July - 2009 Economic Brief

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

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)

(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

(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

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

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!