers. The New York Times (15 Oct.)

IMF raises estimate of losses from crisis to $1.4 trillionIn its quarterly report on global capital markets, the International Monetary Fund increased its estimate of losses from the financial crisis to $1.4 trillion, up from $945 billion in April and $1.3 trillion last month. The IMF also estimated that major global banks will need approximately $675 billion in capital in coming years. "The combination of mounting losses, falling asset prices and a deepening economic downturn has caused serious doubts about the viability of a widening swath of the financial system," the IMF said in its assessment. International Herald Tribune/Reuters (07 Oct.)

Consumer borrowing sees first fall in more than decadeConsumer borrowing fell at an annual rate of 3.7% in August as households scaled back their use of credit drastically, according to the Federal Reserve. This is the first time that consumer borrowing fell in more than 10 years. Although economists expected a $5.25 billion increase in August from July, borrowing was instead down $7.88 billion, totaling $2.58 trillion. The New York Times/The Associated Press (07 Oct.)

The government is throwing everything ... and I do mean EVERYTHING ... at the credit and mortgage markets. But rates on 30-year fixed loans aren't going down. They're going up.

How can rates be going up when the economy is tanking and the government is throwing everything it can at the banking sector and credit markets?

Because bond investors are dumping the heck out of bonds — and when bond PRICES fall, bond YIELDS (interest rates) rise.

Why are investors selling bonds? Well, they just learned that the budget deficit soared to $454.8 billion in fiscal 2008, which ended September 30. That was more than double the $161.5 billion deficit in 2007 and the highest in the history of the country.

Politicians and policymakers would like you to think they can make things better, drive mortgage rates down, save the banking sector, and return us to the happy-go-lucky, reckless lending days of 2003-2007. But they can't. Well, they can and just today they lowered rates by another ¼ point… but the bond market is pushing back and saying loud and clear: "We can see the writing on the wall, there will be too much supply of future government bonds and too little demand, they are out of there."

Federal deficit takes back seat to stabilityConfronted with a hugely expensive economic crisis, Democratic and Republican lawmakers alike elected to pay the bill for a bailout by borrowing money rather than cutting spending or raising taxes. The problem lurking in the shadows is that while borrowing is relatively inexpensive in a weak economy with plummeting interest rates, the cost will become a much heavier burden when growth returns and interest rates climb. The New York Times (19 Oct.)

Job losses hurt every corner of U.S. economyLayoffs are spreading beyond the financial and home-building sectors to every corner of the economy, with the situation likely to worsen as the holiday season approaches. A survey of more than 100 chief financial officers and other senior executives found that 58% expect to reduce payrolls next year, while a majority plan to cut operating costs by at least 5%. A four-week moving average of new U.S. government jobless claims hit its highest point last week in seven years. Reuters (17 Oct.)

Bernanke backs another stimulus packageCongress would be wise to start thinking about another fiscal-stimulus package to pull the U.S. out of a long downturn, Federal Reserve Chairman Ben Bernanke said. Predicting an economy "likely to be weak for several quarters," Bernanke explicitly endorsed for the first time another stimulus package. For months, Democrats have been pushing for a second round of stimulus measures, targeted to domestic construction projects, expanded food stamps and broader federal spending to help states pay for growing health care costs for the poor. Reuters (21 Oct.)

And so it goes…