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!