Practice Management

April - 2010 Economic Brief

2010-04-02T22:23:00.001-07:00

Review:

The same day the health care bill passed, U.S. government debt lost its "risk-free" status. Specifically, investors were willing to accept a lower interest rate to lend money to billionaire Warren Buffett's company, Berkshire Hathaway, for two years than to lend to the U.S. Treasury for the same period of time.

The huge run-up in equities we've seen over the last year is merely proof the US central bank is still powerful. The stock market rebound that's lifted shares in the United States started the same week the Federal Reserve began its $2 trillion program of "quantitative easing" – which simply means printing up money and buying debts with it. What is a person who started investing in 1982 to make of it? From then until 2007, he'd had a full quarter-century of gains. If the market fell, as it did in 1987 or from 2000-2002, it always snapped back.

The fact that a 25-year bull market for stocks had never happened before in history that probably means little to him. After all, it happened to him. It was the experience of his entire life.

But what if a 25-year bull market was an anomaly? A once in a lifetime event? For someone who, say, turned 30 around 1982 and is now nearly 60, this is a hard thing to contemplate. All your life things have been a certain way. You've come to accept them as normal. Any change is thus temporary. That is, until it isn't, and you are left holding on to past dreams. A new leg down in the general market could take down all stocks, even the mining stocks.

I know it can be hard for people to visualize what they grew up with completely being turned on its head. But investment history teaches us that this is exactly what happens, time and time again.
Don't jump to the conclusion that the credit crunch will immediately topple the U.S. economy or stock market. With all the money that Washington has pumped in, a weak recovery can continue and stocks could still enjoy an extension of their rally.
But it cannot last. In the long term, corporate profits cannot be sustained without credit.

Having said that, the S&P 500 and Nasdaq made new highs for the year mid-month after the U.S. and Japanese central banks sent clear signals that the easy credit environment will continue virtually indefinitely.

Fed repeats vow to keep rates near zero for an "extended period"
Source: CNBC
The Federal Reserve reiterated its pledge to keep interest rates close to zero for an "extended period" but offered a slightly more positive outlook for the U.S. economy. Fed officials said spending on software and equipment by businesses has "risen significantly," while the employment market is "stabilizing." "The data flow has been on the positive side," said Ethan Harris, an economist at Bank of America Merrill Lynch. "But the Fed needs to see something more fundamental in the economy to start hiking rates. The current path is not enough." CNBC (16 Mar.) , Financial Times (tiered subscription model) (16 Mar.) , Bloomberg (16 Mar.)

The belief is that economic weakness is not a decisive negative for the market right now because the Fed will keep rates low. Implicit in this thinking is the belief that Fed policy trumps the current economic conditions because the Fed has a history of being able to control/correct the economy via monetary policy. The market therefore trusts the Fed. If it should come to pass that the economy fails to recover despite the heroic actions of the Fed, it will usher in a new, problematic era for the U.S. financial markets and if you are a regular reader you already know my take on this.

To keep rates low, the Fed is printing money like there’s no tomorrow, then using that money to buy bonds.

Meanwhile, with consumers being responsible for 70% of the economy, this just came in from Bloomberg: “Confidence among U.S. consumers unexpectedly declined for a second month in March, a sign Americans are discouraged about the labor market. The Reuters/University of Michigan preliminary consumer sentiment index fell to 72.5 from February’s final reading of 73.6.”

DEBT:
$12,444,406,402,604 – US Debt as of April 1st

U.S. states are suffering from problems that plague Greece
Many of the problems that pushed Greece to the verge of default are showing up in U.S. states, according to The New York Times. Governments are using complex derivatives to compensate for a revenue shortfall, turning to accounting devices that hide debt and searching for ways to pay benefits promised to retired public employees. If buyers of state governments' bonds come to fear default, the matter might get worse, as it did for Greece, economists said. The New York Times (free registration) (29 Mar.)

U.S. adds $600 million to foreclosure-crisis fund
A special fund that helps U.S. states prevent residential foreclosures will get an extra $600 million, the Obama administration said. The funding will go to North Carolina, South Carolina, Ohio, Oregon and Rhode Island. The money is on top of $1.5 billion previously allocated to California, Nevada, Arizona, Michigan and Florida. The Washington Post (30 Mar.)

Country Deficit % of GDP

Iceland 15.7%
Greece 12.7%
Britain 12.6
Ireland 12.2%
Spain 11.4%
U.S. 10.6%
Portugal 9.3%
Poland 7.5%
Italy 5.3%
Canada 4.8%
Germany 3.3%

Ever since America's Declaration of Independence, deficit spending has been a recurring theme in Washington that invariably returns with a vengeance, especially during wartime. But it took 169 long years and seven major wars — from 1776 to 1945 — to rack up a cumulative deficit that matches the gaping budget hole of just 28 short days in February, in fact, last month's deficit of $221 billion was more than TRIPLE the sum total of ALL deficits during the six years under Nixon.

In just one week last month (ending 2/26), the U.S. Treasury issued a grand total of $236 billion in government debt issued in a single week, the most in the history of the world.

This means that Uncle Sam borrowed new money — and replaced old debt — at the rate of $390,212 per second ... $23.4 million per minute ... and $1.4 billion per hour — around the clock! What’s the impact? Credit is actually being sucked OUT of the consumer and corporate economy at a torrid pace, because Uncle Sam is continuing to hog most of the available credit.

Tight credit for small business might cripple recovery, economists say
The contracting availability of bank loans for small businesses might stop the U.S. recovery, economists said. While big corporations have access to the bond market, smaller companies get most of their credit from banks. Total lending by U.S. banks dropped 7.4% last year, the severest decline since 1942. The Wall Street Journal (15 Mar.)

But the kicker is that total household and government debt outstanding is at a new all-time high and has grown 21% over the past three years (and more than doubled in the past ten).

In other words, we’re still in the thick of it. And we expect it could get much worse before it gets better. Simply, absent energetic lending from foreigners, the only way the Treasury is going to be able to keep spending will be to engage in overt monetization. And that will be the starting gun on the next, and most damaging, phase of this crisis, in which the credit crisis morphs into a currency crisis.

Revised data show China, not Japan, is biggest owner of U.S. debt
The U.S. Treasury Department revised its statistics on the ownership of Treasury securities and concluded that China is still the No. 1 investor in U.S. government debt. Last month, the Treasury said China's reduction in holdings had put Japan in the top position. According to the latest data, China owned $894.8 billion in Treasuries at the end of December, considerably more than the previous estimate of $755 billion. Xinhuanet.com (China) (28 Feb.)

Although China has retained its spot as the biggest foreign holder of U.S. Treasury debt in January it trimmed its holdings for a third straight month.

The string of declines is likely to underscore worries that the U.S. government could face much higher interest rates to finance soaring budget deficits.
And out of the ether, CEO Jamie Dimon of JPMorgan told attendees at the bank’s annual meeting that "there could be contagion" if the country’s biggest state, California, can’t pay back all its debt.

JOBS:

Absolutely stunning inter-active unemployment map:

See what 30 million unemployed look like.

U.S. nonfarm payrolls shrank by 36,000 in February, but this figure is better than the 75,000 decline that was expected.
On March 18, with very little pomp and circumstance, president Obama passed the most recent stimulus act, the $17.5 billion Hiring Incentives to Restore Employment Act (H.R. 2487),

BONDS:

So on TOP of massive budget deficits ... on TOP of the biggest rise in U.S. debt ever ... and on TOP of increasing sovereign credit risk, you have an economic rebound underway. That's going to put even more pressure on bond prices, and help to push interest rates higher.

The data released today for January 2010 shows tepid improvement in foreign investor interest in purchasing U.S. assets. The biggest summary of cross-border flow is still just slightly negative for the last 12 months, and well off its 2006 peak of a trillion dollars per year. This should be a pressure for rates to rise, because there is less credit supplied to our markets, especially our corporate bond markets.

BANKS:

Regulators shut 7 banks in 5 states; 37 in 2010. These seven banks add up to about $1.3 billion for the FDIC.

Were one to ask the man on the street – or, indeed, most politicians and bankers – who creates the money that rules our lives they would reply “the State”. They would be wrong. It is true that governments create legal tender – the physical notes and coins that circulate in an economy – but that represents, at its highest, only 3 per cent of the total money in circulation in the global economy. It is the commercial banks, largely unaccountable and privately owned, that create the world’s money.

Governments do not control the single most important mechanism when it comes to their economies: the production and distribution of money. That role has been diverted to the banks, which manufacture money out of nothing and charge interest on that conjured-up money. Beyond an interest rate cut or a token change in VAT rates our politicians have no real power to direct their country’s economy.

Likewise all sorts of financial instruments and “products” are devised by the experts – collateralised mortgage obligations, put and call options, floating rate notes, preference shares, convertible bonds, semi-convertible bonds and endless other “derivatives” – but in essence they are mere variations of the same basic three card trick.

It is true that money is manufactured in the manner I have described – in other words by creating loans to the banks’ clients – surely just as much money is destroyed every time a loan is repaid? This is true to an extent. However, the point to be grasped is that while money is indeed created and destroyed in vast amounts every second of the day, the interest on that money remains un-destroyed and accumulates within the system – and at a compounded rate.

While there is no limit to the number of zeros we can create on a computer, there is a limit to the amount of oil in the ground, the wheat in the fields and the livestock in our farms.

Capitalism, banking and growth become inseparable, but logic dictates that the virtual economy must eventually peel away from the real one and sooner or later the day of reckoning arrives – when the gulf separating these two economies is too large to be sustained – for no power on earth can match the power of compound interest in the ether.

Consider the tale of the Chinese emperor and his chess opponent. The emperor asks what reward would satisfy him if he wins; the opponent replies that a single grain of wheat, doubled for each of the 64 squares on the chess board, would suffice. The emperor, imagining that he has a good deal, loses, only to learn that he now owes his adversary the equivalent of 2,000 times the current annual worldwide production of wheat.

Money breeds more money. Indeed, the banks never really want their loans to be repaid. So long as the interest is funded it is to their benefit for the capital to remain outstanding on their books as “assets” and for the debts to be rolled over. Every time the IMF or World Bank extends a line of credit to some impoverished nation, are they being “charitable” or simply perpetuating the enslavement?

But the system relies entirely, as do all Ponzi schemes, on the assumption of continued growth, hence its inherent instability. Once that growth is threatened the edifice collapses. Likewise with the banks – lend 10 times more money than you possess and when the economy grows, or at least pretends to grow, it’s Porsches galore, but when the lack of growth is exposed it requires only 11 per cent of the loans on your books (in value terms) to be bad and you are bust. The truth is not that these institutions have suddenly become insolvent but that they were never really solvent in the first place.

It is a simple and devastatingly effective swindle, but largely invisible because it has become so deeply embedded in our culture. The consequences of that swindle – the desperate need for economic growth; the environmental and cultural despoliation it engenders – require some radical thinking one encounters nowhere in any of today’s political parties.

REAL ESTATE:

Fannie Mae will seek $15.3 billion in aid from U.S. government
Fannie Mae reported a $16.3 billion fourth-quarter loss, its 10th straight quarterly loss, and will seek $15.3 billion from the U.S. Treasury Department. "Our financial results for 2009 reflected the continued adverse impact of the weak economy and housing market, which has resulted in record mortgage delinquencies and contributed to our recording significant credit-related expenses and net losses during each quarter of the year," Fannie Mae said in a filing with the Securities and Exchange Commission. Bloomberg (27 Feb.)

Refinancing help for U.S. homeowners gets 1-year extension
Homeowners who have seen the value of their house fall dramatically have an extra year to take advantage of a little-used program by the U.S. government. The Federal Housing Finance Agency said the Home Affordable Refinance Program, scheduled to expire June 10, will be extended to June 30, 2011. Google/The Associated Press (01 Mar.) , Housing Wire (01 Mar.) , American City Business Journals/South Florida (01 Mar.)

Since values are falling, many commercial property owners will not be able to refinance. The problem is widespread too since commercial real estate loans are usually the bread and butter of local banks. Only ten major banks made up the bulk of the housing lending market. Yet, according to The Wall Street Journal, more than 3,000 banks and savings institutions have more than 300% of their risk-based capital in commercial real-estate loans. And almost $100 billion of their loans coming due in the next three years may have difficulty getting new financing.

POLITICS and TAXES:

Combined, corporate tax withholdings and individual tax withholdings, these two items posted a multi year low of $34 billion, less than the previous recent low from February 2009 when the first leg of the Greater Depression was allegedly at its zenith. So, there is less tax revenue this year, judging from February’s numbers, and more spending. Something has to give, you can’t have it both ways for long.

Taxes on your investments will increase automatically on December 31st, 2010 whether congress votes on it or not! The Bush tax cuts that lowered taxes on dividends from 35% to 15% and capital gains from 20% to 15% gains are set to expire.

Possible War strategy

Is war just around the corner? While in theory it would make perfect sense to distract Americans from the long road to US insolvency, and other more pressing issues such as the endless criminality all around us, in practice we have so far heard merely rumors. The Herald of Scotland, however, may have credible proof that a US-led attack on Iran approaches and could be just days away. The newspaper has procured proof of an arms shipment to Diego Garcia, which consists of "of 195 smart, guided, Blu-110 bombs and 192 massive 2000lb Blu-117 bombs...put in place for an assault on Iran’s controversial nuclear facilities.

USX DOLLARS:

James Turk reports that the Federal Reserve is vastly understating the growth of the U.S. money supply. Turk writes: "When deposit currency created by the Federal Reserve is added to the traditional definition of M1... M1 after adjustment is actually 170% higher at $2,918 billion. Its annual growth increases to 29.5%, nearly three times the rate reported by the Fed and, more importantly, an annual rate of growth in the quantity of dollar currency that is approaching hyperinflationary levels."

Traders call the Canadian dollar a "commodity currency." Reason is, a large portion of Canada's economy is devoted to exporting commodities. Canada is the sixth-largest oil producer in the world, and the No. 1 foreign supplier of oil to the U.S. Canada is also a major producer of gold, copper, wheat, aluminum, and timber.

This "resource factor," plus the soundness of Canadian banks, has sent the Canadian dollar soaring... while the British pound and the euro are tanking. The value of the "Candol" has gained more than 20% in the past 12 months. This is an enormous move for a major currency.

Many people would like to see a world with currencies backed by "real assets" like gold and silver... rather than ones backed by "full faith and credit." That might happen someday. But for now, the Canadian dollar is about as close to a "backed by hard assets" currency as you can get. This underpinning of value supports the uptrend you see below.

Canadian dollar jumps well above 98 cents against the US dollar,
And we have gone from peak oil prices, to the housing crisis, to the commercial mortgage crisis, to a currency crisis. Go figure!

What’s going on?

The commitment to low rates in both Japan and the U.S. reflects a competition for the honor of having the world's premier carry trade currency. Why would they/we do that? Countries with low interest rates attract borrowers, who then sell the currency to invest in assets in other countries. The currency sales keep the carry trade currency relatively weak.

A weak currency inflates the value of assets within the carry trade country, so it functions as is a good substitute for inflation during a period when there is no real economic growth. That is the case in Japan and the U.S. at this time. In an asset-based economy (where people's net worth is leveraged to real estate and stocks) it creates the illusion of improving prosperity.

REGULATORY SUPERVISION:

Not even the most wild-eyed "conspiracy theorist" could have imagined the rampant criminality that characterizes Wall Street and the Federal Reserve today. This 11-minute clip is headlined "Why aren't these guys in handcuffs yet?"... and is definitely worth your time. The link is here.

Merrill Lynch says it warned regulators about LehmanFormer executives at Merrill Lynch said they notified officials at the U.S. Securities and Exchange Commission and the Federal Reserve about an issue related to the way Lehman Bros. was calculating a measure of its financial health. The executives said they contacted regulators for competitive reasons as they were coming under increasing pressure from investors and trading partners about their liquidity. Financial Times (tiered subscription model) (18 Mar.)

Inspector's report casts doubt on SEC's effectiveness
H. David Kotz, inspector general for the U.S. Securities and Exchange Commission, released a report that casts further doubt on the ability of the agency to oversee and police Wall Street and public companies. Kotz scrutinized the SEC's decision making in regard to launching investigations. "The SEC needs to open investigations based on evidence, rather than unsupported allegations, so as not to waste the agency resources and focus needed for investors and market integrity," said Sen. Charles Grassley, R-Iowa. The Washington Post (23 Mar.)

GOLD:

Over the last six months, we've seen gold outperform long-dated U.S. Treasuries by roughly 15%. I expect this trend to continue and accelerate over the next six months as the Fed stops supporting the U.S. Treasury market at the end of this month.
The man who earned $1 billion in a single day betting against the British pound in 1992 has just raised his bet against the dollar and all paper currencies by a staggering 152%!

According to Bloomberg, George Soros has more than doubled his gold holdings in the last three months of 2009, increasing his stake in the yellow metal by 152%.

QUOTES OF THE MONTH:

“Government is not the solution to our problem. Government is the problem.” – Ronald Regan 1980

“Rising prices of precious metals and other commodities are an indication of a very early stage of an endeavor to move away from paper currencies...What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment.” - Alan Greenspan, 9 September 2009

"If core sovereigns such as the U.S., Germany, U.K., and Japan 'absorb' more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee. The Kings, in other words, in the process of increasingly shedding their clothes, begin to look more and more like their subjects. Kings and serfs begin to share the same castle." - PIMCO Chief Investment Officer and "bond guru" - Bill Gross

“Gold is quietly, at the edge, becoming the world’s second reservable currency, supplanting the euro and rivaling the dollar. [This] trend shall continue months, if not years, into the future.” - Dennis Gartman The Gartman Letter, 18 March 2010

Population...

Note to readers:
One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, my colleagues, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. It has been said, "When you take stuff from one writer it's plagiarism; but when you take it from many writers, it's research." In reference to my sources this month, they include in no particular order:

Chris Wood, Monty Agarwal, Brian Hunt, Chris Weber, Tyler Durden, Greg Spears, Mike Larsen, Darius Guppy, Martin Weiss, Doug Casey, Porter Stansberry, Justin Ford, CNBC, Financial Times, Bloomberg, New York Times, Washington Post, Wall Street Journal, Xinhuanet, American City Business Journal/South Florida.

March - 2010 - Economic Brief

2010-03-01T14:29:00.000-08:00

REVIEW:

Weak jobs data, soft housing prices, shaken consumer confidence and more bad news from Greece sets the tone, now see Obama’s milking cow.

Take the bucket, for example, AIG. “AIG’s” debt to taxpayers is evident. Yet what is not evident is the truth and the truth is that AIG owes taxpayers absolutely nothing. To understand my point, suppose AIG actually pays back the bailout money down to the last dime. Will you receive a check in the mail and a letter of apology? Of course not! Actual taxpayers will never see this money again. The U.S. government will see it – you won’t. Neither will the government do something indirectly beneficial to taxpayers, like repaying the debt. Once government gets money, it spends money. Social Security has been doing this for years. Each surplus has been wasted on other expenditures rather than paying down the debt or preparing for the inevitable retirement shortfall.

Take another bucket, for example, banks, and in particular, Goldman Sachs. In the spring of 2009 it was revealed that Goldman had insured all of its subprime exposure via AIG to the tune of $20 billion, and received roughly $14 billion of money the federal government used to bail out AIG. This allowed it to book huge profits on its subprime investments long before they were actually paid off because the bonds were insured. Of course, it was all a sham – AIG didn't have nearly enough money to pay off any of the insurance. But that’s only half of this disgrace.

Consider the truth, not only did Goldman profit from being insured by AIG but Goldman didn't merely buy insurance on a bunch of random subprime CDOs. It actually bought insurance on special CDOs it had put together and sold to its own clients. In other words, Goldman knew more about these CDOs than anyone else. Connecting the dots, Goldman bought insurance on these CDOs because it knew they’d collapse.
These facts all came to light because of research done by the office of Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform. These new documents will certainly lead to a full investigation of the Goldman-AIG dealings and the subsequent $180 billion bailout led by the New York Federal Reserve. If you own Goldman Sachs, you’d better sell.

How does that make you feel?

How about another “head fake”, the Fed announced it would raise the discount rate by half, to 0.75 percent and the markets reacted as though the announcement had been momentous, the dollar soared and gold fell. In fact, nothing of significance had changed. That’s because banks that face short-term stresses no longer have to borrow directly from the Fed; instead, they borrow “excess reserves” from each other at the federal funds rate – the rate the Fed conspicuously left unchanged last week at 0.25 percent.

The truth is, Wall Street fund managers aren’t paid to make you money (and, in fact, 99% of them lost money for their investors in 2008). With a 50% loss in 2008 and a 50% gain in 2009, do you end up even? Nope. It doesn’t work that way. Just to get even, you’d need a 100% gain in 2009. How did you do?

Avoiding big losses should be your number one investing priority.

It’s true stocks have fallen off somewhat recently. The S&P 500 is down about 6% from where it was a month ago. But stocks are still quite expensive in historical terms. Birinyi Associates reports the current S&P 500 P/E ratio (based on trailing twelve month as-reported earnings) to be 25.96, more than 60% above the long-term 15.98 average P/E ratio I calculated using Standard & Poor’s quarterly data.

These are challenging times. And being a smart investor is as important as ever.
Take note that the game’s table is skewed; a perspective shared by a fellow trader who observes the individual investor’s disadvantage at the gate, “banks that have high-speed computers co-located at the exchange (for the speediest nano-second execution) where they can read your orders in less than microseconds, take them from you and sell them to another bidder with the best spread before your broker can give you a read-back of your execution. They can read your stops, and when there are enough to justify a move, they will quickly buy up to them at millisecond speed in 100-share lots to spring your stops selling their accumulated inventory into them to make the fastest money you’ve ever seen. The SEC justifies all of this as ‘adding liquidity.’ Feeling ripped off yet?”

And what ever your pinstripe, Democrats and Republicans alike – we have spent the country into bankruptcy. That bankruptcy, which will affect the ability of Americans to build wealth for themselves, personally and for generations into the future, is of next to no concern to today’s politicians.

What’s important to them is getting through the next election.

One stark and sobering way to frame the crisis is this: if the United States government were to nationalize (in other words, steal) every penny of private wealth accumulated by America’s citizens since the nation’s founding 235 years ago, the government would remain totally bankrupt. Just in the last 12 months it has nationalized 30% of our economy, so much for capitalism, and now this:

With the budgetary equivalent of a straight face, the Office of Management and Budget reports in its long-term, inter-generational budget projection that the United States government will experience massive, non-stop deficits for the next 70 (SEVENTY) years, requiring the issuance of tens of trillions of dollars of additional debt. The OMB does not project even one year of surplus during the entire seventy year budget period.

$13.5 Trillion of New Debt: The president’s budget proposes to increase the national debt from today’s level of $12.3 trillion to $25.8 trillion in FY 2020 – an increase of $13.5 trillion or 109.8%. The amount of new debt proposed by this budget is larger than the total amount of debt accumulated by the federal government from 1789 to today (even including the $3.6 trillion of new debt over the last three years).

DEBT:

Meanwhile, there's no accurate tally of the government's debt. Supposedly, we owe around $12 trillion. This number is so large that it is meaningless. What does it really mean?

In Stewart Dougherty words, “One stark and sobering way to frame the crisis is this: if the United States government were to nationalize (in other words, steal) every penny of private wealth accumulated by America’s citizens since the nation’s founding 235 years ago, the government would remain totally bankrupt”.

My point? Our government is bankrupt - right now, today. Sure, it might still have access to the credit markets. And yes, since it owes dollars, it can always simply print more. I realize the government can't go bankrupt they way GM did.

It's not a good idea for the world's largest debtor and the world's strongest military power to go broke. Bad things happen in democracies when the government goes broke. At the very least, our creditors will demand much higher interest rates and abandon the use of our currency. That's going to devastate our standard of living.

The U.S. government suffers from the same, or worse, underlying disease as Greece, Portugal, or any other victim of the debt sickness — massive, out-of-control federal deficits. America's burden was $1.4 trillion last year and ANOTHER $1.4 trillion this year. But in the context of back-to-back $1.4 trillion deficits and in the face of a looming bond market collapse, team Obama’s plan represents to little to late.

Money and Markets' Mike Larson explains the situation this way:

"Imagine what would happen if Uncle Sam's borrowing costs shot up like they have in Greece — by 60 percent! Imagine what that would mean for the cost of car loans, mortgages, and other products whose rates track Treasury yields! And imagine the impact on an economy still struggling to recover from the Great Recession! This is the next big story that few people are talking about."

And guess who is at the party?

Goldman's Greek swap wasn't disclosed in subsequent bond sales: Goldman Sachs participated in $15 billion in bond sales for the Greek government after arranging a currency swap that allowed the country to keep its budget deficit a secret from the EU and bond investors, according to a Bloomberg review of documents. In at least six of the 10 bond offerings, there was no mention of the currency swap, according to the review. Not disclosing the swap -- and the deficit it concealed -- might have helped Goldman get better pricing for the bonds, said Bill Blain, co-head of fixed income at Matrix Corporate Capital. Bloomberg (16 Feb.)

Sovereign-debt sales in eurozone reach record high
Borrowing by eurozone governments has hit an all-time high, adding pressure on the weakest economies by driving up the interest rates they must pay on their bonds. This year, sales of eurozone government debt have reached about $153 billion. "The problem of sovereign risk is just beginning," said Theodora Zemek, global head of fixed income at Axa Investment Managers. "Countries with high debt levels will have to pay higher and higher yields to issue new bonds." Financial Times (tiered subscription model) (02 Feb.)

"Should Germany bail out Club Med or leave the euro altogether?"

Germany faces a terrible dilemma. Either Europe's paymaster agrees to underwrite a Greek bail-out and drops its vehement opposition to a de facto EU economic government, treasury, and debt union... or the euro will start to unravel, and with it, Germany's strategic investment in the post-war order.

Remember, back in December you could buy 1 euro for about US$1.52? Now you can buy that same euro for only about US$1.37. That means euros are almost 10% cheaper these days in terms of U.S. dollars than they were just two months ago.

So, what’s going on?

Lenders are afraid. They’re worried that Greece (and perhaps even Portugal, Ireland and Spain... and even France and did I say, England? It’s the Pound that’s really most vulnerable. In real terms, the Pound’s already devalued against virtually every currency and it’s especially exposed over the weeks running up to the UK election). might be forced to default on their debt. Apparently, the investment world thinks that the huge deficits (relative to GDP) in these countries are not sustainable, so it wants compensation in the form of higher interest rates, which just pushes things closer to default.

Greece didn't count most of its defense spending in its annual budgets because such amounts were state secrets; so almost 30% of its spending didn't officially "count."

Why on Earth would anyone loan to any entity (much less a government) that can't produce accurate financial statements? (By the way, the U.S. can't either. The government's own auditor won't certify the government's budgets.) And why does anyone believe a currency backed by a handful of insolvent governments will survive?

Portugal is latest flash point as fear of default in eurozone grows: The cost of insuring Portugal's sovereign debt reached an all-time high as investors became more concerned about a high level of public-sector debt in the eurozone. Yields on Portugal's 10-year bonds rose to their highest level in almost a year. Last week, the government announced that the budget deficit for 2009 amounted to 9.3% of GDP, much higher than it had expected. Financial Times (tiered subscription model) (04 Feb.) , Telegraph (London) (04 Feb.) , EUObserver (Brussels) (05 Feb.)

Are you unknowingly bailing out Greece?

It’s not out of the question, thinks Ron Paul. He says:
“Greece is only the latest in a series of countries that have faced this type of crisis in recent memory. Not too long ago the same types of fears were mounting about Dubai, and before that, Iceland. Several other countries (Spain, Portugal, Ireland, Latvia, Turkey) are approaching crisis levels with public debt as well. Many have strong ties to Goldman Sachs, and the case could easily be made that default could have serious implications for big US banking cartels. Considering the ties between the Fed and these big banks, it is not outlandish to wonder if the US taxpayer is secretly bailing out the entire world, country by country, even as our real unemployment tops 20 percent. Unless laws are changed to allow a complete and meaningful audit of the Federal Reserve, including its agreements with foreign central banks, we might never know if this is occurring or not.”

So the link between Goldman Sachs and Greece is well established. And everyone knows of the revolving door between Goldman and the Federal Reserve. Paul’s concern probably seems more plausible now, doesn’t it? And he’s right, unless laws are changed to allow a complete and meaningful audit of the Federal Reserve, including its agreements with foreign central banks, we will never know if this is occurring or not.

MIT’s Johnson said of Goldman Sachs - “From what we know, this is an egregious example of a conflict of interest... Even if the deal had been authorized, it doesn’t let them off the hook.”

“Investment banks are guilty of being part of a wider collusion that fudged the numbers to make the euro look like a working currency union,” said Matrix’s Blain. “The bottom line is foreign exchanges and bond investors bought something sellers knew not to be the case.”

Report: Biggest names on Wall Street helped Greece, Italy hide debt: Greece and Italy were able to conceal their excessive borrowing with the help of some of the most prominent firms on Wall Street, including Goldman Sachs and JPMorgan Chase, The New York Times reported. Other European countries might have relied on similar derivatives deals to hide their budget deficit from the EU. In many cases, deals put together by the banks were similar to those that triggered the collapse of the U.S. subprime-housing market and the Great Recession, according to the Times. The New York Times (13 Feb.) , Bloomberg (14 Feb.)

Moody's follows S&P with warning on Greek debt's rating
Greek government bonds declined after Moody's Investors Service followed Standard & Poor's in warning that the nation's long-term debt could be downgraded "in a few months." Moody's is the only major credit rating agency that gives Greece's debt an A rating. That rating is important because it allows Greece to offer its bonds as collateral for loans from the European Central Bank. Financial Times (tiered subscription model) (25 Feb.)

Meanwhile, the US deficit has just up-ticked another 100 billion, the bailouts continue, oh, did I say anything yet about the inevitability of higher taxes? Runaway government spending is the way and now this year’s federal deficit is $1.5 trillion, in less time than I could write the words. And have you looked at the Federal Reserve’s balance sheet lately? Since the beginning of the financial market turmoil in August 2007, the Fed’s balance sheet has ballooned. It’s total assets have increased from $869 billion on August 8, 2007 to well over $2.2 trillion. And foreign central banks’ holdings (money we owe to foreigners) amount to $2.9 trillion. No, it’s not a pretty picture.

Obama’s new budget calls for a nearly 9% increase in spending over the 2009 level. Thus, the only way we won’t have another record deficit in fiscal 2011 will be if tax revenues grow by almost 15%. I highly doubt that, given the state of the economy and unemployment levels. What’s much more likely is for tax revenues to ring in at similar levels to today, which would suggest a 2011 budget deficit of around $1.7 trillion (nearly 75% higher than the CBO’s forecast of $980 billion). Even if tax revenues somehow climbed back to the levels of 2006 – 2008, we’d still be locked into a $1.3 trillion-plus deficit, more than 30% above the CBO’s ridiculous forecast.

So, while Greece is being singled out for having a 13% deficit-to-GDP ratio, the U.S. now sports a 10.5% deficit-to- GDP ratio, but if you count the $2.2 trillion that lies off the balance sheet at the Fed, we are right up there with Greece. The U.S. will need to borrow a record $2.5 trillion this year. Within five years, servicing U.S. government debt will account for over half the budget deficit.

There’s only one way out of this mess. We’ve got to pay our debts back with cheaper dollars. And that means inflation.

And higher interest rates follow inflation like summer follows spring. Interest rates right now are at mind-boggling lows. The three-month T-bill pays 0.06%! Want to go out five years? How does 2.39% sound? And the 10-year pays a whopping 3.66%.

This isn’t normal. The average yield for a 10-year Treasury over the last 30 years has been 7.5%. And, historically, three-month T-bills have approximated the CPI – which, over the last 12 months, came in at 2.7%. The Fed’s zero interest rate policy (ZIRP) has artificially depressed interest rates. But the ZIRP can’t go on forever. And it won’t. Rates will rise. It’s not a question of if. It’s simply a question of when. This is a long-term trend. And taking advantage of long-term trends is what makes you money.

Bottom Line: For the first time since just after World War I, we have serious sovereign debt problems in all of the major currencies. And for the first time in the history of man... we have a global monetary base that's not anchored to any real asset.

JOBS:

U.S. had 6.1 jobless workers for every opening in December
In December, the number of unemployed workers for every available position reached 6.1, up from 3.4 during the same month in 2008, the U.S. Labor Department said. The agency's Job Openings and Labor Turnover survey found that there were 2.5 million job openings at the end of December. Los Angeles Times/The Associated Press (09 Feb.)

U.S. consumer confidence is at lowest level in 10 months
The Conference Board said its consumer-confidence index dropped to 46 this month, compared with a revised 56.5 in January. "More than six months after the recovery started, consumer confidence is still close to a record low," said Paul Ashworth, senior U.S. economist at Capital Economics. "Without a sustained acceleration in consumption growth, this recovery will eventually fade." USA TODAY/The Associated Press (23 Feb.)

Chart via Bianco Research

Note: Stock market performance following these drops is usually poor. Just in time for the second “Green Shoots” campaign.

Initial jobless claims in U.S. increase 3 weeks straightFirst-time claims for unemployment benefits increased to 480,000 last week, compared with the previous week's 472,000, the U.S. Labor Department said. Most economists had forecast a decline in initial claims. Last week was the third consecutive week of increase. Forbes (04 Feb.)

Initial claims for unemployment benefits rose 22,000 to 496,000 at the end of February.

So, one survey shows a decline in jobs and the other shows an increase in the unemployment rate; it’s the same difference, but if you are a little skeptical, you should be, as these numbers are also subject to big revisions, and one month shouldn’t be taken too seriously.

Which gets to the special problems of seasonal adjustment and annual revisions: This month the BLS revised its estimate of how many jobs there were by looking at unemployment insurance data for March 2009. The total nonfarm employment level for March 2009 was revised downward by a whopping 930,000, and the previously published level for December 2009 was revised downward 1,363,000, both on a seasonally adjusted basis. The best I can say is that they haven’t learned how to count.

Employment firm Challenger, Gray & Christmas reported that U.S. companies announced layoffs for 71,000 workers, the highest pace of job cuts in five months and up almost 60% from December levels.

U.S. sees steep drop in construction spending for December
Construction spending in December plummeted to its lowest figure since 2003, the U.S. Commerce Department said. Expenditure for construction work totaled $902.5 billion, a 1.2% decline. The drop more than doubled the 0.5% decrease anticipated by economists polled by Reuters. Reuters (01 Feb.)

As ProPublica indicates, there are now 26 states which have depleted their trust funds, among these are the usual suspects including California, Michigan, New York, Pennsylvania and Ohio, which now rely exclusively on borrowings from the Federal government to prevent the cessation of insurance payments to recently unemployed workers. ProPublica estimates that another 8 states will be insolvent within 6 months, representing 68% of the United States. Did you know that 60% of the new jobs created last year, were created in Texas?

BONDS:

Already, total issuance of government debt already hit a stunning $922 billion in 2008. It then surged even higher to $2.1 trillion in 2009, and it's on track to top $2.5 trillion this year. The size of just ONE WEEK's debt auction has ballooned to almost $120 billion — more than the total supply hitting the market in a FULL year not long ago.

So, just make sure you avoid all longer term notes and bonds — whether government-issued or not. When the market price of bonds declines, so does your principal value. And because of that loss in principal, any extra interest they might pay you could be wiped out in a heartbeat.

And U.S. Treasury bills (always shorter than one year) would suffer virtually no price declines, even in the midst of a bond market collapse. Currency risk, yes. Yes, I know. Their yield is miserably low. But they still provide the world's best safety and liquidity.

State, federal debt puts additional pressure on credit market
The U.S. government is engaged in its largest series of Treasury auctions ever, and states are issuing bonds to support spending. These moves are putting additional pressure on the credit market while credit availability remains at a premium. "Clearly the government is not the 800-pound gorilla -- it's the 8,000-pound gorilla in the credit markets nowadays," said Mike Larson, an analyst at Weiss Research. "These numbers are just so mind-boggling. Really, what's going on is you have intractable debt and deficit problems in the country that neither side wants to tackle in a meaningful way, so the market is doing it for them." CNBC (22 Feb.)

This month, China, the single largest holder of U.S. debt, dumped more Treasuries than in ANY month since the government started tracking the data in 2000. Prices slumped. Yields surged. In effect, the U.S. Treasury had to bribe investors with higher yields to get them to buy. The 25-basis-point increase was the FIRST hike in the discount rate since early 2006.

Just a few days ago, Treasury tried to auction off $25 billion in 10-year notes and $16 billion in 30-year bonds. Investors failed to step up to the plate in either auction — a bright red warning sign for bonds if I've ever seen one!

BANKS:

According to Morgan Stanley, European banks will have to roll over more than $1 trillion in debt over the next two years. U.S. banks have an even larger debt load. If our economic forecast is correct, that will put upward pressure on borrowing rates without a commensurate uptick in the economy.

Fed aims to calm markets after surprise increase in lending rateBen Bernanke, chairman of the U.S. Federal Reserve, indicated last week that the central bank might increase its emergency lending rate to widen the spread between that and the main policy rate. Still, markets were caught off guard when the Fed raised the discount rate, prompting officials to say borrowing costs will remain low. "The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy," the Fed said. CNBC/Reuters (19 Feb.) , The Wall Street Journal (19 Feb.) , Bloomberg (18 Feb.)

The number of troubled banks has soared to 702. The FDIC says that 2010 will be the peak year for bank failures.

Bank lending in U.S. sees biggest annual decrease since 1940s
U.S. bank lending fell 7.5% last year, the Federal Deposit Insurance Corp. said. The $587 billion drop marked the biggest yearly decline since the 1940s. Most of the decrease can be attributed to cutbacks by the biggest banks, said FDIC Chairwoman Sheila Bair. The Washington Post (24 Feb.)

REAL ESTATE:

New Home Sales for the month of January declined 11.2% to 309K.

U.S. Economy: Sales of Previously Owned Homes Fall "Sales of previously owned U.S. homes unexpectedly dropped 7.2 percent in January to a seven-month low, indicating a lack of job growth is undermining government incentives to bolster the housing market." – Bloomberg

RealtyTrac has reported that, in January, the number of U.S. families facing foreclosure surged a shocking 15% higher compared to the same month last year!

Banks repossessed more than 87,000 homes last month alone — that’s a whopping 31% increase over January 2009. While an all-time record 2.8 million households were threatened with foreclosure last year, RealtyTrac expects that number to surge to 3.5 million this year — an appalling 40% increase!

Yet, during the past year in which the program has been in effect, sales of existing homes have climbed by 15%, while new home sales have actually dropped by 5% last year. But after being extended once already by the Obama Administration, the 1st time buyer tax credit will expire at the end of April—putting downward pressure on demand for existing home sales.

There are close to two million mortgages that are more than 90 days delinquent, and nearly all of these will end up in foreclosure. Add to that the 2.3 million properties that are in foreclosure or already seized by banks. At current sales rates, that adds up to a record high 16 months of supply. However, just as significant is the roughly 10 million households in a negative home equity position of worse than -20%, for whom strategic default - failing to pay when one could - is a very real option. Last year 25% of the 2.3 foreclosed were strategic.

Although we don’t expect policymakers to raise the fed funds rate until 2011, mortgage rates have already started to head higher and certainly will continue just as assuredly as quantitative easing continues. Thus the end of tax support, oversupply and increased borrowing costs will keep the market suppressed.
This isn’t the overall picture painted by the media that seems to imply that the housing market has at least hit a bottom and is starting to claw its way back from the abyss. Or has it?

First, we must consider the homebuyer tax credit mentioned above as a big contributor to the improved sales and price figures at the end of 2009. (There will likely be another surge in the spring, as homebuyers take advantage of the extended and expanded tax credit.)

Second, The Supply of Homes on the Market Is Likely to Grow
An influx of liquidated properties is likely to prompt a decline in prices if unaccompanied by a comparable increase in demand. An estimate of $473.4 billion in loans that will eventually need to be liquidated corresponds to approximately 1.75 million individual properties. This number represents almost 50% of the existing homes available for sale as of December 2009.

Now let’s not forget about the other market, there is growing concern in Congress that the shaky $6.7 trillion commercial real estate market could implode, delivering a major blow to the economic recovery. A bipartisan group of 79 House members led by Representative Paul E. Kanjorski, Democrat of Pennsylvania, and Representative Ken Calvert, Republican of California, sent a letter to the Treasury Department and the Federal Reserve on Monday urging them to take a more active role in keeping the commercial real estate market from turning into a disaster.

“The growing bubble in the commercial real estate industry has the potential to infect our economy and slow a recovery,” Mr. Kanjorski said in a statement.

Analysts warn of foreclosure crisis in commercial real estate
Analysts said a wave of foreclosure on commercial properties in the U.S. likely will hit community banks especially hard. "There's been an enormous bubble in commercial real estate, and it has to come down," said Elizabeth Warren, chairwoman of the Congressional Oversight Panel. "There will be significant bankruptcies among developers and significant failures among community banks." The Washington Post (19 Feb.)

Default rate on U.S. commercial mortgages continues to rise
The default rate on commercial mortgages in the U.S. increased from 1.6% in the fourth quarter of 2008 to 3.8% in the same quarter last year. Real Capital Analytics said the rate could hit 5.4% at the end of 2011. "The level of distress continues to rise irrespective of improving economic trends," said Sam Chandan, global chief economist at Real Capital. Bloomberg (24 Feb.)

POLITICS and TAXES:

State of the Union Address

President Obama unveiled a $3.83 trillion budget for fiscal 2011
The president has proposed a freeze on some domestic spending, but the freeze will impact only a small portion of the budget, would not kick in until next year, and would include a mix of spending cuts and spending increases. It would have zero impact on the 2010 deficit and little impact on future deficits.

The president has promised to give TARP funds back to taxpayers, but has also proposed applying unspent TARP money to community bank lending — the President is not interested in reducing the deficit.

The president supports "pay as you go" rules for Congress — requiring new spending to be balanced against spending cuts or revenue increases. But the devil is in the details. If the rules have no truly sharp teeth, they will be ineffective.
USX DOLLARS:

U.S. credit rating could come under pressure, Moody's warns
Moody's Investors Service said the U.S. faces a debt-growth trajectory that is "clearly continuously upward" as the credit rating agency warned that the country's triple-A credit rating might come under pressure. "Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the triple A government bond rating," according to a Moody's note. Financial Times (tiered subscription model) (03 Feb.)

Having said that, in fact, the dollar is operating in a win-win environment these days. Heads the dollar wins; tails practically every foreign currency loses. As euro investors stampede for the exits in the first half of this year, many will move their money into the “least ugly” currency available — the U.S. dollar. This inflow should help stabilize the dollar temporarily.

However, having said that, the value of the dollar is collapsing as the un-creditworthiness of the United States becomes evident. That means the price of hard assets – like gold – will keep rising and the value our government's long-term obligations will fall. Note the value of the U.S. long-bond market fell by more than 10% despite the government support. And the value of gold increased by more than 10% as investors fled the dollar.

Ultimately, despite obvious differences, the U.S. government suffers from the same disease as Greece, Portugal and other at-risk nations: Massive, out-of-control federal deficits. America’s red ink was $1.4 trillion last year and will be ANOTHER $1.6 trillion this year.

The safest thing to do right now is split your savings between short-term Treasuries and gold.

Why? Despite this “rush to safety” back into the U.S. dollar underway, and so the greenback continues to rally and the commodities continue to fall; for the moment. The the anxious market believes that the debt-money that trades under the “dollar” brand is of a superior quality to that of the euro (among others), and so the money flows back this way.

But the irony is that whatever brand of the stuff you own, it is still just the same thing: debt-money. Which is to say, an IOU masquerading as money.

REGULATORY SUPERVISION:

The financials were kicked while they were down this month. New York Attorney General Andrew Cuomo filed civil securities fraud charges against former Bank of America CEO Kenneth Lewis and CFO Joseph Price over the Merrill Lynch acquisition. My bet, Goldman Sachs will be next.

Ben Bernanke got reaffirmed for another term at the Fed this month. I’m once again reminded about how supremely unqualified this man is for the job. Prior to becoming Fed chairman, Ben Bernanke basically had zero experience outside academia. His resume only includes three full-time years working for the Federal Reserve and eight months on George W. Bush’s Council of Economic Advisors. The other 23 years of his career were spent teaching college.

What his virtues are I don’t know, but honesty, competence, and a track record of success are not among them. As this great YouTube compilation of Bernanke quotes shows, the chairman has a track record of being wrong on just about everything.
http://www.youtube.com/watch?v=HQ79Pt2GNJo&feature=related

SEC is poised to temporarily restrict short sales
The U.S. Securities and Exchange Commission is expected to approve a measure to restrict short sales on shares once they have fallen 10%, sources said. Charles Schwab, General Electric and thousands of people sent the SEC a petition urging the agency to adopt a permanent short-selling restriction. Meanwhile, Goldman Sachs, Citadel Investment Group and other hedge funds expressed opposition to such curbs. Bloomberg (23 Feb.)

It passed, oh, and good work SEC, you got Goldman Sachs pissed.

Thanks to Shapiro & Co's July 2009 amendment to NYSE Rule 452, that automatic broker vote is over. If shareholders don't send in their ballots, then their votes simply aren't counted. This means that each Proxy Season, corporations send their ballots out to shareholders; the problem is, only around 30% actually bother to cast a vote one way or the other. In other words, if you own 1000 shares of IBM and throw your proxy packet in the trash along with the LL Bean catalog and the Val-U-Pak, E*Trade or Merrill Lynch or whomever holds your stock in a brokerage account for you will do the voting in your name - and they will almost always just vote yes for the incumbent.

This sets the stage for the "No Vote" to mean more than it ever has before without that huge number of automatic "Yes Votes" coming in from the brokerage firms. There are many corporate board members who could find themselves voted out - even in an uncontested election!

To give you an idea of how powerful this rule change may be, in 2004, then-Disney Chairman Michael Eisner's vote count NOT INCLUDING the brokerage Yes's would have had him kicked out with the numbers against him 54 to 46. Instead, he won by that same margin because of the automatics. In other words, “No Votes” matter again and small investors who actually vote will have a proportionately louder voice in the absence of the brokerage firm’s “Yes” bloc vote. Enough said.

GOLD:

Overall investment in gold was 7% higher in 2009 than 2008.

Liu Yuhui, an economist at the Chinese Academy of Social Sciences, said last quarter that China might again scale back purchases of U.S. debt on concerns the dollar will decline. And this after their holdings were already lower in November than they were last July. Is it possible the Chinese (and the myriad other governments concerned about what U.S. leaders are doing to the dollar) and everyone else start buying gold for protection? Anything is possible, but it’s far more likely that they’re just getting started, considering that just 1.9% of Chinese foreign reserves are held in gold. I think most agree with the merits of diversification.

And this just in: An ING survey reports that 45% of investors in Asian markets (excluding Japan) picked gold as their most favored tool to protect their returns from inflation, more than any other asset.

Investment management firm Moonraker reported in a 2009 survey that 20 out of 22 fund managers interviewed bought physical gold for personal investment because they fear quantitative easing programs may lead to inflation. In other words, not only are they buying gold in their funds, they’re stashing some at home as one ounce coins.

Further, central banks are now net buyers of gold for the first time in 22 years. And last quarter it was reported by the Financial Times that the world's wealthiest families are also switching to gold.

George Soros's Soros Fund Management charged into gold during the fourth quarter, doubling its stake in the world's largest gold ETF. The $25 billion New York-based firm became the fourth- largest holder in the SPDR Gold Trust, adding 3.728 million shares valued at $421 million, according to a filing with the U.S. Securities and Exchange Commission yesterday. Taken together, these two investment positions are worth about $663 million and this doubling down represents the ETF fund’s largest single investment, as of Dec. 31.

Meanwhile, back at the Central Bank of Russia there was an update to their website for January. They increased their gold holdings by 100,000 ounces in January. That’s the first time they've added any gold in that month since January of 2007, hmm. It will be of great interest to see if they can improve on what they did during 2009... which was a record year.

QUOTES OF THE MONTH:

"The growing bubble in the commercial real estate industry has the potential to infect our economy and slow a recovery," said Chairman Kanjorski. "In order to safeguard the businesses operating on Main Street and protect the millions of jobs depending on commercial real estate, the Treasury and the Federal Reserve now must take needed and urgent action to stave off a potentially devastating wave of commercial real estate foreclosures and bank losses." - Congressmen Paul Kanjorski and Ken Calvert

“…we are still driving on the same winding mountain road, but this time in a faster car.” - Special Investigator Neil Barofsky, whose job it is to oversee the Troubled Assets Relief Program (TARP)

“Certainty? In this world nothing is certain but death and taxes.” - Ben Franklin
Note: If Ben Franklin were alive today, he would undoubtedly add inflation to his list. The almighty dollar has lost 82% of its purchasing power over the last 40 or so years. Inflation is the unseen pickpocket of modern life. Another pickpocket – a very visible one – is the taxman. Both steal from you and your children. (50% income + Sales tax, 20% Capital Gains + 50% Inheritance tax)

“As we all know, the global economic crisis started neither in Greece, nor in Russia, nor in Europe. It came to us from across the ocean.” - Russian Prime Minister Vladimir Putin, 16 February 2010

"It breaks my heart that 10 years ago we had a balanced budget, that we were on the way to paying down the debt of the United States of America," – Hilary Clinton, 2010

“I hope we can find a way of resurrecting the subprime market, because it was working well until those mortgages were widely securitized” - [Sir] Alan Greenspan, 2010

“There are no markets any more... only interventions.” – Ed Steers

“The point is, ladies and gentleman, that greed -- for lack of a better word -- is good...
Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit...
Greed, in all of its forms -- greed for life, for money, for love, knowledge -- has marked the upward surge of mankind. And greed -- you mark my words -- will not only save Teldar Paper, but that other malfunctioning corporation called the USA.” - Gordon Gekko’s “Greed is good” speech http://www.youtube.com/watch?v=7upG01-XWbY

Note to readers:

One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, my colleagues, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. It has been said, "When you take stuff from one writer it's plagiarism; but when you take it from many writers, it's research." In reference to my sources this month, they include in no particular order:

Martin Weiss, Mike Larsen, Bob Irish, Chris Wood, Ambrose Evans-Pritchard, Porter Stansberry, Andrew Gordon, Tyler Durden, Doug Casey, Greg Spear, David Galand, Bryan Rich, Rick Ackerman, Elisa Martinuzzi, and Jim Rogers

Telegraph.uk, Star Tribume, Bloomberg, Financial Times, Telegraph (London), EUObserver (Brussels), Los Angeles Times, Associated Press, USA Today, Forbes, Reuters, CMBC, THE Washington Post, and The Wall Street Journal.

February - 2010 Economic Brief

2010-02-02T14:16:00.000-08:00

REVIEW:

Right now the U.S. dollar is making every attempt to rally... and probably getting some help doing it. This will certainly influence the price of our favorite metal while this is happening... but will only delay the inevitable. In the first decade of the new millennium, between the last day of 1999 and the last day of 2009, investors in the S&P 500 LOST about 24% of their wealth. Over this same decade our favorite metal returned 14.9% against the US dollar.

The initial recovery in the winter stock bear market brings with it a renewal of optimism. Hope that stock prices will recover to new highs, as they’ve always done; hope that the depressed economy will recover and that everyone will be working again, earning big wages which they can spend on frivolous items that they don’t re¬ally need; hope that the recovery will bring back the stupendous values in real estate; hope that everything will be as it was once; hope that the leaders can deliver all that they’ve promised. As I write this the headlines say the US economy just posted an annualized GDP growth of 5.4% in the 1st quarter of 2010; what they don’t say is any thing about the $389 billion deficit also created in the first quarter of the 2010 fiscal year. This is far from reassuring in my view. That’s way too much hope and way too little realism.

That’s the game you get when you play for Team Bush or Obama – with direct hiring and spending, continuing to buy mortgages and other loans to suppress interest rates, forgiving the bad debts of banks, or changing accounting rules so that banks can postpone reckoning day. And that’s just for starters, all of it packaged nicely in the name of the public good.

At some point, interest rates will have to begin rising to attract new buyers to help pay for all this deficit spending. You may not have noticed but Treasury bond rates have had a significant move off recent lows.

The sharp sword of Damocles hangs by a horse hair above our heads as any sharp loss in confidence on the part of our international creditors would likely lead to a currency crisis that would drive the value of the dollar quickly lower, at the same time that it drives interest rates higher. Of course, the higher those rates ratchet, the more it will cost the U.S. government to carry its massive debt.

I’m sorry, nobody likes a bear. Most people have too much money invested in stocks. They can’t afford to lose money and they don’t like peo¬ple telling them that they are going to lose. They are linked together in a common interest. Almost everyone has a vested interest in being bullish, the investment crowd refuses to listen to anyone who tries to temper its ardor for the stock market.

Is a rising stock market a life-long entitle¬ment, providing for the constant enrichment of all investors?
Recently, we’ve already seen two Dow stocks decline more than 93%. Citicorp fell 93.9% and General Motors 98.2%. Both compa¬nies were unceremoniously dumped from the index.

Charles Kindleberger, in the latest edition of Manias, Panics and Crashes, published in 2005, P. 64, says, “Speculative manias gather speed through expansion of money and credit.”

In his book, A Short History of Financial Euphoria, John Kenneth Galbraith, P. 20, says, “All crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment.” The debt bubble that accompanied the recently concluded twin financial and real estate manias is unprecedented.

These great speculative bubbles are self perpetuating. As the value of the underlying assets increases, so does credit. The constant rise in values attracts a corresponding increase in credit (debt). Moreover, the more speculative prices increase, the more moths are drawn to the flame.

What have the first 10 years of this new millennium taught us?

1. The market is for losers: S&P is down 23%, Dow is down 7.5%, Nasdaq is down 42%. I am sorry for any investor whose future is tied to such indexes. At least if you had burned the money in the fireplace you would have kept warm.

2. Cheer up, you could have done worse. Ten years ago, the brightest brains in the business were telling you to buy AOL, Lucent, Qualcomm, MCI WorldCom. Today, you would be down 66-80%.

Most people believe that stock prices have just begun a new bull market in anticipation of a burgeoning economy. We know better(don't we?)the economy can’t recover until debt has been expunged.

DEBT:

Worldwide government spending in this recession is historically unprecedented. In the U.S. alone, monetary measures and fiscal stimulus packages so far total about 30% of GDP. To put that in perspective, the Roosevelt administration spent about 8% of GDP to fight the Great Depression.

This is an election year. Expect politicians to keep spending recklessly to keep the economy afloat.

The U.S. government is facing a staggering amount of unfunded liabilities in 2010... around $3.5 trillion to be exact. The only way the government can make the interest payments on this debt (a good deal of which has been acquired in the past 12 months) is by printing money.

This money printing will continue to debase the dollar... and will drive our creditors to demand higher and higher rates of interest. You see, what most people don't understand about the huge bull market in stocks over the last 30 years is that it was mostly funded by debt and powered by falling interest rates.
See "Markets at a Glance" by David Franklin, the co-author of this Sprott Asset Management reports, he is interviewed: http://watch.bnn.ca/#clip250810

It is inevitable that the complex web of debt instruments and inter-dependencies that humanity invented to prolong its growth phase by stealing from the future will be a prime focus for a sharp reversal, as we have already reached the point where additional debt provides less than no benefit. This is other wise known as “look out below” for the anticipated fallout, translated, huge correction in the markets.

As complexity increases, (AKA debt instruments) it eventually becomes a liability.

The most important thing to understand about financial and eco¬nomic cycles is that they are just like their counterparts in the natu¬ral world. They are as predictable as are the tides, the moon phas¬es, the annual seasons and, yes, a human lifetime. Like a human lifespan, financial and economic cycles follow a similar path from birth to death. The Long or Kondratieff Wave follows this path over 60 or 70 years, which is typically a meaningful human lifetime. In the cycle, spring is the birth of the economy. In winter, the economy dies. It dies because it is overcome by too much debt. During win¬ter, most of the debt is purged from the economy, which enables its rebirth in the following spring.

How low will the bear market go? It’ll go a lot lower than the 6,470 points that the Dow reached in early March 2009 because this is the Long Wave winter bear market, which follows the huge autumn bull market. This autumn bull market was two and a half times bigger than its predecessor of 1921-1929. The bear market which followed caused the Dow to decline by 90%. Considering the difference in size be¬tween the two respective bull markets we expect that this bear market would be bigger in percentage terms than its 1929-32 counterpart.

Déjà vu?

Wall Street Journal, Friday July 11, 1930 quoted in www.newsfrom1930.blogspot.com as saying, “During the depression, industrialists have been cutting costs and increasing efficiency. This will increase profit margins when the recovery comes.”

In March 2009, at the bottom of the initial leg of the bear market with the S & P down 56% from its peak, dividend yields had risen to 3.5%, indicating that dividends had not been cut. At the same time, the price-earnings ratio stood at 23.77, which was higher than they were at the stock market peak in October 2007.

And today? Well, PEs have risen to a mind boggling 144.81%, reflecting a crash in earnings. The truth is that companies are paying out three times more in dividends than they are earn¬ing. This cannot continue long. If earnings don’t recover in short order, dividends will have to be cut and by as much as 75%.

We can assess value in another way. We know that at bear market bottoms, dividend yields typically reach 6% or even 7%. They are currently just below 2%. To reach a 6% yield, the S & P 500 would have to fall to about 375 points 65% below where it stands at present. This assumes no cut in dividends, which as we have just discussed, is a virtual impossibility.

The response to the first crash in prices to a bubble (Tulips, Mississippi, South Sea) was no different than that employed by the central banks today. They created even more money believing that that was the solution to the problem. It wasn’t.

“We can’t solve problems by us¬ing the same kind of thinking we used when we created them. “ Albert Einstein

The world has changed as we know it. In the current cycle, spring started in 1949 with the Dow at 161 points and it ended in 1966 with the Dow at 995 points. Buying stocks in the Kondratieff summer leads to losses. Summer began in 1966 with the Dow at 995 points and ended in 1982 with the Dow bottoming at 777 points. Buying stocks in the autumn amasses huge gains because in this Kondratieff sea¬son a massive speculative bubble always develops. Thus, buying stocks in 1982 with the Dow at 777 and selling them at the end of autumn in January 2000 with the Dow at 11,750 points would have led to a gain of 1500%. However, buying stocks in the Kondratieff winter leads to huge losses, as between 1929 and 1932, if you can buy the idea of cycles, be forwarned.

JOBS:

Overall it was a disappointment and a decline of 86,000 jobs (with revisions of -1,000) when the country needs a net gain of 100,000 new jobs just to keep up with population growth. This is not yet a recovery.

Bottom line: The hoped-for fast recovery is not happening. In my view, we are still in a recession with continuing negative employment, even if not at the rate of decline that was so disastrous a year ago. In fact, so far this January, there is a total of 482,000 new jobless claims.

U.S. employers cut 85,000 jobs in December, report shows
The rate at which the U.S. cuts jobs has slowed considerably in recent months, but net layoffs still reached 85,000 in December, the Labor Department said. Officially, the unemployment rate held at 10%, but experts said that number is probably misleading. Economists said many discouraged workers have given up searching for a job and are probably no longer counted in the statistics. The Washington Post (09 Jan.)

Actually it is much worse, based on its separate household survey, the government reported that the job losses in December were 589,000 — over SIX times more.

So which of the two figures better reflects the true number of jobs lost last month — 85,000 or 589,000 jobs? According to John Williams' Shadow Government Statistics, it's clearly the latter. http://www.shadowstats.com/ And as you can see above in the chart, this is just a sad detail and a wake up call to it’s duration!

If you include ALL workers who have given up looking for a job (as the government used to before the Clinton administration changed the definition, just like the Obama administration changed the definition of pandemic in 2009), Williams estimates that the TRUE, all-inclusive unemployment rate is now close to 21.9 percent!

And most shocking of all, we are suffering this chronic high unemployment despite the greatest government stimulus of all time.

The big problem: Instead of going into job creation as intended, most of this Washington funny money is flowing into other assets, including U.S. stocks. This helps explain why so many stocks can continue rising despite the economic malaise.

In a related article, the AP reported that the string of ten consecutive months in falling credit was a record and the absolute drop in total dollars loaned from October to November was the largest drop in credit since the government began tracking the data in 1943, and despite the greatest government stimulus of all time.

The data is certain to raise the question of how the American economy will sustain a recovery since consumer spending (and credit) is still over two-third of GDP. Industrial production and exports have begun to recovery from the depths of the recession in the first and second quarters of 2009. But, the consumers still appear to be in deep trouble.

Consumer credit use is not likely to reverse its decline anything soon. December unemployment figures made two things crystal clear. The first is the businesses are still firing people. The other is the more people have stopped looking for jobs entirely.

I noticed too that health spending growth slowed down to 4.4 percent in 2008, the slowest rate of growth in 48 years. The dental growth rate also declined but not as dramatically nor as low as reported in the journal Health Affairs. www.healthaffairs.org

Here's another graph offered with no commentary... as none is needed.

The number of Americans filing for personal bankruptcy rose by nearly a third in 2009, a surge largely driven by foreclosures and job losses. Overall, personal bankruptcy filings hit 1.41 million last year, up 32% from 2008, according to the National Bankruptcy Research Center.

Chapter 11 commercial bankruptcies spiked 50% in 2009Chapter 11 business bankruptcies in the U.S. jumped 50% last year compared with 2008, according to Automated Access to Court Electronic Records. Petitions for Chapter 11 to reorganize or liquidate topped 15,000. Filings for Chapter 7 liquidation were up 38%. In 2009, 207 publicly traded companies filed for bankruptcy, the third-highest number since 1980, according to BankruptcyData.com. Bloomberg (06 Jan.) , Reuters (05 Jan.)

Analysis: U.S. is increasingly locked into long-term unemployment
There seems to be little hope of escape from a truly jobless recovery, given the dismal rate of job creation in the U.S., according to The Economist. The population grew by almost 30 million between December 1999 and December 2009, but at the end of that period, only 400,000 more Americans had jobs. "Without job growth, household indebtedness will linger as a problem, depressing spending and hiring," according to The Economist. "Joblessness is a trap the American labour force may not soon escape." The Economist (14 Jan.)

BONDS:

The causes of the bond market troubles are equally obvious:

There was a return to foreign investment in long-term securities, but net foreign flow into the US is negative.

We have...

1. The biggest and most permanent federal budget deficits in our country's history — $1.4 trillion of red ink in fiscal 2009 and AT LEAST another $7 trillion in deficits over the next decade.

2. The biggest government borrowing binge of all time. Just in the last week of the year, the Treasury Department borrowed $44 billion with the sale of 2-year notes, $42 billion with 5-year notes and $32 billion in 7-year notes, for a total of $118 billion — a new record. Expect more of the same throughout 2010.

3. The most inflationary monetary policy of all time, including a sudden, record-smashing DOUBLING of the nation's monetary base in 2009.

And most ominous of all...

• The U.S. Federal Reserve has tossed its traditional rulebook in the trashcan. It has opened its credit window to brokerage firms, guaranteed trillions of junk credit of the private sector and bought up over a trillion in junk mortgages.

• The U.S. Treasury has bailed out the nation's largest and most outrageous risk-takers — not only institutions like Fannie Mae, Freddie Mac, Citigroup, Bank of America, AIG, and GM ... but, indirectly, also high-rollers like Goldman Sachs and JPMorgan Chase.

Pimco becomes more averse to risk
Pacific Investment Management Co. is scaling back its exposure to U.S. and U.K. government bonds, corporate debt, and mortgage-backed securities, according to an outlook for 2010 from the company. "This all leaves us with portfolios that appear, more than at other times, to be hugging the benchmarks with no bold positioning," portfolio manager Paul McCulley wrote. "We're making a very active decision to run light on risk." Bloomberg (04 Jan.)

BANKS:

BIS invites bank CEOs, central bankers to meet in Basel
The Bank for International Settlements is inviting leading central bankers and heads of major financial institutions to Basel, Switzerland, this weekend to discuss concerns about "excessive risk-taking." The BIS' invitation cites fears that "financial firms are returning to the aggressive behavior that prevailed during the pre-crisis period." The BIS also identified specific proposals, including reducing return-on-equity targets for banks, that it is considering. Financial Times (tiered subscription model) (06 Jan.)

Mitchell Glassman, the man in charge of shutting down banks for the FDIC, recently had to say in testimony in front of Congress…

"While the economy is showing signs of improvement, recovery in the banking industry tends to lag behind other sectors. We expect to see the level of failures continue to be high during 2010.”

REAL ESTATE:

• On Christmas Eve, the Treasury Department announced it will remove the limits on any and all aid to Fannie Mae and Freddie Mac for the next three years.
The intended consequence was to allay investor concerns that these two mortgage giants will exhaust the available government bailout funds.

Treasury officials know that an estimated 3.9 MILLION U.S. homes went into foreclosure last year...and, they know that they can expect more of the same in 2010. So they're literally pulling all stops to funnel funds into this market.

Thus, in this scam the Fed is free to print up all the money it needs to buy mortgages, and thus keep mortgage rates low, confident that no matter how smelly the paper is that it buys, you and your progeny will stand behind the loss. Meanwhile the nation’s monetary base continues to balloon. If there is a bright spot to this, other than that it confirms us in our inflation expectations, it is that the desperation evident in these actions portends that the Fed and the Treasury are running out of rope.

So on the surface it appears housing may be stabilizing somewhat. But if you dig a little deeper you’d find… not so much.

First of all, the slightly improved sales figures and marginal rise in prices likely have much to do with the first-time home buyer tax credit and the move-up/repeat home buyer tax credit, both of which were recently extended through April 30, 2010.
Second, the Census Bureau’s report was statistically insignificant. The margin of error (with a 95% confidence interval) on these figures is +/- 12%. And now this just in, despite the government’s tax credit for purchasers, sales of existing homes in December fell by 17%.

As you know, the portfolios of the nation’s financial institutions are littered with CMBS paper – which means yet more bank failures. If there is one thing Mr. Market likes to see less of, it’s bank failures… and she’ll really dislike it when the already busted FDIC itself has to be bailed out and it will.

On the commercial side, the Silicon Valley is beset by the biggest office property glut since the dot-com bust, leaving the U.S. technology hub with empty high-rises and office parks that make it impossible for landlords to sustain average rents.
More than 43 million square feet (4 million square meters)—the equivalent of 15 Empire State Buildings—stood vacant at the end of the third quarter, the most in almost five years, according to CB Richard Ellis Group.

Almost 3 million U.S. homes received foreclosure notice in 2009The number of U.S. homeowners behind on their mortgage payments reached an all-time high in 2009, with nearly 3 million households receiving at least one foreclosures notice, according to RealtyTrac. Nationwide, 2,824,674 properties, or one of every 45, were in default, a 21% increase compared with 2008. "As bad as the 2009 numbers are, they probably would have been worse if not for legislative and industry-related delays in processing delinquent loans," RealtyTrac CEO James Saccacio said. CNNMoney.com (14 Jan.) , Reuters (14 Jan.)

Mammoth Manhattan apartment complexes are handed back to lenders
Tishman Speyer Properties and BlackRock Realty decided to give New York apartment complexes Stuyvesant Town and Peter Cooper Village, which have a combined 11,227 units, to their lenders. The $5.4 billion purchase from MetLife in 2005 was the biggest real estate transaction in U.S. history. Since November, the owners have tried unsuccessfully to renegotiate debt secured by the property. The New York Times (25 Jan.)

Existing-home sales in U.S. post biggest monthly decline on record
A sharp drop in the sale of previously owned homes in the U.S. during December fueled fear that the housing recovery is faltering. From November to December, seasonally adjusted sales plummeted 16.7%, the National Association of Realtors said. It marked the biggest decline since the group started collecting the data 42 years ago. Mark Zandi, chief economist at Moody's Economy.com, said the statistic highlights the point that "the housing market is on government life support." Los Angeles Times (26 Jan.)

And the FDIC is already bankrupt in that the Deposit Insurance Fund (DIF) is a negative $8 billion. And it is probably much worse than that, if its undoubtedly self-serving accounting were corrected.

Foreclosure filings – default notices, scheduled foreclosure auctions, and bank repossessions – hit 2.8 million properties in 2009, a 21% rise from 2008 and an astounding 120% increase from 2007. And the estimated 1,000,000+ backlog of delinquent loans looming over the market ensures that the housing crisis is far from over.

“The foreclosure crisis isn’t letting up. Between 3 and 3.5 million homes are expected to enter some phase of foreclosure this year.” Rick Sharga of RealtyTrac

POLITICS and TAXES:

Over the most recent 12 months for which there is data (through November 2009), individual income taxes are down 22.4% from the previous 12 months, corporate income taxes are down an astounding 56.5%, and total tax receipts have fallen 17.6%.
Looks like all that money the government is spending will have to come from somewhere else, i.e., the hidden tax known as inflation.

Democrats To Seek $1.9 Trillion Increase In Borrowing Cap-Sources Senate Democrats are to seek an increase to the federal government's borrowing limit by $1.9 trillion lifting the total amount the U.S. government can owe to $14.294 trillion, several congressional aides said Wednesday. WASHINGTON -(Dow Jones)

USX DOLLARS:

Who controls the price of money? The price of money is set completely by the federal government. It's in the hands of the Federal Reserve's Open Market Committee. They can move the value of the dollar in any direction they choose, literally overnight.

So for them to pretend that the catastrophic fall in the exchange value of the dollar since 2002 – that's about when the bear market in the dollar started – is out of their hands or in some way not their responsibility is ludicrous. Only the fact that the American people have no real understanding of money allows this charade to continue.

So let's just be clear about this. The exchange value of the dollar, which largely controls the price of gold, is completely under the control of the Federal Reserve. So if the current administration actually desired to have a strong dollar, they could have a strong dollar overnight. If the Fed were to come out and lift the Fed funds rate to 3.5%, the dollar would go to beyond parity with the euro overnight.

Instinct might tell you to want to short the dollar, hmm. But then if you look at the other major currencies; the Euro, the Yen, and the British Pound, they might be worse. So, choosing one of these currencies is like choosing your favorite dental procedure. As you probably know if you have been following my blog I think gold is better than holding cash, especially now, where both earn no yield.

Here’s the rub!

The Fed’s can't raise rates for a couple of reasons. First of all, they can't do it because they can't afford an increase to their own borrowing costs. They're borrowing record amounts of money in every monthly Treasury funding.

They also can't do it because it would have a catastrophic effect on the ability of the U.S. banks to repair their balance sheets. The banks have to be able to borrow money from the federal government at a very low rate of interest so they can make a wide profit margin by lending out money for mortgages and credit cards and those things. So the death of the dollar is being orchestrated directly to allow for the repair of the banks' balance sheets.

When a bank gets closed, its deposits end up with another bank. The system never really shrinks. The debts and the obligations are just passed around and eventually they're socialized by the issuance of more paper money.

What we have in our system today is not really capitalism. What we really have is a crony form of socialism where all of the risks are socialized and all of the profits are privatized.

So if you're wondering what the hell has happened to your standard of living, you really have two enemies: Number 1 – the federal government, who is robbing you blind by destroying the value of your savings. And Number 2 – big corporate America, namely the banks and the investment firms, whose livelihoods depend on the socialization of their risks.

The thing to remember is that one can't survive without the other. The federal government needs the investment community to go along with the huge deficits it's running and to help finance its debts. The investment community in turn requires the federal government to socialize their risks.

OK, What is a currency?

The answer is that a currency is a government substitute for money.

This originated in the practice of private banks to issue bank notes. You would d take your gold to a bank, and the bank would issue you a paper note attesting to the gold you had on deposit. Why would they do this? Because it’s more convenient to carry a paper in your pocket than a large amount of gold. That’s how this started, with bank notes that represented real money in storage.

And then, as governments took over the function of banking with their central banks so every country has a central bank now and they, too, can printed up bank notes (currencies) that represented gold on deposit. After a while, people seemed to forget that the currency only represented value and had no intrinsic value of its own, and governments were able to stop backing their currencies with anything at all.

That’s how the modern financial world works; its entirely based on nothing masquerading as something of value.

Gold's Rate of Appreciation Against 23 World Currencies
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Average
Switzerland franc -4.1% 5.0% 3.9% 7.0% -3.0% 36.2% 13.9% 22.1% -0.3% 20.3% 10.1%
Denmark krone 1.3% 7.7% 5.8% -0.2% -2.2% 35.5% 10.2% 18.8% 10.9% 20.3% 10.8%
euro/DEM euro 1.1% 8.1% 5.9% -0.5% -2.1% 35.1% 10.2% 18.8% 11.0% 20.4% 10.8%
Canada dollar -2.1% 8.8% 23.7% -2.2% -2.0% 14.5% 22.8% 11.5% 31.1% 5.9% 11.2%
New Zealand dollar 10.8% 8.9% -0.9% -4.4% -4.2% 25.1% 19.3% 19.5% 40.5% -1.5% 11.3%
Norway krone 3.6% 4.5% -3.6% 14.9% -4.0% 31.0% 13.5% 14.6% 36.0% 2.8% 11.3%
Australia dollar 11.2% 11.3% 13.5% -10.5% 1.4% 25.6% 14.4% 18.1% 33.0% -3.6% 11.4%
China yuan -5.7% 2.5% 24.8% 19.5% 5.2% 15.2% 18.8% 22.9% -1.0% 24.0% 12.6%
Singapore dollar -2.1% 9.3% 17.2% 17.1% 1.1% 20.4% 13.3% 23.1% 6.0% 21.0% 12.6%
Thailand baht 5.0% 4.3% 21.8% 9.7% 3.0% 24.9% 8.2% 7.4% 24.6% 19.0% 12.8%
Sweden krona 4.7% 13.5% 3.7% -1.0% -2.5% 40.7% 5.8% 24.2% 29.1% 12.6% 13.1%
Malaysia ringgit -5.7% 2.5% 24.7% 19.6% 5.2% 17.6% 14.7% 23.2% 10.3% 22.9% 13.5%
Japan yen 5.5% 17.4% 13.0% 7.9% 0.9% 35.7% 24.0% 23.4% -14.0% 27.1% 14.1%
Hong Kong dollar -5.4% 2.4% 24.7% 19.1% 5.4% 17.9% 23.2% 31.8% 5.2% 24.0% 14.8%
USA dollar -5.7% 2.5% 24.7% 19.6% 5.2% 18.2% 22.8% 31.4% 5.8% 23.9% 14.9%
Taiwan dollar -0.4% 8.1% 23.7% 17.1% -1.7% 22.1% 22.1% 30.8% 6.9% 20.9% 15.0%
UK pound 1.8% 5.4% 12.7% 7.9% -2.0% 31.8% 7.8% 29.7% 43.7% 12.1% 15.1%
South Korea won 5.2% 6.2% 12.6% 20.2% -8.6% 15.3% 13.1% 32.3% 42.7% 14.3% 15.3%
India rupee 1.3% 5.8% 24.0% 13.5% 0.0% 22.8% 20.5% 17.4% 30.5% 18.4% 15.4%
Brazil real 1.7% 21.4% 91.0% -2.2% -3.5% 3.9% 12.3% 9.6% 37.9% -6.8% 16.5%
South Africa rand 15.9% 62.4% -10.8% -6.7% -11.3% 32.5% 36.6% 28.1% 43.5% -1.9% 18.8%
Mexico peso -4.3% -2.4% 42.0% 28.9% 4.4% 12.7% 24.8% 32.9% 34.0% 17.0% 19.0%
Sri Lanka rupee 8.8% 15.2% 29.7% 19.6% 13.5% 15.6% 29.3% 32.9% 10.0% 25.5% 20.0%

The best currency compared to gold is the Swiss franc, but even this venerable national currency lost 10.1% per annum on average for the past ten years. Gold held on January 1, 2009, was worth 24% more than the dollars in your wallet by New Year’s Eve. The top gold stock of 2009 gained 82%.

REGULATORY SUPERVISION:

In a recent article that explained the cause of hyperinflation (http://www.fgmr.com/december-23-2009-what-causes-hyperinflation.html), that being the “huge bank excess reserves...have funded the Fed’s purchase of US government debt, putting...the US dollar on the road to hyperinflation.” But these huge reserves are not providing enough deposit currency, given the massive, ongoing deficits being racked-up by the US government. In short, the Federal Reserve needs more money.

So the Federal Reserve is proposing a regulatory change (http://www.federalreserve.gov/newsevents/press/monetary/20091228a.htm) that would allow banks to deposit money with it and earn interest income on those deposits. These deposits will be separate and distinct from the reserves that banks leave at the Fed. They would be time deposits, in contrast to the overnight tenor of reserves, and therefore would earn the banks a higher rate of interest. Even their name is different. They are not reserves, but a “term deposit facility”.

It has been evident for some time that the Fed would require new gimmicks to come up with the deposit currency it needs to fund its growing purchases of US government paper. This point is neatly captured by Reuters announcing this new Fed facility: “At the height of last year's financial meltdown, the Fed had been discussing going to Congress to request the authority to issue its own bills. The term deposit facility achieves a similar purpose, but can be undertaken within the Fed's existing authority and does not require congressional approval.”
(http://www.reuters.com/article/idUSN2816062120091228?type=marketsNews)

Side-stepping congressional authority like this is further evidence that the Federal Reserve sees itself as unaccountable to the general public – as if not identifying who received the Federal bailout money was not enough proof of this point already. But the Fed’s devious maneuver here illustrates something much more important, namely, the reason the Federal Reserve exists.

Despite what Fed officials may declare in testimony before Congress, the Federal Reserve does not exist to fight inflation, provide full employment or achieve any of the other laudable goals attributed to it. The Federal Reserve exists solely to provide the US government with all the dollars it wants to spend, even if it has to side-step congressional authority to do it.

There is of course a biting irony in that conclusion, given that Congress is part of the US government. And Congress is as much to blame for the government’s horrific deficits and fiscal madness as the president or anyone else in Washington. So why would the Fed need to side-step Congress?

It is because central banks like to operate in the dark. That is why they meet behind closed doors and resist public scrutiny, as evident from their current effort to stop Ron Paul’s bill to audit the Fed. (http://www.youtube.com/watch?v=2zZeIfx2g6M) But we shouldn’t be surprised by the Federal Reserve’s conduct. Learn more here. (http://goldmoney.com/documents/barbarous-relic.pdf)

Now some news from the Gold Anti-Trust Action Committee, Inc... GATA has brought suit against the U.S. Federal Reserve Board, seeking a court order for disclosure of the central bank's records of its surreptitious market intervention to suppress the monetary metal's price. More on this later on... keep reading!

Sen. Dodd free to press hard for financial reform
The decision by U.S. Sen. Christopher Dodd, D-Conn., to retire at the end of his term frees him to reach for a sweeping overhaul of the financial regulatory system, Capitol Hill lobbyists said. Business and consumer groups said they expect Dodd, chairman of the Senate banking committee, to focus on financial reform as his legacy. "The political forces associated with his re-election are now off the table, so I think it makes it easier to achieve a bipartisan bill," said Scott Talbott, chief lobbyist for the Financial Services Roundtable. Los Angeles Times (07 Jan.)

For another turn of the “rules”... a typical investor in a money market seeks minute investment risk, no volatility, and instantaneous liquidity, or redeemability. These are the three pillars upon which the entire $3.3 trillion money market industry is based.

Yet new regulations proposed by the administration, and specifically by the ever-incompetent Securities and Exchange Commission, seek to pull one of these three core pillars from the foundation of the entire money market industry, by changing the primary assumptions of the key Money Market Rule 2a-7. A key proposal in the overhaul of money market regulation suggests that money market fund managers will have the option to "suspend redemptions to allow for the orderly liquidation of fund assets." so, the next time there's a market crash, and you try to withdraw what you thought was "absolutely" safe money... good luck to you!

Howe vs. Bank for International Settlements:
Reginald H. Howe, partner in Golden Sextant Advisors and litigator in the first gold price-fixing case, Howe vs. Bank for International Settlements, has just analyzed the latest precious metals derivatives report from the BIS and finds that they exploded in the six months ending last June 30. The gold and silver derivatives, Howe remarks, have lost any relation to possible gold production and again raise the question of whether real metal can be delivered against the claims that have been sold. Howe's commentary is headlined "Precious Metals Derivatives: Louder Music, Fewer Chairs," and you can find it at the Golden Sextant Internet site linked here.

Lawmakers, insiders debate reinstating Glass-Steagall
Although experts and financial industry insiders said reinstating the Depression-era Glass-Steagall Act will not help prevent a repeat of the financial crisis, the idea is gaining support in the U.S. Congress from liberals as well as conservatives. The idea also has the support of former Federal Reserve Chairman Paul Volcker and a few other powerful insiders, and the financial industry is not dismissing the proposal or other populist efforts. The Politico (Washington) (04 Jan.)

Fed's suppression of AIG bailout details raises tough questions

Source: U.S. lawmakers and securities lawyers are looking into how to respond to news that the Federal Reserve Bank of New York told American International Group not to make public in securities filings some details of its bailout. One concern is whether federal securities laws were violated when AIG followed the instructions. Rep. Darrell Issa, R-Calif., brought the information to light after obtaining e-mail correspondence between AIG and the New York Fed. CNBC (07 Jan.) , The New York Times (07 Jan.) , The Washington Post (08 Jan.)

SEC files second lawsuit against BofA regarding Merrill Lynch takeoverThe U.S. Securities and Exchange Commission filed another lawsuit against Bank of America, saying shareholders were kept in the dark about huge losses at Merrill Lynch when the bank took over the firm. The SEC sued again after a judge refused to let it add charges to an existing lawsuit against the bank. Reuters (12 Jan.)

SEC, FDIC say regulators played a role in causing crisis
The heads of the Securities and Exchange Commission and the Federal Deposit Insurance Corp. said weaknesses in the U.S. regulatory system, combined with shortcomings by their own agencies, played a part in bringing about the financial crisis. "Not only did market discipline fail to prevent the excesses of the last few years, but the regulatory system also failed in its responsibilities," said FDIC Chairwoman Sheila Bair. Her statement was included in written testimony to the Financial Crisis Inquiry Commission. The Washington Post (15 Jan.)

Corporations and unions are free to contribute as much as they want to our campaigns. If they want to play, they’re going to have to pay… and big! -- A divided U.S. Supreme Court struck down decades-old restrictions on corporate campaign spending, reversing two of its precedents and freeing companies to conduct advertising campaigns that explicitly try to sway voters. [Bloomberg]

GOLD:

Clearly the advice to shift out of stocks and into gold and gold shares was correct. This is best evidenced by the Dow/gold ratio, which measures the price of the Dow divided by the price of an ounce of gold.

The ratio reached its peak in July 1999, when it took 44 ounces of gold to buy the Dow Jones Industrials. Today, the Dow is worth about 9 ounces of gold. The Dow/gold ratio reaches extreme highs or extreme lows around the changes in the Kondratieff seasons.

In 1932, at the bottom of the winter bear market, the ratio stood at 2. There was a huge demand for physical gold but the price of gold was unchanged at $20.67, because it was then pegged to the US dollar. Without this peg the price of gold would have risen sub¬stantially, based on this demand. This winter, gold is not priced at a fixed rate to the dollar. We’ve already seen what has happened to the gold price during the initial stages of this financial crisis, but things are going to get a lot worse, which means that the price of gold is going much higher.

"China becomes world's biggest gold buyer in 2009". The first paragraph reads as follows... "World Gold Council (WGC) data reveals that for the first time in 21 years the world's central banks have been net buyers of gold and China has been the biggest buyer this year, adding 454 tonnes to bring its central bank reserves to 1,054 tonnes."

OK, all this sounds good, but the first thing you have to know about gold is the price of gold in dollars is completely at the whim of the chairman of the Federal Reserve. (That’s why GATA is suing the Fed.) So if you think you're going to see a steady, consistent rise in the price of gold, you're fooling yourself. It's not going to happen.

The government can't allow the price of gold to move too far, too fast. It just can't afford for that to happen. It can't afford for there to be a real lack of confidence in the dollar. They need the value of the dollar to fall and they're happy to see the price of gold go higher, but they don't want it to happen too fast.

From the ringside seat of activity of the COMEX comes this insight from Rick Akerman, “...that the interests of certain parties for a successful [U.S. Treasury] auction would not be met if gold’s recent robust recovery continued.”

That’s the rub that keeps pressure on the keeping gold prices low, but how long can they hold back the rising tide of interest rates?

Now, if you asked what gold price would signal there's an eminent collapse of the dollar. I would not look to the price of gold to make that assumption. What I would look to is the silver-to-gold ratio.

The silver-to-gold ratio has always been an indicator of a monetary crisis. The last time there was a real monetary crisis in the United States was in the late 1970s, and the silver-to-gold ratio peaked at about 16, meaning it would only take 16 ounces of silver to buy one ounce of gold. Right now, the silver-to-gold ratio is around 60, which tells you we're not at any real crisis level yet.

If you do the math right now, you'll find that silver is very undervalued relative to this historic 16:1 ratio.

On another note, there's no run like a bank run and no rush like a gold rush, but both together on a worldwide scale would be as unprecedented as the current global fiat (free floating trust) monetary system. We have the latter, (gold rush) and the figures on OTC gold and silver derivatives warn that the final resolution of the intricacies of a plot, the great gold market deception and manipulation, may well arrive with the former (bank run/credibility of the U.S. government).

You say, ha, no way, but there are 450 banks likely to fail in 2010, (remember last year there were 140 banks that failed) is yours one of them? You already know that FDIC is bankrupt; don’t you want to get yours while you can? Start walking and if you see others going in the same direction with you, start running. Why?

Because, this gold market dénouement means that the actual weight of gold and silver represented by derivatives on the precious metals has grown so large relative to all reasonable measures of physical supply that more and more questions and doubts are being raised about not only the integrity of the price discovery mechanisms for these metals, and also the reliability of many paper claims to the physical delivery of them. Want to learn more? http://www.goldensextant.com/commentary35.html#anchor17538

Question: What do a bank run and a gold run have in common?

Answer: Creditability of the USG

Run on banks?

140 banks failed last year here in the US. Their bad assets have been absorbed by larger banks backed by the Federal Government and your children’s future tax dollars, sort of “born-beholden-baby” generation, the ‘BBB’ generation. How do you like that moniker for your grand kids?

Weimar Germany entered its quintessential hyperinflation with its ratio of government borrowing to spending at 60%. In the U.S. today, that ratio has now crossed the 40% line – meaning the U.S. government is now borrowing over 40 cents of every dollar it spends – putting us in dangerous territory, indeed. And the U.S. isn’t in the worst shape of the world’s many sovereign deadbeats.

It’s happening here, but it’s also happening everywhere.

Vietnam, well, the government of Vietnam "has ordered all gold trading floors to close by the end of March, putting an end to a business which turns over $1bn a day but which the government feared was spinning out of control." Gold imports were creating havoc with the national currency [the dong] and accelerating the trade deficit. Vietnam is one of the world’s largest gold consumers. The Vietnamese buy a similar amount of gold per head as the Germans, who have a GDP per capita more than 40 times greater. (http://www.ft.com/cms/s/0/724c92ec-f6d6-11de-9fb5-00144feab49a.html?nclick_check=1)

But the appetite for gold has put significant pressure on the dong and was a key factor in forcing the government to devalue the currency by more than 5 per cent at the end of November.

Bombay Bullion Association 'revised' their gold import numbers for 2009. From just over 200 tonnes, the number has been changed to 300-350 tonnes... and 2008 numbers were revised a bit higher as well. Does anybody over there know what the real number is? Creditability, transparency check needed, hello.

As you well know, dear reader, Iceland was one of the first countries to go down the drain when its house-of-cards banking system imploded in 2008. Since then, Britain [and other countries] have been trying to get savings account holders lost deposits back. Well, that didn't work out as planned... and the Dutch government is livid. The story is "New Episode in Icesave Saga"... and the link to this story is here.
http://www.rnw.nl/english/article/new-episode-icesave-saga

Without doubt, this is a harbinger of things to come at quite a few banks throughout the world in small countries such as this. The problems in the EU aren’t just with Greece, Italy, and Spain; Britain and France are being downgraded, and its going to get much worse.

ECB indicates EU will not rescue Greece
Juergen Stark, chief economist at the European Central Bank and a member of its inner council, said Greece's financial issues do not meet the treaty terms required to trigger an EU rescue. Under the terms, rescues are limited to nations that face substantial challenges "beyond their control." "The treaties set out a 'no bailout' clause, and the rules will be respected. This is crucial for guaranteeing the future of a monetary union among sovereign states with national budgets. Markets are deluding themselves if they think that the other member states will at a certain point dip their hands into their wallets to save Greece," Stark told Italian newspaper Il Sole 24 Ore. Telegraph (London) (06 Jan.)

The impending global crisis no one is talking about – Japan
The government said early Wednesday that gross domestic product shrank 4% in the first quarter from the previous quarter, worse than the fourth quarter's 3.8% decline, and marking the fourth consecutive quarter of contraction. The latest reading translates into an annualized contraction of 15.2%, the worst performance since 1955.

And now, dear reader another must read, "Why gold will keep going up for years", by John Embry, Chief Investment Strategist at Sprott Asset Management ... and the link to the GATA release is here. http://www.gata.org/node/8281

Time a fun story now to cheer you up, a reward of $50,000 is being offered for information leading to the recovery of eight gold ingots stolen from an unidentified individual.

These gold ingots were part of the treasure recovered from the S.S. Central America, which sank in a hurricane in 1857 off the coast of North Carolina.

QUOTES OF THE MONTH:

"Sprott Says S&P 500 Index Will Plunge Below March Low..."The Standard & Poor’s 500 Index will collapse below its March lows as an expected rebound in economic growth fails to materialize” - Eric Sprott.

“Every seed is awakened and so is all animal life. It is through this mysterious power that we too have our being and we therefore yield to our animal neighbors the same right as ourselves, to inhabit this land.” -Sitting Bull

"We're in a bear market that will last 15 or 20 years" - Eric Sprott, Sprott Asset Management, December 2009

In November 2008, Queen Elizabeth II asked the London School of Economics (LSE) why nobody saw the current financial crisis coming. - Eight months later, this LSE’s response was published in the London Observer.

“In summary, Your Majesty, the failure to foresee the timing, extent, and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.… It is difficult to recall a greater example of wishful thinking combined with hubris.”

“2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US government’s ability to raise money in the debt market. The fact that the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities this year proves that the traditional buyers are not keeping pace with the US government’s deficit spending. It makes us wonder if it’s all just a Ponzi scheme.” – Eric Sprott & David Franklin
http://www.sprott.com/Docs/MarketsataGlance/12_2009_MAAG.pdf

“Gold Is Money and Nothing Else” - J P Morgan said when he was
asked about the role of gold in the financial system by a U.S. congressional subcommittee in 1913.

"If the American people ever allow private banks to control the issuance of their currencies, first by inflation then by deflation, the banks and corporations that will grow up around them will deprive the people of all their prosperity until their children will wake up homeless on the continent their fathers conquered."- Thomas Jefferson

“In old-style 19th Century capitalism, I owned my company, I made a mistake, I bore the consequences. Today, (at) most of the big companies you have managers who, when things go well, walk off with a lot of money. When things go bad the shareholders bear the costs,” - Nobel laureate, Joseph Stiglitz

A PBS program entitled Bill Moyer's Journal. Moyers sits down with Bill Black, the former senior regulator who cracked down on banks during the savings and loan crisis of the 1980s. Black offers his analysis of what went wrong and his critique of the bailout... and it's ugly!!! If you've never seen this before, and it's definitely worth your time... and the link is here... http://www.youtube.com/watch?v=Rz1b__MdtHY

Another must watch video. It's an interview from ABC News that's posted over at yahoo.com. The gentleman being interview is Herb Kay, New York Times best selling author and President of HK Turnaround.
http://cosmos.bcst.yahoo.com/up/player/popup/?rn=289004&cl=17810664&src=finance&ch=289021

"monetary LSD" -- borrowing a phrase used by a French economic minister during the 1970s to describe the floating exchange-rate system that followed the end of the gold standard.

"The human race has only one really effective weapon, and that is laughter. The moment it arises, all your irritations and resentments slip away and the sunny spirit takes their place." – Mark Twain

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” - Ludwig von Mises

“Never, in my 35 years of market observation, have I witnessed a more blatant manipulation. Make no mistake, this deliberate sell-off [in silver] is the handiwork of JPMorgan. This sell-off would not be possible were it not for their large concentrated short position. More upsetting is the apparent complicity of the CFTC in allowing the illegal manipulation of the silver market. The CFTC's probable involvement undermines the very concept of market integrity.” - Ted Butler, 26 January 2010

"Fear the Boom and Bust" a Hayek vs. Keynes Rap Anthem” – Check it out: http://www.youtube.com/watch?v=d0nERTFo-Sk

“The real decisions that impact the capital markets are being made in Washington. And they're sometimes being made by politicians who don't really have a clue about how the industry works, or what unintended consequences their actions may have. If that doesn't scare you, I don't know what will.” - Mike Larsen

Note to readers:

One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, my colleagues, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. I has been said, "When you take stuff from one writer it's plagiarism; but when you take it from many writers, it's research." In reference to my sources this month, they include in no particular order:

James Turk, Ed Steer, Buzz Holling, Bob Prechter, Richard Band, Porter Stansberry, Ian Gordon, Martin Weiss, Doug Cassey, Bob Irish, David Galland, Chris Powell, Chris Wood, Bud Conrad, Corey Boles, John Embry, Mike Larsen, chinamining.org, Business News Network, goldmoney.com, Financial Times in London, longwavegroup.com, Journal Health Affairs, Washington Post, Reuters, Boomberg, Economist, CNN Money, and the LA Times.

January - 2010 Economic Brief

2010-01-02T13:52:00.000-08:00

REVIEW:

Most people assume that because they are approaching retirement age, they are approaching retirement. That's just not the case for most dentists.

Wall Street gets through year of crisis, rally
This year has been a long, bumpy and winding road for U.S. equity markets. They took a severe hit from the financial crisis, then got back half of what they lost in the stock market rally that followed. As the year ends, the Standard & Poor's 500 sits almost 25% higher than where it was when 2009 began. As for the decade, the index is 23% lower than where it stood 10 years ago. The New York Times (30 Dec.)

From the March, 2009, low the S&P 500 has soared 69 percent in nine months. In doing so it recouped a bit more than 50 percent of its former losses. But it's still 27 percent below its all time high of October 2007 and as mentioned above 23% below where it stood 10 years ago.

The whole rally off of the March 2009 low is characterized by low volume. Hence, I see a high probability that this bull run will finally end and prove to be just a huge bear market rally. The rally since the late October low was especially weak. Volume was not only miniscule, it was also declining markedly. This tells me that the recent break out in prices to new highs for the year was on very thin ice.

Debt is still at historic highs, and there is no end to it in sight. In other words, nothing has really changed. But most people are thinking it has, are they delusional? Yes, I think so.

DEBT:

The first two months of the US government’s current fiscal year have resulted in a record $296.7 billion deficit. During this period, the Federal Reserve grew its balance sheet by about $65 billion, in effect purchasing about 22% of the federal government’s new debt. These purchases clearly show the Fed’s policy of “quantitative easing”.

• This year’s federal deficit is in excess of $1.5 trillion. That’s more than the total national debt for the first 200 years of our country.
• The Congressional Budget Office projects that the federal debt will increase to $17.1 trillion over the next decade.
• Government debt will reach 76.5% of GDP by 2019.

Government spending isn't necessarily always a bad thing. We need our bridges and Internet. But spending for the wrong things can be quite disastrous, as in going to wars that make the situation worse, or bailing out big banks that then pay big bonuses. Government by its size is necessarily more inefficient than locally made decisions that optimize the costs and benefits. My analysis suggests that the American economy has benefited very little compared to the huge expenditures and obligations by our government.

In fact, I would argue that the big bailouts only helped a select few while hurting the competitiveness of U.S. business by adding taxes and requirements on those that did not cause the problems. The benefits of the spending are localized, and the damage will be felt for years and across a wide population through wages that purchase less and tax burdens to pay for the spending. Inflation is the only way out that I can see for the size of the expanding government obligations.

Let’s have a look at a chart James Bullard, president of the Federal Reserve Bank of St. Louis, included in a recent presentation to the National Association for Business Economics.

A lot of people seem to have forgotten something that is very much on Bullard's mind: The growth of the Fed's balance sheet isn't nearly finished. In fact, the Fed has only completed purchasing about half of the $1.75 trillion worth of assets it has promised to buy. The assets are mostly mortgages and mortgage-related securities.

Even though these direct purchases are unprecedented, that's only about 10% of the story. Since the beginning of the crisis, the Fed has lent, spent, or guaranteed $11.6 trillion.

That includes providing a backstop on the entire system of mortgage finance in the United States, a system that currently shows nearly a $1 trillion loss. Since the expansion of its balance sheet got started in earnest last fall, the trade-weighted value of the dollar has fallen 15%.

As Bullard points out, a doubling of the monetary base won't necessarily cause an immediate doubling of inflation... But suppose it takes 10 years? The average inflation rate would still be 7% a year. Nothing in our financial markets is prepared for this kind of inflation. Inflation at these rates would cause the average multiple of earnings for equities to fall by at least 50%. Likewise, we would see high-yield corporate bonds yielding at least 20% – double what they are now. And U.S. Treasuries would probably see their yields triple. The destruction of wealth in the bond markets would be unprecedented in modern finance.

Think about what this means in terms of interest payments. Even with interest rates at all-time lows around the world, the U.S. will spend almost $400 billion on interest to service our existing national debt – that's a 3.3% interest rate. Currently, the U.S. takes in roughly $2 trillion in taxes, half of which come from income taxes. So the interest on our debt is already consuming 20% of all tax receipts, or 40% of all income taxes.

It seems obvious to me this money will never be repaid – could never be repaid. The only real question is how much of a "haircut" our creditors are willing to accept in terms of the loss of purchasing power of the U.S. dollar. So far, inflation remains relatively benign. Our creditors don't seem to be losing very much. But we know this will change and could change rapidly, as the Fed continues to expand its balance sheet with less and less creditworthy assets. At what point will our creditors finally decide they can't finance any more of our deficit spending because we're simply not worth the risk?

Looked at from a different point of view, 2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US government’s ability to raise money in the debt market. The fact that the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities this year proves that the traditional buyers are not keeping pace with the US government’s deficit spending.

Foreign holders are also expressing concern over new Treasury purchases. In a recent discussion on the global role of the US dollar, Zhu Min, deputy governor of the People’s Bank of China, told an academic audience that "The world does not have so much money to buy more US Treasuries."

Perhaps the most striking example of the new demand dynamics for US Treasuries comes from Bill Gross, who is co-chief investment officer at PIMCO and arguably one of the world’s most powerful bond investors. Mr. Gross recently revealed that his bond fund has cut holdings of US government debt. The fact that he is now selling US treasuries is a foreboding sign.

Pimco makes major shift from government debt to cash
Pacific Investment Management Co.'s Total Return Fund made a big move from government debt to cash, signaling to analysts that the fund's managers anticipate interest rate hikes as the U.S. economy strengthens. The fund has increased its cash position to its highest level since the Lehman Brothers bankruptcy in September 2008. A company spokesman said the firm does not comment on its holdings. However, Pimco chief Bill Gross said recently that Treasuries are overvalued when weighed against the potential for inflation. Bloomberg (17 Dec.)

IMF: Developed nations to carry big, growing debt after downturn
A look at the debt load of the Group of 20 nations reveals trends that might come as a surprise. The International Monetary Fund projected that by 2014, the total government debt of advanced economies in the G-20 will account for 114% of their GDP. Among developing countries, debt will decline to 35% of GDP, the IMF said. The Economist (21 Dec.)

Now enter the news about the financial woes in Dubai and Greece which should remind investors that the major debt problems associated with the global real estate bubble have not been solved. Yet, they continue thinking that things have changed.
Now that sovereign debt problems are surfacing, a few investors are getting concerned about the sustainability of this recovery. After all, the unprecedented global fiscal and monetary response was an experiment. The outcome is unknown. And the underlying problems related to the crisis still exist: Bad debt, reduced wealth and tight credit to name a few.

U.K., France risk losing AAA rating, Fitch says
Fitch Ratings noted the "unpleasant fiscal arithmetic" facing several European nations, saying none of the benchmark AAA countries, including France and Britain, can count on that status for much longer. "The U.K., Spain and France must articulate credible fiscal-consolidation programs over the coming year, given the budgetary challenges they face in stabilizing public debt. Failure to do so will greatly intensify pressure on their sovereign ratings," Fitch said. Telegraph (London) (22 Dec.)

If I have the numbers straight, two years into the worst recession since the Great Depression, consumer debt has fallen by a whopping $120 billion. Against that amount, we have an increase in federal debt closing in on $2 trillion – a clear sign that not only is the government quickly replacing the private sector, but that it is doing so at a rapid rate.

I thought it might be useful to plot the deficit, tax revenues and government outlays on the same chart, just to confirm what we all know – that the government deficit is much bigger than anything we have seen for decades.

You can see the gap between receipts versus spending outlays has widened to the point where the difference between the two becomes a deficit of almost one and a half trillion dollars.

JOBS:

So far, what the data are telling us – besides how serious the unemployment situation is – is that, one-month blips aside, the economy isn’t out of the woods yet.

And given the sheer number of unemployed, the pressure on the economy – and on the government to continue running deficits – will be with us for some time to come.

25 U.S. states use up funds for unemployment benefits
The strain of recession is using up money in state unemployment funds faster than contributions from payroll taxes are coming in. Already, 25 U.S. states have run out of money to pay benefits and have been forced to take loans ($24 billion) from the federal government to avoid cutting off benefits. The Labor Department projected that by 2011, 40 states will have drained their funds for unemployment benefits. The Washington Post (22 Dec.)

And if we focus on California, the story is even more dire. California’s borrowing from the trust fund stands at $5.3 billion, up from $2.6 billion in July. To put this in perspective, the state is borrowing over $100 million a week to meet its unemployment insurance payments.

And yet a much better than expected jobs report came out - Employers only cut 11,000 jobs in November. This is further evidence that the Government doesn't create jobs, people create jobs.

These are the states that have essentially bankrupted their unemployment insurance systems, and are now forced into borrowing from the Federal Unemployment Trust Account. The number of states relying on Federal money, in order to keep sending out weekly checks, has grown from 18 to 26. And the total amount borrowed has zoomed over 100% ¬ from $12.0 billion to $25.1 billion.

This exponential growth trend is clearly not sustainable. We suspect that 2010 will see many state tax rate hikes on employers and employees, in order to fund their respective unemployment schemes. This will only further burden business’s ability to operate profitably, and reduce the take-home pay of already stretched consumers.

Many of us look around and see stores going out of business and friends that can't find jobs, we question whether this somewhat positive news can be backed up by other measures… measures that are subject to much less manipulation by the government reporting agencies.

One such measure is how much taxes are being collected by the government. When businesses are cutting back and employees are earning less, tax revenue drops. So to get this perspective, take a look at the total number of jobs with the total amount of federal government taxes. The basic idea is that tax revenues come from people who are working in businesses that are successful, so there should be a close correlation, and there is.

U.S. companies reluctant to hire, announce job openingsU.S. employers are not laying off workers as much as before, but they also are not hiring much or announcing job openings. The Labor Department's Job Openings and Labor Turnover survey found that companies posted 2.5 million jobs on the last day of October, fewer than September's 2.6 million. For every job opening in October, there were about 6.3 jobless people, the department said. Google/The Associated Press (08 Dec.)

BONDS:

It's not like the government is going to default tomorrow, or that inflation is going to surge overnight. But auctions of 10-year and 30-year bonds are getting progressively worse, with demand dropping as supply ramps up ...
At the last 30-year bond auction, held on December 10, the bid-to-cover ratio came in at 2.45. That was substantially below the recent peak of 2.92. The 10-year note auction, held one day prior, registered a ratio of 2.62. That too was sharply below the recent high of 3.28. Don't forget that the U.S. Treasury has got $118 billion worth of paper to 'sell' this week.

Foreign Central Banks only took down 40.2 percent of the 30-year bonds sold in mid-December. That was down from the 2009 peak of 50.2 percent in July. Their share in the 10-year auction was even worse — just 34.9 percent. As recently as September, indirect bidders were snapping up 55.3 percent of the notes being sold.

Bottom line: Long-term Treasury auctions are getting weaker and weaker. We haven't seen a so-called "failed" auction yet. That's when the bid-to-cover ratio drops below 1 — meaning the government can't even get $1 in bids for every $1 in securities being sold. But that has already happened in the U.K., and I believe it's only a matter of time before it happens here.
As a matter of fact, 2009 has been the absolute WORST year for total return on long-term Treasuries since at least 1973.

Treasury market's slump could fuel mortgage ratesA lack of interest by investors in U.S. government debt could drive up interest rates on home mortgages and stop the housing market's shaky recovery, experts said. The interest rate on the benchmark for home mortgages, the 10-year Treasury, climbed from 3.2% in November to 3.83% on Monday. Freddie Mac said the average rate for 30-year mortgages had risen to 5.05% last week from 4.81% two weeks earlier. Increasing mortgage rates could force home prices down, cut demand on the part of buyers or both. The Miami Herald/Los Angeles Times Service (29 Dec.)

Eric Sprott said that despite investor optimism, payrolls continue to shrink, with unemployment at 10 percent.

The low level of interest rates is artificial, engineered by the Federal Reserve’s bond purchases, he says. Those purchases are scheduled to end by March 31. Once that happens, demand for bonds will drop, pushing interest rates higher, Sprott says.

And rising rates will stifle the economy.

If the Fed decides to resume the bond buying, then the dollar will be in trouble, as investors lose confidence in Fed policy, he says.

If they announce another quantitative easing, trust me, the gold price will go up another 50 bucks that day.

Analysis: Inflation answers to determine timing of Fed's pullback
Answers to questions regarding inflation will help determine when the Federal Reserve will withdraw from stimulus programs. The U.S. central bank has justified its pledge to keep interest rates close to zero by taking comfort in the expectation that inflation appears to be restrained. While that seems to be true on the surf, economists and others are growing concerned. "We have the most potentially inflationary policy I have ever observed in a developed country," said Alan Meltzer, a Fed historian. Reuters (30 Dec.)

Mortgage rates expected to rise when Fed ends bond purchases
Interest rates on home mortgages are set to climb when the Federal Reserve ends its purchases of mortgage bonds, analysts said. The U.S. central bank indicated that it might end the program, through which it bought $1.25 trillion in mortgage bonds, as soon as March. Analysts said the purchases have kept the spread above benchmark interest rates for mortgage bonds much narrower than what private investors would accept. The Fed's withdrawal is expected to push mortgage rates up nearly 0.75 percentage points by the end of 2010. Bloomberg (31 Dec.)

U.S. to put additional $3B to $4B into GMAC, sources say
The U.S. Treasury will inject between $3 billion and $4 billion into GMAC Financial Services, sources said. Discussions between GMAC and the Treasury about an additional capital infusion -- on top of the $13.4 billion it already received -- have been under way for months. Earlier this year, the Treasury said it was prepared to provide GMAC as much as $5.6 billion more to ensure the company can survive another serious economic downturn. The Detroit News (29 Dec.) , Bloomberg (30 Dec.)

BANKS:

Total bank failures so far this year: 140!

'Wake up, gentlemen', world's top bankers warned by former Fed chairman Volcker"... and the link is here. Paul Volcker, a former chairman of the US Federal Reserve, berated the bankers for their failure to acknowledge a problem with personal rewards, questioned their claims for financial innovation ““I wish someone would give me one shred of neutral evidence that financial innovation (i.e. CDS) has led to economic growth — one shred of evidence“ and then went on to criticize them for failing to grasp the magnitude of the financial crisis and belittled their suggested reforms.

Key facts:
Fact #1. Credit derivatives — mostly bets on the failure of large companies — were the primary cause of the AIG collapse and a key factor in Wall Street's nuclear meltdown last year. So in this report, the OCC seems proud to announce that U.S. banks have reduced their holdings in these radioactive credit derivatives — from a peak of $15.9 trillion at the end of last year to $13 trillion on 9/30/09.

But in the NEXT crisis, triggered by rising interest rates, the banks' big nemesis is likely to be interest rate derivatives — those tied to bond yields, mortgage rates, and a variety of other rates.

Fact #2. U.S. banks now hold $172.5 TRILLION in interest rate derivatives, a new record. That's over THIRTEEN times the amount they hold in credit derivatives.

Fact #3. Among all derivatives held by U.S. banks (now at a record $204.3 trillion), interest rate derivatives represent 84.5 percent of the total!
Banks aren't the only ones vulnerable to higher interest rates.
• Credit unions are loaded up with $318.4 billion in home mortgages, plus $103.9 billion in government agencies and government-sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac. Their combined percentage in assets potentially vulnerable to higher interest rates: 50.4 percent of assets.
• Life insurance companies — providers of life, health, and annuity policies — are among the largest holders of corporate bonds: $1.9 trillion worth! Plus, they hold $332.9 billion in mortgages and another $50 billion in municipal bonds. Combined, that's 55.7 percent of their assets in likely interest-sensitive investments.
• Property and casualty insurers — which cover your home, car, or business — are among the largest holders of municipal bonds: $394.1 billion. Plus, they have $272.6 in corporate bonds and another $112.3 billion issued by government agencies and GSEs. Combined total potentially vulnerable to rising interest rates: 58.4 percent.

Analysis: As U.S. economy picks up, rate increase seems likely
Economic reports will clarify the recovery's strength, but it is becoming clear that the U.S. has emerged from its downturn. So the question turns to when the Federal Reserve will decide the recovery is strong enough for interest rates to rise. The Fed might make a move sooner than many expect. "They're going to have to get aggressive," said Northern Trust economist Paul Kasriel. "And they know that." The Wall Street Journal (21 Dec.)

REAL ESTATE:

In September 2008 the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship. At the same time Treasury established Preferred Stock Purchase Agreements (PSPAs) to ensure that each firm maintained a positive net worth.

Treasury is now amending the PSPAs to allow the cap on Treasury's funding commitment under these agreements to increase as necessary to accommodate any cumulative reduction in net worth over the next three years.

This tells me that the Treasury Department is convinced that the worst of the burst real estate bubble is yet to come.

Fed is worried by real estate, cheered by holiday sales
The economy is "modestly" improving in most of the U.S., but falling home prices and a deepening crisis in commercial real estate present obstacles to any robust recovery, the Federal Reserve said in its Beige Book. The report states that consumer spending has increased moderately and used-car sales are doing well. The job market continues to be a problem, "with further layoffs, sluggish hiring and high levels of unemployment." The Washington Post (03 Dec.)

U.S. housing recovery hits snag as prices flatten out
After four straight months of increase, house prices in the U.S. stood unchanged in October compared with September, according to the Standard & Poor's/Case Shiller Home Price index. The October index was down 7.3% compared with the same month last year. The biggest losers were Chicago, Atlanta and Tampa, Fla., while the biggest winners were Phoenix and San Francisco. CNNMoney.com (29 Dec.) , Boston Herald (30 Dec.)

About one in four homeowners, or 10.7 million Americans, are considered underwater, meaning their mortgage exceeds their home value, according to real-estate information company First American CoreLogic.

And more than half of all homeowners whose payments had been lowered through modification plans, defaulted again.

Report: Value of U.S. homes decreases less than last year
A decline in the value of U.S. homes slowed dramatically this year compared with 2008, according to an analysis from Zillow Real Estate Market Reports. During the first 11 months of this year, houses dropped $489 billion in value, compared with $3.6 trillion for 2008. The decrease brought with it a drop in the rate of negative home equity, according to the analysis. Reuters (09 Dec.)

The National Association of Realtors reported that sales of so-called 'existing' homes rose 7.4% in November compared to October, due to the $8000 first time buyer tax credit, low mortgage rates and foreclosure bargains. To put this figure in perspective, sales were up more than 40% over year ago levels. First-time buyers accounted for more than half of home sales last month and about one-third of sales were 'distressed' properties. The Federal Reserve is the principal buyer of mortgage-backed securities at this time, and that program will also wind down in the first quarter of 2010. A dramatic increase in foreclosures is predicted for 2010, as well, in Arizona, California, Florida, Michigan and Nevada.

In November, new home sales were down 11% year over year, but for the entire year so far, new home sales are down 24%. Why buy new when so many like-new used homes are on the market?

Sales of new homes in U.S. plunge 11.3% in November
Between October and November, new-home sales fell 11.3% to a seasonally adjusted annual rate of 355,000 units, the U.S. Commerce Department said. The drop marks a 9% decline from November 2008. The median price for new homes increased 3.8% last month from October but showed a 1.9% decrease compared with November last year. Los Angeles Times (24 Dec.)

The fallout in commercial real estate is starting to gain steam. The percentage of commercial MBS loans in special servicing climbed sharply to almost 9% last month. There were $65.2 billion of loans in special servicing at the end of November, a net increase of $8.2 billion, or 14%, from October, according to Trepp.

The $8.2 billion monthly increase was the second largest ever, after a $12.4 billion spike in May following the bankruptcy filing by General Growth Properties. The latest transfers drove up the special-servicing rate to 8.95%, from 7.91% at the end of October. The net number of loans in special servicing climbed by 8%, or 266, to 3,585. The special-servicing rate has now climbed for 19 months in a row and stands 22 times higher than the record low of 0.40% in August 2007. The bulk of the increase has come this year.

Retail mortgages continue to account for the largest percentage of loans in special servicing - 31.8%, or $20.8 billion. Multi-family mortgages come next, at 22%, or $14.4 billion, followed by hotel loans, at 19.2%, or $12.5 billion.

Next crisis to be in commercial real estate, experts say
A crisis looms for the commercial real estate market in 2010, then for the government-debt market, particularly in the U.S., investment managers said. "I think the next shoe to drop, which will be the world's biggest shoe, is the continued decline of the dollar and ultimately the breaking of the U.S. government market, which will set the other markets on another terrible path," said Steve Shenfeld, president of MidOcean Credit Partners. The danger of default on commercial real estate also is a major threat, Shenfeld said. Reuters (07 Dec.)

The following chart is from the National Real Estate Investor. It shows the stunning increase in the number of commercial mortgage-backed securities now in “special servicing”… which is to say, in trouble.

POLITICS and TAXES:

FASB chief to propose allowing banks to move away from GAAP
Robert Herz, chairman of the Financial Accounting Standards Board, is set to call on U.S. bank regulators to consider allowing financial institutions to break free from the Generally Accepted Accounting Principles. "Handcuffing regulators to GAAP or distorting GAAP to always fit the needs of regulators is inconsistent with the different purposes of financial reporting and prudential regulation," Herz said in prepared text. "Regulators should have the authority and appropriate flexibility they need to effectively regulate the banking system." The New York Times (07 Dec.)

U.S. lawmakers reluctant to crack down on credit rating agencies
Credit rating agencies have been seen as playing an integral role in the financial crisis, having given top marks to billions of dollars worth of bonds that became part of the subprime-mortgage meltdown. Not only were rating models scrutinized, but there was concern about a conflict of interest because issuers pay rating agencies to appraise their securities. However, while U.S. lawmakers are overhauling the financial system, rating agencies appear to be left out of the revamp. Lawmakers are reluctant to touch the agencies because they are an essential part of the still-fragile credit machine. The New York Times (07 Dec.)

In the 60s, top marginal rates were 70%. At first blush, today’s top rate of 35% appears to be a bargain. It’s not. Nobody really paid 70%. Back in the 60s and 70s, there were a great many deductions individual investors could take. Under the cover of tax code simplification, Congress eliminated all but a few of those deductions in 1986. The trade-off? The top tax rate was reduced to “just” 28%.

Since 1986, the top tax bracket crept up to 39.6% by 2000. The Bush tax cuts in 2001 dropped the max to 35% and reduced taxes for all Americans. When those cuts expire in 2011, it will amount to a tax increase across the board for the 60% of citizens who pay taxes. In addition:

• Capital gains taxes will go up to 20% from 15%.
• Dividends will be taxed as ordinary income – up from 15% today.
• The death tax will be back with lower exemptions.

What will happen, tax-wise, after 2011 is not difficult to ferret out. Consider:

• This year’s federal deficit is in excess of $1.5 trillion, which is more than the total national debt for the first 200 years of our country.
• The Congressional Budget Office projects that the federal debt will increase to $17.1 trillion over the next decade.
• Government debt will reach 76.5% of GDP by 2019.
• The U.S. is fighting two wars.
• Many states are facing massive deficits.

2010 is an election year. And if you really believe that economic policy and the election cycle in America are not related, you also probably believe that Tiger Woods is innocent.

USX DOLLARS:

Ben Bernanke before he was appointed chairman of the Federal Reserve said, “The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost.”

There is of course a cost. There may not be one to the US government, but instead, the cost will be borne by everyone who holds dollars and loses purchasing power as a result of Mr. Bernanke creating as many dollars as the government wants to spend. The other word for this cost is inflation.

In every paper money system the people who lose are the people who are not heavily indebted. The people who lose are the people who save and invest.

The people who win are the people who get to manipulate where the new money is injected. So the people who win are the big bankers and the other folks who are going to have all their bad assets paid off in the new money.

If you look at what the Federal Reserve is doing today, they're creating enormous amounts of money – almost $2 trillion in new money in the last 12 months – and they're directly buying all of the bad mortgages from the investment bankers. That's absolutely true. There's a paper record of it.

What there isn't a record of and what we don't know – and why people want to audit the Fed – is the prices the Fed paid for those bad mortgage debts.

I bet you when the Fed is audited, we're going to discover that they paid par, meaning that they were buying paper at $100 that was actually trading at $10 or $15. And they're doing that of course to save the banks.

What they will do to save the banks, and there is already a precedent for it. For example, gold was taken out of daily circulation in 1933, silver in 1965, and copper from the penny in 1982. The same thing as in Rome: the currency has been debased, taxes have soared, regulation has become extremely onerous. But these things have political causes. Speaking of failed empires, one of the reasons the eastern Roman Empire lasted as long as it did was that for some reason – maybe they learned something from the fall of the western empire – their gold Solidus remained a stable and sound money for almost a thousand years after the western Roman Empire dried up and blew away.

The nation must continue to spend its way out this recession until more Americans are back at work… - U.S. President Barack Obama, November 8, 2009

Implications of a Falling Trade Deficit

The collapse of world trade is one of the hallmarks of this new era for the world economy. As part of that collapse, U.S. imports have fallen off, translating into lower trade deficits. It’s notable that the trade deficit has dropped from an annualized rate of $800 billion to just over $400 billion. One of the important implications of a falling trade deficit is that foreigners have fewer dollars available to reinvest in the U.S.

As the U.S. trade deficit rose, the investment into the U.S rose as foreigners recycled our trade dollars back into the U.S. Now, with the U.S. trade deficit falling due to the weaker economy and lower oil prices, foreigners have fewer dollars available to invest in the U.S.

Interestingly, foreign investments in the U.S. have fallen even more than the trade deficit, indicating less interest in investing in the U.S. Given the record U.S. budget deficits that need to be financed, falling foreign investment couldn't come at a worse time. It indicates significant pressure on interest rates.

Among the consequences is that U.S. corporations and citizens will increasingly be called on to fund the U.S. government deficit. That means consumers have less to spend on goods and services, further dampening economic growth. And it means that the Federal Reserve will be required to print the money to cover the huge government deficit. This will be extremely inflationary.

The following chart shows the latest data (Dec 15) on the trade balance through October, with the scale on the right inverted so that the worse the trade deficit, the higher the (red) line.

One of the important implications of a falling trade deficit is that foreigners have fewer dollars available to reinvest in the U.S. The left scale and (blue) line shows the amount of foreign purchases of long-term securities of Treasuries, Agencies, Corporate Bonds and Equities over 12 months.

As the U.S. trade deficit rose, the investment into the U.S rose as foreigners recycled our trade dollars back into the U.S. Now, with the U.S. trade deficit falling due to the weaker economy and lower oil prices, foreigners have fewer dollars available to invest in the U.S., 50% fewer dollars as a matter of fact.

Wanting to avoid an ear-popping, wealth-destroying inflation, one would assume that the USG would now be turning its attention to cutting the spending, no matter how politically unpopular that might be. I mean, we elect our politicians to lead, right? And when the going gets tough, the tough get going, right?

Follow the Money

When I casually looked at the headline announcing the passage last week of a new military appropriations bill of well over half a trillion dollars, I thought it was a typo. It wasn’t. We support our troops… with $636 billion dollars. (And as a related aside, the military budget doesn’t include the $100 billion or so annual cost of dealing with veterans.)

The bill passed the House of Representatives with only 34 dissenting votes, against 395 voting in favor. The funding bill is only meant to support the legions for the first eight months of 2010, but as it doesn’t take into account the new Afghanistan splurge, it won’t even go that far.

Of course the U.S. needs a strong military. But it doesn’t need a strong military in over 130 countries, and in wars we shouldn’t be fighting, can’t afford, and can’t win.

For the record, the spending in this one piece of the U.S. fiscal pie is more than the entire GDP of Poland, Indonesia, Belgium, Switzerland, Sweden, Saudi Arabia, Norway, Austria, and Taiwan. In fact, it is more than the annual GDP of all but 17 of the world’s nations.

Why so little opposition to this mind-numbing level of spending? Why, hell, that would be downright un-American! Come election time, your opponent, no matter if from the right or left, would use it to paste you as being a dang coward for failing to “support our troops.”

I saw that with apologies to my readers that have those sentiments, but if you are one of the ardent patriots who fall in line with the pro-war rhetoric, it’s time to wake up. Beggaring your children’s future by sending troops all over the world, where they are mostly not wanted, FYI, is not just wrong… it’s appalling. But I digress.

Dear Reader,

While there are many themes and subthemes one can follow these days, only a handful rank as truly important. The fate of the king of paper, the U.S. dollar, is one of those themes.

Simply, if the dollar can manage to weather the beating it is taking, then the U.S. government (USG) will really have accomplished something. Specifically, it will have successfully used the nation’s long and storied heritage to convince our trading partners that we remain creditworthy.

Alternatively, if the long con stumbles… watch out below.

I already quoted the Reuters story on a senior Chinese banking official who openly stated that the con is unraveling.

Paid Holidays – $154 billion.

The six-month extension in unemployment benefits included in this bill brings the total duration of benefits possible to two and a half years.

Meanwhile, the big oil countries in the Middle East have announced they are going to cooperate in starting a shared currency, the Gulf, quotes the London Telegraph.

REGULATORY SUPERVISION:

House panel approves financial-overhaul legislation
The House Financial Services Committee approved legislation that would give U.S. regulators the power to audit Federal Reserve decisions and create a regulatory council that could wind down large, systemically important financial institutions. The Wall Street Journal (02 Dec.) , Financial Times (tiered subscription model) (03 Dec.) , Securities Industry News (02 Dec.) , Financial Times/Lex (tiered subscription model) (02 Dec.)

House approves sweeping overhaul of financial regulation
The U.S. House of Representatives approved legislation that would result in sweeping changes for the financial-services industry. The bill strips the Federal Reserve of its authority to write consumer-protection laws and allows government audits of its monetary-policy decisions. The bill also establishes the Consumer Financial Protection Agency. The industry has supported many of the initiatives but raised concern about others. CNBC (11 Dec.), The Wall Street Journal (14 Dec.), Financial Times (tiered subscription model) (12 Dec.)

If actually I believed that influential people could be moved by evidence, that they would change their views if events completely refuted their beliefs. Well, not so fast, the House of Representatives, when — with the meltdown caused by a runaway financial system still fresh in our minds, and the mass unemployment that meltdown caused still very much in evidence — every single Republican and 27 Democrats voted against a quite modest effort to rein in Wall Street excesses.

Check out U.S. Senator Jim Bunning as he delivers his statement at the Senate Banking Committee explaining why he will oppose the nomination of Ben Bernanke to serve a second term as Chairman of the Federal Reserve. He basically burns Bernanke at the monetary stake... and his closing comments... made my hair stand on end. This whole video is worth listening to... and watching... and the link is here. (http://www.youtube.com/watch?v=rka9VbPPMys)

The Commodities Futures Trading Commission (CFTC) is currently preparing an overhaul of the way commodities are traded, supposedly in order to make the markets more supply/demand-driven and less susceptible to “manipulation” by speculators.
This notion has a lot of traction in DC, as speculators have been blamed any time markets get out of whack, as during last year’s run-up in oil prices. President Obama is committed to “making sure it doesn’t happen again,”

Obama’s appointee to chair the CFTC, Gary Gensler, has consistently maintained that he wants some very specific changes, most importantly the imposition of strict position limits on those trading commodity futures contracts, including energy and the precious metals. He may get them.

The most potentially explosive developments, though, could come with gold and silver. Long futures contracts in the metals have generally been spread among a large number of market participants. The corresponding short contracts, however (and there must be a short for every long), have been highly concentrated. Just two U.S. banks are presently short more than 123,000 gold contracts (better than 12.3 million ounces).

What if the CFTC declared that henceforth traders would be limited to a few thousand contracts in any given month? (3,000 is the putative Comex limit, though it is not really enforced.) All those tens of thousands of short contracts would have to be unwound.

A forced unwinding of any market position tends to result in a spike in the price of the underlying asset. Higher gold and silver prices are pretty much baked in the cake if the CFTC does what it says it’s going to do.

It's a Reuters piece headlined "House approves sweeping financial reforms"... and the link is here for you to get the skinny on it. (http://www.reuters.com/article/idUSTRE5B90CY20091211)

Report: Ginnie Mae's taxpayer-backed guarantees fuel high-risk lending
A relatively unknown U.S. agency, the Government National Mortgage Association, has for years given taxpayer-backed guarantees to lenders that engaged in risky and often illegal practices. Commonly known as Ginnie Mae, the agency endorsed until last week the loans of Lend America, a company with a rising delinquency rate that permitted an executive convicted of mortgage fraud to continue running the company. Housing officials let Lend America sell more than $1 billion in mortgages in the form of Ginnie Mae-backed securities. The Washington Post (10 Dec.)

Here's something else that will save the U.S. banks for another year. Apparently the FASB [Financial Accounting Standards Board] has stated that banks can delay [for up to one year] the implementation of a new accounting rule that will force the end to a manipulation banks have been using to hide risky assets known as SIVs [Special Investment Vehicles]. There may be up to a trillion dollars of SIVs that are affected.

GOLD:

It's easy to say gold is a bubble. It's up more than 26 cent in the past six months, so it has to be right? Even with gold's pullback from record highs above $1,225 an ounce this month, right?
Wrong. Despite its latest rally, gold still lags behind the gains other assets and indicators have experienced since 1980. The price of something in a bubble tends to zoom ahead of everything. Gold has in the very short term (26%) but it's only catching up to other assets.
.............................................Jan. '80........Dec. '09.......% change
Total U.S. credit market debt*........$4.40..........$52.50..........1,097%
S&P 500...................................111...........1,100...............892%
U.S. money supply*....................$1.50............$8.40...........462%
U.S. GDP*..................................$2.70...........$14.30...........425%
U.S. Consumer Price Index.............78..............215.8............177%
WTI Crude Oil.............................$32.50...........$76.84...........136%
U.S. Producer Price Index.............85.2
Gold - weekly average, per ounce.$738...........$1,196.............105%
*$-trillions (U.S.)
SOURCE: CENTRAL FUND OF CANADA

Yes, demand for bullion-based exchange-traded funds is brisk. They've grown to about $70-billion (U.S.) in market capitalization since the first one was launched about five years ago. But although they've grown quickly, they're still small relative to the 5 trillion in dollars of gold in the world.

If you think the back of the secular bull market in gold has been broken, you might want to think again.

When the bank pays you nothing in interest, gold goes up. And right now, the bank is paying you nothing in interest.

Why does gold go up when interest rates are low? It's simple... That's the simple version. Let's add one little tiny wrinkle to it, so you can see why gold has become irresistible now...

The forecast for inflation in 2010 is around 2%. Yet the Fed is keeping interest rates near zero. So instead of earning nothing in interest at the bank, you're actually LOSING 2% a year to inflation. That's what's REALLY happening – the REAL interest rate at the bank (minus inflation) is NEGATIVE 2%.

2002 to today

The median real interest rate was -0.4%.
Gold returned +18.5% per year.
The real return on the S&P 500 was -3% per year (not including dividends).

With inflation on the horizon, I don’t know how much of the roughly $67 trillion invested in bonds will be looking for a new home, but it’ll be a big chunk. Where will it go, equities, gold? In short, when real rates are negative, gold soars and stocks stink. And when real rates are positive, gold stinks and stocks soar.

And against gold, the US dollar has fallen… about 35%. (Think of it this way… each dollar could purchase 1/778 or 0.001285 ounces of gold last year and now can only purchase 1/1192 or 0.000839 ounces, which reflects a decline in the value of the dollar relative to gold of 34.7%.)

5 More Good reasons for GOLD

1. Investment demand for gold continues to be extraordinarily strong This is especially true with the rising prospects of a Sovereign Debt crisis. First it was Dubai, now Greece, Spain, Italy, Ireland and Portugal are all suspect. Debt problems in a global crisis have the ability to be contagious. And that can destroy investor confidence in the capital markets of such countries, and in the global economy.

2. The specter of future inflation is building. Recall it is the fear of inflation that tends to drive the metal prices higher. When you answer a liquidity crisis with more liquidity, you're bound to create more bubbles.

3. Declining supply – central banks have moved from net sellers to net buyers. This is a significant structural change in the gold market as central banks have been net sellers for two decades. Central banks looking to diversify their reserves in light of the rampant currency debasement have very few options available, and we would argue gold is the most attractive. It is also important to note new mine supply has essentially just been replacing aging mines. Given the long lead time between finding a deposit and actually moving it through to production is on average around 10 years, new mine supply remains largely inelastic. Adding further pressure on the supply side of the equation is the dearth of new discoveries and the increasingly challenging mine development environment.

4. All‐in costs remain high – aging mines are experiencing declining grades, and new projects tend to be of lower quality, requiring higher and higher metal prices

5. Very low/negative real rates – lowers the opportunity cost of holding hard assets. Most major countries (including the U.S.) continue to support a low interest rate environment; we suspect this will be the case for some time to come as increasing rates may derail recoveries.

1. In constant 1980 dollars, gold should be $2,300/oz. today.
2. Gold is appreciating against all currencies.
3. The U.S. needs foreign capital - lots of it - to fund their debt.
4. We have had a record increase in the money supply.
5. A record $2-3 trillion in bailout money.

Protectionism

China, which has the world's largest foreign exchange reserves worth $2.27 trillion, mostly held in U.S. Treasury bonds.

We've already seen evidence of restrictions on global trade and capital flows. Consider China’s currency policy. Even after recent visits in China by U.S. President Obama and European Central Bank President Jean-Claude Trichet to lobby for a stronger Yuan, the Chinese have remained steadfast on keeping their currency weak.

We are now hearing influential voices in China calling for an increase in its reserves of another 159 million troy ounces of gold, roughly twice annual global gold production. At $1,200 gold, that means they’d have to spend $190.8 billion, which, while a lot, is really not all that much compared to the size of their reserves of U.S. dollars ($2.27 trillion).

It's possible for China to buy gold from the IMF in large volumes in pursuit of asset allocation for its foreign reserves, but that will mean further detachment from dollars of which China holds the most. This puts China in a real dilemma.
A team of experts from Beijing and Shanghai set up a task force last year to study the issue of gold reserves, Ji Xiaonan, chairman of a supervisory board for big state-owned companies under China's state assets commission, was quoted as saying.
"We suggested that China's gold reserves should reach 6,000 tonnes in the next 3 to 5 years and perhaps 10,000 tonnes in 8 to 10 years,"

More Central Bank Gold Activity

The big story the other day was the announced purchase of 30 tonnes of gold by Russia's Central bank

Russian Federation updated their website a couple of days early this month. For November, they reported purchasing another 200,000 ounces of gold for their reserves, which now sits at 19.7 million troy ounces. The Russian Central Bank has also said that it would purchase an addition 32 tonnes [960,000 ounces] in December. This purchase won't show up on their website until around January 20th.

QUOTES OF THE MONTH:

Anyone who says he or she cares about the working class in this country should have walked out on the Democratic Party in 1994 with the passage of NAFTA. And it has only been downhill since. If welfare reform, the 1999 Financial Services Modernization Act, which gutted the 1933 Glass-Steagall Act—designed to prevent the kind of banking crisis we are now undergoing—and the craven decision by the Democratic Congress to continue to fund and expand our imperial wars were not enough to make you revolt, how about the refusal to restore habeas corpus, end torture in our offshore penal colonies, abolish George W. Bush’s secrecy laws or halt the warrantless wiretapping and monitoring of American citizens? The imperial projects and the corporate state have not altered under Obama. The state kills as ruthlessly and indiscriminately in Iraq, Afghanistan and Pakistan as it did under Bush. It steals from the U.S. treasury as rapaciously to enrich the corporate elite. It, too, bows before the conservative Israel lobby, refuses to enact serious environmental or health care reform, regulate Wall Street, end our relationship with private mercenary contractors or stop handing obscene sums of money, some $1 trillion a year, to the military and arms industry. Obama is not the problem. We are. - Chris Hedges

Bankers own the earth. Take it away from them, but leave them the power to create money and control credit, and with a flick of a pen they will create enough to buy it back. - Sir Josiah Stamp, former President, Bank of England

“When the nose of the camel is in the tent, the rest of the camel is not far behind.” - Arabian proverb

The U.S. has no way of avoiding a financial Armageddon. - John Williams, shadowstats.com

With just two weeks to go in 2009, the declines since the end of 1999 make the last 10 years the worst calendar decade for stocks going all the way back to the 1820s, when reliable stock-market records began, according to data compiled by Yale University finance professor William Goetzmann.

"I've been condemned by traditional economists who said that printing money is responsible for inflation. Out of the necessity to exist, to ensure my people survive, I had to find myself printing money. I found myself doing extraordinary things that aren't in the textbooks.” - Gideon Gono, the current Governor of the Reserve Bank of Zimbabwe.

Note to readers:

One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, my colleagues, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. I has been said, "When you take stuff from one writer it's plagiarism; but when you take it from many writers, it's research." In reference to my sources this month, they include in no particular order:

Claus Vogt, Doug Casey, Porter Stansberry, Glen O. Kirsch, Steve Sjuggerud, David Galland, Chris Wood, Doug Casey, Brian Rich, Fabrice Taylor, Bob Irish, Bud Conrad, Mike Larsen, Ed Steer, Andrew Gordon, Glen O. Kirsch and Dan Weil, Globe & Mail, CNBC, The Wall Street Journal, Financial Times, Washington Post, Reuters, Security Industry News, Lec, The New York Times, Los Angeles Times, Boston Herald, CNN Money, Detroit News, Bloomberg, Miami Herald, Google/Associated Press, London Telegraph, and the Economist.

December - 2009 - Economic Brief

2009-12-02T16:32:00.000-08:00

REVIEW:

"See no evil, hear no evil, speak no evil"

The Dow has now retraced 67% of its bear market decline.
Suddenly and miraculously, the same economists who told you this crisis could never happen are now telling you that this crisis is "over." And the same government officials who scoffed at the notion of giant financial failures are claiming they have the final solution to those failures.

But the derivatives I warned you about are not gone. They are still there. Nor are the bad debts on the books of major banks. And most important, the government policies which created the crisis in the first place have not been modified or reduced, in fact, they have actually made the crisis worse.

They have now transformed the Wall Street debt crisis into the Washington debt crisis. They have transformed a crisis that was bankrupting individual institutions into a crisis that could threaten to bankrupt sovereign governments. Worst of all, they have converted a crisis of debt into a crisis of currency.

This is not just more of the same trend that we have witnessed over the decades. It's a massive, revolutionary change affecting the entire structure of the U.S. economy.

The trend going into 2010 will be for interest rates to stay down and liquidity of the money supply up. So far, as of this month, 120 banks have failed this year. There is a 10.2% unemployment, that represents 27 million unemployed, worse than the Great Depression in terms of families affected. Additionally, the collapse of the US dollar relative to the Euro and Yen is close to all time historic lows now and it will breakdown further with continued monetization by the Fed. On top of all this, Americans are insecure, if they haven’t lost their job, they are worried they might. They don’t have access to credit, energy bills are rising and Consumer Prices in US Increased 0.3% in October.

DEBT:

$12,031,299,186,290.07. That's more than $12 TRILLION in case you have trouble grasping a number that big. In just the past decade, it's up more than 111 percent.

We're running ever-larger budget deficits, including $1.42 trillion in fiscal 2009 alone.

The interest cost alone on our debt last year was $202 billion. In plain English, we're going to be dedicating a larger and larger share of the U.S. budget just to pay interest on our debt. Forget about defense, health care, Social Security or anything else.

China owned $799 billion of our Treasury debt as of September. That's up from $618 billion a year earlier and $468 billion the year before that. About 61 percent of the Treasuries traded in the marketplace, as of mid-2008, were in foreign hands. And now, China has surpassed Japan as the largest foreign owner. That means they control the purse strings. They don't even have to dump their existing bond horde to send prices plunging and interest rates surging. They can just step back and buy fewer bonds at auction! They used to say, it’s our dollar, your problem, but now it’s their dollar and our problem, hmm.

Bottom line: We're in hock as a nation like never before. Neither the administration nor Congress has any plan to change that fact. And both the actual and hidden costs of our debt are rising every day. We should all be concerned, and anyone who tells you otherwise is, in my view, woefully misguided.

Now, don’t just look at that chart – think about it.

Warren Buffett:

We cannot keep running fiscal deficits like we are currently without having a lot of consequences over time... If you are running a $1.4 trillion deficit, even if you are exporting $400 billion of I.O.U.s in effect to the rest of the world, that leaves another trillion. And you know, the domestic savers are not going to come up with a trillion...

Actually, Warren Buffet is mistaken, the percentage of foreign ownership of the US Bond market is now up to 61%, or $ 854 billion, almost double what it was at the beginning of the century, 9 years ago.

These levels of deficit spending are not just off the map, they are off the planet. And you know as well as I, as dire as that level of spending is, it is very likely understated. That's because it fails to take into account a multitude of off-balance-sheet obligations.

And include projections that assume very low levels of inflation, which is to say no significant increase in interest rates – i.e., no significant increase in the cost to the government of carrying all its many debts.

Economists say U.S. GDP is miscalculated
The calculation of U.S. GDP is not correct, a group of economists said. Imports priced at their point of origin at a certain amount are being accounted for at U.S. prices when GDP is calculated. The problem appears to have swelled GDP reporting, the economists said. While last quarter's GDP was reported at an annual growth rate of 3.5%, the number was actually 3.3%, they said. The New York Times (08 Nov.)

Can a nation really buy itself a recovery by borrowing trillions upon trillions? No way. And that’s the real story. As I mentioned in my last post, debt as a percentage of GDP is close to 40%, that three times more as a percentage of GDP than during the last Great Depression.

Geithner fails to spur bank lending in U.S.
Commercial and industrial lending in the U.S. has dropped 17% since October 2008, according to the Federal Reserve. Efforts by Treasury Secretary Timothy Geithner to incite banks to lend more seem to have had little effect. Analysts see this as a significant threat to economic growth. The lack of bank lending is "a serious problem," said Jan Hatzius, chief U.S. economist at Goldman Sachs. "This could keep growth significantly weaker than the consensus view in 2010 and is likely to keep the Federal Reserve at a near-zero-percent funds rate all next year." Bloomberg (08 Nov.)

JOBS:

Consider the Obama administration’s claim that the 640,000 jobs were created from $159 billion of stimulus spending (a cost of almost $250,000 per job, most of which are temporary, and many last for just weeks). But where did that $159 billion come from?

It came from you and me… the taxpayers. What would we have used that $159 billion for had it not been taken from us?
If that $159 billion had been left in our hands, we would have spent and allocated it on things that are the highest priority for us, not likely the government’s list of highest priorities.

Obama: U.S. needs "bold, innovative action" to halt job losses
Meeting with business leaders and members of his Economic Recovery Advisory Board, U.S. President Barack Obama said the government and the private sector must work together to stop rising unemployment. He said "bold, innovative action" is needed. "Having brought the economy back from the brink, the question is how are we going to make sure that people are getting back to work and able to support their families," Obama said. "It's not going to happen overnight, but we will not rest until we are succeeding in generating the jobs this economy needs." Los Angeles Times (03 Nov.) , USA TODAY/The Oval blog (02 Nov.)

Business bankruptcies rise 7% in U.S.
Bankruptcy filings by U.S. businesses increased 7% in October, according to researcher Automated Access to Court Electronic Records. Last month, 7,771 businesses filed for bankruptcy, compared with 7,271 in September. The real estate and retail sectors suffered the most, said Jack Williams, a bankruptcy law professor at Georgia State University. Almost any financial challenge could cause a business to file for bankruptcy in these difficult times, Williams said. The Wall Street Journal (03 Nov.)

The jobs report was horrific, with the 'official' unemployment rate hitting a new high of 10.2%. The 'real' unemployment rate, when all the B.S. is taken out, shows 17.5%. Normally an unemployment report as negative as that would have marked a great correction to the Dow-Jones Industrial Average, but in these days of managed markets, no one should be surprised that the Dow finished in positive territory...
Yes, it’s true, U.S. employers cut 190,000 jobs in October.

If you want to see the growing unemployment situation with your own eyes in your area, visit Whitney Tilson at T2 Partners’ interactive graphic.

(http://cohort11.americanobserver.net/latoyaegwuekwe/multimediafinal.html)

It is called “The Geography of Recession” although it should be called “The Geography of Depression” which reminds me of one of Ronald Reagan’s quips, “Recession is when your neighbor looses his job. Depression is when you lose yours.”

BONDS:

Higher than normal inflation ahead

The fact is, buying 10-year Treasuries now makes you only 1.46% after inflation. That’s before taxes. After taxes, your returns barely break above zero.

The U.S. Treasury Department said it plans to sell a record $81 billion in its quarterly auctions of long-term debt next week and replaced its inflation-protected 20-year bond with a reintroduced 30-year security." By choosing to replace its 30-year TIPS with fixed rate, 20-year notes the Treasury is telling everyone that even they believe the US will have higher than normal inflation.

Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that's not counting any additional deficit spending, which is estimated to be around $1.5 trillion.

Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That's an amount equal to nearly 30% of our entire GDP. And we're the world's biggest economy. Where will the money come from?

Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we're still going to come up nearly $3 trillion short. That's an annual funding requirement equal to roughly 40% of GDP.

It is ironic, the bond market, which is sometimes considered competition for equities, is actually one of the important factor boosting the major indices. In this liquidity-driven rally, the low interest rates provided by central banks are providing cover for massive corporate capital-raising. A record $2.7 trillion of new corporate bonds have been issued this year with all this “new” money floating around is it any wonder why stocks are up: no one seems to pay any attention to the debt anymore.

BANKS:

U.S. bank lending posts biggest decline in 25 years
Banks in the U.S. cut back the amount of money loaned to customers by $210.4 billion in the third quarter, the Federal Deposit Insurance Corp. said. The 2.8% reduction marks the sharpest drop since at least 1984. The biggest banks, which received billions of dollars in taxpayer bailouts, accounted for a disproportionately large part of the drop. "We need to see banks making more loans to their business customers," said Sheila Bair, the FDIC's chairwoman. The Washington Post (25 Nov.)
Sure, lots of people realize the government is propping up the banks with their repeated bailouts. But most folks don't understand the real way the government is saving the banks. It's not the shares the feds bought (and paid too much for). It's the whole system of paper money.

The government is deliberately helping the banks by keeping short-term interest rates super low, so the banks' funding costs almost disappear. Then, by running a huge budget deficit and spending record amounts of money on domestic programs, the government insures inflation (and longer-term rates) will remain high and the banks make money on the spread between short-term rates and long-term rates. So, this is really how it is done, it is not so much the bailout directly, but through the environment of inflation coupled with government’s control of short-term lending rates, manipulated artificially to be lower to advantage the banks so they can pay back their loans among other things with cheaper money.

Again, the problem is the bailout is with your money, not theirs. According to a Wall Street Journal analysis of regulatory filings, more than 2,600 banks and thrifts have commercial real estate loan portfolios that exceed 300% of total risk-based capital, the capital used as a cushion to cover losses. Regulators consider the 300% level a red flag for the banks’ health.

Meanwhile, despite the government’s best efforts the total number of banks closed by regulators this year to 115, the latest round of 9 closing represented, together, 153 offices. The problem is that the FDIC is out of money. The FDIC says this bailout will cost $2.5 billion. I noted a week later over at the FDIC website that another five banks have been closed. If you want to see if yours is on the list, click here.

Audit: Taxpayer bailout possible after FHA reserves plunge
Cash reserves maintained by the U.S. Federal Housing Administration are substantially less than the level required by law, an independent audit found. In the worst-case scenario, the agency's reserves could be wiped out, forcing a taxpayer bailout to cover its obligations, according to the audit by Integrated Financial Engineering. CNBC (12 Nov.) , The Washington Post (13 Nov.) , The New York Times (12 Nov.)

Rather than forcing banks to accept losses the FDIC allows banks to carry underwater commercial loans at pre-crash values. A commercial real estate crash would be so untidy, it mustn’t be allowed. Therefore, with a wave of its magical wand, the FDIC is allowing banks to carry loans on their books at bubble valuations, even if the underlying properties have fallen by 40% or more. Call it extend and pretend, or fraudulent accounting… the net result is the same: zombie banks that won’t lend because they know that, in time, the piper must be paid. Banks can do their best to disguise their books, but there’s no hiding from the grim future for commercial real estate.

The Fed has expanded its cash and reserves to the banks, so they can buy Treasury Bills to pay for our national deficit crisis. Since 2008. the U.S. monetary base (coins, paper money, and central bank reserves) has swelled from about $800 billion to $1.7 trillion.

Banks increase purchases of U.S. Treasury bonds to bailout the government
Major banks, including Bank of America and Capital One Financial, increased U.S. Treasury bond purchases 26% to $125 billion in the 12 months through June, the Federal Reserve said. Combined purchases by government-owned companies rose 18% to $1.4 trillion in the year through mid-October. "Banks will continue to purchase Treasuries for the next several quarters, at least until the end of 2010, as they continue to be reasonably risk averse," said Ira Jersey, an interest rate strategist at RBC Capital Markets. Bloomberg (02 Nov.)

REAL ESTATE:

Behind us is the subprime crisis of 2007 and 2008. In front of us, an equally big is the option-ARM commercial real estate crisis, a two- to three-year slog that lies just around the next bend and could continue through 2012.

Right now, 1 in 4 US homes (23%) have lost all their equity, and we're sitting in the eye of this mortgage hurricane. When we hit the opposite wall early next year, the storm will become deadly all over again.

One out of every six FHA mortgages was late by at least one payment in the third quarter. Foreclosures have reached the highest level in three decades. Almost more concerning, prime fixed-rate mortgages – the good stuff – has seen delinquencies rise to 5.8% and foreclosures to 1.95%, another three-decade high.

However, housing prices continue to stabilize, but at a low level and prices are still going down generally. Mortgage applications for new home purchases hit a 12-year low in the middle of November (down 22% in the past month).
Mortgages in trouble reach 14% in U.S.

About 14% of U.S. homeowners were either delinquent on their mortgage or in some stage of foreclosure during the third quarter, the Mortgage Bankers Association said. That is the highest rate since the group started collecting the data in 1972. Borrowers usually considered creditworthy and people with loans insured by the Federal Housing Administration are becoming a bigger proportion of the 7.4 million households with mortgage problems, the association said. The Washington Post (20 Nov.) , Los Angeles Times (20 Nov.)

Dennis Lockhart, president of the Atlanta Fed, warned that non-performing commercial real estate loans will be affecting smaller banks. Consequently, these troubled banks will not be making loans to small businesses, thereby crimping the recovery.

U.S. foreclosure filings slip 3% from September to October.
October saw 332,292 U.S. homes seized by lenders or listed in default or auction documents, data provider RealtyTrac said. It was the eighth consecutive month that the number was more than 300,000, but there was a 3% decline from September. "The fundamental forces driving foreclosure activity in this housing downturn -- high-risk mortgages, negative equity and unemployment -- continue to loom over any nascent recovery," said James Saccacio, RealtyTrac's CEO. "We continued to see foreclosure activity levels that are substantially higher than a year ago in most states." Bloomberg (12 Nov.)

Mortgages in trouble reach 14% in U.S.
About 14% of U.S. homeowners were either delinquent on their mortgage or in some stage of foreclosure during the third quarter, the Mortgage Bankers Association said. That is the highest rate since the group started collecting the data in 1972. Borrowers usually considered creditworthy and people with loans insured by the Federal Housing Administration are becoming a bigger proportion of the 7.4 million households with mortgage problems, the association said. The Washington Post (20 Nov.) , Los Angeles Times (20 Nov.)

Housing starts hit 6-month low in U.S.
House construction plummeted 6.8% in October, falling to an annual rate of 476,000 units and marking the weakest month since May. Building permits, an indicator of future construction volume, dropped 4%. In the broader economy, the Consumer Price Index increased 0.3% last month, the U.S. Labor Department said. Vehicle prices were the biggest factor, jumping the most in more than 28 years. Analysts attributed the increase to the end of "Cash for Clunkers." Reuters (18 Nov.)

POLITICS and TAXES:

The administration knows that it can’t keep running a massive deficit without taking a big political hit come the mid-term elections next November, but likewise, they won’t cut the spending out of fear that it will result in a crisis economy ahead of those same elections.

Watching the government rack up debts that will be impossible to repay while narrowing the tax base (at least 50% of Americans pay zero federal income tax) at the same time is very scary. Not only has the government gone mad with spending and corruption, but it also expects about 10% of the population to pay for essentially all the costs. The math simply doesn't add up: 10% of the population can't (and won't) pay for all of the costs of a “democratic” federal government, a government running $2 trillion deficits, taking over health care, owning all the banks... and by extension the mortgages on 90% of all homes.

October's $176.4B deficit in U.S. tops forecast, sets record
The U.S. government's budget deficit set a record for October, with $176.4 billion marking the 13th consecutive month of monthly deficit. The 13-month run also was a record. October's deficit exceeded the $150 billion shortfall expected by economists. The Washington Post/The Associated Press (13 Nov.)

USX DOLLARS:

Pro-Western Turkey announced last week that it’s no longer using dollars for its commodity trading with Iran and China. From now on, it’ll be using national currencies. The amount of money affected by this move – $65 billion – isn’t chump change. But that, in itself, is not going to bring down the dollar. However, notice the trend.

IMF sells 200 tonnes of gold to RBI. Notwithstanding the Indian population's interest in gold, the economic authorities there have traditionally been rather disdainful of the metal. For many years it has been clear that Washington has been strongly opposed to Central Bank interest in gold, out of jealousy for the US$. That India feels able to defy American preferences in this way is an ominous sign for the dollar hegemony."

Consider India the vanguard of central banks more aggressively diversifying reserves away from U.S. assets.

India’s got game, and China seems the overwhelming favorite to get more chunks of the gold the IMF is offloading to shore up its finances, but a question no one can answer yet is whether India will touch off a bidding war among central banks. Not that India cares all that much at this point as it leapfrogs past Russia to become the ninth-biggest government holder of gold.

Now, consider a Bidding War:

Traders are now betting on who will announce the next big purchase. Will it be China looking to employ its $2.3 trillion of reserves? What about Japan, which has the second-biggest pile of currency? Or Gulf states working to end dollar hegemony? And let’s not forget about Brazil and South Korea.
Oh, this just in, following Sri Lanka, the Central Bank of Mauritius has bought 2 tones of gold from the IMF. It seems to be an Indian sphere of influence phenomenon and now:

Gulf council considers changing currency peg from U.S. dollar
Members of the Gulf Cooperation Council forming a currency for the region will reconsider their decision to peg the currency to the U.S. dollar, Kuwaiti Foreign Minister Mohammed Sabah Al-Salem Al-Sabah told the country's parliament. "It is not necessary for the GCC currency to be linked to a certain currency," he said. "It could be one currency or a basket of currencies." If the dollar stays low for a prolonged period, Kuwait's argument against the peg could find support among other Persian Gulf states, analysts said. Maktoob/Reuters (17 Nov.)

Yes, oil producing nations are demanding the US dollar be replaced.

Also, Indonesia announced that it’s considering its first sale of euro-denominated bonds next year, South Korea too.

Dallas Fed President, Richard Fisher, said that a goal of the Fed is to maintain the purchasing power of the US dollar. To quantify the success of this or lack thereof, one should look at the rate of increase in the CPI to measure how much a like basket of goods cost over different periods of time. Using Bloomberg data going back to 1920(as far back as it goes and the Federal Reserve was established in 1913), the purchasing power of the US$ has fallen 91% since 1920. Since 1971 when the US went off the gold standard, the US$ has lost 81% of its value. Greenspan took office in 1987 and the US$ has since lost 47% of its purchasing power. Bernanke followed Greenspan in Feb ‘06 and since then the US$ has lost 8.3% of its value. This report card of the Fed’s ability to achieve its key goal speaks for itself.

What is the Federal Reserve System?

I came across this amazing chart by JP Koning called “A Visual History of the Federal Reserve System” that I must share with you. The free digital PDF version of the chart is too big to post, but you can download it here. (http://financialgraphart.com/history_of_fed_free.pdf)

This may be why:
•Hong Kong has asked London to return its gold.
•Middle East countries, too, want to get their gold back from London.
•Germany wants the U.S. to return its gold.
•And large money managers are demanding physical gold bullion (as opposed to
paper contracts).

REGULATORY SUPERVISION:

14,700-plus taxpayers use IRS program to declare offshore accounts
More than 14,700 U.S. taxpayers took advantage of amnesty from the Internal Revenue Service to report offshore bank accounts, said IRS Commissioner Doug Shulman. In most years, about 100 people come forward. "To put it simply, this is a historic milestone for the nation's hardworking taxpayers," Shulman said. Los Angeles Times/The Associated Press (17 Nov.)

Report: Problems in municipal bonds cost taxpayers billions
Corruption by local governments and their consultants, kickbacks from banks, a lack of transparency, and mistakes related to municipal bond finance cost U.S. taxpayers as much as $6 billion a year, Bloomberg News concluded in an investigation. Transactions mentioned in a nine-count indictment against CDR Financial Products, its founder and two employees, including wire fraud, obstruction of federal authorities and conspiracy, are only part of the picture. Federal and state laws leave a large portion of the $2.8 trillion municipal bond market beyond the reach of regulation or supervision, Bloomberg found. Bloomberg (02 Nov.)

It is already understood that in 2011, all sorts of bad things are scheduled to occur for income earners. The federal tax rate will bump up from 35% to 39.6%, and long-term capital gains, now at 15%, will be boosted to as much as 28%. Therefore you might want to consider selling most of your investments that are now showing long-term capital gains.

Audit the Fed?

The bill to audit the Fed, with 308 co-sponsors, has been stripped of provisions that would remove Fed exemptions from audits. Mel Watt, a Democrat from North Carolina, has eliminated "just about everything" while preparing the legislation for formal consideration. Watt is chairman of the panel's domestic monetary policy and technology subcommittee. Watt's district includes Charlotte, N.C... headquarters of Bank of America. Well, golly gee! What a surprise!

The problem is you cannot support the world's reserve currency when you are the world's largest debtor, when you plan to finance annual deficits exceeding $2 trillion with progressive income taxes and money printing. Our economy is a charade. And when it falls apart, the consequences will be devastating.

The FDIC, Federal Reserve, and Office of Thrift Supervision just released new guidelines for how banks deal with troubled commercial real estate loans. And get this: "Under the guidelines, loans to creditworthy borrowers that have been restructured and are current, won't be classified as high risk by regulators solely because the collateral backing them has declined to an amount less than the loan balance." Yes, you read that correctly. Banks won’t have to show losses “solely” because the collateral has fallen in value below the loan.

FHA delays release of independent audit
The U.S. Federal Housing Administration delayed releasing an audit by Integrated Financial Engineering. The audit was scheduled for release Wednesday, but the FHA cited problems with the economic modeling used. There is concern about whether the FHA might need more funding because its loan volume has sharply increased and the number of defaults it must cover has skyrocketed. The Washington Post (05 Nov.)

GOLD:

The Simplest Reason Gold Will Soar

1)
When the bank pays you nothing in interest, gold goes up. And right now, the bank is paying you nothing in interest.

The forecast for inflation in 2010 is around 2%. Yet the Fed is keeping interest rates near zero. So instead of earning nothing in interest at the bank, you're actually LOSING 2% a year to inflation. That's what's REALLY happening – the REAL interest rate at the bank (minus inflation) is NEGATIVE 2%.

2)
Banks, funds, insurance companies, governments, and individuals all over the world hold $200 trillion worth of financial assets. Less than half-a-percent of that is in gold (5 trillion). For investors over the world to increase that to just 1.25%, then they would buy $2.5 trillion more gold from a total gold market value of 5 trillion. And this demand has already started.
Case in point: BlackRock steps up and goes on the record as stating that they see central banks being net buyers of gold, as they diversify out of the dollar.
Here’s a quote:

“Central banks will be net buyers of gold this year as they diversify away from the U.S. dollar, marking a reversal of a decades-old trend.”

Another source says that BlackRock is doing more than just talking gold, but has a total of $4.655 billion invested in gold shares.

Do the math. Comparing the size of the gold shares market to the size of their portfolio, the 0.3% of their assets said to be invested in gold shares comes to something like 1 to 2% of the gold share market so investors are on their way towards increasing their percentage of wealth in gold assets.

John Paulson, the most successful money manager of 2008, has made a $4.3 billion bet on gold and gold stocks too this year.

Now consider this, Sovereign Wealth Funds which amount to government pension plans represent 3 trillion dollars in US currencies and they are moving to a position in gold as they hedge against inflation and diversify away from US dollar risk... Do the math, see the demand.

If Sovereign Wealth Funds diversify 1% into gold, then that represents another 30 billion in demand for gold in a gold market with a 5 trillion dollar value, representing all the gold mined in this world.

3)
What's the only investment that's gone up for the past eight years?

The answer is gold.

Gold is only approaching the halfway mark to $2,300 an ounce, which would be its 1980high when adjusted for inflation.

While the dollar is likely to bounce at some point, making gold correct, the long-term fate of the dollar has already dried in cement. If the dollar were simply to return to its March 2008 low of 71.30 next year - a 5% drop from current levels - this would imply a rise in gold of 23.5% and a price of about $1,437 an ounce.

The long-term scenario is more dramatic. If you believe the dollar will lose half its value from current levels, this would imply a gold price around $2,735.

Gold price hits record high after IMF sells to India
The price of gold surged to a record high of $1,087 per ounce Tuesday after the International Monetary Fund sold 200 tonnes to India's central bank. The $6.7 billion sold is about half of the gold the IMF wants to sell to increase its finances. The IMF is satisfied with proceeds of the sale, the fund said, and price changes on the market had to be expected. Business Standard (India) (04 Nov.)

4)
In terms of gold options, a central bank and investment bank equilibrium, higher volume was seen in early July... and, of course, open interest is well under the peak, [which is] just short of 600,000 [contracts] seen in January 2008. So, in this sense, gold is not yet blowing off steam.

5)
This gold revival has a clear geographic profile, too. Expect Asian central banks that took the whole “trust-the- Federal-Reserve-to-protect-the-dollar” hype too literally will be especially avid buyers.

You see, the gold price is not only making headway in US dollar terms, but also in most major (and minor) currencies as illustrated by the table and graph below.

Appeal of gold broadens as U.S. dollar weakens
The appeal of investing in gold is growing as the U.S. dollar weakens, analysts said. Investors bid up the price Friday to a record level, more than $1,100 per ounce, as investors fear economic conditions will worsen. "It's a structural shift we're seeing on the investing side, from Asian central banks right down to individual investors buying ingots and coins," said Suki Cooper, a strategist for precious metals at Barclays Capital. The New York Times (07 Nov.)

Gold closes in on $1,200 as falling dollar fuels rally
Investors looking for a safe refuge from the falling dollar are driving demand for gold, pushing it to a third record high this week. The rally accelerated on news that Sri Lanka had joined India, Mauritius and Russia in making major gold purchases. The International Monetary Fund said it sold Sri Lanka 10 metric tons for $375 million. "It's a fever," said Jonathan Barratt, an analyst at Commodity Broking Services. "The dollar index has broken through a massive support. That's only going to add weight to the gold and commodity rally." Bloomberg (26 Nov.)

6)
The entire rally in the DJIA from 2003 to the peak in 2008 was actually a continuous decline when priced in gold... Even the super-rally in stocks over the last six months is nothing more than a very weak bounce off the bottom. From a peak of nearly 42 ounces of gold to buy a share of the DJIA earlier this decade, we made it down to a low of almost seven ounces in March 2009. That is a decline in the "value" of the DJIA of 83%.

In real terms, a few years ago (summer of 2005), you would have needed 550 ounces of gold to buy an average house. Today, you need more like 150. Dow Is Down 83% in Terms of Gold.

But there's a much better and more accurate way to view the markets.

The S&P 500, but measured in gold, rather than U.S. dollars. What this shows is the value of stocks compared to gold. Gold is a much better standard of value than the U.S. dollar because it can't be printed or manipulated as easily as the U.S. dollar.

What the S&P relative to gold makes clear is how cheap stocks have really become – something you can't see on off regular S&P 500 charts because of the effects of inflation.

QUOTES OF THE MONTH:

“The dramatic increase in JPMorgan’s short position in the October Bank Participation Report dispels any notion that they are not controlling the price of silver. Without that short selling, the price would have been much higher. The US is a nation governed by the rule of law. It is perhaps our greatest quality. That means no one is above the law; not JPMorgan, not the COMEX, not the US Government itself. Whoever is responsible for the maintenance of this concentrated short position is undermining the best interests of our country.” - Ted Butler

“Furthermore, we have directly addressed exactly none of the actual causes of the crisis – our bloated and omnipotent banking sector, the ever experimenting Federal Reserve and regulation.” – From the Pragmatic Capitalist

Apparently, Warren Buffet was asked the secret to a successful life. He answered:

• Find work you love to do
• Share your life with the right person

“Nearly every article of the Communist Manifesto has been adopted by the government of the United States...” – Porter Stansberry

“A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship. The average age of the world’s greatest civilizations from the beginning of history, has been about 200 years.” - In 1787, Alexander Tyler, a Scottish history professor at the University of Edinburgh, wrote the above about the fall of the Athenian Republic.

"your dollar will be worth just as much tomorrow as today"... - President Nixon promises the dollar won't be devalued, you can see the video here.
(http://www.youtube.com/watch?v=iRzr1QU6K1o)

"It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world". – Thomas Jefferson

Note to readers:
One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, my colleagues, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. I has been said, "When you take stuff from one writer it's plagiarism; but when you take it from many writers, it's research." In reference to my sources this month, they include in no particular order:

Chris Wood, Bud Conrad, Andrew Gordon, Ed Steer, Rusty McDougal, Ed Steer, Doug Casey, Martin Weiss, William Pesek, Brian Hunt, Ted Butler, Steve Sjuggerud, David Galland, Porter Stansberry, Bloomberg, New York Times, Business Standard (India), Washington Post, Los Angeles Times, Associated Press, Maktoob, Reuters, CNBC, Wall Street Journal, USA Today, and the Oval Blog.

November - 2009 Economic Brief

2009-11-01T14:38:00.000-08:00

Perspectives:
The Bureau of Economic Analysis (BEA) released the advance GDP numbers for 3Q09, and they showed the economy grew at an estimated annual rate of 3.5%.

• Cash for Clunkers program added 1.66 percentage points to the Q3 change in real GDP.

• The change in non-farm inventories added 0.91 percentage points to the third-quarter change in real GDP and reflects inventory replenishing after the last three consecutive quarters saw very low restocking of inventory.

Just for fun, let’s see what the number would have been without these extraordinary events. Reducing the 3.5% advance GDP number by the approximately 1.47% artificial boost from the Clunkers scheme (1.66% - 0.19%), and 0.66% for inventory build-up (third-quarter trend is roughly 0.25%), gives us a rounded figure of 1.4%.

But wait, there’s more... the average revision from the advance GDP (what was just reported) to the final (what will be reported in two months) is ±1.3%. So the “un-juiced” number we just calculated is almost within the margin for error.

Now for the really bad news in the GDP: Real disposable personal income decreased 3.4%.

One guess not subject to error is that 4Q09 GDP, unless Washington rolls out some other spending-inducing programs, is almost certain to be far lower.

Why gold?

Since 2003, the U.S. dollar has lost a whopping 25 % of its value relative to a basket of major world currencies — but gold has more than TRIPLED, so today's 10,000 Dow is, in actual fact, worth 7,500.

"Plus ça change, plus c'est la même chose."

Nobody really knows how much gold there is, but the most reasonable estimates are something like six to eight billion ounces. Out of this, the U.S. government reports that it has 265 million ounces of gold in its treasury.

If we divide the money supply by the number of ounces the U.S. could back its paper with (and nobody, including the Federal Reserve, actually knows how much money they have floating around out there... more on the audit later, think Ron Paul).

Let’s estimate that M0 in the U.S., the narrowest measure of money supply that consists of just notes and coins, amounts to one trillion. So, 265 million into seven trillion gives you about $26,420 dollars per ounce of gold.

Now, if we add in the total obligations of the U.S. government, which it will either need to print more money to meet, or it will have to default on – that’s about 100 trillion. If those dollars are printed, that would give us $377,430 per ounce. The same ratio for M1 would give you about $6,226 per ounce and M2 would give you $31,320per ounce.

All of these numbers are far, far above the current level of roughly $1,000 per ounce.

The mainstream headlines will tell you that stocks – as measured by the S&P 500 – are up 18% this year. But gold is up 23% in the same time. So in terms of real wealth, stocks have actually decreased this year.

Dollars are flooding the market, but they're worth less and less.

Why do the media conceal and manipulate the facts?

The mainstream media shows a clear bias to report good news about the economy. And when there is no good news to report? They find a glimmer of improvement and put it in the headline… even when the rest of the article shows nothing but deterioration.

So what is their motivation?

The media is motivated to appease their advertisers, most of which depend on you continuing to spend money and keeping your investments in the market. And don’t forget, the media are also tools of their owners. That’s why you didn’t hear CNBC criticize General Electric (their parent company) for having to go hat in hand to the government for a $140 billion bailout. Finally, it can’t be ignored that the media is giving the new administration a pass, trying to make it appear that the stimulus and bailouts are working.

Over the last 10 years, while the dollar has lost 36 percent of its value, have you seen or heard Washington do anything to prevent the dollar's decline? From the Roman times to the modern day, inflating away debt problems by devaluing currencies has been part and parcel of every government on the planet. The U.S. — whether led by a Democrat or a Republican — is no different.

Washington's top priority is clearly to let the U.S. dollar fall in value, even if it ultimately means it will be replaced by a new world reserve currency. Their hidden rationale: It will inflate away the mountains of debts in this country by artificially raising asset prices.

In the first half of this year, the Treasury has stepped up its pace of borrowing to annual rates of $1.4 trillion in the first quarter and $1.9 trillion in the second quarter. That's 3.5 times and six times more than last year's pace, respectively.

Remember, the dollar is an abstraction representing a debt owed by a bankrupt government. As such, it has an intrinsic value of zero. Once it becomes obvious that the emperor has no clothes, we could see a serious loss of confidence that feeds back on itself.

There have been 28 episodes of hyperinflation of national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz (Professor Emeritus of Economics in the Center for Economics and Business (WWZ) at the University of Basel, Switzerland) has spent his career examining the intertwined worlds of politics and economics with special attention given to money. His conclusion: The tipping point occurs when a government's deficit exceeds 40% of its expenditures.

Guess what? The U.S. will hit the 40% mark in 2009.

What to do?

Right now, $1,000 invested in a 3-month Treasury bill yields a meager $1.20 in yearly interest. At that rate, just to match the 5 percent interest you could have earned on T-bills in early 2007, you'd have to leave your money sitting there for 42 years! What’s your tipping point? if your entering retirement like the boomers, you had better keep working.

U.S. savers are obviously getting shafted.

All told, that means that each and every household in America is now indirectly responsible for more than 1 MILLION DOLLARS in government debts and obligations. And that assumes no new government spending, no new social programs, no new wars, no new economic disasters or bailouts. Worse, it assumes no new deficits in the meantime!

Put another way, even if the government could somehow pay off that debt at the rate of $100 million PER DAY, it would take 3,446 years before the total government debts and obligations are paid off.

Think Debt:

Good news:
If government spends more – even if inefficiently – output goes up. In the last 60 years, the share of government output in GDP has increased from 21.4 percent to 38.6 percent in the US.

Dollar's slide lifts U.S. trade balance
The dollar's decline against other major currencies brought some good news with it in August. The U.S. trade deficit narrowed from $31.9 billion to $30.7 billion as imports declined and exports grew, the Commerce Department said. Los Angeles Times/The Washington Post (10 Oct.)

Bad news:

OK, Let’s talk about the debt problem again:

If you consider all of the structural problems in the U.S. economy, there has not been a lot of progress toward getting things back on track. The root causes of what created the near debilitating financial and economic crisis still remain:

Banks are still saddled with toxic assets,

Bank failures stack up: Now 106 for 2009

- Housing prices are still 30 percent lower,

- Foreclosures are still hitting new record levels,(foreclosures rose 44% this past month alone).

- Credit is still tight and demand for credit is still contracting sharply,

And now...

The budget deficit has ballooned, $1.58 trillion in 2009

And debt levels around the world have climbed.

The United States government is saddled with ...
• An officially recognized national debt of $11.8 trillion,
• Unfunded national obligations of $104 trillion!
• Another $9 trillion in cumulative deficits over the next ten years.
• Plus another trillion dollars for health care reform, no matter what bill finally makes it through Congress.

Grand total: $125.8 TRILLION of public debts!

To understand what's driving their approach to policymaking you have to see that their underlying principle is this: They are more afraid of a relapse in the economy than any big outbreak in inflation.

The Fed won't raise rates until unemployment starts dropping notably. St. Louis Fed President James Bullard went so far as to say that a falling unemployment rate was a "prerequisite" to boosting interest rates. His reasoning, huge excess capacity and additional job losses mean demand falls on its own. If you increase interest rates too to protect the dollar you risk more job loses and unhappy voters. And thus, we continue in the vicious cycle.

The problem with unemployment as an indicator is that unemployment is a lagging indicator. And inflation will get its toe hold before any shift in unemployment numbers, meanwhile consumers are hunkering down on their spending and saving rates, cost of living is going up, and banks are not making any new loans to business or consumers.

Overall unemployment rose to 9.8%, with the unemployment rate for men hitting a new post-depression high. The economy shed another 260,000 jobs in September and the previous figure for jobs lost in the recession was revised up by more than 800,000.

The banks aren’t buying into the phony recovery. Lending has fallen for five straight months

Out of 100 corporate bonds issued this year so far, 97 are stashing it away. Companies aren’t doing spending either, save for non-farm inventory relennishment after going "dry" for the previous two quarters.

In fact, Earnings season is now upon us and we expect it to be positive. Companies have had 3-4 quarters to make emergency adjustments to their business models, reduce capital expenditures, refinance debt at lower rates, cull workers, roll back compensation, pressure suppliers, improve productivity, jettison marginal operations and refocus on higher margin opportunities, like the suck-back before a tsunami wave.

We suspect those are some of the main reasons companies are "beating the Street" at this time; it is not due to improving end user demand.

Capacity now sits at 63%... and falling to cheep labor over seas.

So, be prepared to endure many more years of high unemployment, under-employment and declining real wages. Upwards of two million people are likely to lose their homes in 2010 and 2011. But the good news is that the economy is recovering and the banks are alright.

Domestic Economic bailiwick:

Up until the day, the investment bank, Lehman Brothers, collapsed in September of last year, it took the Fed a total 5,012 days — 13 years and 8 months — to double the cash currency and reserves in the coffers of U.S. banks.

In contrast, after the Lehman Brothers collapse, it took Bernanke's Fed only 112 days to double the size of U.S. bank reserves. He accelerated the pace of bank reserve expansion by a factor of 45 to 1. Now, just nine months later, the Fed has bought up a cumulative total of $924.9 billion in mortgage-backed securities (MBS). Simply put, the Fed has been buying up virtually all the junk and nonjunk mortgages it can lay its hands on.

Meanwhile, the private sector is getting killed...

Last year, banks provided new credit at the annual pace of $472.4 billion in the first quarter and $86.7 billion in the second. This year, they're not providing ANY new credit — they're actually LIQUIDATING loans at the rate of $857.2 billion in the first quarter and $931.3 billion in the second.

Ditto for banks and mortgages. Last year, mortgages were being created at the annual clip of $522.5 billion and $124 billion in the first and second quarters, respectively. This year, on a net basis, mortgages haven't been created at all. Quite the contrary, the Fed reports that, on a net basis, they've been liquidated at an annual pace of $39.3 billion in the first quarter and $239.5 billion in the second.

Getting cash out of credit cards and other consumer credit is even tougher. Last year, folks were able to add to their consumer credit at annual rates of $115 billion and $105 billion in the first two quarters. This year, in contrast, they've been forced to CUT back on their credit at annual rates of $95.3 billion in the first quarter ... and at an even faster pace in the second quarter — $166.8 billion.

Add to this the fact that Geithner has borrowed a mind-boggling $1.41 TRILLION to fund Washington’s debt addiction — nearly THREE TIMES MORE than the Treasury had borrowed at this time last year.

And still, this is only the beginning: The Congressional Budget Office (CBO) has warned that Obama’s budget will add nearly $10 trillion in new government debt over the next ten years.

Meanwhile, default notices, scheduled auctions and bank repossessions - were reported on 937,840 properties in the third quarter, a 5% increase from the previous quarter and an increase of nearly 23% from Q3 2008. “They were the worst three months of all time,” said RealtyTrac spokesman Rick Sharga.

U.S. residential foreclosures hit record high in Q3
During the third quarter, home foreclosures in the U.S. reached a record high. "They were the worst three months of all time," RealtyTrac spokesman Rick Sharga said. The firm said 937,840 homeowners received some form of foreclosure notice. The number is 23% higher than that of last year's third quarter, RealtyTrac said. CNNMoney.com (15 Oct.)

Commercial real estate is weakest sector in Fed's Beige Book
Weak or deteriorating commercial real estate markets were reported by all of the Federal Reserve's 12 district banks, according to the central bank's latest Beige Book. The Fed's regular anecdotal report found that the overall economy is still plagued by weakness in banking and increasing unemployment. Among the few bright spots in the report were observations of "stabilization or modest improvements" in manufacturing and housing. Bloomberg (21 Oct.) , Google/The Associated Press (21 Oct.)

The biggest single high-stakes derivatives gambler on Wall Street is Goldman Sachs: For every dollar it has in capital, Goldman Sachs is risking a whopping $9.21 on possible defaults by its trading partners, or more than TRIPLE the risk being assumed by the larger high-rolling champion JPMorgan Chase who, btw, currently controls 40% of the silver “market”.

So it should come as no surprise that, with the U.S. Federal Reserve virtually guaranteeing a Garden-of-Eden financial environment for banks, and Goldman has hit the jackpot this year on tax payer’s money: The bank has accumulated a bonus pool of an estimated $16 billion to dish out to an exclusive group of its heavy hitters.

Meanwhile, all across the USA, with small and medium-sized businesses unable to get credit or hire...

Food for thought:

1.
Europe is terrified of Russia, and the reason is: Liquefied Natural Gas.
Spain is especially dependent on natural gas, piped in from across the Urals.
Russia is threatening supply cuts this month. If that happens, the Spanish economy could be brought to its knees in approximately 45 days, bringing the rest of Europe with it in about 60.

2.
Water’s running out much faster than oil.
Blame mass migration. Migrants are flooding from farms to condos faster than they can be built in China. Add in over 70 million new people every year—a truly mind-boggling number.

3.
Closer to home, Canada's banks are estimated to be among the healthiest in the world, having avoided the subprime bubble. Canadian banks are hiring Wall Street investment bankers in droves. Canada is a resource-rich country and we expect a secular geopolitical shift of power in the direction of those nations.

4.
The cost of medical care in the U.S. is exceptionally high, at 16.5 % of GDP, dwarfing the 10.5% spent on housing and the 9.6% spent on food.

Quotes of the month:

1.

“A power has risen up in the government greater than the people themselves, consisting of many and various and powerful interests, combined into one mass, and held together by the cohesive power of the vast surplus in the banks.” — John C. Calhoun, Speech from 1836

2.

“Gold stocks are really a way to short government – or go long on government stupidity.” - Doug Casey

3.

This is a story about a 4-page letter written jointly by Congressman Alan Grayson and Congressman Ron Paul. It's addressed to Chris Dodd, Chairman of the U.S. Senate Committee on Banking. In it, they request that "the confirmation of Ben Bernanke be postponed until the Federal Reserve released documentation that will allow the public and the Senate to have a full understanding of the commitments that the Federal Reserve has made on our behalf." The headline of the story reads "Alan Grayson and Ron Paul Ask Whether Bernanke is "Fit to Serve"... and the link is here.

4.

"By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose." - John Maynard Keynes from 1920

5.

"...but what’s even more shocking is the fact that the interest of our [U.S.] debt will more than likely exceed US $450 billion for the fiscal year 2009 and that is significantly more than the estimated US $300 billion in tax revenues flowing into the government coffers. That means that the US cannot even service its debt without turning to the printing press." - Enrico Orlandini

6.

"More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other; to total extinction. Let us pray we have the wisdom to choose correctly." - Woody Allen

7.

“On Wall Street there have always been only two basic ways to make money… the second, and seemingly preferred method, exploit those who know less than you -- and take their money.” - Dylan Ratigan, anchor on MSNBC

8.

"My instinct was to want to short the dollar, but then I looked at other major currencies -- euro, yen and British pound -- and they might be worse." Picking these currencies is like choosing my favorite dental procedure," he said. "And I decided holding gold is better than holding cash, especially now that both offer no yield." - Larry Summers, White House economic adviser

9.

“Upon reflection, it’s quite obvious how tenuous it is to back up one’s currency with a pile of paper issued by another country, but this is exactly how the world of international currency has worked for decades. And it has worked quite well…until now.” – Eric Sprott

10.

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” - Ernest Hemingway

Note to readers:
One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, my colleagues, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. I has been said, "When you take stuff from one writer it's plagiarism; but when you take it from many writers, it's research." In reference to my sources this month, they include in no particular order:

Martin Weiss/Money & Markets, Richard Young/Investorplace, David Galland, Larry Edelson, Doug Casey, David Galland, Ed Steer, Brian Hunt, Bud Conrad, Bob Irish, Chris Wood: Bloomberg; Google; CNNMoney; Associated Press; Los Angeles Times, Washington Post, Federal Reserve Bank of St. Louis.

October - 2009 - Economic Brief

2009-10-04T10:41:00.000-07:00

So why the rally?

It goes something like this, the S&P 500 posted a new closing high for the year this past month, Dollar Index down to fresh 11-month lows, crude oil gained 3% to settle at $70.93/bbl, while gold closed at $1006 per ounce.

Good News:
Retail sales spurted 2.7% in August vs July, the largest monthly pop in more than three years, thanks to the cash for clunkers program, higher fuel prices and deep discounting.

Bad News:
Retail sales are down 5% year over year, and the Commerce Department said that wholesale inventories fell for the 11th month running in July to the lowest level in nearly 3 years.

Yet,
Fed Chairman Ben Bernanke. said that the U.S. recession has “very likely” ended...

To which I ask, “Are you kidding me?” As evidence, I offer a few of Bernanke’s spectacularly poor miss-pronouncements.

You can watch it by following the link just here to see for yourself. http://www.youtube.com/watch?v=HQ79Pt2GNJo&feature=player_embedded

In fact:

Sales for companies listed in the S&P 500 fell 16% in the second quarter, compared to last year. That follows a decline of 14% in the first quarter. Of course, most analysts haven’t focused on that. All they seem to care about is that profit margins are improving.

“Beating Expectations”

If you expected your kid to get an “F” in math class and he came home with a “D”, would you celebrate? Of course not. It’s only slightly better than outright failure.

But over and over again, the media and the investment world celebrate when companies “beat expectations”, even when those companies post a substantial loss. This is what I call “the fog” of the markets.

Hello...

We are in the late stage of the bear market rally.

It’s expensive out there. Right now the dividend yield is a paltry 2.8 percent for the Dow Jones Industrial Average, 2.5 percent for the S&P 500 and a miniscule 0.4 percent for the Nasdaq 100.

So according to this time-proven indicator, the stock market has to be rated expensive because historically, the stock market was a bargain when the dividend yield was 6 percent or higher calculated by just dividing the annual dividend payment by the share price.

Another indicator, price-to-earnings ratio on earnings calculated using Generally Accepted Accounting Principles (GAAP).

Regular readers know that GAAP is under assault by the government who has forced them to change their rules to help out the banks and their “troubled assets” late last year. Anyway, flawed as GAAP is, it is what we have and by that standard the normal historical range for the GAAP P/E is less than 10 (undervalued) to 20 (overvalued). The current figure is 137 ... a record high! So according to this indicator, stocks are extremely overvalued. Did you know that the Price to Actual Earnings is actually higher now than at the top of the market in 2007?

Bottom line:
Based on the two classic valuation methods, this market definitely does not look cheap.

So why the rally?

Did you know that the amount of leverage in the banking system is even greater today than at its peak in 2007?

But at what cost?

Many foreign governments and central bankers are now demanding that the greenback be abandoned as the world’s reserve currency.

• China is already lobbying — aggressively — for a new global reserve currency and leading the campaign to establish an Asian currency reserve fund.

o For example, it announced last month that it will sell $880 million worth of renminbi-denominated bonds in Hong Kong. That marks the first time Beijing will offer renminbi bonds to foreign investors.
o Additionally, China recently established a $95 billion currency swap with other Southeast Asian countries, and a $10 billion currency swap with Argentina. It is the first major Yuan swap agreement with a Latin American country — and directly threatens the dollar south of the border. Its goal: To aggressively take its Yuan to the next sphere of influence in the currency markets, forcing a worldwide monetary change...
o In June, China became a net SELLER of U.S. Treasury notes and bonds!

• Over the past few weeks, the U.N., France, India, Russia, Brazil and several other nations — as well as economic thinkers such as George Soros and Nobel Prize winning economist Joseph Stiglitz — have joined China in demands to replace the dollar as the world’s reserve currency.

• The G-7’s recent funding of the IMF with $1 trillion of “fiat” money... new regulatory powers ... and broader use of the IMF’s Special Depository Receipts, or SDRs confirms that the stage is being set for a new global monetary order.

• Even South America’s Bank of the South is preparing to open its doors soon with seed capital from Argentina, Brazil, Venezuela, Bolivia, Ecuador, Paraguay and Uruguay. Its objective: Independence from the U.S. dollar!

On a related note, I noted with interest that Tim Geithner, the Goldman Sachs Secretary of the Treasury, has gone on record as saying that the government will withdraw its $3 trillion backstop guarantee from the money market fund industry, thus the expiration of the government’s guarantees for money market funds. Is your money in a Money Market?

Why would the government do this?

By simply looking at that of one of the world’s largest money market funds, one can see that 38% of the portfolio is made up of CDs issued by foreign banks, 9.9% in short-term corporate paper, and 12.3% in medium-term paper, much of it hitched to the fates of portfolios of car loans, insurance companies, and a variety of corporate entities.

SO?

The value of your dollars — have plunged more than 14% in the last 6 months.

(In the mean time, the Swiss franc has climbed 13 percent, the Canadian dollar has risen 18 percent, the Brazilian real has jumped 32 percent, the Australian dollar has soared 35 percent and the New Zealand dollar has vaulted 41 percent.)

This is the greatest economic convulsion in FIVE CENTURIES and its taking place right before your very eyes.

The domino effect of the financial crisis and economic downturn around the globe clearly shows how interconnected and interdependent economies have become under globalization.

Even the United Nations...

U.N. agency calls for reducing dollar's role as reserve currency
The world could reduce the risk of economic crises and prevent attacks on currencies by speculators if it reduces the role of the U.S. dollar as a reserve currency, a U.N. agency said in a report. The report calls for introducing a supranational currency, special drawing rights administered by the International Monetary Fund. "If we established an exchange rate system that would guarantee more stable exchange rates, the need for foreign exchange reserves would be much reduced," said Detlef Kott, a U.N. economist. "Therefore, in our report, we focus very much on the reform of the international system to determine the exchange rates." Russia Today (08 Sep.)

Meanwhile, the Chinese government is encouraging its citizens to buy gold and silver. If 1.3 billion Chinese citizens start buying gold and silver, even in tiny quantities, imagine what that will do to the market!

Why might the Chinese be pushing gold? While it’s only conjecture, and wild conjecture at that, China has a lot of gold – in the ground (it is now the world’s largest gold producer) and in its reserves (with the clear intention to increase its holdings, most likely from local production). Could they now be looking to actively encourage higher prices? This would decrease the relative importance of their U.S. dollars in their reserves and increase the overall quality of their reserves by a greater focus on a tangible asset. Who can say what motivates the cadre that calls the shots in China? But one thing is clear, precious metals are on their minds and that’s not the only metal, have you heard of Lithium Batteries, well, Lithium comes from Tibet... but I digress.

So what's next?

Will China dump the rest of its estimated $876 billion hoard of U.S. Treasuries, roughly 22% of our US government debt? NO, but China is a game changer and they know it.

China and The US: A Good Old-Fashion Trade War

China voiced unusually strong objections to tariffs put on its tire exports to the US. The American government believes that the Chinese are targeting the industry which is costing US jobs. Labor unions will like the decision, as will a number of members of Congress who think China does not work on a level playing field when it comes to trade.

China has a large advantage over the US on the trade issue. Large American companies like Wal-Mart (WMT) source so many good from China that the supply chain could not be replaced by getting manufactured goods elsewhere. China does not rely as much on American imports as the balance of trade shows every month.

The temptation to take actions against China for instances where it ships goods to America at what appear to be below market prices will increase as unemployment moves to 10% and beyond. But, it is a sucker’s game for the US. China has the factories and America has the consumers. All locking out China’s products does is drive up consumer prices and drive down consumer spending which is still the engine of US GDP.

One thing seems clear: One of Washington's most dependable sources of loans to finance our own out-of-control deficits is drying up. That means demand for longer-term Treasuries is softening.

That also means you can pretty much count on much higher interest rates in 2010 and beyond — and you can count on those higher rates to crush any chances of a vigorous recovery or rapidly rising stock prices going forward. Did I mention higher taxes too?

China's 500 biggest firms outperform U.S. counterparts
For the first time, profit generated by China's 500 largest firms outstripped earnings of the 500 biggest companies in the U.S., according to a report from the China Enterprise Confederation and the China Enterprise Directors Association. Last year, the Chinese companies produced $170.6 billion, compared with $98.9 billion in the U.S. "Chinese enterprises enjoy relatively better policies and domestic market environment," said Wang Jiming, vice president of the China Enterprise Confederation. "But Chinese companies still lag behind the world's leading enterprises in resource allocation, innovation, international presence, business models and corporate culture." China Daily (Beijing)/Xinhua News Agency (07 Sep.)

Switzerland replaces U.S. as most competitive economy
Switzerland has become the world's most competitive economy, with the U.S. slipping to second place for the first time, according to a report by the World Economic Forum. Economies that earn a large percentage of GDP from financial services, such as the U.K. and the U.S., were hurt in the crisis, according to the report. The BRIC countries -- Brazil, Russia, India and China -- all moved higher in the ranking, while trust for banks in both Switzerland and the U.S. fell to record lows. Reuters (08 Sep.)

The World Economic Forum released a report this month that rated the U.S. 108th for financial trustworthiness, 106th for access to financing and 93rd for economic stability. Ouch!

On the home front:

A mortgage trade group reported Thursday that more than 13% of the nation's mortgage holders were delinquent on their mortgages or in the process of having their homes repossessed during the second quarter of this year. That's the highest figure since tracking began in 1972. California's rate, 15.2%, was among the highest of all states

And it’s not just residential.

The default rate for commercial mortgages jumped from 1.62% to 2.25% in the first quarter and should hit 4.1% by the end of the year, says Sam Chandan, president of Real Estate Econometrics.

Unwilling to seize devalued properties in a moribund market, lenders have foreclosed on fewer than 10% of the loans, says Real Capital Analytics. That's prolonging the crisis by keeping properties from being resold at lower prices, says New York real estate lawyer Edward Mermelstein.

A bigger problem: the nearly $1 trillion in short-term commercial mortgages slated to mature by the end of 2010. With property owners unable to refinance, even solid loans could go into default.

Seven Foods for Thought:
1.
Cross-state purchase of health insurance. Interesting that the one power the Constitution grants Congress, that is, to prevent states from interfering with cross-state business contracts, is the one they refuse to use. One of the reasons that health insurance costs so much is because of mandated state coverages. (Drug treatment, alcohol treatment, acupuncturists, hair pieces, etc., and so forth.)

If a senior citizen wanted to opt out of Medicare and get private insurance, the rules now state that failure to accept Medicare means you cannot collect Social Security payments. Thus, the vast majority cannot opt out of the government plan even though a recent Harvard study concluded that the US health care crisis is costing more than 44,000 lives each year and the New England Medical Journal claims that medical treatment comes in behind cancer and heart disease as the number three reason for death in the US.

2.
Senator Timothy Wirth will be prosecuted for deliberately manipulating Congress during the sessions that ultimately led to the passage of punitive and scientifically unsound global warming legislation. You can read more and watch the senator smugly confess here. http://wattsupwiththat.com/2009/08/15/getting-steamed-about-global-warming-not-coming-to-a-theatre-near-you/

3.
Federal District Judge Jed S. Rakoff was supposed to a approve a $33 million settlement between the SEC and Bank of America over the issue of the financial firm making inaccurate statements regarding Merrill Lynch compensation. The SEC and Bank of America will have to return to court for a trial on February 1. The most important issue at hand will be that the judge says that BAC “materially lied” in its disclosures about the Merrill bonuses.

The unexpected action by the judge threatens to kill a time-honored gentlemen’s agreement between the SEC and major American public companies. That being, when the SEC catches corporations doing something that violates the securities laws, rather than take up the commission’s time which could be better used chasing people like Bernard Madoff, the companies are allowed to settle charges by paying large fines. This usually means that the company does not admit to anything, although its guilt is generally assumed. Why would a firm that is entirely innocent make a payment to settle charges? I digress.

4.
Senate Democrats might wait on climate-change legislation
Senate Democrats' consideration of putting climate change on the back burner might force U.S. President Barack Obama to send diplomats empty-handed to negotiations in December in Copenhagen. Obama was expected to offer congressional approval of concrete measures limiting emissions as evidence that the U.S. is serious about dealing with global warming. Senate Majority Leader Harry Reid suggested that Democrats want to handle health care before climate change and that global warming could be addressed next year. The Guardian (London) (16 Sep.)

5.
Part of the solution:

Contraception is almost five times cheaper as a means of preventing climate change than conventional green technologies, according to research by the London School of Economics.

6.
Right now the FDIC insures around $4.5 trillion of banking reserves. That’s the money you and I count as “safe” when we deposit it in almost any American bank account.

I think it’s important to knock some of the mystery off these almost incomprehensibly large numbers – because for most people, $1 billion is just about as unthinkably large as $1 trillion when it comes down to it. To further illustrate the point, it takes one thousand piles of $1 million to equal $1 billion. To get $1 trillion, you need a million piles of $1 million.

Doing some quick math, we can see that $10.4 billion goes into $4.5 trillion 432 times. So essentially, the FDIC insures every $432 of deposits with one lonely dollar.

The FDIC currently insures 8,153 banks. So far this year, 81 have failed – or 1% (in 2007, just three banks failed). And there are another 416 banks on a watch list. What happens if another 1% fails?

Well, the FDIC has a reinsurer of its own, sort of. It’s called the U.S. taxpayer, backed by the full faith and credit of the Fed’s printing presses. If they can’t tax us enough, they’ll backstop the FDIC with newly created dollars – the very definition of inflation.

6.
So much about the FDIC, what about the FHLB?
Who is the FHLB? Even if you heard their name, you probably haven't been worrying about what they do. They were created in 1932 as a government-sponsored entity (GSE) made up of 12 regional Federal Home Loan Banks, each of which is an individual corporation. Founded in the depression, they have carried on, providing money for mortgages. are 8,100 member banks, thrift and credit unions, and insurance companies that provide the mortgages. That's why you rarely hear about them – they are a bankers’ bank. They don't lend directly to buyers but only through banks. Banks collateralize their advances from the FHLB by the mortgages they make.

They have $1,147 trillion of assets and liabilities. They have $45.8 billion of total capital. So they are highly leveraged at about 25 to 1.

Even though there is no explicit government guarantee, the FHLB has been able to borrow at attractively low rates, because the public assumes such a guarantee. (Sound familiar? Fannie and Freddie pop to mind?) As such, the debt issued by FHLB is considered AAA by Standard & Poor's – so it's used regularly as a substitute for cash. Municipalities often invest here.

The next wave of mortgage difficulties is expected to include large amounts of Option ARM (adjustable-rate mortgage) loans that are scheduled to be resettled over the next year or two. That sets the stage for another federal government takeover or receivership like Fannie and Freddie. That means even more bailouts, and eventual Fed monetization to fund it. Credit collapse is destructive for housing, but it is dollar-destructive to bail out everybody. My bet is some of both will happen, with the easy path toward bailouts and dollar destruction being the more likely.

7.
Back to Tibet
Rare Earth Elements are exceedingly rare and hard to locate. They are found in sufficient quantities only in certain parts of the world. And the demand for these metals is increasing rapidly.

They are used to enhance the power of magnets in computer hard drives. They are used in wind turbines… catalytic converters… and the motors of hybrid cars. They are used to make lasers. And they are found in just about every iPod, BlackBerry, plasma TV, and mobile phone on the planet. They can even help filter viruses and bacteria from water.

China controls 95% of the world supply of Rare Earth Elements. That’s because most of these materials come from mines in Inner Mongolia and Tibet. And two weeks ago, the Chinese Ministry of Industry and Information Technology called for a total ban on the exports of most of them. Others will be restricted by quotas.

Did you know that Obama refused to see the Dali Lama because of China’s request that he not be received. Oh, let’s just sweep this under the rug or good old fashioned bad-boy politics.

Quotes of the month:

“But why do people have to pay 5,6,7 percent sales taxes in stores, but the derivative dealers on Wall Street pay no sales tax on hundreds of trillions of transactions every year? Seems like a hefty double standard.” – Ralph Nader
Which is why Cong. Peter DeFazio (Dem. Oregon) has introduced legislation to tax such speculation. (HR 1068)

“...you can make a moral argument that you shouldn’t buy T-Bills, because they will be repaid with stolen money – taxes.” - Doug Casey

And finanlly,

“One hundred senators, 435 congressmen, one president, and nine Supreme Court justices equates to 545 human beings out of the 300 million are directly, legally, morally, and individually responsible for the domestic problems that plague this country.

I excluded the members of the Federal Reserve Board because that problem was created by the Congress. In 1913, Congress delegated its Constitutional duty to provide a sound currency to a federally chartered, but private, central bank.

I excluded all the special interests and lobbyists for a sound reason. They have no legal authority. They have no ability to coerce a senator, a congressman, or a president to do one cotton-picking thing. I don't care if they offer a politician $1 million dollars in cash. The politician has the power to accept or reject it. No matter what the lobbyist promises, it is the legislator's responsibility to determine how he votes.

It seems inconceivable to me that a nation of 300 million cannot replace 545 people who stand convicted -- by present facts -- of incompetence and irresponsibility. I can't think of a single domestic problem that is not traceable directly to those 545 people. When you fully grasp the plain truth that 545 people exercise the power of the federal government, then it must follow that what exists is what they want to exist. Do not let these 545 people shift the blame to bureaucrats, whom they hire and whose jobs they can abolish; to lobbyists, whose gifts and advice they can reject; to regulators, to whom they give the power to regulate and from whom they can take this power. Above all, do not let them con you into the belief that there exists disembodied mystical forces like "the economy," "inflation," or "politics" that prevent them from doing what they take an oath to do.” - Charlie Reese, a former columnist of the Orlando Sentinel Newspaper

Note to readers:
One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, my colleagues, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. I has been said, "When you take stuff from one writer it's plagiarism; but when you take it from many writers, it's research." In reference to my sources this month, they include in no particular order:

Brain Rich, Gregory Spear, Doug Casey, CNNMoney.com;Bob Irish, Porter Stansberry, Doug Casey, Kevin McElroy, Larry Edelson, Douglas A. McIntyre, Dan Weil, Richard Young, Gregory Spear’s Market Commentary; Daily Wealth Reader; The Daily Crux, Money and Markets/Mike Larsen, Martin Weiss; The New York Times/The Associated Press; The Washington Post; The Wall Street Journal; Reuters; China Daily (Beijing)/Xinhua News Agency; The Guardian (London) and Bloomberg.

September - 2009 Economic Brief

2009-09-02T20:38:00.000-07:00

As goes the economy, so goes dentistry, but how about the unease that many now feel as they observe the disconnect between what their own eyes see and what the government tells them they should be seeing?

Case in point:

ADA 4th economic confidence survey available
According to the 4th ADA Survey of Economic Confidence, 2nd quarter results were more negative than those of the 1st quarter of 2009, but more positive than those for the 4th quarter of 2009.

“...50 percent report that key dental metrics are still trending in a negative direction.…”

Yet, we are being told:
U.S. consumers become more optimistic than expected
The Conference Board Consumer Confidence Index surged to 54.1 this month, up from July's adjusted 47.4. Economists polled by Thomson Reuters had anticipated an uptick to 47.5. The index remains far from a mark of 90, which suggests the economy is in good shape. The New York Times/The Associated Press (25 Aug.)
In a period where less bad is the new good...

Good News:Unemployment rate “fell slightly” from 9.5% to 9.4% earlier this month.
BAD NEWS:
These people were removed from the official count, because they have given up their active job search. More than two-thirds of U.S. economic activity relies on consumer spending. American’s are just not spending like they once did for one big reason: Over 6.5 million Americans have lost their jobs since the Great Recession began; last quarter we saw a 1.2% decline in consumer spending.

Rising unemployment claims in U.S. catch experts off guard
A second consecutive week of increase to initial jobless claims in the U.S. came as a surprise to analysts, who had expected a decline. Initial claims for benefits rose to 576,000 last week, a 15,000 increase from the previous week, the Labor Department said. Most analysts' forecasts called for first-time claims to drop to 550,000. Yahoo!/Agence France-Presse (20 Aug.)

U.S. retail sales post surprise 0.1% drop
Breaking a three-month trend of increasing consumer spending, retail sales dropped 0.1% in July, the U.S. Commerce Department said. The boost triggered by the government's "Cash for Clunkers" program was not enough to make up for plummeting sales at department stores. Bloomberg (13 Aug.)

Bad News:
U.S. housing starts unexpectedly fell in July. Already, nearly 10% of U.S. home mortgages are in some stage of delinquency or default.
Delinquent home mortgages in U.S. reach record high.

The percentage of U.S. home mortgages either going through foreclosure or being classified as delinquent has reached the highest level since records began in 1972, the Mortgage Bankers Association said. Prime loans, made to the most desirable borrowers and considered the least risky by lenders, accounted for more than half of the mortgages in foreclosure. Rising unemployment and the recession are driving forces behind the housing crisis, said Jay Brinkmann, chief economist for the Mortgage Bankers Association. The Washington Post (21 Aug.) , The Wall Street Journal (21 Aug.)
GOOD NEWS:
The blow was somewhat blocked by a slight increase in single-family home starts

Bad News:
A New Debt Load
The Office of Management and Budget (OMB) is projecting a federal deficit of $1.5 trillion for the current fiscal year, due to a 24% increase in spending (to save Wall Street and stimulate the economy) and a 17% decline in tax revenues. The revenue drop is the largest since the Great Depression. The deficit this year will reach 11% of GDP, a level not seen since the end of WWII. But that's not all.
BAD NEWS:
According to the White House, the deficit is expected to average nearly $1 trillion annually for the next decade. Beyond 2013, deficits are anticipated to remain high largely due to demographic trends that will inevitably increase spending on Medicare, Medicaid and Social Security. Over the next decade, economists project that the national debt will rise to 75% of GDP as the boomers age. That would be a typical war time level, but it does not bode well for a peacetime economy.

GOOD NEWS:Governments around the world are injecting huge amounts of money and credit into the struggling patient known as the global economy. All this Monopoly money is driving rallies in stocks and bonds.
“GOOD NEWS”:
Changes to accounting rules sway banks' balances
An accounting expert studied the earnings reports of financial firms and found that 45 posted higher earnings in the first quarter because of a recent change in accounting rules. Bank of New York Mellon and other large companies were able to post profits instead of losses because of the change. The Financial Accounting Standards Board is considering another change that could force financial institutions to take paper losses, reversing the paper gains. The Washington Post (05 Aug.)

MORE BAD NEWS:
At the peak of the credit crisis last October, the Baltic Dry index fell 90%. Then it staged a recovery, hitting new highs on June 3 but in just 10 days of August, the Baltic Dry Index, a good proxy for global demand, had tumbled 25 percent. The worst week for the index since October. The Baltic Dry Index is down 35% in the last two months.

Our country's debt load at the end of July totaled $11,669,251,349,504.65. That's $11.7 trillion, or roughly about $520,000 per individual taxpayers, your household is on the hook for $771,000 when we include medical and social security obligations. Oh, and just this month Washington casually announced that another $9 trillion (a 27% increase from the previous forecast of $7.1 trillion) will be layered onto the federal government deficit over the next 10 years or roughly another $77,100 per household. Hello?

So, how big is a trillion again?
A trillion seconds is 30,000 years ago. And if you laid a trillion dollar bills end-to-end, it would stretch to the moon and back… 400 TIMES.

In the case of the U.S. government, our ever-increasing debt load means one of two things is going to have to happen. Either ...

1. Economic growth is going to surge, sending tax revenue through the roof and allowing us to pay off all these bills, notes, and bonds. That’s the American dream, dream on.

OR ...

2. Taxes are going to have to rise sharply to make good on our
debts

At the same time, we're counting on foreign creditors to finance that debt explosion. But those creditors ALREADY own about 53 percent of our marketable debt, the highest percentage share in history. And they're starting to rebel.

Case in point: Both Russia and China

They're talking about buying fewer dollar assets, and more assets denominated in other currencies.

Why would these guys want to move their money out of dollars? Simple.
As the dollar loses value on the global currency market, our foreign creditors lose money. That's because every dollar worth of bonds they own translates into fewer pounds, euros, yen, and so on.

The dollar's share of global reserves shrank to 64 percent at year-end 2008 from 73 percent in 2001, according to the International Monetary Fund. If that figure continues to decline, U.S. interest rates will simply have to rise.

That means Uncle Sam will pay more to sell Treasuries. Your mortgage rates will go up and so will corporate borrowing costs...

But here's the scary thing: even if the Chinese lent the U.S. all their $2 trillion of Foreign exchange, it would only cover this year's U.S. borrowing. Where is the U.S. going to get next year's?

According to the financial markets, the world has become a very calm and comfortable place again. The rally that began in March of 2009 is now 22 weeks long and has seen the S&P 500 rise 49.4 percent, but what have we done?

Maybe we are all in denial, replacing private debt with public debt, not dealing with our banking system by not holding it accountable, not changing structurally towards more sustainability, rewarding the fools who got us here, (Summers, Bernanke, Geithner) and the banksters are taking over again. Maybe you didn’t notice but almost 40% of the share volume on the NYSE was comprised of Citigroup, Bank of America, Fannie Mae, and Freddie Mac.

Is it working?

Geithner says White House to consider further stimulus
The Obama administration will look into extending subsidized bond programs and other efforts to spur the economy, said U.S. Treasury Secretary Timothy Geithner. "There's a range of things that we're going to look at as we get into the fall," Geithner said at the site of a school financed by qualified school construction bonds. "The important thing to note is that [the bonds] are really working, and people can see the difference. But we're not yet at the point where we need to make that judgment. We'll take a careful look at that as we get into the fall." Reuters (20 Aug.)

And,

U.S. Treasury Secretary Timothy Geithner formally requested that Congress raise the $12.1 trillion statutory debt limit in August.

And,
Reuters reports that corporate insiders recently pulled $53 from the market for every $1 they put in.

And,
Tax receipts are set to plunge 18 percent this year, the biggest decline since 1932 during the Great Depression. Individual taxes are off 22 percent year-over-year, while corporate revenue has plunged 57 percent.

Buffett noted this month that our government is spending $1.85 for every $1 it takes in from taxes ... that ever-increasing purchases of Treasuries by foreign investors are "no sure thing" ... and that our deficit is on track to hit 13 percent of GDP, more than double the previous non-wartime record of 6 percent. Additionally, Warren Buffett has gone public this month in agreeing with our contention that the government’s proliferate spending will lead to a serious degradation in the value of the dollar.

And, what about earnings,
This chart illustrates how earnings are expected (38% of S&P 500 companies have reported for Q2 2009) to have declined over 98% since peaking in Q3 2007, making this by far the largest decline on record (the data goes back to 1936). In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative.

Finally, as you can see in the chart above, in no sense are the earnings being posted anywhere remotely close to prior levels.

And so the situation today is comparable to changing the grading curve. Further to this fairy tale economic recovery... There is a battle being fought behind the scenes, a fight that could set the stage for a very, very big correction in stocks of banks and other financial services companies. During the first phase of economic crisis, the government leaned on the Financial Accounting Standards Board, or FASB as it is usually referred to, to suspend its mark-to-market valuation standards.

The consequence of this change was that, presto, much of the capital challenges the financial institutions were struggling with just disappeared, and banks could trot out their freshly smudged balance sheets with a satisfied smirk.

That smirk could soon be slapped away if new proposals by the FASB to return to mark-to-market, and even extend it, are again accepted as required practice. Why would the FASB reverse itself on this issue? Simply, if accountants are to have any credibility at all – or serve any real purpose – they need to be true to their profession. Otherwise, why would anyone believe in the work they do?

Changes to accounting rules sway banks' balances
An accounting expert studied the earnings reports of financial firms and found that 45 posted higher earnings in the first quarter because of a recent change in accounting rules. Bank of New York Mellon and other large companies were able to post profits instead of losses because of the change. The Financial Accounting Standards Board is considering another change that could force financial institutions to take paper losses, reversing the paper gains. The Washington Post (05 Aug.)

Even so,
Defaults on corporate debt soar to record high
This year, 201 issuers of corporate debt have defaulted on a total of $453.1 billion in debt, compared with 126 corporate defaults totaling $433 billion for all of 2008, Standard & Poor's said. The latest data also top figures for the comparable period in 2001, which had been the worst year for corporate-debt defaults. Financial Times (tiered subscription model) (19 Aug.)

SEC faces dilemma as it weighs various public interests
The Securities and Exchange Commission is facing a dilemma because the U.S. government has become a large stakeholder in many of the country's banks. Actions taken by the SEC could hurt financial institutions in which the government holds shares. The agency must decide whether to protect investors or the government's investments. "Normally, the SEC's focus is on the protection of investors -- that is, people who are trading securities in capital markets," said James Cox, a Duke University professor. "With the government being a substantial stockholder, you could well think the SEC's consideration could extend to matters that relate to the financial success of the firm itself." The Washington Post (04 Aug.)

Questions arise as Wall Street profits from trading with Fed
The Federal Reserve has become one of the largest customers of Wall Street banks as it strives to stabilize markets by purchasing securities. The result has been huge profits for the banks, raising questions about how the U.S. government deals with private-sector counterparties. "You can make big money trading with the government," said an executive at an investment-management firm. "The government is a huge buyer and seller, and Wall Street has all the pricing power." Financial Times (tiered subscription model) (02 Aug.)

Remember, the Fed has failed miserably at protecting the currency, purportedly its primary purpose.

The U.S. dollar has lost more than 90% of its value since 1913, when the Federal Reserve Bank was created. It has lost more than 50% of its value since 1987, when “Easy Money Al” Greenspan began his tenure at the bank.

Food for thought:
People often mistake inflation with its effects.
They think that inflation means “prices going up.” But it doesn’t. Let me explain…
Inflation is when the supply of money expands faster than the growth of goods and services in the economy. When there are too many dollars chasing too few goods and services, prices rise.

So, the rising price of beer, milk, eggs and gasoline is the result of inflation. But that part of the equation doesn’t usually happen right away. And that’s what makes it so dangerous. It is a huge mistake to believe there is no inflation, just because prices aren’t rising.

The inflation has already happened. And it continues. Take a look at the chart below. It represents the U.S. Monetary Base – currency in circulation, plus bank reserves held at the Fed.

Hmm. Looks like inflation to me.
So, by definition, massive inflation has already arrived. The question is: when will the wave of monetary inflation show up in the prices we pay?

Did I mention the security wild card?

According to the 2008 official Pentagon inventory of our military bases around the world, our empire consists of 865 facilities in more than 40 countries and overseas U.S. territories.

We deploy over 190,000 troops in 46 countries and territories.

According to Anita Dancs, an analyst for the website Foreign Policy in Focus, the United States spends approximately $250 billion each year...

This is all staggering expensive. In an era when the need for funds at home is self-evident, on purely practical grounds – and there are obviously others – the maintenance of our global imperial stance, not to speak of the wars, conflicts, and dangers that go with it, should be at the forefront of national discussion.

For example, The U.S. has spent $223 billion in Afghanistan since 2003… What's more, mainstream cost estimates never show the huge, "hidden" costs of wars… like the cost to replace tanks and jets… and the future costs to take care of injured soldiers. The actual costs of both Afghanistan and Iraq will run into the trillions.

Did I mention hidden costs?

In a recent article titled, The Expiring Economy, Roberts pointed out that during the “worst economy since the 1930s,” the administration has ”embarked on a $1 billion crash program to build a mega-embassy in Islamabad, Pakistan.”
And who is going to pay for the $636 billion national “defense” budget the House just approved?

Did I mention the energy wild card?

Analysts: Rising energy costs threaten economic recovery
With the price of crude oil reaching $76 a barrel, experts are worried about the possible impact of energy costs on a still-fragile world economy. "Although the financial crisis had been addressed, the commodity crisis has not," Goldman Sachs said. Financial Times (tiered subscription model) (09 Aug.)

Did I mention the ethical issues?

Paulson's ties with Goldman continue to raises ethical questions
Seven months after Henry Paulson left his position as U.S. Treasury secretary, questions continue to be asked about his relationships with executives at Goldman Sachs, the investment bank he had previously run. "I operated very consistently within the ethic guidelines I had as secretary of the Treasury," Paulson said in response to a lawmaker's question about his dealings as Treasury secretary. He added that he obtained an ethics waiver for dealing with the firm "when it became clear that we had some very significant issues with Goldman Sachs." The New York Times (08 Aug.)

Did I mention China’s new gold policy?

2009– the FIRST year that the Chinese public is allowed to own physical gold or silver. Will the Chinese turn into goldbugs overnight? No. Over the next 5 years? Probably, yes.

Note to readers:

One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. I has been said, "When you take stuff from one writer it's plagiarism; but when you take it from many writers, it's research." In reference to my sources this month, they include in no particular order: ADA, Bob Irish, Gregory Spear’s Market Commentary; Daily Wealth Reader; Doug Casey, The Daily Crux/Dr. Steve Sjuggerud & Tom Dyson, Money and Markets/Mike Larsen, Martin Weiss; The New York Times/The Associated Press; The Washington Post; The Wall Street Journal; Yahoo!/Agence France-Presse; and Bloomberg.

August - 2009 Economic Brief

2009-08-05T14:58:00.000-07:00

From July 10 through July 23 the S&P 500 index gained 11.1 percent and we are still rolling, but on just exactly what is not so clear; what's clear is it certainly is not earnings, they are way down.

Earnings declined over 98% since peaking in Q3 2007, making this by far the largest decline on record (the data goes back to 1936). In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative.”

As you may note, materials, consumer discretionary, and information technology were the three biggest sector winners.

Note that all three of these sectors are highly cyclical. In other words, they do well when the economy is strong and poorly when the economy is weak.

The fact that these three continue posting strong gains means investors are betting on a quick economic recovery.

But even if things are now less worse ... and possibly even bottoming ... is such an optimistic rotation into these riskier stocks warranted?

Case in point, even after announcing a poor quarterly earnings report, shares of Google posted a new yearly high, go figure!

Consider too what we heard from Microsoft in July. The firm said profits sunk 29 percent in the second quarter of 2009 vs. the same period a year earlier.
What about the financials and their bogus profits?

According to Bloomberg.com,

Goldman Sachs’ current record $3.44 billion earnings from their free or low cost capital supplied by broke American taxpayers has led the firm to decide to boost compensation and benefits by 33 percent. On an annual basis, this comes to compensation of $773,000 per employee.

As Eliot Spitzer said, the banks made a “bloody fortune” with US aid. And now, Goldman is taking the most trading risk in the firm's history.

Yes, it's true, Goldman generated record profits in the second quarter. Now it's also true that it doing so by taking the most trading risk in the firm's history, with money it, heretofore, never had access to until it' s new partner showed up, the US government with money from the Federal Reserve.

Yet presently, the banks have more than a $1 trillion in toxic assets on their balance sheets and the wholesale credit markets (securitization) are in a shambles. Nothing has been done to separate commercial from investment banks, force all derivatives onto regulated platforms, unwind insolvent financial institutions, establish prices for complex securities, increase capital requirements, or put an end to off-balance sheet operations. In short, we are not fixing the problem are we? The next bubble is already here. This time it’s government spending, fiscal deficits and increasing risk...

The point being... Beware of the Bear Trap

Here are my reasons:

1)
The sheer size of the derivatives market.
In 2006 the global market for derivatives was $285 trillion. Now it's $592 trillion. Its six-year compound rate of growth: A shocking 34.5 percent per year!

Despite all the talk of reducing risk and reforming the financial system, U.S. commercial banks still hold record amounts of high risk derivatives. The latest tally: $202 TRILLION in notional value derivatives. And even that pales in comparison to the global tally by the Bank of International Settlements, now at $592 trillion.

Bank of America has total credit risk to derivatives to the tune 169 percent of its capital; Citibank, 216 percent; JPMorgan Chase, 323 percent; HSBC Bank USA, 475 percent; Goldman Sachs, a whopping 1,048 percent, or over TEN times its capital

2)
The Lack of Transparency.
We railed against over-the-counter (OTC) derivatives, representing 96 percent of all derivatives held by U.S. commercial banks. No one but the parties involved knows precisely what the contracts are, or what their value really is.

Now, in Senate Banking Testimony, SEC Chairman Mary Schapiro has openly admitted that
"OTC derivatives are largely excluded from the securities regulatory framework by the Commodity Futures Modernization Act of 2000. In a recent study on a type of securities-related OTC derivative known as a credit default swap, or CDS, the Government Accountability Office found that 'comprehensive and consistent data on the overall market have not been readily available,' that 'authoritative information about the actual size of the CDS market is generally not available,' and that regulators currently are unable 'to monitor activities across the market.'"

3)
Too much in the hands of too few.
Back in 2006, there are close to 9,000 commercial and savings banks in the U.S. But... 97% of the bank-held derivatives in the U.S. are concentrated in the hands of just five banks. Today, 3 years later, virtually nothing has changed. And if you include the recent shotgun mergers and restructurings, such as Bank of America's acquisition of Merrill Lynch, the concentration of risk today is even greater.

4)
Cancerous growth in Credit Default Swaps (CDS).
It was just $180 billion in 1996. That grew to $893 billion in 2000 ... $1.95 trillion in 2002 ... and a stunning $20 trillion in 2006. It's hard to believe. That's a 111-fold expansion in just a decade! CDS are just one of the derivatives in a larger $592 TRILLION market of all different kinds of derivatives controlled by U.S. commercial banks. It’s the derivative that relates to the insurance-for-insurance for home mortgages through Fanny Mae and Fredy Mac.

The problem: Now, hedge funds and other investors are using these derivatives to spin the roulette wheel. In fact, the hedge fund industry now holds 32% of the credit default swaps, up from 15% two years ago. Think about that for a minute:
Thinly capitalized, gun-slinging hedge funds are now essentially taking on the responsibility for insuring billions of dollars in bonds.

5)
Outstanding derivatives dwarf the trading in the underlying securities.
The sheer volume of total derivatives outstanding (not just CDSs) ... is dwarfing the amount of underlying debt securities. In other words, the sheer volume of derivatives outstanding ... is dwarfing the amount of original debt in the underlying debt securities or the amount of debt the specified company owes. That's causing major market distortions.

6)
The Baltic Dry Index,
which measures the freight rates for dry cargo traveling by ship, hit an all time high of 11,793 on May 5, 2008. Then it plunged to 663 on December 5, a decline of 94.4 percent. It was as if trade was coming to a standstill. However, freight rates soon started to recover...

Since its December low, the index is up to approximately 4,000 for a whopping gain of some 500 percent! And the "green shoot" crowd is pointing to this surge as proof of the revival in world trade, even though the index is still down 68.6 percent from its May 2008 high.

7)
Container vessels reflect the movements of goods instead of raw materials. So their behavior is more representative of what's going on with sales of finished goods. And they exclude any possible commodity speculations.

According to Germany's Commerzbank, freight rates of container vessels are down 75 percent from early 2008. More importantly, they declined by almost 30 percent this year and hit a new low in June.

Association of American Railroads reports that total traffic for the major players fell 21% in Q2 vs a 16% decline in Q1, which means business inventories are not getting replenished.

8)
The Chinese stock market is up 78 percent from its November low. But even so, it's still down 50 percent from its October 2007 high.

9)
The secular credit expansion has reversed, both consumers and banks are deleveraging and companies in the middle are downsizing to accommodate a leaner business model going forward: the "new normal." The asset boom was driven by liquidity and liquidity was driven by easy credit. Whether you wanted to buy a car, a condo, a corporation or a Collateralized Debt Obligation, financing could easily be arranged. Things are different now.

This rally is celebrating the fantasy that the old normal can be revived. Dreams die hard and these developments do not bode well for world trade.

Meanwhile, the Fed is stealthily tightening, not by raising rates, but by withdrawing funds from the money supply and extending time periods for short-term bond offerings! And it is a good thing to because according to the U.S. Federal Reserve, seasonally adjusted M2 has gone from $7.25 trillion in July of 2007 – to over $8.37 trillion today.

(Note: M2 is calculated by totaling up the value of cash held by the public, checkable deposits, household savings deposits, small time deposits, and money market mutual funds. M2 is an important economic indicator used to forecast inflation. If you have too much money or M2 awash in the economy chasing too few goods and services, the result is higher inflation.)

That’s 15.44% more money circulating around the economy in just two years, a colossal $1.12 trillion increase. This large injection of currency into our economy will certainly lead to higher inflation, which will be further amplified due to our fractional reserve banking system. In a fractional-reserve banking system a new sum of money is created whenever a bank gives out a loan.

Unless backed into a corner (do I hear China?) the Fed won’t increase rates as it could cause interest payments on the government’s debt to double, it would be better to devalue the currency than to make still larger payments; today payments are slightly below $500 billion annually. Year over year M2 growth (actual currency in circulation and key economic indicator used to forecast inflation) was 9.3% in June and has only increased 2.5% year to date. Banks have increased their cash reserves by more than 25% in the last year, but lending is not increasing.

Money pumped into financial system not reaching broader economy

Central banks worldwide have frantically poured money into the financial system to cope with the credit crunch, but that liquidity does not appear to be reaching the broader economy. Central bankers are encouraging financial institutions to use the funds to bolster lending, but banks are concerned about their balance sheets and potential losses on loans. (Financial Times tiered subscription model) (21 Jul.)

Instead, the velocity of money, (See March – 2009 Economic Brief for an explanation of monetary velocity), in the U.S. financial system is slowing as banks hold on to capital for a rainy day. And not just banks; consumers, too, the U.S. savings rate is now approaching 7%, having been near zero two years ago.

In fact, just about everything in the U.S. seems to be slowing down. For example, the country is experiencing the longest and steepest decline in driving since the invention of the automobile.

10)
According to the latest data from Standard & Poor's, the second quarter of 2009 saw just 233 dividend increases.

How does that stack up historically?

Well, it's the worst second quarter on record since 1958! This year might just go down in history as the worst year ever for dividends. In the first quarter of 2009, companies cut $40.8 billion in dividends, more than were eliminated in all of 2008.

11)
The number of states that have exhausted their unemployment insurance fund and now must borrow from the federal government to meet weekly payment obligations continues to rise. So far, 18 states have tapped the feds for a total of $12 billion.

And all this pales in comparison to California’s fiscal disaster — the nation's most populous state, with the largest GDP and the greatest impact on the entire U.S. economy — collapsing.

Remember: California has a GDP of $1.8 trillion, larger than the economies of Russia, Brazil, Canada and India.

12)
And U.S. employers have just slashed another 540,000 jobs in June vs a 322,000 loss in May, driving the official U.S. unemployment rate to 9.5 percent, its worst level in 26 years. If you include part-time and discouraged workers, 16.5 percent of America’s work force is now jobless! Every single job created after the prior recession has been wiped out.

Unemployment remains a major hurdle, Treasury official says

The U.S. Treasury is concerned that 40% of those unemployed describe themselves as "permanent job losers," a much higher percentage than in previous recessions, said Alan Krueger, assistant Treasury secretary for economic policy. Employment will continue lagging behind production, he said, and the weak job market "poses severe challenges" for economic recovery. Reuters (20 Jul.)

Unemployment claims reach 554,000 in U.S.

The number of initial claims for unemployment benefits in the U.S. climbed by 30,000 last week, bringing the total to a seasonally adjusted 554,000, the Labor Department reported. A government official said the increase was slightly exaggerated by an unusual pattern in auto-industry layoffs. The New York Times/Reuters (23 Jul.)

Job worries undercut U.S. consumer optimism

Consumer confidence in the U.S. declined for the second month in a row in July, The Conference Board said. The research group's Consumer Confidence Index slid from 49.3 in June to 46.6 this month. "Consumer confidence, which had rebounded strongly in late spring, has faded," said Lynn Franco, director of The Conference Board Consumer Research Center. USA TODAY/The Associated Press (28 Jul.)

13)
Consumer confidence unexpectedly plunged by nearly 10 percent last month The consumers whose spending used to account for 70 percent of the entire U.S. economy. And with 70% of our economy dependent on consumer spending, where is the recovery going to come from?

Let’s take a quick look at what is really happening out there for the consumer... in the first three months of 2009, delinquencies on home equity loans, home equity line of credit and credit cards exploded to new, all-time record highs — and delinquencies on auto loans surged a mind-numbing 48 percent from the end of 2008. As a reflection of consumer confidence you can also factor in that retail sales dropped 4.9% in June, due in part to deep discounting. That headline figure may not sound too bad, but double- digit sales declines were common among many.

All department stores that reported June sales posted declines. The new frugality is affecting the entire retail spectrum, from low-end Target (down 6.2%) to high-end Neiman Marcus, where sales were off 20%. Interestingly, sales of televisions were up 50% year-over-year, suggesting the return of the cocooning phenomenon.

Meanwhile, the “consumer effect” on the default rate on Corporate “junk” bonds has almost quadrupled to 9.5 percent from 2.4 percent a year earlier, according to Fitch Ratings.

Banks continue to struggle with troubled loans

Results from Wells Fargo, U.S. Bancorp, KeyCorp and SunTrust Banks show that while they are performing well in some areas, they are still struggling with increases in troubled loans to businesses and consumers. All four banks reported steep increases in loan losses. The reports indicate the financial industry is not done working through issues related to the financial crisis. The Wall Street Journal (23 Jul.)

U.S. household leverage, as measured by the ratio of debt to personal disposable income, increased modestly from 55% in 1960 to 65% by the mid-1980s. Then, over the next two decades, leverage proceeded to more than double, reaching an all-time high of 133% in 2007. That dramatic rise in debt was accompanied by a steady decline in the personal saving rate. The combination of higher debt and lower saving enabled personal consumption expenditures to grow faster than disposable income, providing a significant boost to U.S. economic growth over the period. In the long-run, however, consumption cannot grow faster than income because there is an upper limit to how much debt households can service, based on their incomes.

Beginning in 2000, however, the pace of debt accumulation accelerated dramatically... Between 2000 and 2007 the total U.S. credit market debt increased at five times the rate of nominal gross domestic product. Rising debt levels were accompanied by rising wealth.

In the last 18 months, the ratio of debt to disposable income has only eased to 128%, which means that it will take at least a decade to rebuild balance sheets enough to resume spending at pre-crisis levels. It's going to be a long hard slog even if the stimulus works according to plan. The full brunt of the credit collapse may be behind us, but please, the other two shocks, namely deflating labor markets and deflating home prices, are very much still front and center.

Belt-tightening consumers slash discretionary spending

Companies that make and sell consumer discretionary items such as toys and motorcycles are taking a particularly harsh beating as unemployment continues to rise. Analysts said sales cannot go up as long as consumers' income is going down. BusinessWeek (19 Jul.)

14)
U.S. deficit reaches record $1 trillion and counting

With three months left to go in the budget year, the U.S. government's deficit has hit an all-time high of $1 trillion. The Congressional Budget Office predicted that by the end of the year, the deficit will be 13% of the country's GDP. That compares with a recent high of 6% of GDP in 1983 during the Reagan administration and 30.3% in 1943, when the U.S. spent a huge amount of money to fight World War II. The Associated Press (13 Jul.)

Here are some key statistics regarding the debt burden of the US:

 US official debt is $11.3 trillion. This represents an astronomical 80% of our 14 trillion GDP.

 Unfunded national debt that is not accounted for is well north of $50 trillion. That includes $10.5 trillion for Social Security promises, $39.5 trillion for Medicare and Medicaid promises and $8.4 trillion for prescription drug coverage.

 Household debt is over 100% of US GDP. It was only 40% in the severe recession in the mid 70s.

 Alarms go off when nations have budget deficits that exceed 5% of their GDP. The US is heading towards a 13% deficit for fiscal 2009. Perennial defaulters like Mexico and Argentina have 2.9% and 3.6% deficits respectively. This is a good point to remind you that US GDP as well as tax receipts are plummeting.

 More than half of this year’s national budget has to be borrowed. A choking $1.85 trillion is on the auction block.

 The global demand for US debt instruments has fallen off a cliff. The Fed-Treasury complex is now buying our own debt in a desperate end game strategy.

 Rising interest rates will make government sponsored debt even more impossible to pay.

That means that when the music stops on this Fed orchestrated mythical musical ride, the downside momentum could be dramatic. Keep your powder dry because the stimulus still isn’t enough.

Have you heard that:

U.S. House leader requests an open mind about second stimulus

Though he agreed that it is too early to give up on the original economic stimulus, and that U.S. House Majority Leader Steny Hoyer said the nation should be open to another round. The increase in unemployment is slowing down, but "it's not where it ought to be," he said. Reuters (07 Jul.)

That's a tacit admission that the $787-billion package enacted in February is failing to get the job done.

Out of the blue:

Food stamp bonanza: Over 10% of America now enrolled
Nationwide, enrollment in the program surged in March to about 33.2 million people, up by nearly one million since January and by more than five million from March 2008. In a recent research report, Pali Capital Inc. estimated that food-stamp spending will increase between $10 billion and $12 billion this year from $34.6 billion in 2008.

Quotes of the month:

One,
Bill Gross, managing director at the giant bond investment firm Pimco, used his own colorful language to describe the recent past — and provide a vision of the future:

"U.S. and many global consumers gorged themselves on Big Macs of all varieties: burgers to be sure, but also McHouses, McHummers, and McFlatscreens, all financed with excessive amounts of McCredit created under the mistaken assumption that the asset prices securitizing them could never go down. What a colossal McStake that turned out to be...

The fact is that American consumers have suffered a collapse in wealth of at least $15 trillion since early 2007.

Two,
TARP Special Inspector General Neil Barofsky is unhappy with Treasury Secretary Geithner. In testimony before the House Committee on Oversight and Government Reform, Mr. Barofsky criticized the Treasury for lack of transparency and offered a headline grabbing estimate of the U.S. government's potential maximum cost from the financial crisis: $23.7 trillion.

Three:
"We want to get to the bottom of what the Federal Reserve's been doing, and what they're getting away with." And, "It's a real contest between those of us in America who believe in freedom and the free market versus those who would socialize our country." – Ron Paul

Facts of the month:

“In 20 years, China’s cities will have added 350 million people—more than the entire population of the United States today.” - by McKinsey Global Institute

50 million Americans are already on antidepressants!

Note to readers:
One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. In reference to my sources this month, they include in no particular order: Gregory Spear's Market Commentary; DailyWealth Reader; Tom Dyson/The Daily Crux; Money and Markets/Claus Vogt, Nilus Mative, Martin Weiss, Mike Larsen; Investorsdailyedge.com; Bloomberg; Reuters; The Wall Street Journal; Russell McDougal, DDS; Mike Whitney; Doug Casey; Ted Peroulakis; Financial Times; Reuters; and Business Week.

July - 2009 Economic Brief

2009-07-01T15:36:00.001-07:00

Recovery called into question by exploding U.S. debt
Worries about the U.S. government's skyrocketing debt are prompting doubt about a turnaround for the economy. Government bonds have come under heavy selling pressure, driving up yields. A recovery could be derailed by increased borrowing costs for consumers and businesses, economists said. Financial Post (Canada)/Reuters (28 May.)

Industrial production takes surprise 1.1% drop in U.S.
Output from factories, mines and utilities in the U.S. fell 1.1% in May compared with April, the Federal Reserve said. Economists polled by Reuters had expected a 0.9% decline. Reuters (16 Jun.)

Let’s see, where were we...

In early September 2008, the Bernanke Fed did an abrupt about face, 180 degree turn by a little less than $1 trillion. The percentage increase in the monetary base was the largest increase in the past 50 years by a factor of 10. Now, the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. The amount of currency has increased by 10%, while bank reserves (non-currency) have increased 20 fold.

So, in March, in a desperate attempt to jump-start the credit markets, Bernanke dared go where no other Fed Chairman had gone before. He dropped short-term rates to zero. He committed to buying $300 billion in long term Treasury securities plus another $100 billion in government agency securities.He even promised to buy up to another $750 billion of mortgage-backed securities.

Total new commitments in that one announcement alone: $1.15 trillion.

However, despite the Fed's giant purchases, Treasury Bond prices have continued to plunge instead of rising or stabilizing as Bernanke had hoped.

Total Fed purchases so far: $130.5 billion.

Catch-22

Low interest rates are absolutely crucial to any possible economic recovery stateside while the free market demands higher interest rates to compensate for risk of inflation (e.g. Federal Reserve is buying its own US Treasuries).

And despite the Fed's mammoth mortgage bond purchases, we've just seen a sudden collapse in mortgage bond prices.

Total Fed purchases so far: A whopping $507 billion!

Plus,

The Treasury alone will need to issue a whopping $1.84 trillion in net new Treasury securities this year — just to finance the deficit expected by the Obama Administration.

That excludes any costs for future credit that goes bad (among the trillions that the government now guarantees to save GM, AIG, Fannie and Freddie, the entire banking sector and many other companies) or the hundreds of billions now being demanded by cities and states! Hello, good-bye, California!

California close to paying bills with IOUs
Within a week, California will have to start issuing IOUs to pay its bills, the state's controller said. "Next Wednesday, we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression," Controller John Chiang said. State Treasurer Bill Lockyer said he will draw funds from a reserve account to meet the state's debt-service obligations. Reuters (24 Jun.)

Keep this in context:

The Fed's Flow of Funds Report for the first quarter of 2009, demonstrate, beyond a shadow of a doubt, that the credit market meltdown, which struck with full force after the Lehman Brothers failure last September, actually got a lot worse in the first quarter of this year.

This directly contradicts Washington's thesis (spin) that the government's TARP program and the Fed's massive rescue efforts began to have an impact early in the year. Go figure!

The first quarter brought the greatest credit collapse of all time.

Who is suffering the biggest and most pervasive losses?
U.S. households and nonprofit organizations!

In U.S. households alone, the losses have been massive: $1.39 trillion in the third and fourth quarters of 2007... a gigantic $10.89 trillion in 2008 ... $1.33 trillion in the first quarter of 2009 ... $13.87 trillion in all, by far the worst of all time.

And don’t forget:

The king of off-balance sheet accounting would have to be the U.S. government. You see, the “official debt” doesn’t include the very real obligations our country owes for Social Security and Medicare. Add these and a few other entitlement programs to the equation and the United States’ TOTAL debt is in the neighborhood of $100 trillion.

The Fed’s solution is to step in and buy our own debt, when other countries and institutions are unwilling or unable to do so. But this creates a catch-22. This amounts to nothing more than printing dollars. And the more dollars we print to buy our own debt, the weaker the dollar becomes and the less likely that foreign countries are willing to buy.

The main reasons investors sell — fear of inflation and damage to the U.S. government's credit — are, themselves caused by the Fed's own buying. In other words, the more the Fed buys, the more our bond investors are motivated to sell.

The U.S. is a debt-thirsty (addicted?) nation at a time when the global pool of liquidity is drying up. That is a prescription for much higher Treasury rates down the road and other even more uncomfortable consequences.

For example, more and more of the world markets think about another world currency, other than the US dollar.

U.S. Treasury Secretary Tim Geithner met with Chinese leaders just a couple of weeks ago. His top goal is to reassure them their money invested in U.S. dollars is safe. China holds $740 billion in U.S. government bonds and is just now closely inspecting the merchandise.

U.S. dollar's position shaky
The financial crisis has brought a sense of urgency to the debate over whether the U.S. dollar should play such a dominant role in the world's economy. Brazil, Russia, India and China called for a "more diversified" international monetary system. If the dollar is ousted as the world's reserve currency, it might raise the cost of government borrowing. But it could also usher in a boom for U.S. exporters by making their products more cost competitive. The Washington Post (24 Jun.)

The People's Bank of China — the central bank for 1.3 billion people and America's biggest creditors — has just issued an economic report calling on the world to replace the U.S. dollar as the world's reserve currency ... and for the International Monetary Fund to issue a new, single "super-sovereign currency."

Wall Street should be in a good mood today as it closes the books on one of the best quarters in three generations. Keep in mind, however, that celebrations on the Street never last long.

How do we explain buyers paying high prices for bank stocks that are fundamentally broke?

With investors who ignore the fundamentals, such as the surge we just saw in unemployment, 9.4%, not to mention the already mentioned “DEBT”; and they seem to be easily seduced by Washington and Wall Street spin.

Mass layoffs in May tie March's record high in U.S.Mass layoffs -- at least 50 job losses by a single employer -- grew to 2,933 last month, from April's 2,712, the U.S. Labor Department reported. That is practically a tie with March's figure, which set a record. Yahoo!/Reuters (23 Jun.)

They don’t call this rally a “sucker’s rally” for nothing (although using such a term as “bear market rally” would probably be grounds for dismissal at a mainstream brokerage). It rose on fumes. It certainly didn’t rise on earnings. Take a look at the S&P’s earnings in the past 20 months. They’ve nosedived from $80 to $7 – the biggest drop ever recorded.

According to Ibbotson Associates, of the 74 rolling 10-year periods since 1926 (i.e., 1926-1935, 1927-1936, and so on), U.S. large-cap stocks posted negative returns in just three of them. The first two were 1929-1938 (-0.89% compound annual return) and 1930-1939 (-0.05% compound annual return), and involved the Depression. The third loser decade was the most recent -- and the worst. From 1999-2008, U.S. large-cap stocks "returned" a compound annual average of negative 1.38%.

And how do we explain that by the end of 2008, household debt in the U.S. was $13.8 trillion (which has doubled since the year 2000), nearly equal to our $14.3 trillion GDP – do they spin it as near economic recovery or one heck of a stimulus factor for the economy.

Good News:

In April, 2009, the personal saving rate in the U.S. surged to 5.7 percent, a 15-year high. That represents a massive trend change and has important consequences for the future.

Even the Baby Boomer Generation, some 78 million strong, have realized that planning on rising stock and real estate prices to meet their future needs has led to huge losses. They've suddenly realized that consumption and indebtedness are not the way to prosperity.

And, the $64,000 question is: If we reduce consumer debt we also preclude a sustainable profit recovery for the banks (the economy and the stock market). What to do?

For its efforts, the government has bought a rally of nearly 40 percent in the S&P 500 since the March lows.

While stock prices have been enjoying what I see as just another bear market bounce ... the U.S. bond market has been crumbling under the weight of Washington's increased spending and interest rates on the rise.

The problem is:
No government, even one run amuck with spending and money printing, can replace $13.87 trillion in losses by households.

If interest rates continue to increase, any hope for economic recovery could be cut off at the knees ... the ultimate outcome could be soaring borrowing costs for consumers and businesses alike.

Oil remains the key wild card. If oil prices level off, the inflationary bullet may be dodged. If they continue to rise, stagflation could certainly follow.

U.S. consumer confidence loses bit of ground
The Conference Board's sentiment index, an indicator of consumer confidence in the U.S., edged down last month. Economists who anticipated a modest move toward greater optimism were caught off guard. Consumer confidence was still higher than the record low in February. Bloomberg (30 Jun.)

Food for thought:

Grain shortage sets U.S. up for soaring food prices
The stage is set for rising food prices and grain shortages in the U.S., triggered by depleted stocks of corn and soybeans, analysts said. "The dynamics for higher food prices are already in place, but they are being masked by problems in the larger economy," said Greg Wagner, senior commodity analyst at AgResource. Los Angeles Times/The Associated Press (10 Jun.)

Note to readers: One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. In reference to my sources this month, they include in no particular order: Gregory Spear's Market Commentary, DailyWealth Reader, The Daily Crux, Money and Markets, Investorsdailyedge.com, Moody’s, Bloomberg, The New York Times, The Associated Press, Financial Times, The Globe and Mail (Toronto), Financial Week, International Herald Tribune, Reuters, The Washington Post, The Wall Street Journal, Martin Weiss, Sharon Daniels, Russell McDougal, Jon Herring, Claus Vogt, and Andrew Gordon.

June - 2009 Economic Brief

2009-06-04T22:11:00.000-07:00

Investments soar as investors ignore the economy!

The economy sank at an annual rate of -6.1 percent in the first three months of 2009 ... after plunging -6.3 percent the previous quarter — that's the WORST back-to-back contraction in 50 YEARS.

Yale professor Robert Shiller looks at a 10-year trend in "normalized" earnings for the S&P 500 Index, after adjusting for inflation. In March, his normalized P/E ratio fell to 13, its lowest level since 1986! But wait, that still isn't dirt-cheap.
That's because, at the end of previous secular bear markets in the 1940s, 1970s, and early 1980s the normalized P/E ratio frequently fell below 10 ... sometimes even lower.

After the market's nine-week rebound rally, the normalized P/E ratio is back up to 15.6 today ... that's close to its historical average, but again it's certainly not cheap.

Don't lose sight of the severity of this economic crisis. The recession is currently in its 17th month. Already, it's the longest recession since WWII — even worse than the previous record holders — the recessions in 1973-75, and 1981-82.

GDP already fell at an annual rate of -6.1 percent last quarter alone! The previous record decline was -1.9 percent in 1982.

The consumer economy's apparent strength is misleading because it is fueled by lower taxes and transfer payments from the government. And yet the market has been on a tear with the S&P 500 climbing to old highs, and guess -- just guess -- where the bulk of those gains have come from? Why, from financial stocks, of course, go figure…

If a bank is earning a positive interest spread, it's making money. It's as simple as that.

And right now, the banking industry in general is earning interest spreads so wide, they're close to breaking all-time highs due to the government’s help!

Keep in mind that during America's first Great Depression, stocks staged rallies of +25 percent to +30 percent on four different occasions, but with each rally attempt coming from a lower level, while the overall market trend continued to spiral downward.

Our apparent willingness to prop them up into perpetuity has yet to be seriously challenged, which explains the financials rally. Rumors of profitability have been greatly exaggerated (thanks in part to mark-to-dream-on accounting), but when the U.S. taxpayer is your compulsory patron, it is, as the kids used to say, all good.

However, the rally appears to be overdone. Most of it is built on the banks beginning to rebound with the government’s help. That’s absurd.
The last I checked, the same problems that are at the core of the crisis not only still exist, but are worsening...

 Consumers have purged 20 percent of their net worth since the second quarter of 2007, in addition to the biggest decline in consumer credit ever recorded, a decline of 80 percent! This represents a massive contraction of bank loans and credit, sabotaging attempts to revive credit flows and stimulate the economy.
Reason: These banks must build capital quickly, and the only realistic way to do so is by cutting back on their lending.

 The housing market, which fueled the crisis, is still printing new lows and foreclosure rates are still rising aggressively. About 22% of homeowners carry mortgage balances that are greater than their houses are worth. Home foreclosure filings skyrocketed 32 percent to a new all-time record high in April, making the March-April period the worst two-month surge in foreclosures ever with a record 682,000 homeowners receiving notices.

The big picture: Housing starts, the best measure of the industry's health, peaked at an annual pace of 2.3 million units in early 2006.
Now, they're running at barely more than a 0.5 million units.
That's a decline of 77.6 percent — three-quarters of America's largest single industry wiped out.

Following on the heels of the subprime debacle, a huge wave of Alt-A and option-ARM resets are in the pipeline. They will soon start showing up as huge credit losses. We are not even one-third of the $3.8 trillion of total losses thought to occur across all mortgage types including commercial. So there's more than twice as much pain ahead as behind. Ouch.

 Unemployment is still rising, during April, joblessness in the U.S. likely reached its highest level in 25 years, economists said. For the fifth consecutive month, employers slashed 600,000 or more jobs, bringing the unemployment rate to 8.9%, 23 million people. Who is going to pay for social security and Medicare?

 The problem, of course, is that we have fewer people working and paying taxes while the cost of providing benefits is skyrocketing. Meanwhile, politicians keep TALKING about solving this problem somehow. Yet they aren't actually DOING anything. Republicans. Democrats. It doesn't matter. They're all complicit!

 While our trade balance has swung from a massive deficit to a smaller deficit over the past seven months, it hasn't been because of stellar exports. Rather, it's been because our imports are plunging,

 Chrysler and GM filled for bankruptcy, data released recently showed U.S. auto sales fell nearly 34 per cent in May from a year earlier and car manufacturing consumes around half the global supply of metals,

 US Treasury approves capital infusions for six insurers – (told you so),

 So far, 32 banks have failed since January 1, more than the 25 that failed in all of 2008,

 The combined monetary and fiscal stimulus to combat the recession, the banking crisis and all the other aftermaths of the burst bubble already add up to 30 percent of Gross Domestic Product.

That's a new record by a HUGE margin:

• In 1974 it was 4 percent
• In 1982 it was 2.8 percent
• And in 2001 this figure was 7.2 percent

And time is passing — which makes all of the aforementioned problems dramatically more threatening.

Here is the situation:
The facts:

• Congress cannot raise taxes without sinking the economy even faster.

• The Treasury can't borrow the money without driving interest rates through the roof for everyone.

• And the Federal Reserve can't print the money without destroying global confidence in the U.S. dollar and credit markets, gutting the economy even more.

“The explosive rise of the U.S. budget deficit and debt burden will lead to serious inflation down the road”, “A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, at some point, it’s going to inflate its way out of the burden of that debt,” and “Every country that has denominated its debt in its own currency and has found itself with uncomfortable amounts of debt relative to the rest of the world, in the end they inflate,” says billionaire and Obama supporter Warren Buffett.

• While the S&P 500 is up for the year, only three of its ten sectors are in positive territory. The Technology and Materials sectors are up the most at 19.4% and 18.5%, while Consumer Discretionary has been the third best at +11.3%...

• A strange thing happened this year, for the first time since 1983, the Treasury ran a DEFICIT in April, a huge shift from a year earlier, when Treasury recorded a SURPLUS of $159.3 billion, so, we've ALREADY dug a budget hole that's more than five times as deep as the one in 2008!.

Each of these — singly or in combination — will sabotage the same bailouts they're seeking to finance.

Let’s talk about gold and money supply:

The U.S. government has learned from experience and has taken Volcker's advice. Given the U.S. dollar's role as the world's reserve currency, the U.S. government has the most to lose if the market chooses gold over US currency and erodes the government's stranglehold on the monopolistic privilege it has awarded to itself of creating "money."

So the U.S. government intervenes in the gold market to make the dollar look worthy of being the world's reserve currency when of course it is not equal to the demands of that esteemed role. The U.S. government does this by trying to keep the gold price low, but this is an impossible task.

For example, until the end of the 19th century, approximately 40 percent of the world's money supply consisted of gold, and the remaining 60 percent was national currency. As governments began to usurp the money-issuing privilege and intentionally diminish gold's role, the US currency's role expanded by the mid-20th century to approximately 90 percent. The inflationary policies of the 1960s, particularly in the United States, further eroded gold's role to 2 percent by the time the last remnants of the gold standard were abandoned in 1971.

So how does the U.S. government manage the gold price?
They recruit Goldman Sachs, JP Morgan Chase, and Deutsche Bank to do it, by executing trades to pursue the U.S. government's aims.

How did the gold cartel come about?

There was an abrupt change in government policy around 1990. It was introduced by then-Federal Reserve Chairman Alan Greenspan to bail out the banks back then, which, as now, were insolvent. Taxpayers were already on the hook for hundreds of billions of dollars to bail out the collapsed "savings and loan" industry, so adding to this tax burden was untenable. Greenspan therefore came up with an alternative.

Banks could generate the needed profits through the Federal Reserve's steepening of the yield curve, which kept long-term interest rates relatively high while lowering short-term rates. To earn this wide spread, banks leveraged themselves to borrow short-term and use the proceeds to buy long-term paper. This mismatch of assets and liabilities became known as the carry trade.

The Japanese yen was a particular favorite to borrow. The Japanese stock market had crashed in 1990 and the Bank of Japan was pursuing a zero-interest-rate policy to try reviving the Japanese economy. A U.S. bank could borrow Japanese yen for 0.2 percent and buy U.S. T-notes yielding more than 8 percent, pocketing the spread, which did wonders for bank profits and rebuilding the bank capital base.
And right now, the banking industry in general is earning interest spreads so wide, they're close to breaking all-time highs.

Right now, the spread between the two-year note and the 10-year note is 2.32%. The spread has only been higher than this three other times in American history. In 1992, it reached 2.65% and in 2003, it set an all-time high at 2.74%. Finally, last November, it peaked at 2.61%.

In other words, right now, with the yield curve at 2.32%, the banking industry is earning record interest income. Take Bank of America as an example. It takes money in from depositors. Depositors can get their money back whenever they want. If the bank does tie their money up, it's usually for less than a year. These depositors receive the lowest interest rates in the market. I just checked at my local branch, and right now Bank of America pays 1.9% on a one-year CD.

The carry trade was a gift to the banks from the Federal Reserve, and all was well provided that the yen and gold did not rise against the dollar, because this mismatch of dollar assets and yen or gold liabilities was not hedged. Alas, both gold and the yen began to strengthen, which, if allowed to rise high enough, would force marked-to-market losses on those carry-trade positions in the banks. It was a major problem because the losses of the banks could be considerable, given the magnitude of the carry trade.

So the gold cartel was created to manage the gold price, and all went well at first, given the help it received from the Bank of England in 1999 to sell half of its gold holdings. Gold was driven to historic lows, as noted above, but this low gold price created its own problem. Gold became so unbelievably cheap that value hunters around the world recognized the exceptional opportunity it offered and demand for physical gold began to climb.

As demand rose, another more intractable and unforeseen problem arose for the gold cartel.

The gold borrowed from the central banks had been melted down and turned into coins, small bars, and monetary jewelry that were acquired by countless individuals around the world. This gold was now in "strong hands," and these gold owners would part with it only at a much higher price. So where would the gold come from to repay the central banks?

In short, the banks were in a predicament. The Federal Reserve's policies were debasing the dollar, and the "canary in the coal mine" was warning of the loss of purchasing power. So Greenspan's policy of using interventions in the market to bail out banks morphed yet again.

The gold borrowed from central banks would not be repaid after all, because obtaining the physical gold to repay the loans would cause the gold price to soar. So beginning this decade, the gold cartel would conduct the government's managed retreat, allowing the gold price to move generally higher in the hope that, basically, people wouldn't notice. Given gold's "canary in a coal mine" function, a rising gold price creates demand for gold, and a rapidly rising gold price would worsen the marked-to-market losses of the gold cartel.

So the objective is to allow the gold price to rise around 15 percent per year while enabling the gold cartel members to intervene in the gold market with implicit government backing in order to earn profits to offset the growing losses on their gold liabilities. The gold cartel's trading strategy to accomplish this task is clear. The gold cartel reverse-engineers the black-box trend-following trading models.

Just look at the losses taken by some of the major commodity trading managers on their gold trading over the last decade. It is hundreds of millions of dollars of client money lost, and the same amount gained for the gold cartel to help offset their losses from the gold carry trade -- all to make the dollar look good by keeping the gold price lower than it should be and would be if it were allowed to trade in a market unfettered by government intervention.

As I see it there are only two outcomes. Either the gold cartel will fail or the U.S. government will have destroyed what remains of the free market in America.

Total demand for gold in Q1 ’09 rose 38 percent year on year.

One measure of inflation- the Consumer Price Index (CPI) has recently turned positive. Deflation is out—Inflation is starting.

There are a lot of reasons why investors and institutions buy gold. It has no counterparty risk. It’s the premier hedge against inflation. And it’s a safe haven in a sea of financial and political turmoil.

But there is really only one reason why the price is going up… because the demand for the metal is significantly outpacing the supply.

Besides scrap gold and individuals selling their holdings into the market, the other primary source of supply are sales of bullion from the holdings of central banks. For a number of years, central bank sales and leasing have accounted for about 1,500 metric tons per year. This has bridged a serious supply gap and has helped the banking establishment keep a lid on rising gold prices.

Just now, it appears becasue there is no public accounting of central bank coffiers, that the central banks are running out of ammo (gold to sell) and it appears that the tide has turned. The central banks of Brazil, Russia, India and those in the Middle East have all stated a policy of increasing their gold reserves. Not surprisingly, China has also. The Director of China’s Central Bank recently stated:

“Reducing reliance on the dollar and maintaining greater diversification in foreign exchange reserves is the only way to reduce the risk. As a result, an increase in our country’s gold reserves is necessary.”

Russia added 90 metric tons to their reserves in December and January. Ecuador added 28 metric tons in January. Remember Ecuador, in December ’08 it defaulted on its IMF loan, now look who is coming home for dinner.

Considering that the world’s entire gold production in 2008 amounted to only 2,400 metric tons, the potential impact of central banks going from selling 1,500 metric tons to becoming net buyers can’t be overstated.

A short time ago, it was revealed China had nearly doubled its gold reserves, from a game-theory perspective, China has to buy gold and rattle its sword. Last month North Korea set off an underground nuclear device. Apparently, China’s President Hu Jintao finds North Korea’s President Kim useful in the short-term for keeping Japan and South Korea off-balance and in extracting concessions from the United States.

North Korea can continue to defy the international community as long as it has Beijing's support. So we don't have a North Korea problem. We have a China one.
Remember: The first phase was the debt disaster. The second phase was the collapse in the economy. Now, in the third phase, Treasury bonds and the U.S. dollar are getting hit hard, largely due to foreign selling.

Out of the blue:

Friedman, former president of the powerful NY Fed, (he's also a director of Goldman) buys 52,600 shares of stock in Goldman Sachs, and he's accused of a conflict of interest. Friedman quits - but where does he quit? Why I'll be damned, he quits his Fed job - and chooses to remain a Goldman director. What a surprise!

It's now obvious that the Fed and the Treasury want, above all, to save the banks. Everything else is secondary. It's also increasingly obvious that the bankers own the nation and that Goldman Sachs runs the nation and the banks. The whole thing is so flagrant that my head spins. And what Goldman doesn't control, the Pentagon controls.

Rising gold means that the dollar is being devalued - it takes more of a weak dollar to buy an ounce of gold. I expect the "dollar-bugs" to do everything they can to halt the rise in gold. The Fed does not want its massive creation of dollars to be advertised via a surging gold price, and so it goes.

Note to readers: One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. In reference to my sources this month, they include in no particular order: Gregory Spear's Market Commentary, DailyWealth Reader, The Daily Crux, Money and Markets, Investorsdailyedge.com, Moody’s, Bloomberg, The New York Times, The Associated Press, Financial Times, The Globe and Mail (Toronto), Financial Week, International Herald Tribune, Reuters, The Washington Post, InvestmentNews, CBS News, The Toronto, Rick Pendergraft, Business Week, The Wall Street Journal, Martin Weiss, Sharon Daniels, , Financial Post, Mike Larson, Bryan Rich, Claus Vogt, James Turk of Freemarket Gold & Money Report, Sharon Zimmerman, Richard Russell of the Dow Theory Letters, Porter Stansberry, Dan Ferris of Extreme Value.

May - 2009 Economic Brief (2)

2009-05-03T14:34:00.001-07:00

(Part two of two)

Is the US Government “for the people”?

Is the economy based on the irrational assumption that the economy won’t get as bad as it already is?

 The Financial Accounting Standards Board, under intense political pressure, will ease mark-to-market accounting rules, to “mark-to-make believe” allowing banks more leeway on valuing their assets and the ability to mark down the debts on their books and still stay in business.

- Accounting change makes Goldman's December losses vanish and Goldman Sachs’ advice to direct a $13 billion counterparty windfall to itself.

- The closer Citi gets to bankruptcy the more money it would “make” on its derivitives, not to mention the 2.5 billion “credit value adjustment” it received, so it too could report a positive income.

- It let Wells Fargo, for example, claim a Q 1 profit when it’s drowning in losses.

 Fed looks to revive real estate by changing TALF terms U.S. government uses tax-funded TARP allocations to purchase equity interests (toxic assets) in financial institutions at current market value (15 -30 cents on the dollar).

- “The toxic assets weighing down bank balance sheets aren’t going anywhere anytime soon, despite the Obama administration’s plan to purge them”, Soros says. “And that will be a continuing negative factor for the global economy”, he points out.

- “It is a win-win-lose proposal: the banks win, investors win — and taxpayers lose,” economist Joseph Stiglitz told The New York Times.

 The U.S. Treasury is expected soon to announce that it will expand the Troubled Asset Relief Program to help struggling life-insurance companies.

 The U.S. Securities and Exchange Commission is considering the possibility of creating an entirely new business model for credit rating agencies, including doing away with requirements that debt issuers use them. Relying less on rating agencies is the point.

 Eliot Spitzer, questioned the disproportionately high number of high-interest mortgages made by national banks to Hispanic and black borrowers.

- Court to rule on case that could shift bank regulation
Supreme Court justices to rule on shift of oversight of banks from federal to state regulators.

- Six banks failed the stress tests
And they're all appealing...

 A bankruptcy filing by Chrysler after the government's negotiations with some of the automaker's creditors broke down and U.S. President Barack Obama hopes there would be a quick restructuring and what he calls, a "new lease on life". When did you last hear bankruptcy being referred to as a "new lease on life"?

 The Federal Reserve made a surprise move three weeks ago by saying it would buy almost $1.2 trillion in long-term government bonds and mortgage-related securities to prop up the economy.

 Consumer credit in U.S. plunges nearly $7.5 billion
The Federal Reserve reported that U.S. consumer borrowing dropped much more steeply in February than analysts expected. Consumer credit was down $7.48 billion during the month, while analysts surveyed by Reuters had expected a $1 billion fall. It is the largest monthly decline since the Fed started keeping track in 1968. Reuters (07 Apr.) , The Dallas Morning News/The Associated Press (07 Apr.)

 Another Day, Another Scheme The latest one lets ordinary people participate in Geithner’s Public-Private Partnership Program (PPIP), PPIP violates FDIC rules. FDIC’s role in insuring depositors has been expanded to a much greater one guaranteeing over $1 trillion in junk assets, way over its charter $30 billion limit by twisting the rules to arrange it.

 Chrysler turned down a $750 million federal loan to avoid limits on executive pay. Chrysler Financial said in a statement that it declined the offer because it does not need the money. The Washington Post (21 Apr.)

 More banks might be allowed to skip interest payments
The deal obtained by Citigroup last month allowing it to suspend interest payments on $25 billion in federal loans might be expanded by the Obama administration to include other big, distressed banks. The idea is to give the banks more help without going back to Congress, which is unlikely to authorize more money because of public anger over government bailouts. The Washington Post (21 Apr.)

 Circumstances of B of A's acquisition of Merrill spark uproar
Testimony by Bank of America CEO Kenneth Lewis regarding the circumstances under which the bank acquired Merrill Lynch has triggered a furor. Lewis, who is under tremendous pressure regardless, testified in February that former U.S. Treasury Secretary Henry Paulson raised the possibility of having him and his board removed if they did not complete the deal. CNBC (23 Apr.) , Financial Times (24 Apr.) , The Washington Post (24 Apr.)

• Bottom line: When faced with the choice of saving his own job or saving his shareholders, Lewis decided to keep his mouth shut, go ahead with the merger and save his job. Additionally, in January, Washington gave Bank of America $20 billion of your money to offset losses it suffered because of its shotgun marriage with Merrill.

• And as of Friday's close, the decision made by Paulson, Bernanke and Lewis has cost shareholders as much as 43 percent of their money in just over four months, even AFTER a vigorous rally.

 Analysis: FDIC bends its own rules to insure debt
Columnist Andrew Ross Sorkin explains how mission creep prompted the Federal Deposit Insurance Corp. to go from insuring bank deposits to becoming "an enabler of enormous leverage" at the center of the financial crisis. U.S. Treasury Secretary Timothy Geithner's plan to help private investors buy banks' troubled assets includes details of how the FDIC is working to stabilize the financial system by adding risk rather than reducing it and how the agency is reinterpreting its own rules to do so. The New York Times (06 Apr.)

 The Federal Reserve is clearly worried about the ability of foreign central banks to keep buying America's debt. So now, the Fed is buying U.S. Treasury securities. As far as I'm concerned, a government buying its own bonds is like a snake eating its own tail or it is doing something that no other entity can do legally, that is simply print the money. If you do that, it's called counterfeiting. When the Fed does it, it's called monetary policy.

 The U.S. “domestic monetary base” consists of coins and paper money in circulation and in bank vaults, plus commercial bank deposits held by the Federal Reserve. In September of 2008, this figure was $262 billion. However, the Federal Reserve recently indicated that this number will swell to $3.8 trillion by September of this year!

That is a 15-fold increase in the domestic money supply in just one year!

Has Washington and Wall Street gone CRAZY?

The International Monetary Fund (IMF), not driven by domestic politics, says the economic decline is gaining momentum.
The U.S. Treasury says the credit crisis is easing.

The IMF says credit crisis is spreading.

The Fed says most banks have capital far in excess of needs.

The IMF says U.S. banks will suffer ANOTHER $1 trillion in losses beyond what they’ve already written down.

In The Great Depression of the 1930s, there were no fewer than NINE sucker rallies just like this one!

Credit was the drug and, like crack, it was sold around the world at a price so cheap that few could resist. In the U.S., the drug was sold to subprime borrowers; in Europe it was sold to emerging states; in South American and Asia it fueled export development in relatively poor economies. We all know that addiction is not sustainable; we just couldn't see the phenomenon objectively, because we were hooked, as well. Through the eyes of an addict, the world of addiction makes sense.

When the drug supply was suddenly withheld in the fall of 2008, the global economy entered a state of forced withdrawal, cold turkey. This isn't Armageddon, it's withdrawal. After a time, fiscal sobriety will feel normal and healthy. A much slower, but more sustainable pace of global growth will be the eventual result.

Meanwhile and in short, the Obama administration, rather than chart a new course to fiscal sanity, is intent on re-inflating the unsustainable bubble, even as the cost of protecting against default recently surged to new highs, indicating the highest risk yet of bankruptcies since the crisis began! If we don't address the core problems of the financial crisis — companies that got "too big to fail" while at the same time stretching their treacherous tentacles throughout the halls of power in Washington — this problem will NEVER go away.

Kevin Phillips, author and former Republican strategist said, today’s crisis represents “the bursting of the huge 25-year, almost $50 trillion debt bubble that helped underwrite the hijacking of the US economy by a rabid financial sector…” manipulating both Republican and Democratic administrations through the largest lobby group on the Hill.

Study finds lobbying in Washington extremely profitable
Data prepared by University of Kansas professors show that hundreds of millions of dollars spent by major corporations lobbying for a 2004 change in tax law generated a return on investment of 22,000%. The study focused on 93 companies that spent as much as $282.7 million in 2003 and 2004 to persuade lawmakers to enact a one-year tax holiday on overseas profit. In return, the companies got about $62.5 billion in tax savings, the study found. The New York Times/The Associated Press (09 Apr.)

The combination of fiscal and monetary stimulus now comes to about one-quarter of the size of the U.S. economy (as measured by GDP). And that does not take into account all of the guarantees – of bank deposits, money market accounts, bank bonds, and other liabilities.

Michel Chossudovsky calls current policies amounting to “the most drastic curtailment in public spending in American history” - directing most of it for militarism and foreign wars, Wall Street bailouts, and half a trillion for public debt service. From the very beginning of this crisis in 2006, instead of liquidating the bad debts — the toxic assets — the authorities have shuffled them up the food chain, like DDT. First, the DDT was mostly in the failed mortgage lenders. Then it was moved to the big banks. And now, it's being shifted to the federal government itself. So it should come as no surprise that the government's most volatile securities — bonds — will be the next victim of the market's revenge.

If the Fed is successful at turning the U.S. economy and credit crisis around, it will only be because it flooded the system with trillions of paper dollars, sowing the seeds for eventual wild inflation. All the bailouts — all the sandbags the government has placed here and there — are wiped away by the new flood waters of rising interest rates.

A projected deficit of $1.8 trillion this year and a current national debt of over $11 trillion could lead to a big spike in inflation, therefore make sure you protect your wealth and purchasing power.

Of course, the media would argue that when the economy turns back up, the Fed will jump in with both feet to head off inflation by aggressively raising interest rates, or so the story is foretold. We shall see.

It's not hard to understand the relationship of the dollar with human emotions like greed and fear. And that relationship is rarely more visible than it is today...

When investors are willing to take on more risk, stocks, emerging market currencies and commodities all bounce. On the other hand, when fear is prevalent, the dollar soars, Treasuries take off, and gold starts sniffing towards $1,000 an ounce.
This relationship between greed (risk) and fear (safety) is the driving force of financial markets right now.

Out of the blue:

A new bull market is opening up for oil… A barrel of oil cost only $50 and you have an excellent opportunity to make some superb gains by investing in the oil sector at these low levels.

Personally, I hate the fact that burning fossil fuels leads to global warming. I think we should all use nuclear power and drive electric cars, but this technology is still a long way off, and our society is going to be dependent on oil for another 10 to 20 years minimum. Oil is not a permanent solution and it will eventually run out, but the world is addicted to oil and it can’t kick the habit anytime soon, like credit!

However, there is new evidence from Earth’s history and ongoing climate changes that reveal that the dangerous level of atmospheric carbon dioxide is much less than once believed. The safe level is no higher than 350 parts per million, probably less, and we just passed 385 ppm.

Oil and gas companies are spending almost nothing on alternative energy development.

 Royal Dutch Shell said last month that it will freeze its investments in wind, solar, and hydrogen power.

 Exxon says that by 2050, hydrocarbons — including oil, gas, and coal — will account for 80 percent of the world’s energy supplies, about the same as today.

 Shell, for example, said it spent $1.7 billion since 2004 on alternative projects. That amount is dwarfed by the $87 billion it spent over the same period on its oil and gas projects around the world.

Climate change threatens everyone, especially our children and grandchildren, the young and the unborn, who will bear the full brunt through no fault of their own. It is clear that we cannot burn all fossil fuels, releasing the waste products into the air, without handing our children a situation in which amplifying feedbacks begin to run out of their control, with severe consequences for nature and humanity.

Do you think the environment is more important than the economy? What would it be like if you never heard much about the environment, only the economy, would you care? Did you know the word “economy” comes from the Greek word that means to manage and pass on your farm or household to your sons in better shape than you received it. The key point being, sustainable.

Note to readers: One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. In reference to my sources this month, they include in no particular order: Gregory Spear's Market Commentary, Dan Demming, The Daily Reckoning, The Daily Wealth, Money and Markets, Christian Hill Investors Daily Edge, Moody’s, Bloomberg, The New York Times, The Associated Press, Financial Times, Reuters, The Washington Post, The Wall Street Journal, Martin Weiss Money and Markets, Financial Post, Larry Edelson, Google.com, Mike Larson, Chris Mayer Capital & Crisis, The Dallas Morning News, Bryan Rich, Ted Peroulakis, Brain Hunt, Sean Brodrick, Nilus Mattive, Mike Larson and The Times (London).

May - 2009 Economic Brief

2009-05-03T14:24:00.000-07:00

(Part one of two)
The U.S. equity market is in the midst of the strongest rally, the Dow has now rallied a whopping 28 percent from its March low.

That's the biggest, most powerful rally in the Dow in 76 years — since its Great Depression low in 1933!

You might think that we entered a new bull market because corporate earnings are better than expected, but less bad than expected is still bad. But still, you think that things are not that bad, for example:

Consumer confidence climbs to highest level since November
Consumer confidence in the U.S. exceeded the predictions of economists in April, the Conference Board reported. The Consumer Confidence Index, a widely followed benchmark of how consumers feel about the economy, reached its highest level since November. Google/The Associated Press (28 Apr.)

According to The Big Picture blog, the only times we have ever seen the stock market surge close to this much in such a short time frame were:
• December 1929
• June 1931
• August 1932
• May 1933
• July 1938
• September 1982

Given the extensive parallels we and others have pointed out between circumstances then and now, one would think it would be natural to assume that the worst is behind us, and like that last rally, on September of 1982, that we are at the beginnings of a new bull market, but you would be wrong; because there is too much effort and money being thrown around for you to be right!

It’s a new ball game, confidence is at issue. Even at the G-20 summit in London acknowledged this when they called for an additional $1.1 trillion in loans for a new global Financial Stability Board to regulate hedge funds so that now we can know, for the first time, ~ that “The era of banking secrecy is over”.

Small comfort when you realize that they failed to address $684 TRILLION in dangerous derivatives worldwide plus tens of trillions of debt still likely to go bad; and for this reason, the government has maintained that it must continue to prop up the former insurance giant American International Group (AIG) because allowing the company to fail would result in a cascade of counterparty losses that would cause the entire system to collapse. This doesn’t look good.

And neither does this proxy statement.

 Proxy statement: AIG chief a major Goldman shareholder
A recent Goldman Sachs proxy statement shows that American International Group CEO Edward M. Liddy owns 18,244 units of restricted Goldman stock, which would have a value of about $2.2 million if they could be sold today. This potential conflict of interest could raise more questions from Congress and taxpayers about AIG's relationship with Goldman, which benefited from AIG's government bailout. The New York Times (16 Apr.)

All this good market news is happening, yet, is it rational? What’s really happening out there?

 U.S. industrial production fell 1.5% in March, down to as little as half of the peak production levels and has dropped by 13.3 percent since the recession began in December 2007. That's the largest percentage decline since the end of World War II. During the first quarter of 2009, annualized industrial output fell a staggering 20 percent.

 Capacity utilization at factories plunged to a record low, the lowest level in the 42 years the government has been keeping track!

 Globally, $50 TRILLION in net worth has vanished in the past 18 months alone. This includes more than $37 trillion in LOST stock market value worldwide, plus a sharp and ongoing plunge in real estate values both at home and abroad. For the full year, household wealth dropped $11.1 trillion, or about 18 percent. That's the largest decline EVER recorded.

 Thus sending the global economy into its first contraction — a drop of 1.7 percent — for the first time since World War II.

 The U.S. economy contracted by 6.1% in the first quarter. Between last November and the end of March, the economy shriveled more than in any six-month period in over 50 years.

 The International Monetary Fund (IMF) believes we've only acknowledged $1.29 trillion of the $4 trillion in total global credit losses to date. That means we're not even a THIRD of the way through the process.

 The COMMERCIAL real estate business is in full-scale meltdown mode. Wall Street Journal ran a story called "Commercial Property Faces Crisis." It reported default rates on $700 billion of commercial mortgage-backed securities could hit 50%, and noted that as many as 700 banks could fail as property loans go sour.

 U.S. consumers cut back their spending in March but yes, it was "up" in March. But by a lousy 0.7 points. The reading of 26 was worse than economists were expecting and the second-worst reading (after February) in the index's 42-year history.

 U.S. job losses total 742,000 for March

 The pace of job losses is worse now than in the past five recessions going back to July of ’74... This makes the total jobs lost in the first quarter of the year nearly 2 million. By comparison, a total of just over 3 million jobs were lost all of last year.

 This pushed the unemployment rate to 8.5%, the highest reading since late 1983. But it's really a lot worse.

- It excludes workers seeking full-time jobs, failing to find them, and then accepting part-time work that almost invariably pays far less.

- It excludes discouraged workers who have given up looking for jobs because they can't find any.

 The World Bank's Vikram Nehru, the World Bank's chief economist for its East Asia region, cautioned:

"We are still in the middle of a perfect storm. For example over the last four months things have gone from bad to worse in many of the advanced economies."

 Retail sales plunged 1.1 percent in March. That was a huge swing from the 0.3 percent gain in February, and much worse than forecast. Down a disturbing 10.6 percent from March 2008.

 Declines in the Consumer Price Index of 1.6% in February and 1.2% in March reveal fundamental weakness in consumer demand.

 For the 12-month period ending in March, prices for consumer goods dropped 0.4 percent. That's the first 12-month bout of deflation in 44 years! Medical care costs rose yet again during the month of March, bucking the overall trend. And while food prices dipped 0.1 percent, they were UP 4.3 percent during the rolling 12-month period.

 On a year-over-year basis, wholesale prices are now falling at a 3.5 percent rate. That's the deepest rate of deflation recorded in this country since January 1950! In addition, consumer-level deflation came in at 0.4 percent, the most since 1955.

 Japan has reported that auto exports to the U.S. are down more than 66 percent.

 House prices in U.S. continue rapid decline
Suggesting that the U.S. recession has not yet bottomed out, home prices fell in January at a record pace, according to the S&P/Case Shiller index. On average, houses nationwide have lost almost a third of their value from the 2006 peak. Reuters (31 Mar.)

- 7 percent of homeowners with mortgages were at least 30 days late on their loans in February, an increase of more than 50 percent from a year earlier.

- 39.8 percent of subprime borrowers were at least 30 days behind on their home mortgage loans, up 23.7 percent from last year.

 Moody's said many cities, counties and school districts face the risk of downgrade in the coming months. The New York Times (07 Apr.)

 Moody's downgrades Berkshire Hathaway to Aa2

 More companies cut dividends in the first quarter of 2009 than since 1955, when Standard & Poor’s began tracking dividends.

 1 in 10 Americans receiving food stamps
Showing the recession's impact, 10% of Americans -- 32.2 million people -- received food stamps in January, setting another record, according to the Agriculture Department.

 The quality of the balance sheet of the U.S. central bank is deteriorating.

- And the Fed banks are holding total capital of just $45.7 billion against the sum total of $2.19 trillion in assets, meaning the Fed is leveraging its capital 48-to-1. That compares to only 27-to-1 two years ago.

 This week, software giant Microsoft reported its first quarterly sales drop since it went public in 1986. It was one of the greatest unbroken strings of profit growth in history.

 Six of the nation's ten largest banks are currently at risk of failure, including JPMorgan Chase, Goldman Sachs, Citibank, Wells Fargo, Sun Trust Bank, and HSBC Bank USA.

 These banks in trouble are the biggest, controlling 63 percent of the assets of the nation's 19 largest banks.

You can see the extremes quite clearly, the 1929 extreme high was above the upper trend line, and the bottom that followed in the early 1930s touched the lower boundary.

The last time this lower boundary was reached happened during the early 1980s, at the end of the secular bear market that began in the mid-1960s ... 15 years before.

Cheers! See Part two of two

Is the US Government “for the people”?

Is the economy based on the irrational assumption that the economy won’t get as bad as it already is?

April - 2009 Economic Brief

2009-04-01T18:57:00.000-07:00

Closing in on $13 trillion

In addition to the original goal of TARP, the U.S. government has loaned, invested, or committed $400 billion to nationalize the world's two largest mortgage companies ... $42 billion for the Big Three auto manufacturers ... $29 billion for Bear Stearns, $185 billion for AIG, and $350 billion for Citigroup ... $300 billion for the Federal Housing Administration Rescue Bill ... $87 billion to pay back JPMorgan Chase for bad Lehman Brothers' trades ... $200 billion in loans to banks under the Federal Reserve's 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 in currency swaps for industrial nations ... $120 billion in swaps for emerging markets ... trillions to cover the FDIC's new, expanded bank deposit insurance, plus trillions more for other sweeping guarantees.

And it STILL wasn't enough

If it had been enough, the Fed would not have felt compelled this week to announce its plan to buy $300 billion in long-term Treasury bonds, an additional $750 billion in agency mortgage backed securities, plus $100 billion more in Fannie Mae and Freddie Mac paper.

Total tally of government funds committed to date: Closing in on $13 trillionBut, you say, what about the recent advance

The recent advance in the S&P 500 was the largest in the equity market since 1938. From its recent March 6th bottom to March 27th peak, the Dow had jumped a resounding 21 percent in just 20 short days. And the rally may still not be over.

Before I go on, let my just say:

Going forward, we expect to be hearing numerous parallels between this market and the 1930s, not all of them positive.

For example:
1) In America's First Great Depression, the financial collapses beginning in 1929 led to GDP declines of 8.6 percent in 1930, 6.4 percent in 1931 and 13 percent in 1932. The U.S. GDP is currently collapsing at the annual rate of 6.2%.

2) Market corrections can be measured by two parameters: time and price. The current decline of 69 weeks has taken the Dow down 50%. The pace happens to precisely equal the pace of the Dow’s decline in 1929-1930.

3) Moody’s Investors Service now predicts that corporate bond defaults will more than triple this year — and exceed the levels seen during the great depression!

4) Bloomberg just reported that the AVERAGE S&P company suffered a massive 58% plunge in earnings in the last three months of last year. Average earnings have plunged 61% year-over-year, much more than during the 1930s. In fact, the last time earnings declined more than 61% was 141 long years ago! It took 25 years for the Dow to recoup its 1929 high; 19 years after the Japanese bubble popped, and Japan's stock market is still making new lows.

5) Like this crisis, the Great Depression was essentially a debt implosion. But in 1929, total debts represented no more than 170% of GDP. This time around, U.S. consumers are buried under a far larger mountain of mortgage debt, auto loan debt, credit card debt and other consumer debts. Result: Total debts are now close to 350% of GDP – TWO TIMES MORE!

6) In the first 18 months of the 1929-32 bear market, there were many small and medium-sized bank failures. However, none were as massive or as dangerous as the giant failures we’ve experienced in the first 18 months of this giant bear market. This time around, the failures (or bailouts) of giants like Bear Stearns, Lehman Brothers, Fannie and Freddie, Washington Mutual, and Wachovia dwarf anything seen in 1929. And even these large failures will be trumped several times over by the impending demise of Citigroup and AIG.

7) In 1929, the United States was a creditor nation, with substantial foreign reserves. Today, the U.S. is the world’s largest debtor nation, dependent on foreign lenders to keep it afloat. That means that there’s a definite limit to how much longer the U.S. government can continue to borrow to bail out failing institutions.

8) In 1929, there were fewer giant banks. They controlled a smaller share of the total market. And they were generally stronger than the thousands of community banks around the country. Today, by contrast, the nation's high-roller megabanks dominate the market. In 1929, derivatives were virtually nonexistent. Not today! U.S. banks alone control $200.4 trillion; and it's precisely in this dangerous sector that the megabanks dominate the most.

Just two weeks ago, the S&P 500 Index slipped once again to a new bear market low, the lowest level since 1996 to be exact ... 12-years worth of stock market gains LOST in just 18 months! But then stocks turned on a dime and rallied dramatically, with the S&P 500 up nearly 10% in less than two-weeks.

So, what made this most recent advance and what does it really mean?

The Geithner's Plan

The Geithner's program is for a Public Private Partnership to take toxic assets off the books of the banks.

With this plan, Geithner is stating that the assets in question are only temporarily undervalued due to liquidity issues. He argues that these "firesale prices" are unfair and that the true value of the pool of mortgage backed derivatives is significantly greater than the 15-30 percent of current pricing. So, the government is planning to step in and provide the temporary liquidity needed to help the market find a fair price for these assets.

Geithner's goes on to say that even though these assets were tragically mismarked as AAA, they actually represent a mixture within the standard junk category, and not all should be rated at the bottom. The market responded and is encouraged that companies with good reputations that specialize in evaluating bonds to purchase, such as PIMPCO, or is that PIMCO, will be involved in managing the portfolio of these assets and helping to price and sell them. S&P, Moodys and Fitch, the rating companies whose collusion caused the crisis in the first place, will not be involved.

It would not be an overstatement to assert that the economic future of the U.S. for the next generation or two depends on him being right. There are many details yet to be worked out, but the current market rally is a sign that a significant number of large players are betting that it will succeed. I hate to be pessimistic or seem unpatriotic, but I will be betting against The Plan. It is just a bit too heroic for my taste.

As the Wall Street adage reminds us, "Bear markets decline on a slope of hope." They tend to end in a period of hopelessness, not heroism. We are not there yet.
Specifically, the Fed said that it will ramp up its purchases of Fannie Mae and Freddie Mac Mortgage Backed Securities (MBS) from $500 billion to a whopping $1.25 TRILLION in the coming months. The Fed is also going to double its purchases of Fannie Mae, Freddie Mac, and Federal Home Loan Bank bonds to $200 billion from $100 billion.

And for the icing on the cake...

The Fed will buy as much as $300 billion in longer-term U.S. Treasury securities. It's going to focus on Treasuries with maturities between two and ten years, and make purchases two or three times a week.

I am sorry to say this, but this is Banana Republic-type stuff, Zimbabwe anyone? Printing money out of thin air at the central bank, only to turn around and buy debt securities issued by your Treasury, is the kind of practice you typically see in emerging market regimes.

We're essentially monetizing our country's debt and deliberately devaluing our country's currency. We're also screwing over our foreign creditors — a dangerous path to tread considering we're a net debtor nation that's trying to borrow tens of billions of dollars a month to fund our massive deficits.

The Treasury, Federal Reserve, FDIC, and Congress have now lent, spent, guaranteed, or committed roughly $13 trillion to bail out the financial industry and attack the credit crisis. One wonders whether the outright failure of AIG might have precipitated a necessary cleansing that would have been healthy in the long run for the global financial system.

Instead, we have zombie corporations and more importantly until the third quarter of last year, the banks' losses in derivatives were almost entirely confined to credit default swaps — bets on failing companies and sinking investments.
But credit default swaps are actually a much smaller sector, representing only 7.8 percent of the total derivatives market.

Credit quality is worsening... and I'm not talking about home mortgages or credit cards

In other words, forget about PRIVATE credit quality. SOVEREIGN credit quality is coming into question, that is a debt instrument guaranteed by a government. Just look at this chart...

Unfortunately, it's not a stock. This chart actually shows the cost of buying insurance against a U.S. government debt default in the Credit Default Swap (CDS) market.

And now, with new losses in interest rate derivatives, the disease has begun to infect a sector that encompasses a whopping 82 percent of the derivatives market.

And U.S. banks alone control $200.4 trillion.

In the 1930s, the banking crisis helped drive the economy into depression and the stock market into its worst decline of the century.

The same is happening today. Whether the nation's big banks are bailed out by the federal government or not, the fact remains that they're jacking up credit standards, squeezing off credit lines, and even shutting down major segments of their lending operations.

The problem is according to the OCC's Q4 2008 report, America's top five commercial banks control 96 percent of the industry's total derivatives, In other words, for every $100 dollar of derivatives, the big banks have $99.78 ... while the rest of the nation's 7,000-plus banking institutions control a meager 22 cents!

This is a massively dangerous concentration of risk.

The point is that large banks are exposed to the danger that, with exploding federal deficits and likely inflation to follow, interest rates will suddenly surge, delivering a whole new round of even bigger losses in the months ahead.
Worst of all, the five biggest banks are exposed to breathtaking default risk — the danger that their trading partners could fail to make good on their debts.
Specifically, at year-end 2008:
• Bank of America's total credit exposure to derivatives was 179 percent of its risk-based capital;

• Citibank's was 278 percent;

• JPMorgan Chase's, 382 percent; and

• HSBC America's, 550 percent.

What's excessive? The banking regulators won't tell us.

According to the OCC, Goldman Sachs' total credit exposure at year-end was 1,056 percent, or over ten times more than its capital.

Does this preclude sharp rallies? Absolutely not!

Don’t worry they have insurance, they have A.I.G.

A.I.G. didn’t specialize in pooling subprime mortgages into securities. Instead, it sold credit-default swaps.

These exotic instruments acted as a form of insurance for the securities. In effect, A.I.G. was saying if, by some remote chance (ha!) those mortgage-backed securities suffered losses, the company would be on the hook for the losses. And because A.I.G. had that AAA rating, when it sprinkled its holy water over those mortgage-backed securities, (now called “toxic assets”; remember Geithner's remark when speaking of the banks bailout earlier, that the “toxic assets” were tragically mismarked as AAA.) suddenly they had AAA ratings too. Already A.I.G. is into tax payers for 180 billion that they can’t be on the hook for; that’s equivalent to nearly HALF the U.S. government’s entire budget deficit for all of 2008! So much for insurance being of any real value and so much for a deregulated market...

Sadly, AIG's CDS portfolio is just one of many: Citibank's portfolio has $2.9 trillion, almost a trillion more than AIG's at its peak. JPMorgan Chase has $9.2 trillion, or almost five times more than AIG. And globally, the Bank of International Settlements reports a total of $57.3 trillion in credit default swaps, more than 28 times larger than AIG's CDS portfolio.

By the way, speaking of AAA ratings, last month saw two publicly-traded companies lose their AAA credit ratings, General Electric and Berkshire Hathaway . That might not sound like a lot ... until you realize that there were only seven to start with!

A recent quote by Paul Volker, ex-Fed Chairman, certainly causes one to stop and think, he said "The fate of the world economy is now totally dependant on the growth of the US economy, which is dependant on the stock market, whose growth is dependant on about 50 stocks, half of which have never reported any earnings."

So what does all this mean?

The U.S. government is heavily in debt to the tune of roughly $13 trillion. The U.S. government is going to have to print up trillions of dollars worth of new money in an attempt to break out of this economic crisis. This is a desperate attempt to maintain the status quo. Over the past several decades, we have burdened future generations with massive liabilities. With what we have added in the last year, we have ensured that those debts are mathematically impossible to pay. The only “solution” is to print more and inflate away those debts.

Buffett's answer...

"The precise nature is anyone's guess, though one likely consequence is an onslaught of inflation."

Buffett told CNBC that the economy “can't turn around on a dime” and that those efforts could trigger higher inflation once demand rebounds. We are certainly doing things that could lead to a lot of inflation. In economics there is no free lunch.”

How will we pay this back?

We will certainly not default on our debt anytime soon. It’s likely that the government could simply inflate its way out of this mess, so essentially the biggest debt ever amassed could be paid back with almost worthless dollars printed to avoid deflation and keep us in a recession, the lesser of two evils.

The kicker is:

This means the excess supply of currency in circulation is going to lead to demand-pull inflation. Demand-pull inflation is described as too much money chasing too few goods.

Here is how and why...

The Fed cut interest rates to almost nothing in an attempt to head off the deflationary effects of falling house prices and weakening consumer demand. This “reflation” shows us that the Fed is no longer focused on fighting inflation; they are now completely focused on avoiding a depression.

We already know deflation is bad, so why is inflation bad too?

Well, inflation hurts people who have saved up a nest egg and those who live on a fixed-income. The same dollars buy less goods and services. So those who have saved are penalized as the dollar is destroyed. Also, wages never go up as fast as inflation, so working people can experience an increase in their cost of living, without the pay raise to go along with it. It’s important that you shield yourself from inflation to protect your wealth and buying power. Knowing this, today’s 30-year fixed rate mortgages at 4.89 % look really good... and what we are doing to our children and grandchildren is unconscionable.

Because of the inevitable surge in interest rates driven by massive government borrowing this will challenge most corporate bonds to a point where they could lose anywhere from half to 90 percent of their current market value. And let’s not forget Treasury bonds, OK?

Even Warren Buffet says, “When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s," he went on. "But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary."

Why do 30-year fixed rate mortgages at 4.89 % look really good...

Consider that the lowest annual average mortgage rate seen in the 20th and 21st centuries was 4.7 percent, set right after World War II. In other words, this is just about the cheapest that mortgage money has ever been.

What if foreign governments decide they don't want to loan us any more money by buying U.S. Treasury and other government-backed bonds?

And who buys most of our bonds? China and Japan

At the end of 2008, China owned $727.4 billion worth of U.S. Treasury bonds. And Japan was second, at $626 billion. But China has been — and continues to be — the most important lender to the U.S.

Inflation and a weaker dollar will erode the value of China's near $1 trillion loan to the U.S. not to mention China’s trade deficit of 266 billion and China knows it. In fact, the Chinese are already starting to move out of U.S. bonds as the mountain of debt shoots to the moon and the safety of U.S. obligations comes under attack. The Treasury will likely have to boost interest rates to get investors to buy its bonds which is why the bond market is primed for trouble and the reason for Buffet’s comments above.

What does it all mean?

It's Geithner and Bernanke's goal to stimulate the economy at all costs... they’re not going to raise rates until they are absolutely certain that they have gotten the economy going again. And it's Obama's goal to get interest rates down, too... to make mortgages more affordable. So, still lower rates could be coming in the short-tem; and a devalued dollar and inflation have already been set in motion for the long-term.

Right now, you know intuitively that a key factor which got us into trouble was too much debt. Yet the solution being offered is to encourage banks to lend more and people to borrow more. Go figure!

Remember the market tends to recover before the economy and the economy tends to recover before employment. When you see employment start improving, that is when you need to start worrying about inflation.

And that means the U.S. dollar is going to decline. Partly because Fed Chairman Bernanke knows we need a weaker dollar to help get us out of the mess we're in.
And partly because China — despite all the complaining that you're hearing from them about the sinking dollar — also wants a cheaper dollar.

You see, China needs a cheaper yuan just like the U.S. needs a cheaper dollar. With a cheaper currency, China can avoid deflation ... spark inflation ... and boost its exports. China and the U.S. get what they want: Cheaper currencies. Meanwhile, both countries' exports to the Euro region and other areas, like Canada and South America, get a huge boost.

It’s a strange world isn’t it.

Out of the blue:

Is this a government in denial? Yes, and desperate to maintain local as well as international aspirations with or without an economic foundation. We still have our 730 military bases in 160 foreign countries and we still spend more on military endeavors than the rest of the world combined. Could some of those resources be better used here at home? Remember,

a government of the people, by the people, for the people, shall not perish from the earth...

Today the federal budget accounts for nearly 30% of GDP - the most since WWII. Add in the highly regulated and highly subsidized health care industry and you've got the government in control of nearly half the economy. Now add in the banking system - which couldn't exist without the FDIC, which would already be insolvent without the backing of Congress. Now add in the insurance industry, which will surely collapse next. Now add in all the state governments' spending and employees.

Most Americans don't understand: The government is now running most of the economy, by a wide margin. And who keeps the government afloat? The Chinese. The United States is now dependent upon the Chinese to finance our consumption through ownership of U.S. Treasuries. And with an already fragile economy, the U.S. is put in a position of weakness relative to China. China realizes that if the U.S. Government continues to print money at the current pace, their holdings will decline in value due to a devaluation of the dollar. So if the Chinese won’t buy our bonds, we will just buy our own. That is a nice setup. We print the money, we need to borrow to finance our deficit, if no one is willing to lend us the money we will just lend it to ourselves. Sweet!

Think about that for a little while... Up until now, the so-called "Communist" Chinese, whose government makes up about 10% of China's GDP and who control the No. 1freest city in the world (Hong Kong), are now paying for the most government-controlled economy in the world - the so-called "land of the free."

P.S.
Notice, I haven't even mentioned the potential for mischief and instability coming out of the rest of the world -- enough black swans to blot out the sun.
And don't forget about a crisis that's killing 12 million people per year, including 10,000 children per day. Three billion people have been added to the planet just since 1970, but the per capita supply of fresh water is one-third lower today than it was then. In the United States — groundwater is being used up at a rate 25 percent faster than it is being replenished.

Note to readers:
One may wonder how it is that I accumulate such a mass of information, let alone have the time for this blog. First, it is purely self-interest as I too have to navigate these markets and since I am making the time to do the reading and discovery, why not share it with a larger audience, and so I do. Second, my sources are many and varied and what I do is take the best of the best, cut and paste, and string together a somewhat coherent thesis. In reference to my sources this month, they include in no particular order: Gregory Spear's Market Commentary, Automaticearth.com, The Motley Fool, DailyWealth Reader, The Daily Crux, Money and Markets, Louis Navellier, Investorsdailyedge.com, Moody’s, Bloomberg, The New York Times, The Associated Press, Financial Times, The Globe and Mail (Toronto), Financial Week, International Herald Tribune, Reuters, The Washington Post, InvestmentNews, CBS News, The Toronto Star, Forbes, Jim Kunstler, Rick Pendergraft, Business Week, The Wall Street Journal, Martin Weiss, Sharon Daniels, Dan Weil, BCA Research, Financial Post, Gulf News, Los Angeles Times, Larry Edelson, CNNMoney.com, Google.com, Mike Larson, CNBC, ETF Trends, and The Times (London).

2009 - March Economic Brief

2009-03-03T10:58:00.000-08:00

March – 2009 Economic Brief

"Today, we have three interrelated problems: a collapse of the real economy, a collapse of the banking system and rapidly shrinking world trade," said Jeffrey Garten, a professor at the Yale University School of Management. "If you treat one without treating the others, you are doomed." However, Obama’s stimulus plan makes the U.S. real estate market the main pivot in the whole economic mess we're in right now.

Is your house in order?

Over 60% of dentists in one survey acknowledge that the present economy means they now plan to work longer than they'd expected.

Though not the precipitating factor in the current crisis, the weakening of household balance sheets (fewer assets, same liabilities, less net worth, more anxiety) has likely had a significant effect in depressing consumption, which has been the single largest factor in our recent decline in GDP. Since the Federal Reserve Survey of Consumer Finances was conducted in 2007, median net worth fell from $120,300 to between $90,000 and $95,000 - back around 1998 levels ($91,300).
When you or I get in a debt bind, we are forced to make difficult budgetary decisions. We cut back on our spending. Let me know when you hear this happening on a national level.

On the other hand, there is a true disconnect between “the people” and this past year’s Wall Street bonuses: $18.4 billion, the fifth-highest total ever. Did I mention that: the official unemployment rate has now exploded to 7.8%, that U.S. home prices continue to fall (still 20% overpriced), that the current crisis is global is hitting the whole world simultaneously and providing no outside support to offset U.S. domestic weakness. Did I mention that earnings are falling and stocks are still far from cheap based on those earning, that debt and leverage are gone, or that in the undeniable history of speculative bubbles that things always return to their norm?

The reason for this crisis, in a word — CONFIDENCE — or rather, a dramatic loss of confidence and faith in our financial system.

Like many people, I was disappointed by the Financial Stability Plan announced on Tuesday the 10th. The devil is in the details and we shall see just what is disclosed (made transparent) because fairly or unfairly, many people think that Tim Geithner is in Wall Street’s pocket because he has said that being tough on the banks and top bankers would further worsen credit markets and thus deepen/prolong the recession. On the other hand, if he had forced banks to write down their book values (bad assets) based on actual market conditions—and then deal with the consequences—he would have ended the financial crisis, but it would be ugly - it’s kind of a catch-22 thing, your damned if you do and your damned if you don’t, I guess.

Can the U.S. afford this $789 billion major fiscal stimulus package? What’s this government to do? Cutting spending is not really an option given the economic crisis and given the growth of entitlement commitments in the future, (the total U.S. debt – including Medicare, Medicaid and Social Security – is more than $99 TRILLION!), and that’s not to mention our increasing military needs. In fact, the only way the debt can be paid off is by inflating it away which will drive interest rates up and the dollar down, or so economic logic predicts.
Add to this, the information that the International Monetary Fund said last month that Japan’s economy would shrink 2.6 percent in 2009, versus contractions of 1.6 percent and 2 percent in the U.S. and Europe. Are you starting to get the picture that this downward spiral is now engulfing all the world’s economies? I hope so.
So what happened to the stimulus package, why did it drive the markets, yet again, down?

First, the Fed will be expanding its Term Asset-backed Securities Loan Facility, or TALF. In this program the Fed will lend money to investors who buy securities that fund various types of loans. The Treasury will seed the TALF program with as much as $100 billion. The Fed will provide additional leveraged funding, up to $1 trillion.

Second, the Treasury is going to set up a public-private program to buy “bad assets” from the banks, up to $500 billion.

Third, Regulators will "stress test" bank portfolios, and inject capital into them, if necessary, through the purchase of convertible preferred securities.

Fourth, there was some talk about foreclosure mitigation and prevention at Fannie Mae, Freddie Mac, and private banks. Recently, Mr. Obama rolled out a $275 billion anti-foreclosure plan, so it’s not all talk.

Let’s go over this again, first, he got Congress to pass a $787 billion stimulus package ...

Next, he got Treasury Secretary, Timothy Geithner, to unveil the administration's bank bailout plan which he now admits could cost up to $3 trillion .

Sound good so far, it’s nothing new. Are you still wondering why the markets reacted by going down?

Add it all up, and it comes to more than $4 trillion, an amount nearly ten times larger than the budget deficit for all of 2008. All in just 32 short days! Without a doubt, the $4 trillion makes Obama the single most profligate spender in history — bar none. And still the government didn’t spell out exactly how, when, and why it would save the day. So the “plan” is still to come up with yet another plan. What kind of plan is that?

Wall Street certainly didn’t like the ambiguity after so much of a “save the day” rhetoric. It was more of the same old failed logic. Remember the TAF, the TSLF, the PDCF, the TARP and all the rest of those acronyms? Those programs have kept many "failed" financial institutions alive. Is the TALF any different, no! Are we are still on life support, yes!

Look at it this way: If you were a very rich man living at the time of Christ ... and you could have started saving $1 billion per year every year thereafter, you'd still be only half way there! You'd need still another 2000 years to finance what Obama has committed to spending in just the one month since he began his presidency.

We haven’t even talked about failed commercial loan originations which dropped 80% year-over-year in the fourth quarter. EIGHTY PERCENT! Just think of the impact that's going to have on the commercial real estate business which is destined to collapse next.

I could go on, but the real point is that you can buy into Washington’s hype or you can prepare your portfolio for a long, low, lean time ahead.

That's why, despite $4 trillion in new spending schemes and guarantees, the Dow has plunged to new lows, that’s why every stock index in Asia and Europe have also cratered in unison.

That’s why gold — the world's crisis hedge of last resort — has once again shot for the moon. Did I mention that the Feds, Ben Bernanke, has admitted in the latest release of the FOMC minutes that there will be no recovery in 2009. The rationale for owning gold, as it once again approaches the $1,000 an ounce level, is the prospect of mounting monetary disorder. The long-term story for gold is as a remonetization play as investors lose faith in inflating currencies alongside monetary and fiscal policy measured up against the desire of Central Banks to keep asset prices relatively stable, if not volatile, but certainly not wanting the dreaded Deflation economic apocalypse.

Here, gold is a prime candidate to become a “mania asset” once its demand becomes chiefly financially driven.

How high can gold ultimately go?

Normally, Central Bankers see high gold prices as a lack of trust in the financial system (not to mention their ability as Central Bankers). We saw this in 1932 and 1980 when the Dow Jones Industrial Average/gold ratio was 2:1. Only nine years ago in 2000, this ratio was over 40:1. Arriving at 2:1 again does not necessarily mean the Dow must decline significantly from here; more likely gold prices will surge and the Dow will stay range-bound but volatile. For this reason, this is the first time I can see Central Bankers actually favoring a high gold price as it would suggest that their attempts to stave off deflation were starting to work. Central Bankers in favor of higher gold prices; my how things have really changed.

These are the three essential truths to be drawn from the market...

1. Analysts have consistently underestimated the seriousness of our current economic problems. Weren’t we supposed to have a turnaround by the end of last year? And then it was supposed to happen the second half of this year... and now it is not going to happen this year at all.

2. All the fundamental numbers are still worsening. Jobs, factory orders, housing, bank writedowns, economic growth, unemployment and so on.

3. Most of those who are predicting an imminent turnaround are doing so on the basis of the government’s bailout plans. But government actions so far have failed dismally. “Government as the answer” just doesn’t do it for me, how about you?

Let’s take a step back and look at the big picture.

Somewhere near $30 trillion has been lost in global stock markets. Global real estate has suffered a similar fate. This doesn't include bond, commodity or other market losses. These losses are only in markets that are fairly transparent. Who knows what has happened in the hidden and unregulated derivatives market, where somewhere near $600 trillion sloshes around, nothing good for sure. These toxic problems are at the root of what ails us, yet the public is left in the dark. You can't make any of these markets, businesses or individuals whole by throwing around a few trillion freshly digitized dollars. The scale is simply too big. With this in mind, perhaps it is useful to understand something about economic philosophy. Let me explain.

An epic battle being waged between "David vs. Goliath"

School of Goliath — The intellectual leader is Milton Friedman (Money Supply Theory). Milton Friedman believed that the government should flood the economy with massive amounts of money to enhance and increase consumer demand.

Basic Premise: In order to keep the current recession from turning into a depression as we witnessed in 1929, the government must stimulate the economy with massive amounts of money so that we can enhance and increase consumer demand.

This is where Mr. Bernanke, Mr. Giethner and President Obama's advisors reside.

School of David — The intellectual leader is Irving Fischer (Debt-Deflation Theory). Irving Fischer's Debt-Deflation Theory holds that the government must let the invisible cleansing hand of the market wash away the debt before economic growth can resume.

Basic Premise: In order to keep the current recession from turning into a depression as we witnessed in 1929, the government must step-back and let the invisible cleansing hand of the market let those business who fail, fail - and clear the debt before any real economic growth can again take hold in the economy.

The point where we are at now in this battle is the part where debt levels have reached such huge proportions in the economy, that due to the size of the money involved, pumping more money into the system is ineffective because the velocity of money declines as the size increases.

Let me explain the term "monetary velocity" and how important it is:

Monetary velocity means how fast money is circulated in the economy — the speed in which it is spent. And it is a key measure in the definition of economic growth and output.

But, in this epic battle, eventually, when debt levels become so huge, as they are now, people get scared. They save, hoard and use their money to pay down debt. They don't take on more debt or run out and spend more just because the money supply has been increased magically (digitized dollars) by the government.
In fact, the more money pumped into the system only adds to the total debt in the economy, and therefore prolongs the downturn.

We will be locked in a sustained period of risk aversion (rising unemployment, deflation, and sovereign debt defaults) as this crisis plays out. And at a time of major risk aversion, the world will flock to its reserve currency — the U.S. dollar, until inflationary pressures (more digitized dollars) move the herd to gold. Why? Because the endgame to this crisis will eventually bring much higher interest rates to keep the herd feeding on US dollars, a downgrade of the US government's credit status, hyperinflation, and the destruction of the dollar.

If demand for money rises faster than supply, then prices for other goods will fall because people want cash rather than assets. This is what's happening right now. The feds are increasing money supply by the trillion. But there's huge demand for that money, too, people want to be in cash, not assets because of the downside risk in the recession/deflation environment based on the total debt and the inability to efficiently service it due to its size. That’s why the US treasury is able to sell short-term bonds at 0% interest, because people want the cash more than any risk associated with some return.

Money demand is all about people's confidence and sentiment. It could change rapidly at any moment (herd mania). When confidence returns and when people start spending money as fast as they get it, watch out: because we're headed for a huge inflation and you should turn your paper money into gold and silver because all of a sudden money will be worth less making prices for goods and other assets worth more.

In fact, if you go back to my March and April 2008 posts you will understand that the US Empire has been insolvent, and run on debt for many years. We've long had the privilege of issuing the primary currency in international trade because of demand for the US dollar. No other nation has been able to print money out of thin air and purchase goods and services with it from abroad (Thank you China, it’s our money, but it’s your problem).

Here’s the rub

The US needs over $2 billion per day coming in from foreign sources to balance our trade and budget shortfalls. We have been and remain at the mercy of foreigners. A total of $1.5 billion was all that came in for the entire month of October. November actually saw a negative $21.7 billion. That means $21.7 flowing out of the US and nothing flowing in on a net basis. Who exactly is going to pay for the trillions in spending the US has on the agenda this year?

Yes, the Fed will have to do this deed. They create money (digitized dollars) in which to fund our debts. (Don't try this at home, it’s illegal to print money.) In whose behalf is the US Treasury piling up all these debts? Taxpayers; of course, you and me and your grandchildren’s children for many generations out. It's little more than a house of cards at this point. The amounts of debt are too astronomical (In god we trust!) to be repaid, ever.

The US is insolvent by any reasonable method of accounting. The debts cannot be paid. When they can no longer be serviced, it's over!
I'm not trying to depress you, though that has likely happened. This is all really ugly. Maybe it's the darkest night before dawn, but it's hard to imagine how all this can pass us by and leave the world unchanged.

Some good news:

If this stimulus package doesn't work, there will probably be Stimulus Plan II.
Interestingly, one neat effect of this coming US dollar inflation is that it will reduce our trade imbalance with China at the same time.

The price of gold has jumped from $737 to over $995 an ounce, a gain of more than 35%! This situation makes gold the de facto reserve currency. Gold alone cannot be devalued or manipulated. It is the safe haven standard of value today, just as it has been for the last 5,000 years.

It would be hard to pick a more interesting time to be alive.

Thankfully, despite all the bad news, we still have efficient free transactions — not only in goods, but also in services; not only in assets, but also in debts; not only for private-sector securities, but also for government securities.

And Canada is now the largest single supplier of oil and refined products to the United States. Northern Alberta is sitting on the biggest petroleum deposit in the world. It has 300 billion barrels of proven reserves ... and another TRILLION barrels that are just waiting for recovery technology to improve. That's eight times the oil in all of Saudi Arabia!

Some Bad News:

Economist, Paul Krugman, a recipient of the Nobel Prize in Economics, said in a speech at the University of Pennsylvania on February 19th that the U.S. economic-stimulus program doesn't deliver enough stimulus to pull the U.S. out of its downturn.

On the dame day at a Columbia University dinner reported by Reuters...

George Soros said the financial system has effectively disintegrated, with the turbulence more severe than during the Great Depression and with the decline comparable to the fall of the Soviet Union, while ...

Paul Volcker said he could not remember any time, even in the Great Depression, when things went down so fast and quite so uniformly around the world.

Another point of view out of the blue:

Did you know the exhalations of breath and other gaseous emissions by the nearly seven billion people on Earth, their pets and livestock are responsible for 23% of all greenhouse gas emissions? Like it or not, we are the problem!

February - 2009 Economic Brief

2009-02-06T21:57:00.000-08:00

"If you have fiscal stimulus without fixing the banking system, it will be like a sugar high," said Robert Zoellick, president of the World Bank, and Dominique Strauss-Kahn, managing director of the International Monetary Fund.

The contagion has now hit Main Street!

Unemployment has gone through the roof in almost every industry. This also means that the value of almost every bank asset is greatly overstated whether it be 50 cents on the dollar or 20 cents on the dollar, who knows?

Can the U.S. government bailout Citigroup and Bank of America? Can it do this even as thousands of large and small retail companies, air transport firms, auto companies and others file for Chapter 11, even as Europe and Asia keep sinking? And that’s not all, did you know how this crisis is spreading overseas to other banks? The Royal Bank of Scotland (RBS) announced recently that its losses for 2008 would be a staggering 28 billion pounds (41.3 billion U.S. dollars)!

If you have been following my blog then you already know about Bank of America’s $2.4 billion loss, Citigroup’s $8.3 billion loss, but did you know JPMorgan Chase's derivatives could double the size of the banking crisis overnight. On the day that JPMorgan Chase needs to join the ailing Bank of America and Citigroup in Uncle Sam's intensive care unit, the derivatives mess doubles immediately. In fact, the International Monetary Fund raised its estimate of bank losses on U.S.-originated loans from $1.4 trillion just this past October to $2.2 trillion just three months later-- and that does not cover the cost of capital needed to allow banks to resume normal lending. No wonder these bailouts keep failing! All this is in addition to the Obama administration discussions on the need for a second round of bank bailouts that could cost U.S. taxpayers an additional $1 trillion to $2 trillion. Hold on to your hat.

Does this sound like a B-grade movie? Well, they're actually trying to do it.

Congress has approved the second $350 billion from the original 700 billion TARP bailout even though according to the Congressional Budget Office (CBO), taxpayers have already lost at least $64 billion on the first 350 billion on that “investment’ into the banks. And while the Treasury has abandoned its plan to buy up “bad bank” assets, the Federal Reserve has gone ahead with another $500 billion program that does precisely that through a massive entity that acts like a giant insurance company, picking up most or all of the bank losses. Go figure? And yet, despite all these efforts, the economy is still collapsing. Why? Because this debt scenario is on top of all the other debt scenarios.

You must expect that each new incarnation of the debt crisis will be a bigger threat to your wealth and your income.

Take a look at the more than 2.6 million families who lost a paycheck in 2008. This may not be you, but this is sure as heck represents your patients. That means the total number of unemployed workers are now over 11 million — fully 74% as many as were unemployed in The Great Depression. Obama himself has warned that the unemployment rate will explode to at least 10% in 2009, more than 15 million workers will be without a job — more, even than during the depths of The Great Depression. Wage freezes and outright salary reductions
are already spreading like some kind of new economic plague!

Two Competing Expectations For the Future

They are:
1. That uncontrollable money-printing and excess spending on bailouts and stimulus will breed a new, super-inflationary environment, or

2. The change in capital flow as evidenced by shifting consumer confidence is ushering in a period of deleveraging and deflation that will force a global economic rebalance. Psst, don’t tell any one, but we are already in a depression.

Consumption is obviously on the decline. The declines in credit market have made a huge impact on consumer demand. Investment is likely heading in the same direction. A labor expert said there is "a vicious circle of depression, where job losses lead to falling consumption, which lowers industrial confidence."

The result of uncertainty in expectations has created hoarding of cash; not just by individuals, but also by banks and institutions that are not willing to lend. That means the U.S. government plans to make up for the shortfall in consumer demand and institutional credit by increasing its spending. How can it do this? It can do this because the U.S. government has one weapon no other country has – the world's reserve currency.

Inflation is not a short-term concern, if you're looking at the U.S. on a relative basis, relative to competing economies and currencies, thus the story for the ongoing bull market for the U.S. dollar begins to make sense. For example, the British pound just hit a new 23-year low against the dollar which is a good sign for the U.S. dollar. Add to this mix that China is also facing pressure from President Obama to allow the Yuan to rise in value which would be the equivalent to economic suicide. Timothy Geithner, Obama's pick for Treasury Secretary, said that "China is manipulating its currency." How about a currency war, anybody?

Nevertheless, the last thing China can afford is to allow its currency to rise and make its exports more expensive. So I foresee that the currency-valuation issue will probably turn into some sort of political battle down the road, threatening to make things worse for both the U.S. and China. It is getting ugly out there.

But, and this is the major “but” in this scenario, it seems improbable that this level of deficit spending can continue without sparking a run on the dollar via foreign governments selling U.S. Treasury bonds. In the last 6 weeks the Treasury market was hit harder than it's been hit since 1987 and further, there is not sufficient global savings to buy more than 30 percent of the proposed extreme spending programs. Only the Treasury market can spend freshly minted money like this because it is vastly larger than the stock market and also, by the way, this kind of money is way too big for effective internal Federal Reserve control. Why?
Simply, our creditors, other foreign governments and investors will not allow us to print money forever.

Two cases in point, 1) South Korea's economy contracted a painful 5.6% last quarter — twice as bad as had been expected. The problem, China is South Korea's biggest export market. And exports to China are nose diving. South Korea is also one of the largest holders of U.S. Treasury bonds and on January 19, the head of investments for South Korea's government pension service, Kim Heeseok, told Bloomberg, "It's time to sell U.S. Treasuries" because the ongoing stimulus is going to cause inflation. 2) In December, investors who were buying the longest Treasury bond in existence — the 4.5% "long bond" expiring May 15, 2038 ended up with only 2.52% and since then the bond value has lost $1,890. In other words, they lost the equivalent of more than five years of interest in just six weeks. So don't count on Uncle Sam to save your bank, your business, or the economy.

Still not convinced? Add to this equation the fact that China's exports have plummeted so they don't have the money to lend us anymore. With the U.S. economy in the dumps, these government bonds aren't as attractive as they used to be. China has already said they want to diversify away from them. Recently, China's Premier Wen Jiabao laid the responsibility for this global crisis squarely on Washington's doorstep: The financial crisis, he said, is "attributable to inappropriate macroeconomic policies and their unsustainable model of development characterized by prolonged low savings and high consumption; excessive expansion of financial institutions in blind pursuit of profit." The reality is the world’s biggest investors in US Treasury bonds — China and Japan — need the funds to help offset their own economic slide.

Did I mention that oil prices have dropped sharply, so OPEC doesn't have as much to lend us either. The same can be said for other major investors in Russia, Western Europe and Latin America.

What to do?

Keep up to 90% of your money in cash (short-term) or gold bullion (long-term). Why gold? It’s an inflationary hedge, its supply is limited. All the gold that's ever been mined in the history of the world can fit into two Olympic-size swimming pools. At the end of last year, the total paper money and IOUs of the entire globe totaled more than $600 trillion. That’s 10 times the GDP of the WORLD. Gold, at its 2008 year-end price of $869.75 an ounce, equals just $831 billion — less than 1% of the total outstanding paper in the world.

Simply Put:

The U.S. banking system is toast. It's bankrupt in every sense of the word and in every number you can imagine. The U.S. Government is also broke. Think of the implications of creating more debt to pay off existing debt ... printing more paper money to circulate in the economy ... and then spending trillions of previously non-existent dollars to try and stimulate the economy.

Then printing trillions more to save the banking system ... to pay off eventual Social Security obligations as they come due ... to pay Medicare liabilities ... to fund failing pensions ... and more. I’ll put it to you this way, if you or I spend hundreds of thousands more than we earn each year ... and then borrow nearly every penny we need to pay our bills, it's called "insanity." When Washington does it, nobody bats an eyelash.

So what's left?

Cash and Gold —

Gold performs admirably in deflations as well as inflations!

We could be facing multiple years of adversity before our economy rids itself of excess leverage, before bad debts are liquidated, and before a sustainable recovery can begin.

We are witnessing nothing less than a sea change in the way Americans think about their spending, savings, investments and debt.

Want some good news?

If you look at the last 12 months or the last six months, health care has been the best-performing sector. So far, so good.

Want another perspective?

Chris Buckley's satirical novel "Boomsday” is more than satirical, it is prophetic.

It says:

In the long term, Obama's adding a $1 - 2 trillion stimulus package on top of what Nobel economist Joseph Stiglitz calls a "$10 trillion hangover" of debt left over by former President Bush from the economic meltdown, two wars... and then adding to that the fact that Pakistan and India are ready to go at each other, plus the wild card that is Israel, plus melting ice caps on both poles, plus reforming out-of-control economics of retirement entitlements, like Social Security, (which eat up 40% of the federal budget), all this, will be like rearranging deck chairs on the Titanic because the real problem is population growth.

If you are over 50 years of age you have lived 1/10 of the time since Columbus discovered America. If you agree the average life time is 80 years, then any 8 of those years represents the same 1/10 of your life time. In the year 400 AD the world’s population was 200 million. It took 1,000 years for the world’s population to double to 400 million in the 1400’s when Columbus first thought he had discovered Asia. Now it takes two years for the population to grow by 200 million, not 1,000 and that is the real problem that no one is talking about; bigger even than our current economic crisis!

Yes, population is the core problem that, unless confronted and dealt with, will render all solutions to all other problems irrelevant. Population is the one variable in an economic equation that impacts, aggravates, irritates and accelerates all the other problems. The point is more and more people are filling up our little planet.

A United Nation's study estimates the world population will continue exploding, from 6.6 billion to 9.3 billion by 2050! By 2050 America's then 400 million will be vastly out numbered by 8.9 billion others across the planet, all competing with America. In short, within four decades, half your life time, human demands will easily double. That makes population growth the key variable in every economic equation ... impacting every other major issue facing world economies ... from peak oil to global warming ... from foreign policy to nuclear threats ... from religion to science ... everything.

The focus for government, and for everyone, should be on how to minimize the risk that people will not freeze to death in their mortaged homes or are not poisoned by their own drinking water. Trying to save the banking system doesn't address that. Trying to save the banking system with the money that belongs to the people makes it more likely they will freeze to death. That in a few words is the choice before us.

How Much More Economic Pain Is Yet to Come?

The answer: A whole lot more!

The S&P 500's November low was 752, which amounted to a peak-to-trough loss of 52%; that makes this current downturn the third worst in modern stock market history, but not as bad as either of the Great Depression bears of the 1930’s, at 86% and 54%. However, the current downturn has already been deeper and faster than any other bear market in recent history. Why just last quarter, the U.S. economy shrank the most since 1982 as consumer spending recorded the worst slide in the postwar era. The means the US economy is shrinking at a 3.8% pace. Unadjusted for inflation, GDP shrank at a 4.1 percent pace, the most since the first three months of 1958.
The IMF dropped its forecast for global economic growth to a measly 0.5% for 2009 — the weakest pace since World War II. What's more, that's a drastic reduction from the 2.2% growth the IMF had predicted as recently as November.

The S&P 500 lost 8.57% last month, which was the worst January on record. In January, we saw gold climb nearly 5% and silver jump 11%. January was the worst January ever for the DOW and the S&P 500.

Lawrence Summers, director of the National Economic Council, said the country faces "a real risk" of slipping into deflation. ADP Employer Services said in a report that the U.S. private sector eliminated 522,000 jobs in January. Fitch Ratings said U.S. credit-card payments that are at least 60 days late reached a record 3.75% in January. We know from comments made by participants at the World Economic Forum in Davos that bankers the world over anticipate a huge wave of commercial real estate defaults that will begin later this year and stretch into 2010. Federal regulators have closed six banks this year already so we are well on pace to pass twenty-five U.S. banks that failed last year.

Still not concerned?

Did you know that the costs of the government bailouts of the housing crisis, the credit crisis, and the Wall Street bailout exceeds the costs of all US Wars, The Louisiana Purchase, the New Deal, the Marchall Plan and the NASA Space program combined!

Did you know that America’s massive accumulation of debts now totals $294 trillion.

That’s 420 times larger than the $700 billion TARP bailout program and nearly 300 times bigger than the largest estimates of the Obama rescue package. This icludes $52 trillion in interest-bearing debts tallied by the Federal Reserve; $60 trillion in government Medicare, Social Security and pension obligations estimated by the Government Accountability Office; and $182 trillion in derivatives, as reported by the Comptroller of the Currency.

All this in addition to:
•The Fed reports that say U.S. households lost $7.9 trillion in real estate, stocks and other assets.

•Plunging income in households

•Government rescues are slow, we are still waiting for the 2nd half of TARP

•Sinking confidence

•The cost of financing the rescues - already the price of long-term bonds are collapsing and yields increasing so much so that the average A-grade corporate bond costs 16.95%. I ask you, how can they or anyone afford this higher borrowing cost long-term?

•National Association of Realtors said the nationwide median price of an existing home fell 15.3% in December, the largest drop ever. And there is still an over supply of between 1.5 million and 1.75 million new and existing homes on the market. Yes, sales are going up, but prices are going down. Wholesale dumping is still ahead, forcing sellers to slash prices, driving millions more into foreclosure and swamping any foreclosure prevention efforts.

•Alright, I’ll stop, I know its too much to take in all at once, but stay tuned... and don’t get euphoric over the “bad bank” solution, the name says it all, or would you prefer to call it BARF, bad asset repository fund.