February - 2009 Economic Brief

"If you have fiscal stimulus without fixing the banking system, it will be like a sugar high," said Robert Zoellick, president of the World Bank, and Dominique Strauss-Kahn, managing director of the International Monetary Fund.

The contagion has now hit Main Street!

Unemployment has gone through the roof in almost every industry. This also means that the value of almost every bank asset is greatly overstated whether it be 50 cents on the dollar or 20 cents on the dollar, who knows?

Can the U.S. government bailout Citigroup and Bank of America? Can it do this even as thousands of large and small retail companies, air transport firms, auto companies and others file for Chapter 11, even as Europe and Asia keep sinking? And that’s not all, did you know how this crisis is spreading overseas to other banks? The Royal Bank of Scotland (RBS) announced recently that its losses for 2008 would be a staggering 28 billion pounds (41.3 billion U.S. dollars)!

If you have been following my blog then you already know about Bank of America’s $2.4 billion loss, Citigroup’s $8.3 billion loss, but did you know JPMorgan Chase's derivatives could double the size of the banking crisis overnight. On the day that JPMorgan Chase needs to join the ailing Bank of America and Citigroup in Uncle Sam's intensive care unit, the derivatives mess doubles immediately. In fact, the International Monetary Fund raised its estimate of bank losses on U.S.-originated loans from $1.4 trillion just this past October to $2.2 trillion just three months later-- and that does not cover the cost of capital needed to allow banks to resume normal lending. No wonder these bailouts keep failing! All this is in addition to the Obama administration discussions on the need for a second round of bank bailouts that could cost U.S. taxpayers an additional $1 trillion to $2 trillion. Hold on to your hat.

Does this sound like a B-grade movie? Well, they're actually trying to do it.

Congress has approved the second $350 billion from the original 700 billion TARP bailout even though according to the Congressional Budget Office (CBO), taxpayers have already lost at least $64 billion on the first 350 billion on that “investment’ into the banks. And while the Treasury has abandoned its plan to buy up “bad bank” assets, the Federal Reserve has gone ahead with another $500 billion program that does precisely that through a massive entity that acts like a giant insurance company, picking up most or all of the bank losses. Go figure? And yet, despite all these efforts, the economy is still collapsing. Why? Because this debt scenario is on top of all the other debt scenarios.

You must expect that each new incarnation of the debt crisis will be a bigger threat to your wealth and your income.

Take a look at the more than 2.6 million families who lost a paycheck in 2008. This may not be you, but this is sure as heck represents your patients. That means the total number of unemployed workers are now over 11 million — fully 74% as many as were unemployed in The Great Depression. Obama himself has warned that the unemployment rate will explode to at least 10% in 2009, more than 15 million workers will be without a job — more, even than during the depths of The Great Depression. Wage freezes and outright salary reductions
are already spreading like some kind of new economic plague!

Two Competing Expectations For the Future

They are:
1. That uncontrollable money-printing and excess spending on bailouts and stimulus will breed a new, super-inflationary environment, or

2. The change in capital flow as evidenced by shifting consumer confidence is ushering in a period of deleveraging and deflation that will force a global economic rebalance. Psst, don’t tell any one, but we are already in a depression.

Consumption is obviously on the decline. The declines in credit market have made a huge impact on consumer demand. Investment is likely heading in the same direction. A labor expert said there is "a vicious circle of depression, where job losses lead to falling consumption, which lowers industrial confidence."

The result of uncertainty in expectations has created hoarding of cash; not just by individuals, but also by banks and institutions that are not willing to lend. That means the U.S. government plans to make up for the shortfall in consumer demand and institutional credit by increasing its spending. How can it do this? It can do this because the U.S. government has one weapon no other country has – the world's reserve currency.

Inflation is not a short-term concern, if you're looking at the U.S. on a relative basis, relative to competing economies and currencies, thus the story for the ongoing bull market for the U.S. dollar begins to make sense. For example, the British pound just hit a new 23-year low against the dollar which is a good sign for the U.S. dollar. Add to this mix that China is also facing pressure from President Obama to allow the Yuan to rise in value which would be the equivalent to economic suicide. Timothy Geithner, Obama's pick for Treasury Secretary, said that "China is manipulating its currency." How about a currency war, anybody?

Nevertheless, the last thing China can afford is to allow its currency to rise and make its exports more expensive. So I foresee that the currency-valuation issue will probably turn into some sort of political battle down the road, threatening to make things worse for both the U.S. and China. It is getting ugly out there.

But, and this is the major “but” in this scenario, it seems improbable that this level of deficit spending can continue without sparking a run on the dollar via foreign governments selling U.S. Treasury bonds. In the last 6 weeks the Treasury market was hit harder than it's been hit since 1987 and further, there is not sufficient global savings to buy more than 30 percent of the proposed extreme spending programs. Only the Treasury market can spend freshly minted money like this because it is vastly larger than the stock market and also, by the way, this kind of money is way too big for effective internal Federal Reserve control. Why?
Simply, our creditors, other foreign governments and investors will not allow us to print money forever.

Two cases in point, 1) South Korea's economy contracted a painful 5.6% last quarter — twice as bad as had been expected. The problem, China is South Korea's biggest export market. And exports to China are nose diving. South Korea is also one of the largest holders of U.S. Treasury bonds and on January 19, the head of investments for South Korea's government pension service, Kim Heeseok, told Bloomberg, "It's time to sell U.S. Treasuries" because the ongoing stimulus is going to cause inflation. 2) In December, investors who were buying the longest Treasury bond in existence — the 4.5% "long bond" expiring May 15, 2038 ended up with only 2.52% and since then the bond value has lost $1,890. In other words, they lost the equivalent of more than five years of interest in just six weeks. So don't count on Uncle Sam to save your bank, your business, or the economy.

Still not convinced? Add to this equation the fact that China's exports have plummeted so they don't have the money to lend us anymore. With the U.S. economy in the dumps, these government bonds aren't as attractive as they used to be. China has already said they want to diversify away from them. Recently, China's Premier Wen Jiabao laid the responsibility for this global crisis squarely on Washington's doorstep: The financial crisis, he said, is "attributable to inappropriate macroeconomic policies and their unsustainable model of development characterized by prolonged low savings and high consumption; excessive expansion of financial institutions in blind pursuit of profit." The reality is the world’s biggest investors in US Treasury bonds — China and Japan — need the funds to help offset their own economic slide.

Did I mention that oil prices have dropped sharply, so OPEC doesn't have as much to lend us either. The same can be said for other major investors in Russia, Western Europe and Latin America.

What to do?

Keep up to 90% of your money in cash (short-term) or gold bullion (long-term). Why gold? It’s an inflationary hedge, its supply is limited. All the gold that's ever been mined in the history of the world can fit into two Olympic-size swimming pools. At the end of last year, the total paper money and IOUs of the entire globe totaled more than $600 trillion. That’s 10 times the GDP of the WORLD. Gold, at its 2008 year-end price of $869.75 an ounce, equals just $831 billion — less than 1% of the total outstanding paper in the world.

Simply Put:

The U.S. banking system is toast. It's bankrupt in every sense of the word and in every number you can imagine. The U.S. Government is also broke. Think of the implications of creating more debt to pay off existing debt ... printing more paper money to circulate in the economy ... and then spending trillions of previously non-existent dollars to try and stimulate the economy.

Then printing trillions more to save the banking system ... to pay off eventual Social Security obligations as they come due ... to pay Medicare liabilities ... to fund failing pensions ... and more. I’ll put it to you this way, if you or I spend hundreds of thousands more than we earn each year ... and then borrow nearly every penny we need to pay our bills, it's called "insanity." When Washington does it, nobody bats an eyelash.

So what's left?

Cash and Gold —

Gold performs admirably in deflations as well as inflations!

We could be facing multiple years of adversity before our economy rids itself of excess leverage, before bad debts are liquidated, and before a sustainable recovery can begin.

We are witnessing nothing less than a sea change in the way Americans think about their spending, savings, investments and debt.

Want some good news?

If you look at the last 12 months or the last six months, health care has been the best-performing sector. So far, so good.

Want another perspective?

Chris Buckley's satirical novel "Boomsday” is more than satirical, it is prophetic.

It says:

In the long term, Obama's adding a $1 - 2 trillion stimulus package on top of what Nobel economist Joseph Stiglitz calls a "$10 trillion hangover" of debt left over by former President Bush from the economic meltdown, two wars... and then adding to that the fact that Pakistan and India are ready to go at each other, plus the wild card that is Israel, plus melting ice caps on both poles, plus reforming out-of-control economics of retirement entitlements, like Social Security, (which eat up 40% of the federal budget), all this, will be like rearranging deck chairs on the Titanic because the real problem is population growth.

If you are over 50 years of age you have lived 1/10 of the time since Columbus discovered America. If you agree the average life time is 80 years, then any 8 of those years represents the same 1/10 of your life time. In the year 400 AD the world’s population was 200 million. It took 1,000 years for the world’s population to double to 400 million in the 1400’s when Columbus first thought he had discovered Asia. Now it takes two years for the population to grow by 200 million, not 1,000 and that is the real problem that no one is talking about; bigger even than our current economic crisis!

Yes, population is the core problem that, unless confronted and dealt with, will render all solutions to all other problems irrelevant. Population is the one variable in an economic equation that impacts, aggravates, irritates and accelerates all the other problems. The point is more and more people are filling up our little planet.

A United Nation's study estimates the world population will continue exploding, from 6.6 billion to 9.3 billion by 2050! By 2050 America's then 400 million will be vastly out numbered by 8.9 billion others across the planet, all competing with America. In short, within four decades, half your life time, human demands will easily double. That makes population growth the key variable in every economic equation ... impacting every other major issue facing world economies ... from peak oil to global warming ... from foreign policy to nuclear threats ... from religion to science ... everything.

The focus for government, and for everyone, should be on how to minimize the risk that people will not freeze to death in their mortaged homes or are not poisoned by their own drinking water. Trying to save the banking system doesn't address that. Trying to save the banking system with the money that belongs to the people makes it more likely they will freeze to death. That in a few words is the choice before us.

How Much More Economic Pain Is Yet to Come?

The answer: A whole lot more!

The S&P 500's November low was 752, which amounted to a peak-to-trough loss of 52%; that makes this current downturn the third worst in modern stock market history, but not as bad as either of the Great Depression bears of the 1930’s, at 86% and 54%. However, the current downturn has already been deeper and faster than any other bear market in recent history. Why just last quarter, the U.S. economy shrank the most since 1982 as consumer spending recorded the worst slide in the postwar era. The means the US economy is shrinking at a 3.8% pace. Unadjusted for inflation, GDP shrank at a 4.1 percent pace, the most since the first three months of 1958.
The IMF dropped its forecast for global economic growth to a measly 0.5% for 2009 — the weakest pace since World War II. What's more, that's a drastic reduction from the 2.2% growth the IMF had predicted as recently as November.

The S&P 500 lost 8.57% last month, which was the worst January on record. In January, we saw gold climb nearly 5% and silver jump 11%. January was the worst January ever for the DOW and the S&P 500.

Lawrence Summers, director of the National Economic Council, said the country faces "a real risk" of slipping into deflation. ADP Employer Services said in a report that the U.S. private sector eliminated 522,000 jobs in January. Fitch Ratings said U.S. credit-card payments that are at least 60 days late reached a record 3.75% in January. We know from comments made by participants at the World Economic Forum in Davos that bankers the world over anticipate a huge wave of commercial real estate defaults that will begin later this year and stretch into 2010. Federal regulators have closed six banks this year already so we are well on pace to pass twenty-five U.S. banks that failed last year.

Still not concerned?

Did you know that the costs of the government bailouts of the housing crisis, the credit crisis, and the Wall Street bailout exceeds the costs of all US Wars, The Louisiana Purchase, the New Deal, the Marchall Plan and the NASA Space program combined!

Did you know that America’s massive accumulation of debts now totals $294 trillion.

That’s 420 times larger than the $700 billion TARP bailout program and nearly 300 times bigger than the largest estimates of the Obama rescue package. This icludes $52 trillion in interest-bearing debts tallied by the Federal Reserve; $60 trillion in government Medicare, Social Security and pension obligations estimated by the Government Accountability Office; and $182 trillion in derivatives, as reported by the Comptroller of the Currency.

All this in addition to:
•The Fed reports that say U.S. households lost $7.9 trillion in real estate, stocks and other assets.

•Plunging income in households

•Government rescues are slow, we are still waiting for the 2nd half of TARP

•Sinking confidence

•The cost of financing the rescues - already the price of long-term bonds are collapsing and yields increasing so much so that the average A-grade corporate bond costs 16.95%. I ask you, how can they or anyone afford this higher borrowing cost long-term?

•National Association of Realtors said the nationwide median price of an existing home fell 15.3% in December, the largest drop ever. And there is still an over supply of between 1.5 million and 1.75 million new and existing homes on the market. Yes, sales are going up, but prices are going down. Wholesale dumping is still ahead, forcing sellers to slash prices, driving millions more into foreclosure and swamping any foreclosure prevention efforts.

•Alright, I’ll stop, I know its too much to take in all at once, but stay tuned... and don’t get euphoric over the “bad bank” solution, the name says it all, or would you prefer to call it BARF, bad asset repository fund.

January - 2009 Economic Brief

Good news!

To those of you who have been following my economic surveys since March 2008 you will be happy to learn that I have a New Year’s resolution - to be brief, and not include so much documentation and/or references. These commentaries represent a mélange of newsletters, CFA resources, media and my own spin. For specific reference, ask me directly. So what follows is in summary format...

More good news because of bad news

The U.S. trade deficit has narrowed substantially; our trade deficit fell to $40.4 billion from $56.7 billion. Such an improvement in the U.S. trade deficit means that dollars aren't leaving to flood other overseas investments. In fact, they're coming back to our shores ... a sure argument for why the U.S. dollar is in a position to appreciate ... despite the global recession. That's why I remain bullish on the U.S. dollar, short-term. Ultimately inflation will re-inflate almost all tangible assets, and the chief beneficiary... gold anyone? (See March and April’s 2008 postings for more on this.)

Further, the monetary base was increasing at 3-4% per year through September 2008, nice and steady.

But then it kicked into overdrive and accelerated to a mind-blowing 990.9% annual rate for the three months ending. And, if averaged out, that's an annual increase of 86%. All this will tend to push the market to rally some and volatile it will be.
The name of the game for 2009 is going to be avoiding losses. A Treasury-only money fund gives you immediate availability to your money. You can have your funds wired to your local bank overnight. And you can even write checks against it, much as you'd write checks against any bank checking account. That’s the end of the good news.

What happened?

The entire safeguards system, consisting of disclosure, regulation and supervision failed. The point at issue is the Glass-Steagall Act – passed in 1933, in response to the Wall Street crash. It prevented commercial banks – which take deposits from ordinary households and firms – from engaging in high-risk speculative activities undertaken by investment banks. Or at least it did until 1999 when, it was repealed by President Clinton. One of the main proponents of scrapping Glass-Steagall was Clinton's Treasury Secretary Larry Summers. Despite his key role in enacting this historic blunder, Summers is to be Obama's chief economic advisor. Go figure? James Wolfensohn, the former president of the World Bank said, it is "not the system; the system did not drive it... (it happened) because individuals took advantage in the absence of appropriate regulation." This month, the Congressional Oversight Panel is reporting that the U.S. Treasury is doing nothing, including failing to properly track the hundreds of billions of dollars it doled out in bailouts (referring to TARP - Troubled Asset Relief Program). The more things change, the more things remain the same.

Treasury Secretary Paulson said, "In the years leading up to the crisis, super-abundant savings from fast-growing emerging nations such as China and oil exporters... laid the seeds of a global credit bubble that extended far beyond the U.S. sub-prime mortgage market and has now burst with devastating consequences worldwide... investors looking for yield, missed pricing risk.” So, massive levels of new, exotic derivatives (mortgage-backed securities) funded by emerging countries’ savings is one of the core reasons for the lack of U.S. consumer savings and the global crisis. This has been confirmed, says the Organization for Economic Co-operation and Development, who have said that the crisis in the US started to really surge beginning in 2004 with investment in residential mortgage-backed securities. The European banks invested this new money in Eastern Europe, Spain and the UK invested like the U.S. into a housing bubble, and Japan’s banks continued to invest more and more into their own equities.

What’s happening now?

A new phase of the bank crisis is beginning ... soaring unemployment, plunging stocks, canceled dividends, and sinking investment income is ahead.

Robert Shiller, professor of economics at Yale University, said the U.S. economic downturn "is no ordinary recession", the problems are much worse.

The U.S. economy is in trouble. And it could get much worse for the U.S. as unemployment seems set to shoot higher. But, it's all relative to the rest of the world. And relative to the potential for a lot more pain elsewhere. Still, consider that the U.S. financial assets could surprise investors, meaning: expect a lot of volatility.

Retail:

Expect thousands of store closures, reeling from the worst falloff of US holiday sales since the 1970s. Industry experts said the economic downturn is not following patterns seen before, and consumers may be in the process of changing their spending habits permanently.

Stock market:

Last year's 32% decline in the stock price of Warren Buffett's Berkshire Hathaway was the worst fall in more than 30 years but still better than the 39.8% drop of the S&P 500 or the Dow Jones Industrials, which has lost 33.9% since January 1, 2007 or the Nasdaq which lost 35.49%.

Call it what you want: depression or recession, but factor in a 24 month contraction, given the circumstances. I remind readers that Ronald Regan defined recession as when your neighbor loses his job and a depression when you lose yours. Note that the P/E ratio of the S&P 500 based on trailing reported earnings for 2008 is 19, which is not cheap because Bear markets tend to end with trailing P/E ratios in single digits, so we still have lots of room to move.

On the other hand, and in consideration of the expected market volatility going forward, we could get a rally lasting a few more weeks to a few months (see chart http://www.spearreport.com/update/1.2.09_Dow.gif.). The last three times the Dow was this oversold, which occurred in the 1970s, the market rallied for 6-8 months.

Commodities:

Commodities in 2008 posted their worst performance in history.

Manufacturing:

The Institute for Supply Management's (ISM) factory index tumbled from 36.2 in November to just 32.4 in December, the lowest level since June of 1980. The all-time low for this data series, which began in 1948, was 29.4 in May 1980.

Industrial Production:

Ford and General Motors, for example, are down more than 90% from their peaks. Industrial production dropped by a bigger-than-expected 2 percent in December.

Financials:

Bank of America has fallen 68%. Bank of America posted its first loss in 17 years — a whopping $1.7 billion and cut the dividend it pays to stockholders. Bank of America has been given a $138 billion rescue package that matches that given to Citigroup. Citigroup’s total losses for the year are a staggering $18.7 billion, including a $8.29 billion loss for the fourth quarter.

State governments:

The number of states facing urgent fiscal difficulties has suddenly surged to at least 45. The Center on Budget and Policy Priorities (CBPP) projects that their combined deficits will surge to $350 billion.

City Governments in Even Worse Shape:

Cities are typically unencumbered by the legal requirement to balance their budgets. In New York City the New York Independent Budget Office is now pegging it’s deficit at $11.3 billion. In California, the biggest borrower in the municipal market has torn a $42 billion hole in the state’s budget. This scene, repeated across the nation, could create a whopping $100 billion in new municipal deficits on top of the $350 billion in deficits at the state level.

Grand total: $450 billion in red ink flowing from state and local governments ...

Real Estate:

More than 861,000 homeowners lost their houses to foreclosure in 2008, and filings surpassed 3.1 million.

Pension Funds:

The consulting firm Mercer recently estimated that the pension funds of big U.S. companies are underfunded to the tune of $409 billion! This could also lead to reduced business investment as companies are forced to divert money from equipment and facilities budgets to their pension funds.

Federal Home Loan Banks:

After the federal government, they’re the biggest borrowers in the country. Moody’s recently warned that eight out of the 12 FHLBs could ultimately face capital problems thanks to losses on their $76 billion of mortgage securities not backed by Fannie Mae and Freddie Mac. While many investors have never heard of the FHLBs, they collectively have roughly $1.25 trillion.

US Federal Government deficit:

Add to this an estimated additional $1.186 trillion deficit at the federal level for 2009 plus the latest woes of the nation's megabanks and all in the midst of a collapsing economy! And, by the way, how much is that? That’s more than the inflation-adjusted cost of the Vietnam ($698 billion) and Korean Wars ($454 billion). It makes last year's $455 billion deficit look like chump change. The projected 2009 figure is equal to about 8.3% of U.S. GDP. Further, the Budget and Economic Outlook for Fiscal Years 2009 to 2019 (available at: http://www.cbo.gov/ftpdocs/99xx/doc9957/01-07-Outlook.pdf - see page 23), projects red ink as far as the eye can see: An additional $3.135 trillion from 2010 through 2019. WOW!

Add to this:

The more than $70 TRILLION in debts Washington already has incurred during the “good” economy that is comprised of the more than $10.6 trillion in national debt... plus the $58 trillion in unfunded Social Security obligations and Medicare.
And this is all before Obama’s estimated $1.2 trillion in fiscal stimulus programs coming... to once again bail us out. Isn’t Washington doing the same thing that the private sector did, spending money it doesn't have? Go figure?

Confidence:

Sure Obama will bail us out, create jobs, bail out millions of defaulting homeowners, provide universal public health, embark on the most extensive public works campaign, create deep tax–cuts, and let’s assume he does get some money to Main Street, what will they do with excess funds? They'll use it to bump-up their balance sheets, they’ll start saving — (a process that has already begun with the bank bailouts and is, by the way, bullish for the dollar).

Six Trends Ahead:

1) All eyes will likely remain focused on the real estate, mortgage and stock markets while quietly behind the scenes another bubble will be bursting: The bond market. Debt issues from the Treasury to borrow the money planned for the fiscal stimulus will remove trillions more in wealth from investors who have fled to the so-called safety of government bonds. U.S. Treasury long-term bonds are now the riskiest of all assets on the planet. Expect to see a 30% to 40% plunge in these bond prices in 2009 because at some point investors are going to balk at all of this debt issuance... and when they do they'll demand higher yields to buy US debt, driving bond prices down and interest rates up making long-term treasuries the next bubble to burst.

Mortgage giant Freddie Mac said on January 15th that rates on 30-year fixed-rate mortgages fell below 5% this week — the lowest level since it began surveying lenders in 1971.

2) The Fed will continue to bail out institutions like Fannie Mae, Freddie Mac, AIG, Citigroup, Bank of America, GM, Chrystler and others that are sure to fail in 2009 and will be eventually forced to stop the bailouts (at around 2 trillion, current estimates at $1.186 trillion) because the insurance industry’s capital and surplus cushions are eroding fast. There will be an unstoppable chain of bankruptcies. The Fed will also be forced to keep short-term interest rates near zero to try and pump up the economy, setting the stage for a massive re-inflation of virtually all assets (through a weaker dollar).

3) A rise in social unrest all over the world. This includes terrorism, and inevitable attacks on U.S. targets overseas and possibly at home. Don’t expect the Middle East story to go away.

4) Expect the economy to continue to slide, unemployment to soar (10%), corporate earnings to collapse —yet the stock market will surge, then fall in one powerful paradoxical rally after another. Be mindful that these rallies are short term. Use these surges to get out of all this crazy making until consumer confidence returns.

5) The real estate collapse will continue, not just in home markets, but spreading to commercial markets too. Increase unemployment will lead to increased delinquencies, credit will go down. Home equity loans are a thing of the past, REITs will dry up.

6) Real incomes are going to go down – deflation is the way forward and the cure to inflation.

What to expect outside the US?

Developing countries will have to make major changes to their export-only model. This means developing a viable domestic market. That means transferring economic and political power. Simply put: Developing countries lack domestic demand because the ruling powers refused to invest in their own people. Instead they focused solely on exporting and investing their surpluses abroad, as Paulson said. And that means a lot of social unrest could be in the cards in 2009. While developing economies are suffering, they are also dragging down emerging economies. Emerging stock markets declined more in 2008 than developing and will continue to be harder hit.

Consider:
• Emerging markets of all stripes have been cut-off from their funding sources.

• India, also heavily dependent on foreign demand for its goods, is suffering its worst export slump in recent memory. India is off 55%. Overseas shipments plunged 12.1% in October and another 9.9% in November.

• Russia's pure, energy-dependent economy is imploding and unrest is rising. The Russian government has devalued the ruble 11 times since November, and thrown a quarter of its foreign currency reserves at the raging debt crisis. Standard & Poor's has cut Russia's long-term debt rating for the first time in nine years. Russia's RTSI index has plummeted 75%.

• Ukraine is already teetering! They are hugely exposed to emerging markets in Eastern Europe and elsewhere.

•Portugal became the fourth country (after Spain, Greece and Ireland) in the eurozone in as many days to face a rating warning from Standard & Poor, citing high debt burden as a reason for their credit rating being at risk.

• Unrest in Greece

• Scandal in Italy on privatization of pensions and municipal bonds

• The Organization for Economic Co-operation and Development's index is pointing to a "deep slowdown" in the global economy, with Russia, China and Germany posting the sharpest declines. In Germany, November export figures tumbled more severely ... by 10.6% from the month prior.

• Europe's economy contracted at the fastest rate since the 1930s

• Everywhere from Australia to New Zealand and from Argentina to Mexico and even the once-rich Middle East, the worldwide debt crisis, the bust in commodities and the sharp slowdown in global trade are transforming massive booms into instant recessions. Already, Ecuador has defaulted on its bonds because of falling revenues as oil prices continue to tumble. Venezuela is quietly wooing large oil giants to come back and Brazil's Bovespa index is down about 45%.

• Japan has been slammed by its worst recession since World War II... The Japanese Manufacturing Purchasing Managers' Index has been below 50 for 10 straight months. For December, the index dropped to its lowest level in history to 30.8, down sharply from 36.7 in November.

• South Korea'sNational Statistical Office reported that industrial production dropped by 14.1% year-over-year in November, after falling 2.3% in October. That, too, is the biggest decline ever recorded.

• The Economic Development Board of Singapore said manufacturing output fell 7.5% in November from the previous year and warned that it expects the recession to last...

• Factories across China are closing, unemployment is soaring, and social tensions are rising. China's SSE Composite index has fallen 66%; imports, down 17.9% in November alone; foreign investments to China, off 36.5% from last year. The key thing to keep in mind about China is that manufacturing represents about 40% of the Chinese economy. So this manufacturing slowdown hurts them proportionately more than it does our consumer-based economy. Exports fell for a second consecutive month in December (the first time in the last decade) by 2.8%.

2009 Economic Forecast:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How much is that?

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

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

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

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

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

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

Yet, meanwhile the economic news continues to sour:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

You may ask again, why?

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

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

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

Commercial vacancy rates are skyrocketing.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Finding these numbers too large to believe?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

·Unemployment is rising...

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

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

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

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

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

In fact, expect further declines throughout 2009.

The next shoe to drop:

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

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

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

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

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

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

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

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

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

The Good News?

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

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

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

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

What Can Dentists Do To Protect Themselves?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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