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Is a Global Currency War About to Start?
by: Daniel Zurbrügg October 29, 2010
The recent IMF meeting in Washington ended without any firm results despite intense discussions. There were a few important points on the agenda but probably the most important one was the discussion about the threat that a global currency war is about to break out. With many countries facing record amounts of debt, interest rates at virtually zero and economic growth being weak, these countries are trying to devalue their currencies in an attempt to make their economies more competitive and therefore kick start the economy again and finally create jobs.
This is nowhere more obvious than with the situation between Japan and the United States. With the Japanese Yen recently hitting fresh highs versus the Dollar it is becoming increasingly difficult for Japanese companies to export to the United States; the weakening U.S. Dollar is eating into their margins. Despite the Bank of Japan’s intervention in the currency markets, it has not been successful in breaking the trend. At the same time, the U.S. Federal Reserve made it very clear that it will do everything it can to prevent the economy from slipping into deflation. Their priorities are clear and that means that job creation and getting the economy back on track is the primary mission.
In this context, it is interesting to look at the U.S./China dispute over China’s currency policy. The U.S., as well an increasing number of other countries, are calling for China to let their currency appreciate to a level that reflects fundamental economic reality. It is just interesting that the U.S. is trying to make pressure on China, since the U.S. has been benefiting for decades from its role as the world’s reserve currency. It kept the U.S. Dollar artificially strong for a long-time and gave the U.S. a competitive advantage for many years.
This can be seen even today as the U.S. Dollar is still the largest and most liquid currency in the world. However, the importance of its role is diminishing and investors worldwide are looking to further diversify their currency holdings. The incentive to do so is bigger than ever as the Federal Reserve is implementing measures that will ultimately devalue the U.S. Dollar further.
China will eventually let their currency appreciate, no doubt about that, but they will do it when they are ready and when it helps them, not when other countries press for such a move. Such pressure might even be counterproductive given the fact that China is one of the largest holders of U.S. Treasuries. Now they see that the value of their investment is at risk since the Federal Reserve is doing everything it can do devalue the currency. There is a risk that China will move more and more of its investments away from the U.S. Dollar and further diversify their currency reserves. The latest statistics point to reduced treasury purchases by China and that seems to be the start of a longer-term trend.
What the Federal Reserve does is the same as what other central banks do but a number of additional factors are influencing the valuation of a currency. Even the question of how much gold each one owns in order to back their currency is only a minor factor that determines the value of a currency. As noted above, the price of a currency needs to be seen as a combination of numerous factors. These include political stability, economic competitiveness, secure legal system, protection of currency rights, degree of regulation, just to name a few.
In light of this, the current strength of the Yen vis-à-vis the U.S. Dollar is a clear sign that there are other factors driving the Yen. It is obvious that the large deficit of Japan is not exactly giving the Yen any advantage over the U.S. Dollar but we believe that the very large amounts of private sector savings are bolstering the currency. This is something that is quite worrisome in the U.S., since an increasing number of U.S. households are dealing with a heavy debt burden. A lack of fundamental support for the U.S. Dollar may serve to drive regulators into a misguided devaluation solution.
Disclosure: No positions
http://seekingalpha.com/article/233285-is-a-global-currency-war-about-to-start?source=email_the_macro_view
Loss of Purchasing Power: The True Inflation-Target Bullseye
By The Mogambo Guru
10/28/10 Tampa, Florida – When it comes time to put the current crop of economic blowhards and lunatics on trial for the disaster their insanely-bad advice caused, this quote from Frederic Mishkin, former Fed governor and who is directly responsible for the mess we are in, may come in handy.
He says, in The Financial Times newspaper, that there is a lot of talk going around that "a numerical inflation target is under consideration inside America's central bank. And if there ever was a time to establish such a transparent and credible commitment to a specific target, it is now." Gaaahhhhh!
Is there any doubt as to why we are in the economic trouble we are in? This is one of the guys who was at the Federal Reserve who inflicted this on us! Gaaaahhhh!
I had hoped that the little screaming episodes at the end of the previous two paragraphs would be the end of such behavior, I would take a few pills, and/or chug down something alcoholic, and then I would be ready for WHY it is that "it is now," apparently a place unique in American history, that we must agree to accepting a deliberate 2% inflation in prices when the Whole Freaking Purpose (WFP) of the Federal Reserve, as even this ridiculous chump admits, is "price stability," which means "zero inflation" to everybody except these academic twerps who laughably slosh around in the fetid, stinking cesspool of their arrogant, neo-Keynesian econometric stupidity that has turned into a complete (pause for effect) and (pause) utter (pause) failure.
Surprisingly, even though I was prepared, he did not say why such a crazy thing as this is needed "now"! Instead, he just blithely went on that "The Fed has a dual mandate, to achieve price stability and maximum sustainable employment. But at the moment it is missing both objectives. Inflation is well below 2 per cent. A slugging economy means unemployment is likely only to decline slowly from its current level of about 10 per cent."
I can't believe that this Fed weenie is admitting that he is a failure! And then he goes on to imply that he never heard that inflation in prices was a matter of monetary policy, and instead says something as stupid as, "This combination of economic slack and low inflation raises the possibility that inflation expectations will drift downwards." Hahaha!
The federal government is deficit-spending almost $2 trillion a year, the Federal Reserve is going to create enough new money to "target" 2% inflation, and he thinks that "inflation expectations will drift downwards"? Hahahaha!
I have to admit that I quit reading right there, and I ran home to make plans to put this fabulous technique to my advantage! After some reflection and research, I figured that I needed a nice chunk of money to enable me to quit my stupid job, get out of this stupid town and get away from all these stupid people, and that $750,000 would suffice as a beginning target.
Firstly, I gathered up all the employees and told them, echoing Mr. Mishkin, "I am going to take 2% out of everyone's pay towards meeting a $750,000 target, and if ever there was a time for such a transparent and credible commitment to a specific target, it is now!"
Unfortunately, instead of bleating ineffectually like sheep, like I expected, they all started complaining and yelling in protest.
Deftly I deflect their anger by again taking the lead of Mr. Mishkin, and I say, "The amount that I already steal from you people is less than 2%! What did you think the "HBMC" deduction was on your stupid pay-stubs, you idiots? HBMC means "Happy Birthday Mogambo Contribution! Hahaha! And it is less – much less! – than 2% of your stupid checks! Now, it will be a Mishkin-approved `transparent and credible' 2% on-the-nose! Now, aren't you happy, you stupid proletariat workers?"
I immediately realized that, for some reason, they aren't happy with any of this. So I told them, "Don't tell me your stupid problems, you ungrateful whiners and slackers! I'm only taking a lousy 2% of your stupid paychecks. Go tell Frederic Mishkin that you don't want him deliberately taking 2% out of your stupid paychecks, and then another 2% out of the buying power of every other dollar you own, you morons!"
As I stalked off the stage, I was met by my assistant who rushed up breathlessly to tell me that the news about my little embezzlement had flashed like wildfire through the company, up to my boss, to her boss, to the executive director and the whole accounting staff. Unsurprisingly, I was "summoned."
The meeting was a long one, and I kept trying to explain to these bozos that "The Federal Reserve creating more money creates inflation in prices, which is the One Freaking Thing (OFT) that you don't ever want to happen or, well, just look around you, morons!"
Finally, it boiled down to two main arguments. One disagreement was concerning who was the moron around here (another "them against me" plot), and the other argument pitting the theft of the employee's buying power by the outrage of inflation in prices deliberately caused by the Federal Reserve creating extra money, which is an outrage of monstrous proportions, against my piddly little misdeed of doing the same thing by just taking a little money out of their paychecks, which is just a little ordinary embezzlement.
At last, backed into a corner, I cried out in my best Shakespearian anguish, "Which, indeed, is the greater crime, whether to bid surcease to my suffering the slings and arrows of outrageous fortune by purloining a few paltry pence, or watch with fevered brow the ever-princely prices paid for a crust of bread by peasants as inflation cuts them down, inflation slicing through their real, after-inflation incomes like a razor-edged scythe mowing down a harvest of green wheat to rot in the fields, destroyed through the foul, hellish machinations of the Federal Reserve to continually increase prices, condemning all to a gnashing of teeth and to wail anew with each dawning in the east, where Juliet is the sun!"
The only good news is that I have been buying gold, silver and oil against a lot of potential calamities, this fiasco being one of them. Fortunately, the strategy has worked out again, just like buying gold and silver has always worked out when the government was borrowing and spending to the point of its bankruptcy, and always when a central bank like the foul Federal Reserve keeps creating excess amounts of new money.
The strategy to buy gold, silver and oil would have worked just as well for an invasion of space ships or large radioactive monsters rising from the depths of the sea, a universal utility that makes you giddy with delight and you say, "Whee! This investing stuff is easy!"
The Mogambo Guru
for The Daily Reckoning
http://dailyreckoning.com/loss-of-purchasing-power-the-true-inflation-target-bullseye/
U.S., China and the One-Sided Compromise
by: John Browne October 29, 2010
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Keep in mind that the US gets about 1 to 1-1/2 trillion dollars per year in GDP from being the world's reserve currency. So this would be another 10% shot to our system...
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Last weekend, the G-20 finance ministers met in South Korea to find areas of agreement in preparation for the main G-20 gathering in November. The Chinese rebuffed renewed American pleas for them to revalue their yuan. They rejected Secretary Geithner's suggestion of a four percent cap on current account surpluses. However, in return for accepting America's continued dollar debasement, the Chinese did agree to "look into" a revaluation of the yuan and the management of trade surpluses. They also agreed to an international self-policing regime to curb currency manipulation. This 'one-sided' compromise was hailed in the Western media as a triumph for Mr. Geithner. The US stock markets and dollar rallied. All looked good for the election season in November.
Unfortunately, compromises are never one-sided; they are only construed as such. Though the reporting failed to emphasize it, Mr.
Geithner actually agreed to a massive shift of monetary power in exchange for China's empty concessions. The shareholdings and board composition of the huge and powerful International Monetary Fund (IMF) have now been shifted. China will now become the third largest shareholder of the IMF and the developing economies will get a six percent larger voting share. Two European states will lose their seats on the IMF's board in favor of developing countries.
Meanwhile, China, supported by Russia, India, and even Brazil, continued to lobby hard for the US dollar's privileged role as the international reserve currency to be replaced by a wide basket of currencies and gold. To this end, the IMF has recently been given additional "emergency" lending facilities. These could be used in a coming sovereign default crisis to 'bail out' Western countries, at which point they would be unable to resist global economic governance under the guise of the reformed IMF.
In short, Secretary Geithner's "victory" at the G-20 was one only King Pyrrhus could love.
But the blame cannot be laid entirely with Mr. Geithner. The fact that he left the meeting at least saving a bit of face for his delegation is a monumental achievement, considering the dismal condition of the US economy.
Fed Chairman Bernanke appears desperate to flood the United States economy with another round of quantitative easing (QE-2). In a $13 trillion economy, a release of anything less than $1 trillion would not be seen as effective. Remember, the Fed already injected over $1 trillion after the credit crunch - and we are still in recession. How much will it take to right this listing ship?
When Geithner pledged to China a "gradual" debasement of the dollar, it is astonishing that they didn't laugh him out of the room.
If he were to make good on his pledge and convince Bernanke to cut QE-2 to, say, $500 billion, the US GDP and stock markets would almost certainly begin to contract. This would threaten the banking system with a second crisis borne out of the ashes, or toxic assets, of the first.
For a frame of reference, the US home mortgage market is valued at some $10.6 trillion. Indeed, foreclosures and past-due loans amount already to some 14 percent of the market, or about $1.5 trillion. Of this staggering figure, the loans delinquent or in foreclosure to which the top three banks (Bank of America (BAC), Wells Fargo (WFC) and JP Morgan (JPM)) are exposed amount to more than $600 billion, an amount roughly equal to the original TARP bailout fund.
At the same time, thanks to falsely low interest rates, the banks' net interest margins, or the difference between what they earn in loan interest and what they pay to their creditors, are being squeezed severely, while their non-interest earnings are falling, due to lower economic activity and the prohibitions contained in FinReg.
Finally, there is the murky question of how exposed the banks are to the massive derivatives market, a house of cards with a shaky foundation.
As we have described for several years, the US economy is virtually locked into a long arc of decline. There are no politically palatable solutions to this quandary. Until Americans are ready to take their lumps and accept a steep drop in their standard of living, the US government will have no leverage with the creditor nations and no ability to keep its promises. Therefore, we should celebrate when China even gives our Treasury Secretary an audience.
If China does manage to topple the US dollar from its perch as the international reserve currency, our economy will very likely move into free fall as decades of inflation come pouring back into the country. We will be forced to live within our means or face hyperinflation. Losing a few votes at the IMF is a small cost to delay this eventuality, but it also puts us one step closer to it.
http://seekingalpha.com/article/233219-u-s-china-and-the-one-sided-compromise?source=email_the_macro_view
Is The Fed Stringing Us Along With QE2?
by: T3 Live October 27, 2010
By John Darsie
Earlier this week I reported commentary from two leading economists at Goldman Sachs who believe that in order for the Fed to close the Taylor implied interest rate gap, they will need to enact a massive $4 trillion QE program, rather than the $500 million whisper number which has been mooted. With the much anticipated November 3rd FOMC meeting expected to bring an announcement on QE2, it got me thinking: what if the Fed is just stringing us along?
For the past several months, the market has been pricing in QE2, and that is exactly how the Fed wants it. In his most recent statement, Chairman Ben Bernanke made some of his most dovish comments to date, reiterating his commitment to maintaining levels of economic growth, unemployment and inflation consistent with the committee's mandate. As noted on this blog back in March, language has been the Fed's most powerful tool with interest rates already bound at zero. 'Extended period' has been the phrase du jour, and promises of further intervention, if warranted, have been forthcoming.
A floundering consumption-based economy needs consumers to spend, and the Fed has endeavored to boost consumer confidence and get people spending again. The Fed has been propping up the market through POMO via primary dealers for months now for this precise reason, to get people to believe the 'recovery' is taking hold (and many believe a little wink-wink has directed money into large index components like AAPL to make sure the Fed gets the most bang for its buck). Consumer confidence is to the recovery like technical analysis is to the stock market; they are largely self-fulfilling prophecies.
The problem is two-fold: a growing public distrust of our leaders and a liquidity trap. The American public has grown cynical in the wake of widespread foreclosure fraud and fraudulent securitization, persistent unemployment, terrorist threats, growing inequality and evidence that the government is the biggest game-rigger of them all. Each astonishing scandal now comes with a shrug of the shoulders, because we have come to expect incompetence and corruption. In psychology it's called anchoring, a phenomenon where individuals perceive events based on an implicitly biased expectation, or anchor. The government has aimed to restore confidence by imposing regulation and creating 'too big to fail', but in the process perpetuated the risk-taking and lack of accountability that is at the root of our society's problems as a whole. It's moral hazard, and taxpayers have been the only ones forced to take a penalty stroke.
Through its use of supportive, dovish language, the Fed has coddled consumers. It's like a father in the water standing in the water to catch his child the first time he or she goes off a water slide. "I'm right here, I won't let anything happen to you." A good father would let the child paddle for a little while to see if it can stay afloat on its own, and in the process the kid could learn a thing or two that might serve it him or her well in the future.
The second problem, which FOMC committee members have openly noted, is that we are in a liquidity trap. The demand for money has become almost infinitely elastic. Interest rates are already at zero and an expansion of the monetary base has done nothing to stimulate additional demand for capital investment or output.
"After the rate of interest has fallen to a certain level, liquidity preference is virtually absolute in the sense that almost everyone prefers cash to holding a debt at so low a rate of interest. In this event, the monetary authority would have lost effective control."
-John Maynard Keynes
Monetary velocity is the metric for evaluating a liquidity trap. Velocity is the dollar value of GDP produced per dollar added to the monetary base, basically how much of that money is translating into purchases of good and services. Increasing the monetary base is only effective in stimulating the economy if it increases velocity, something that does not happen when you are already at zero interest rates.
That held true in our case, which is the reason the first round of quantitative easing was largely ineffective besides debasing our currency and putting money in the coffers of China, who has not allowed the yuan to appreciate substantially. Individuals and business are sitting on excess cash reserves rather than spending them.
In an environment of high interest rates, people are reluctant to hold cash because it is not accruing interest. But with interest rates close to zero (and low yielding debt securities, ex. T-bills) they choose to save the cash reserves because there is no incentive. Banks actually have disincentive to lend because the Fed is paying them interest on cash reserves. The Fed is pushing on a string, as the analogy goes, causing great distortions in the markets while doing little to promote growth or a reduction in unemployment.
Now, we reach the real heart of the issue: is the Fed really serious about QE2? The Fed has made it clear it is not content with merely slow growth, and unemployment, rightfully, remains a huge concern. However, we must examine the current state of the recovery and how it relates to each of the aforementioned problems. In terms of consumer confidence, we are starting to see a resurgence based on yesterday's reading. The number came in at 50.2 vs. the 49.9 consensus expected, which may not seem significant, but it shows that optimism is lifting more quickly than expected. While housing remains a drag, last week's Fed Beige Book showed at least modest pockets of growth, enough, perhaps, for the Fed to just keep leading us on.
That brings me to my second point about the folly of further monetary easing in the presence of a bona fide liquidity trap. Members of the FOMC have acknowledged the presence of a liquidity trap, but have warned about the inherent danger of price deflation and the need to protect against it at all costs.
Besides, as economists at Goldman Sachs noted, it would take an obscenely large $4 trillion QE2 to meet the desired level of inflation and close the Taylor gap. The Fed doesn't want QE2 for the sake of it, and would love to avoid it altogether if possible. The committee and chairman recognize the existence of the liquidity trap and realize the implications of further easing are largely unknown. However, they seek to maintain the 'Bernanke Put' on the market in order to maintain confidence and, for example, put Americans in shopping malls ahead of the holiday season.
This brings me to my ultimate point: the Fed is hoping to simply talk its way out of this mess. They don't want QE2 necessarily, they just want us all to think it is coming. I am not entirely convinced it is coming at all, but the most likely scenario is an incremental approach, supported by language that suggests more could be on the way. It reminds me of the relationship between Andy "Nard Dog" Bernard and Angela in The Office. Angela leads Andy on with promises of ravenous marital sex, but when the wedding day comes Andy is left standing at the altar. After the November 3rd FOMC meeting, I expect the chairman to announce the Fed's intention to re-enter into large scale asset purchases on the scale of, at the very most, about $500 billion, while leaving the door open for future intervention. That will hopefully, from the Fed's perspective, satiate the market's voracious appetite for further easing, bouy consumer confidence and buy enough time for the economy to actually recover. At least I hope that is as far as they go.
But who knows? Sometimes it feels like Michael Scott is running the show.
Disclosure: None
http://seekingalpha.com/article/232614-is-the-fed-stringing-us-along-with-qe2?source=email_the_macro_view
Book Review: Boomergeddon
by John Rubino on October 25, 2010
The trouble began in the early 1980s, when we baby boomers entered our 30s and began molding the world in our own image. You can graph the spreading darkness from that point, as US debt, the number of government employees, the trade deficit and virtually every other measure of societal pathology inflected upward. Our generation, says James Bacon, a Virginia writer and magazine publisher, will go down in history as the one that ended the American empire — along with the retirement dreams of pretty much everyone everywhere.
Full disclosure: I’ve known Jim Bacon ever since I wrote for one of his magazines back in the 1980s. He was one of my favorite editors, both because he had a light touch and because he almost always saw the real story behind the noise and opinion. So I expected his new book, Boomergeddon to be both easy to read and incisive, and he’s succeed on both counts. Here’s a representative excerpt from the intro:
When you wake up 20 years from now, shaking your head of thinning white hair (those of you who have hair), groping for your bifocals, and feeling all out of sorts because your “golden” years have become as shopworn as cheap costume jewelry, you’ll know whom to blame. Just look in the mirror and take a long hard look at the miscreant who failed to save enough money, despite abundant warnings that retirement would be very, very expensive. Then head to East Capital Street, N.E./ Washington, D.C., where you can accost any member of the 535 members of Congress who, through successive decisions more short-sighted than your own rheumy eyeballs, racked up mountains of debt, presided over the disintegration of the United States retirement safety net, and ruined whatever shot you had at living an old age where the words “happy,” “carefree” and “solvent” applied.
Bacon’s main point early on is that the system has devolved to the point where it no longer matters who’s in charge. Each major party is run by a ruling class of lobbyists, bureaucrats and professional politicians who are beholden to a set of interest groups that demand higher spending and increased money printing. Each side blames the other for the mounting problems, so elections tend to be alternating landslides, as opposition candidates demonize incumbents, are given a chance to fix things, and then proceed to reward their constituents with even higher spending. Notes Bacon, “The illusion of a significant divide between the two [parties] is maintained by the close attention given to minor differences within a narrow band of public policy options.”
In other words, the political class pretends to argue about immigration, abortion, and marginal tax rates while a demographic tsunami of retiring boomers bankrupts the social safety net. The guys in charge will retire rich while the people depending on government help will get stiffed.
The first half of the book sets this scene, with chapters on the health care system’s financial implosion, the demographic disaster of an aging population, and US dependence on foreign creditors. A lot of this won’t be new to sound money folks, but it’s well-organized and up-to-date, so it’s interesting nonetheless. And readers new to the subject will be suitably shocked.
The result of all these intersecting trends will be Boomergeddon, the end of the world as we boomers know it. With the US unable to finance its global military presence, regional tyrants will make the world less stable. The social safety net will fray and the dollar will be inflated away, ending the retirement dreams of most seniors. Where being born in America was once like winning the lottery, retiring there will be — literally — like going bankrupt.
So, what to do? Towards the end of the book, Bacon offers some strategies for minimizing the risk of life in hard times. There are sections on material possessions, debt, living arrangements, etc. This is Dave Ramsey territory, where cash is king and the paid-off mortgage has replaced the BMW as the status symbol of choice. And it’s right-on. If boomers had been living this way for the past 30 years we’d be in pretty good shape as a society. But we made other choices and are now reaping what we’ve sown. It’s too late for the system, and for most boomers, but some still have a chance to salvage a secure retirement, and this book is a useful guide. Here’s the Amazon link.
http://dollarcollapse.com/uncategorized/book-review-boomergeddon/
Jobless Claims in U.S. Unexpectedly Drop To Three-Month Low
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To be quietly revised upward next month...
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Jobless Claims in U.S. Unexpectedly Drop To Three-Month Low
By Courtney Schlisserman - Oct 28, 2010 12:21 PM ET
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Initial jobless claims decreased by 21,000 to 434,000 in the week ended Oct. 23, the lowest since early July. Photographer: Jim R. Bounds/Bloomberg
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Oct. 28 (Bloomberg) -- Applications for U.S. unemployment benefits unexpectedly fell last week to the lowest level in three months, a signal the labor market may be starting to mend. Initial jobless claims decreased by 21,000 to 434,000 in the week ended Oct. 23, the lowest since early July, Labor Department figures showed today in Washington. Bloomberg's Michael McKee reports. (Source: Bloomberg)
Claims for jobless benefits unexpectedly dropped last week to a three-month low, a sign the U.S. labor market may be starting to mend.
Initial jobless claims decreased by 21,000 to 434,000 in the week ended Oct. 23, the lowest since early July when fewer auto plants than normal closed for retooling, Labor Department figures showed today in Washington. The total number of people receiving unemployment insurance dropped to a two-year low, while those getting extended payments also fell.
Consumer spending, which accounts for about 70 percent of the economy, is beginning to stir and may give employers reason to add workers ahead of the holiday shopping season. Fewer firings are an initial step toward more hiring as companies such as Ford Motor Co. see sales improve.
“Certainly these are encouraging numbers,” said Brian Jones, senior economist at Societe Generale SA in New York, who forecast claims would drop to 430,000. At the same time, he said, “given other labor-market readings, you want to be hesitant about saying we’ve turned the corner.”
Stocks fell, erasing an early rally, depressed by shares of industrials after 3M Co. cut it profit forecast. The Standard & Poor’s 500 Index decreased 0.3 percent to 1,179.35 at 12:17 p.m. in New York. Treasury securities also rose, sending the yield on the benchmark 10-year note down to 2.68 percent from 2.72 percent yesterday.
Fed Action
The Federal Reserve asked bond dealers and investors for projections of central bank asset purchases over the next six months, and how it would affect on yields. The central bank is seeking to gauge the possible impact of so-called quantitative easing aimed at spurring the economy and job growth, according to a New York Fed survey obtained by Bloomberg News.
The unadjusted claims data showed a 3 percent increase in applications for the week following the Columbus Day holiday period, smaller than the 7.9 percent rise that usually occurs during that time of year, a Labor Department spokesman told reporters as the figures were being released. For that reason, the seasonally adjusted figure showed a decrease.
Economists forecast claims would increase to 455,000 from a previously reported 452,000 for the prior week, according to the median of 47 projections in a Bloomberg survey. Estimates ranged from 430,000 to 464,000.
Lower Average
The four-week moving average, a less volatile measure, fell to 453,250, also the lowest since July, from 458,750. Fewer auto plants than usual closed for model-year retooling in July, pushing down the level of claims that month. Prior to July, the last time weekly claims were this low was in August 2008.
The number of people continuing to receive jobless benefits fell by 122,000 in the week ended Oct. 16 to 4.36 million, the fewest since November 2008.
The continuing claims figure does not include the number of Americans receiving extended and emergency benefits under federal programs. Those who’ve used up their traditional benefits and are now collecting emergency and extended payments decreased by about 414,100 to 4.66 million in the week ended Oct. 9.
The unemployment rate among people eligible for benefits, which tends to track the jobless rate, held at 3.5 percent for a third week in the period ended Oct. 16.
Eleven states and territories reported an increase in claims, while 42 reported a decline. These data are reported with a one-week lag.
‘More Labor Retention’
“We are seeing signals of more labor retention at what is typically the crucial consumer-spending time of the year,” John Herrmann, senior fixed-income strategist at State Street Global Markets LLC in Boston. “That extra labor retention could bolster confidence and lead to a further strengthening of chain- store sales” heading into the holidays.
The National Retail Federation projects that sales during November and December will rise 2.3 percent from a year ago, the most in four years. Americans plan to spend an average of $688.87, 1 percent more than 2009, and may step up discretionary purchases, according to a survey for the Washington-based group by BIGresearch.
“We feel good about the momentum thus far,” Brian Goldner, chief executive officer of Pawtucket, Rhode Island- based Hasbro Inc., said during an Oct. 18 conference call. New toys are selling well at retailers, and “we expect a very robust holiday season,” he said.
September Employment
Companies in September added 64,000 workers, while total payrolls that include government agencies fell a larger-than- forecast 95,000, Labor Department figures showed Oct. 8.
The economy is forefront in Americans’ minds as the Nov. 2 Congressional elections approach. Forty-three percent of respondents to a Gallup Inc. poll released this week rated economic conditions as the most important of four issues in considering in how they would vote.
Ford, the second-largest U.S. automaker, plans to invest $850 million and add 1,200 jobs in Michigan by 2013 as sales rebound, the company said Oct. 25. It will add 900 hourly positions in its factories and 300 salaried jobs at its engineering and manufacturing operations, it said.
Other companies are still paring staff. United Technologies Corp., the maker of Pratt & Whitney jet engines and Carrier air conditioners, plans to cut about 3,300 jobs as part of its cost- reduction efforts announced this year. It eliminated 1,300 positions in the first nine months of this year and is targeting the rest through 2011, it said in a quarterly filing with the U.S. Securities and Exchange Commission Oct. 25.
To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
http://www.bloomberg.com/news/2010-10-28/unemployment-claims-in-u-s-unexpectedly-decline-to-a-three-month-low.html
Report: Greece Falling Short of Rescue Package Deficit Goal
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No surprises here. The bonus is that even the numbers that are missing the requirements are so fudged as to be worthless...
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Report: Greece Falling Short of Rescue Package Deficit Goal
by CalculatedRisk on 10/27/2010 10:28:00 PM
From Landon Thomas at the NY Times: Greece Said to Be Falling Short of Deficit-Cutting Goals
With economic conditions weaker than expected, tax revenue is coming up short of projections in parts of Europe.
...
Greece ... looks as if it will run a budget deficit for 2010 greater than the 8.1 percent of gross domestic product it agreed to as part of a rescue package from the International Monetary Fund and the European Union ...
In Ireland, which is expecting its third consecutive year of economic contraction this year, the government says it will need an additional 15 billion euros in budget cuts to reduce its deficit from 32 percent of gross domestic product to 3 percent by 2014.
According to Bloomberg, the yield on the Greece 10-year bond jumped to 10.39% from 9.36% on Tuesday, and the yield on the Ireland 10-year bond increased to a new crisis closing high of 6.77%.
http://www.calculatedriskblog.com/2010/10/report-greece-falling-short-of-rescue.html
The US$200-Trillion Debt Which Cannot Be Named
Thursday, October 28, 2010 – by Staff Report
The scary real U.S. government debt ... Boston University economist Laurence Kotlikoff says U.S. government debt is not $13.5-trillion (U.S.), which is 60 percent of current gross domestic product, as global investors and American taxpayers think, but rather 14-fold higher: $200-trillion – 840 per cent of current GDP. "Let's get real," Prof. Kotlikoff says. "The U.S. is bankrupt." Writing in the September issue of Finance and Development, a journal of the International Monetary Fund, Prof. Kotlikoff says the IMF itself has quietly confirmed that the U.S. is in terrible fiscal trouble – far worse than the Washington-based lender of last resort has previously acknowledged. "The U.S. fiscal gap is huge," the IMF asserted in a June report. "Closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP." This sum is equal to all current U.S. federal taxes combined. The consequences of the IMF's fiscal fix, a doubling of federal taxes in perpetuity, would be appalling – and possibly worse than appalling. – Globe and Mail (Canada)
Dominant Social Theme: What? That can't be. Let's not talk about it.
Free-Market Analysis: These numbers cited by Laurence Kotlikoff have been all over the Internet for a while now but have not been much reported by the mainstream press. No surprise there, but we are a bit shocked that the Globe and Mail chose to pick them up. Was it a slow news day? The story itself has been around since August.
Because the Globe and Mail has covered it, so shall we. Here is our question: Given these numbers, how can banks and institutions purchase US fixed income securities, let alone the dollar? What sense does it make? These large institutions, with fiduciary responsibility, are basically buying a bankrupt product. And it is not just the US. The entire Western world (maybe with the exception of Germany) is pretty much either flat broke or worse than broke.
For us, this shows as much as anything else how controlled the system really is. It's just a fiction and has little resemblance to reality. Institutions are said to flee to the "safe-haven" of the US dollar when they are nervous. But as Kotlikoff shows, the safe-haven is nothing of the sort. When one adds up all of the various commitments that the US has made abroad and at home (to its own citizens) the debt begins to add up to the monstrous, impossible number Kotlikoff arrives at.
So we ask: Can't bond buyers at large institutions add? How are they comfortable buying the bonds of a bankrupt entity? And why has it taken until 2010 for a mainstream economics professor to measure the "real debt" of the US and speak out about it? Heck we've known this for years now! If the Western monetary system were a person, it would long ago have been declared clinically insane and shipped off to an asylum. What is worse is the conspiracy of silence about the "real" US debt, which we have to assume parallels at least partially the debt of other Western nations. The whole of the West is busted, pretty much – and the "austerity" plans being put in place are just more window-dressing, albeit of a very nasty sort.
Of course there are several ways out of this dilemma. Probably the easiest one is inflation verging on hyperinflation. If the US prints enough dollars-from-nothing (as Bernanke seems intent on doing) perhaps the dollar will lose so much value that the growing debt will be partially erased. Of course this basically debases the goods and services that people currently count on. The services will remain as a kind of legal fiction – funded but not worth anything.
Another more controversial way to get rid of the "real" debt would simply be for the US to devalue or to announce that it was not going to honor current accumulated debts. Of course this would do nothing to reduce further debt burdens (though it would certainly anger debt-holders) – and this is why Professor Kotlikoff predicts that many of the promises made by the US to its citizens will not be met. The article excerpted above informs of us following:
He opposes further stimulus spending because it will simply increase the debt. But he does suggest reforms that would help – most of which would require a significant withering away of the state. He proposes that the government give every person an annual voucher for health care, provided that the total cost not exceed 10 percent of GDP. (U.S. health care now consumes 16 percent of GDP.) He suggests the replacement of all current federal taxes with a single consumption tax of 18 per cent. He calls for government-sponsored personal retirement accounts, with the government making contributions only for the poor, the unemployed and people with disabilities.
The solutions offered by Kotlikoff would surely revamp the social contract that the US has with its citizens. But this is what is taking place in Europe as well. It turns out that the welfare state is a mathematical impossibility. Ludwig von Mises was correct. Those that practice socialism eventually bankrupt themselves.
Of course throughout most of the 20th century, von Mises (and the Austrians generally) were ignored by mainstream Western economics. Keynesian economics, monetarist economics, econometrics and even supply-side economics all got a broad hearing and received various levels of approbation from various social strata. But free-market economics was given short shrift. Except for the von Mises Institute, there were few supporters for its stiff dose of truth-telling. But look at where that has left the US and the West.
The 20th century as we have often noted was a true Dreamtime. People were convinced by the dominant social themes of the power elite that government was going to take care of them. As the century wound down the claims became more extravagant. Government workers especially won the right to stop working and collect pensions after only 20 or 25 years, and retirements became bigger and more gaudy as public sector unions pressed for more and more benefits.
But this was only part of it. In America, especially, people were led to believe that if they saved and "invested" in the stock market, they could do very well for themselves. They were led (promoted) to believe (as the Chinese believe today) that real estate was a good "investment" and that prices, while uneven, would always head upwards sooner or later. It seemed to make sense, after all, given that the demographics were fairly inexorable. Baby boomers would continue to bid up securities and commodities because there were so many of them. The Dow, one popular financial guru wrote, was surely going to 20,000 and even 40,000 in a fairly short period of time.
In the late 20th century, the power elite driven US financial/media complex was in its heyday. There were hundreds of magazines and dozens of TV programs all focused on explaining how to "invest" and where money should be placed for maximum advantage. The game was on. Millions of pages were printed explaining what mutual funds were "hot" and what companies were high flyers. NONE of this information, for the most part, ever mentioned real money – gold or silver – or predicted that gold would rise fourfold in the 2000s.
And now? Silence has begun to descend upon the hyperactive financial-media complex. Some of the most prominent business and investment magazines have either gone of out of business or been sold for a nominal dollar-and-debt. Baby boomers (and European pensioners) who until recently looked at their balance sheets and believed that their financial goals had been achieved are starting to realize that much of what they counted on is increasingly ephemeral.
Their housing valuations are impressive, but now banks will not necessarily lend against home equity and their domiciles are increasingly illiquid. Their stock portfolios were heavily damaged and somehow the current stock market rises have not helped replenish the equity. Their pensions – from large corporate employers or from the state itself – seemed solid, and yet Europe is finding out that those pensions can be rewritten and are not so certain after all.
What was the point of it all? Some people became teachers and put up with the increasingly ludicrous rules imposed by unions and the political correctness demanded by peers. Others became police officers and kept silent while their brethren-in-blue became increasingly cynical and violent. Still others worked for the state and turned a blind eye to the corruption and payoffs that went on all around them. People worked in non-profits and soon realized that much of the money that was supposed to go to needy clients never got there. People worked in finance and accounting and soon realized that most of their efforts involved increasingly useless record-keeping for an ever-expanding authoritarian state.
We could go on, and indeed we have mentioned all this before. Every part of Western regulatory democracy in the 20th century was a kind of Dreamtime. The elites spun magical fantasies that people, not knowing any better, inhaled ecstatically. People like to believe that life is certain and that social structures can guarantee wealth. But they cannot. Only human action can provide one with any certainty – and then only if one has accumulated gold and silver during one's lifetime.
Ironically, it has not, perhaps, turned out much better for Western elites. This tiny group of people puffed up by arrogance and secret internal narratives launched promotion after promotion during the 20th century. The idea was to frighten the middle class especially into giving up wealth and power to a specially created superstructure of global bodies that had been created as appropriate repositories.
But in the 21st century, even the Western elites have not fared so well. The Internet has stripped them of their anonymity and revealed their promotional machinations. The economic crisis, which they intended to use to create a one-world government, has become a problem as well, causing people to turn to the Internet to see what has gone wrong. The education that takes place every day is eroding the elite's hold on government, economics, military power and, most importantly, on the minds and psyches of the once easily-controlled masses.
Kotlikoff seems to believe that once people understand what has happened to them – once they wake up from Dreamtime – they will be amenable in some sense to a rational re-ordering of their deflating dreams. We think this is not necessarily an accurate perception. What he apparently expects is that people will patiently rebuild a system that has essentially served as a coffin for their hopes and goals. His idea is that a civil society will restructure its methodologies to deliver what is real and good and necessary.
But Western Dreamtime was never about delivering anything. It was about fooling the masses and the middle classes, draining them of wealth and power in order to create a One-World Order. The system, fully perverted early in the 20th century, was not set up to deliver anything; it was set up to extract something – most unfortunately the authenticity that people are capable of bringing to their lives and work. Once people realize just how badly they have been misled, we think a growing number will want to reject what we have called "regulatory democracy" outright. Thus, we think large-scale social cohesion will be harder to come by; and authoritarian solutions levied by a desperate power elite likely won't work either.
We have predicted – and continue to predict – a gradual entropy could overcome the rigid structures of modern nation-states, and larger political entities may begin to fracture into smaller ones. Gold and silver may come into circulation not via any economic or political mandate but simply because precious metals have historically been the money of choice absent government mandates against their circulation. People may pursue more entrepreneurial vocations; the family farm may return; the international corporation may fall on hard times.
Conclusion: All this depends on how badly Dreamtime is fractured by the coming realities and how angry people get about the wasting of their assets and opportunities. No, we don't know what is coming next, but if the Western elites cannot control society through its promotional schemes – due to an increasing lack of credibility – the ramifications are both significant and severe. People who have woken up (whether they wished to or not) will eventually begin to discover what it is to lead lives of significance and human action. Some may not enjoy it.
http://www.thedailybell.com/1481/The-US200-Trillion-Debt-Which-Cannot-Be-Named.html
URWC- Mish is one of the best...eom
Mike Shedlock on the Economy, Deflation and Where to Invest This Year
Mike Shedlock on the Economy, Deflation and Where to Invest This Year
by: Chris Martenson October 27, 2010
Today marks the launch of our new and (hopefully) regularly recurring "Straight Talk" series, featuring thinking from notable minds that the ChrisMartenson.com audience has indicated it wants to learn more about. Readers submit the questions they want addressed and our guests take their best crack at answering. Our hopes are high you'll enjoy the expert insights and alternative perspectives this new series brings.
Our inaugural Straight Talk contributor is Mike Shedlock, author of Mish's Global Economic Trend Analysis, one of the most visited and respected economic blogs on the Web. Mish is an outspoken deflationist and outlines his rationale for being so in his answers to our questions. He is also a registered investment advisor representative for SitkaPacific Capital Management.
You've gone from mainframe computer programming analyst (in 2005) to being one of the most widely-read econobloggers in the world today. To what extent do you attribute your competitive advantage to holding a non-traditional background vs. the more `classically' trained analysts and commentators?
Mish: It certainly helps not having a background in economics as taught by academia today. Nearly everyone in academia is a Keynesian or Monetarist.
It is safe to say that Krugman is the high priest of the Keynesians. In current academia, Greg Mankiw is arguably the high priest of the Monetarists. If we include the Fed, then the Monetarist high priest is without a doubt Ben Bernanke, whose background just happens to be academia, as opposed to any real world experience.
I find it amusing to see the battles between the two camps when they are both wrong about their proposed solutions. The only thing they are ever right about is when they attack each other.
In contrast, I had some very good teachers with non-academic backgrounds in self-taught Austrian economics. One of them is a friend for going on 10 years. I refer to him on my blog by his initials "HB". He has done a couple guest blogs on my site under the name "Trotsky".
Those posts are Misconceptions about Gold and Why does fiat money seemingly work?
"HB" now has his own blog under yet another pen name, Pater Tenebrarum. The Blog is called Acting Man, with a perspective of Austrian economics.
I also need to thank Barry Ritholtz at the Big Picture Blog for early on promoting my work, Todd Harrison at Minyanville, and of course Calculated Risk who actually created the first template for my blog.
Interestingly, Barry, CR, and I have been 1-2-3 (in various orders) in terms of page counts according to Traffic Rankings for individual, non-corporate sponsored blogs.
Marc Faber has influenced me a lot and I consider his book Tomorrow's Gold to be required reading. Marc is also a friend even though we disagree on the inflation/deflation debate.
There are two other must-read books and the electronic versions come at the great deflationary price of zero.
•The Case Against the Fed
•What Has Government Done to Our Money?
Both of those are by Murray Rothbard, with thanks also to the Mises Institute for making them available at no cost.
In addition, I have certainly learned a lot from John Hussman who writes a great column every week, and more recently from David Rosenberg who writes a great column nearly every day.
Certainly Bloomberg is a great source of information and to pick a single Bloomberg author it would be Caroline Baum. Baum's mentor happens to be economist Paul Kasriel who also has taught me a lot. So has Australian economist Steve Keen.
Thanks go to an Austrian-minded friend who simply prefers to be known as "BC".
I also need to thank Krugman and others I violently disagree with. It helps clarify my thinking debating those I disagree with, even if they never respond.
Finally, I get a lot of interesting stories and commentary from my readers. Those readers are real people, doctors, business owners, scientists, and technology wizards, most of whom operate in the real world, and thus have more street smarts and common sense than anyone on the Fed.
Looking at my answer now that I have typed it out, my competitive edge is to do one hell of a lot of reading, thinking, and typing, day in and day out, even weekends. I entertain all points of view, even if it seems like I don't in my finished posts.
Many of our readers have subscribed to Chris' position that the economy must be increasingly interpreted through two other lenses; energy and other environmental resources. Can you comment on the Three E's?
Mish: I am a firm believer in peak oil. I don't know how anyone can deny it.
Given peak oil, and given the demand from China for oil and other commodities, the world is on a crash course of demand that cannot be filled.
China is growing at 8-10% a year (assuming you believe the stats). Can China keep growing at that rate forever? For even 10 more years? What about India? Brazil?
Either we get some serious energy breakthroughs, China slows, or the standard of living drops in the US, UK, and Europe. Well China does not want to slow, and the US and Europe are fighting hard to maintain a standard of living that is not sustainable.
Historically these situations end up with war. That is an observation, not a prediction.
Something has to give, perhaps many things, but all of the people who think China will soon be the number one economy in the world and that China's growth is sustainable, better start thinking about the implications of what I just typed above.
You're a vocal deflationist. What do you see as the most convincing data points (the top 1-3) for your position and why?
Mish: Before we can discuss inflation and deflation it is imperative to define the terms. Not everyone will agree with my definitions, not even those who claim to be followers of Austrian economic theory. Yet my definitions have a solid theoretical and practical foundation.
Inflation and Deflation Definitions
Inflation is an expansion of money and credit, with credit marked to market. Deflation is a contraction of money supply and credit with credit marked to market.
The "marked to market" bit is my own addition. I use it because it explains a lot of things that are happening. Indeed, the entire definition is predictive of things that will happen. For example, if credit contracts and there is demand to hold money, treasury rates are going to drop.
Contrast that with a definition that says rising prices constitute inflation. What will treasury rates do?
It was easy to see the housing bubble would collapse and in turn credit would plunge and writeoffs would soar. That was the basis for my prediction that interest rates across the entire yield curve would make all-time lows.
When I made that call, oil was near $140, and nearly everyone thought I was nuts. But it happened. Recently we made new lows in 2- and 5-year treasuries and credit continues to contract.
Bernanke and various Fed members talk about preventing deflation, but that talk is always in terms of the CPI.
However, it is impossible to measure prices of consumer goods accurately enough, housing prices are not in the CPI (I think they should be), but most importantly, we are in a fiat credit-based economy.
In a credit-based system, where credit dwarfs money supply, it is foolish to look at inflation through the myopic eyes of either prices or monetary inflation alone. Sure, the Fed can print, but if there is no demand for credit, what does $1T or even $10T of excess reserves do? The answer is nothing other than to make the Fed's exit problem down the road a nightmare.
Money Multiplier Theory is Wrong
It is important to understand that widely believed money multiplier theory (the Fed prints and the money makes its way into the economy 10 times over) is wrong.
The reality is credit expansion comes first, reserves come second. I discussed this at length, using some charts from Steve Keen, in Fiat World Mathematical Model
Yet, talk is all the rage "just wait till all those reserves come pouring into the economy, it will cause hyperinflation". I have to laugh because the thinking is ass backwards.
What Really Happened?
1.Greenspan lowered interest rates fueling housing speculation and a credit bubble.
2.The housing/credit bubble burst.
3.Credit plunged as did credit marked to market.
4.In the wake of plunging credit the Fed stepped in to provide reserves for banks.
5.Consumer psychology changed and there is no demand for credit so it sits there as so called "excess reserves", earning slight interest for banks to help them cover losses still to come from foreclosures, credit card losses, and commercial real estate losses.
Looked at in this fashion there are not really excess reserves at all.
Please see Fictional Reserve Lending And The Myth Of Excess Reserves for further rebuttal to the notion that monetary printing will soon have the inflation genie flying out of the bottle.
2009 Recovery
Credit continued to contract in 2009 but the stock market soared. This happened because the corporate bond market freed up, which in turn gave a new lease on life to hundreds of corporation otherwise headed for bankruptcy.
In response, value of debt "marked to market" on the balance sheets of banks went from pennies on the dollar to full value. Credit did not expand but credit marked-to-market sure did, even if it is impossible to say precisely how much.
Thus my model suggests 2007 to February 2009 were periods of deflation, March 2009 to May 2010 were periods of inflation, and now we are likely back in deflation but it is hard to say given institutions do not mark assets to market. Extend and pretend is massive.
Looking ahead, my model suggests we go in and out of deflation for a number of years, just as Japan did, without the economy ever picking up any steam.
Your position has called for a deflation first but then a probable transition over to inflation at some point. We won't hold you to this, but what triggers do you see for this shift and, again with great latitude, when might this happen?
Mish: With fiat currencies, the probability of inflation approaches 100% given a long enough timeframe. However, we need to fix numerous structural issues, write off enough bad debts, and get to the bottom in housing before there is a serious chance of sustained inflation.
I am not calling for consumer prices to collapse (except in unneeded junk), but that could conceivably happen. By the way, because energy and food prices have been sticky compared to housing, we hear the statement all the time, "we have inflation in things we need and deflation in things we want."
No we don't. The statement is inaccurate because it defines inflation in terms of prices. With a proper definition one does not have inflation and deflation at the same time.
Critical Player is Congress, Not the Fed
The longer the Fed and Congress fight deflation, the longer it will take to play out. It could take 2 years or 10. The attitude of the next Congress, and the Congress and President after that will be crucial.
I believe the next congress will throw around fewer stimuli than the current one. I could be wrong. But 2 years will not seal the fate. There will be a presidential election in another two years.
Will we get a Chris Christie or another Obama? That is an undecided factor very much in play.
The critical point of this discussion is everyone's misguided focus on the Fed. The Fed arguably has a role, but Congress is a far bigger player than the Fed in determining the length of the path we take.
Interestingly, Bernanke, a Monetarist, recently chastised Congress over budget issues. This likely has Krugman going bananas.
In your own or in others' forecasts of how the future will play out, do you think that the difficult-to-predict Human Crowd Psychology factor is underrepresented? If so, what could be done to better incorporate it?
Mish: Few understand the deflationary impacts of the entire gamut of trends that is playing out, or the stress those trends place on families.
I discussed this recently in Inflation Targeting Proposal an Exercise in Blazing Stupidity; Fed Fools Itself
Demographic Pendulum in Motion
It is futile to fight changing social trends, but that has not stopped the Fed with reckless proposals on top of reckless proposals. Please see Inflation Targeting Proposal an Exercise in Blazing Stupidity; Fed Fools Itself for more details.
As I stated in June of 2008, we are now on the back side of peak consumption and Peak Credit. Regardless of what Bernanke of the Fed does, the demographic pendulum is in motion. There is no going back.
That the Fed cannot change attitudes is at the very heart of the deflation argument. Japan certainly tried and failed, Bernanke will fail as well.
The Fed can provide liquidity but it cannot not determine where it goes, or if it goes anywhere at all.
The important point here is the pendulum has just barely moved from peak risk taking to risk aversions. With that in mind, and given the Fed and Congressional propensity to fight a battle that cannot be won, it will be years before the pendulum gets to the other side.
Asymmetric Pendulum
I have not mentioned this before but the pendulum is actually asymmetric, at least in terms of time, not necessarily price or attitude.
We spend far more time in inflation and risk taking than deflation and risk avoidance. Moreover the cycle swing takes so long time wise from one end to the other, that by the time we get to peak risk taking, most do not even think deflation is possible.
Everyone thinks deflation is impossible, much the same way everyone thought housing prices would rise forever. There were wrong about housing and they are wrong about deflation.
How the heck do you find the time to write so much? Our members are amazed by the output on your blog and by the fact that they've received personal answers to questions they've emailed you.
Mish: I certainly love what I am doing. I also believe I am helping people. I have stacks of emails to prove that point, mainly in regards to getting people out of housing, out of the stock market on time, into gold, and not betting against treasuries.
To be sure, I get some hate mail, mostly in regards to my stance on public unions, but that volume is small compared to everything else. I can get as many as 300 emails a day, and I try to answer any pleas for help. I have spent as long as 2 hours answering calls for help, even when I cannot possibly get anything out of it.
If someone sends me a link to an article I use, they may only get a one word response of "thanks". If I get a question, I try to answer. I certainly appreciate when some thoughtful people send me a link or a comment and say "no response needed".
Many days I am reading and writing for 15 hours. I can spend 3 hours just answering emails from readers and clients. On weekends, in the summer, I can spend as little as 2-4 hours, but 3 minimum is more like it.
I am often laughing my head off over things I write. So I am having fun.
Bear in mind my role at Sitka Pacific is advisory, client services, and general manager type functions. Those are part of the 15 hours mentioned. I do not trade. Fortunately I have a fantastic partner who shares the same risk management and customer first attitudes. We have grown from about $15 million assets under management to about $75 million under management in the last few years.
That is small by Wall Street standards, but I expect to double or triple that in a few years, the right way, by putting client interests first.
Which assets do you see as being the being the `most hated by the most people'? Which are `most beloved'? In your opinion, are these perceptions well-deserved and if not, what opportunities do they represent?
Mish: Certainly US treasuries are universally despised. People were shorting 10 year notes at 4%. Yikes!
However, after this rally it is hard to be super-bullish on them now. Bullish yes, super-bullish, no. I would advise not shorting them.
I do not think the gold story is fully understood yet. It may not be hated, but it is not loved like technology or housing was. Thus I think more will come from gold but it will not necessarily be from here. We can easily have a sharp correction first.
The one thing not despised but universally ignored is Japanese equities. For a long-term hold perspective, I like Japan. Apathy is a great setup. Otherwise, there is precious little to like about anything.
This market, including corporate bonds, is way over-loved. Sentiment is extreme, and earnings expectations will not happen. The market can keep going up, but the risk-reward setup is horrendous.
If you knew that the purchasing power of your existing assets and income would disappear one year from today, what would you invest in during the coming year to prepare?
Mish: The question left out a critical aspect of "how" assets would "disappear". For example, equity and housing assets might crash because of deflation, or theoretically the dollar could fall to zero in hyperinflation. How one would best profit would be quite different.
In regards to hyperinflation, the odds are minuscule. First we need to define the term.
Hyperinflation is a complete loss of faith in currency. Some think this will happen out of the blue, others think the Fed will print and print and print. Let's look at a few examples.
Zimbabwe Hyperinflation
In the case of Zimbabwe, a loss of faith in currency occurred before the printing occurred. The Weimar Republic is a different story.
In Zimbabwe, the Mugabe government initiated a "land reform" program intended to correct the inequitable land distribution created by colonial rule. Ultimately, Mugabe's attempt to bail out the poor at the expense of the wealthy is what triggered capital flight and loss of faith of the currency.
His reforms not only caused a flight of capital and human capital (the wealthy), they also led to sanctions by the US and Europe. In response, Mugabe turned on the printing presses but the loss of faith in the currency had already occurred.
Weimar Hyperinflation
In Weimar Germany, printing for war reparations kicked off hyperinflation.
War reparations were a political event. So was the invasion of Germany to enforce payment of those reparations.
Argentina Hyperinflation
Argentina based its currency on the US dollar, a political mistake. When Argentina could no longer hold the peg, its currency collapsed.
Hyperinflation is a Political Event
The commonality between Zimbabwe, Weimar, and Argentina is they are both political events. In Zimbabwe a political event triggered capital flight, in Weimar a political event started massive printing, and in Argentina everything collapsed when a foolish peg could not be sustained.
In each case, a collapse of faith in currency (hyperinflation) led governments to massive printing campaigns, not the other way around.
US Comparison
The US compares to Zimbabwe how?
The US compares to Argentina how?
Is anyone going to force the US into war reparations?
The idea that we are going to wake up one day and suddenly out of the blue face hyperinflation may be theoretically possible but it is extremely unlikely in practice.
Moreover, and it is important to keep coming back to this point, we are in credit-based system. The Fed is not going to cause hyperinflation by printing.
Besides, the Fed cannot give money away. And as I have pointed out, Bernanke is even chastising Congress about fiscal spending. The Fed would not give away money even if it could!
Sure, the Fed can provide liquidity, but it cannot force businesses or consumers to borrow. Yet people tell me the Fed will cause hyperinflation. It does not add up.
Congress can give money away, but the next Congress will look a lot different than this Congress. I discussed the political and some economic consequences of that reality in Obamacare Career Ending Votes; Republican Chance to Win Senate; Expect House Blowout; Stimulus Appetite Greatly Diminished
Here is one more point about hyperinflation. If the US dollar goes, every fiat currency on the planet will follow. The idea that hyperinflation will hit the US alone is preposterous. The Euro, the Yen, the Pound would all go up in flames at the same time.
The way to protect against that situation is to have gold. Holding gold also works against the other extreme, deflation, on the basis that gold is money.
Gold does not do well in all circumstances, however. Gold did very poorly from 1980 to 2000, a period of ordinary inflation. There is no guaranteed play anywhere.
What's the question we should have asked, but didn't? What's your answer?
Mish: I guess it would be: "Does your crystal ball have a forecast for the stock market? For Gold? The US Dollar?"
Let's start with gold. I see articles everyday by some prominent people saying things like "I know gold is going to ... whatever".
The thing is, they don't know and neither do I. Only a charlatan or a fool can make such a claim. Of course the fools and charlatans may be right, but it is not because they "know" anything.
One thing I do know is that I don't know things of that nature. That puts me ahead of all those who claim to know the unknowable.
Probabilities
I prefer to look at things in terms of probabilities. It is highly likely the Fed embarks on Quantitative Easing. That should be good for gold, but short term that QE may easily be priced in.
Moreover, the Fed may go slower than what the market thinks.
Thus, there could be a huge "sell the news" event in both gold and the stock market on the QE announcement, no matter what that announcement is.
Should that happen, given that gold is in a long-term bull market, and given that Bernanke will likely go back to the QE well, I expect buying the next big dip in gold would be a higher probability event than buying a 10% correction in the stock market.
There is a lot going for gold, but it is by no means a "sure thing".
Is the Equities Bottom In?
Many people claim the "Bottom is In"?
Is it? How can they know? I am not even sure if the bottom is likely in. Look at the half-dozen 50% or greater rallies in the Nikkei over the course of two decades, all taken back and then some.
How many "knew" that would not happen. How many in the US "knew" that housing prices could not possibly collapse.
I am quite sure that stocks are richly priced, but that sure does not mean stocks cannot rally further from here.
We are in a credit bust scenario with enormous deflationary pressures, even if outright deflation is not sustained. As such, the risk in equities is a lot higher than most think.
Faith Bubble
There is a lot of confidence in the Fed's ability to produce inflation. Indeed, I think there is a bubble of confidence in the Fed's ability to produce inflation.
Should that bubble burst, equities can collapse far faster than most think possible.
Risk Management
Hyperinflation is theoretically possible, but highly unlikely in practice for reasons stated above. But what if Prechter is right? Actually I think the grand-supercycle collapse he is calling for is also highly unlikely, although it too is certainly possible.
Is worry over such extremes or attempts to profit from such extremes at this stage a waste of energy? I think so.
Unless you are a day-trader, it is important to be aware of such possibilities, while focusing on the more likely probabilities.
The bottom may be in, but a test of 850 or even the 700-800 area of the S&P sure seems likely enough. How many are prepared for that?
Anti-dollar sentiment is once again extreme. It is quite similar to the extreme anti-Euro sentiment a few months back. Look at what happened. Are we setup for another reversal?
How many are prepared for the market to go sideways for 5 years or longer, as earnings catch up with valuations. This happened in the 70's and there is absolutely no reason it cannot happen again.
Sadly, most aren't prepared for those scenarios, just as they were unprepared for the collapse we saw in housing and the collapse we saw in global equities.
Some questions to ponder are: Do you really want to be long after this runup? How long? What are appropriate hedges? What happens if the dollar rises? Is it possible, if not likely to get a reasonably strong move up in the US dollar here?
The important point is not whether or not you agree with my probabilities; the key point is to be thinking about risk management and opportunities. It is far easier to make up for lost opportunities than lost cash.
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CM.com readers can submit their preferences for future Straight Talk participants, as well as questions to ask them, in our new Straight Talk forum.
Disclosure: Author is long gold, cash
http://seekingalpha.com/article/232576-mike-shedlock-on-the-economy-deflation-and-where-to-invest-this-year?source=email_the_macro_view
Millions Of Unemployed Americans Now Live As Paupers Even As Foreign Nations Use Sovereign Wealth Funds To Buy Up Huge Chunks Of American Infrastructure
Most Americans still do not understand just how bad the economic horror we are facing really is. Today, millions of Americans are living as paupers in the land that their foreathers built even as America's infrastructure is literally being sold out from under their feet by corrupt politicians. The "official" unemployment rate in the United States has been at nine and a half percent or above for 14 consecutive months, and today it takes the average unemployed American about 35 weeks to find a job. However, the "official" unemployment rate is misleading, because it does not include workers that have quit looking for work or that have had their hours cut back to part-time. According to 60 Minutes, when you add those "discouraged workers" and "underemployed workers" into the equation the actual rate is about 17 percent, and in the state of California the actual rate is about 22 percent. Meanwhile, foreign nations are using sovereign wealth funds to buy up staggering amounts of U.S. infrastructure. America is quite literally for sale in 2010. All across the United States, highways, ports, toll roads and even parking meters are being gobbled up by foreign powers. We have shipped massive amounts of wealth and jobs to other nations, and now those very same countries are turning around and buying huge amounts of U.S. infrastructure with the gigantic piles of dollars that they have accumulated.
Widespread long-term chronic unemployment was something that America was never supposed to see again. Our leaders promised us that the U.S. financial system was so strong that we would never have another "Great Depression" in our lifetimes. But then the financial crisis of 2008 happened. Unprecedented numbers of Americans started losing their jobs and the U.S. Congress did something that it had never done before. Congress decided to extend unemployment benefits all the way out to 99 weeks.
Doing that has cost U.S. taxpayers approximately $100 billion dollars to this point, but we were promised that it was a "temporary" fix and that it would give displaced U.S. workers a chance to find new jobs.
Surely any industrious American worker could get another job within 99 weeks, right?
Wrong.
Today, there are at least 1.5 milion "99ers" - those Americans that have completely exhausted all 99 weeks of unemployment benefits and that still do not have jobs.
Sadly, as bad as that number sounds, it is likely to keep growing. Today, over one-third of all unemployed Americans have already been unemployed for at least one year. If this trend continues, we are going to end up with millions of "99ers".
60 Minutes recently did a report on some of these "99ers". Many of them are very highly educated and very highly qualified. If you have not seen this 60 Minutes report yet, you have got to take few minutes to sit down and watch it. This video is so shocking that many of you will have your jaws on the floor by the time you finish watching it....
Is the U.S. Federal Reserve Setting the Stage for Hyperinflation?
By Don Miller, Associate Editor, Money Morning
The U.S. government wants to stimulate growth in the moribund economy by stoking the fires of inflation. But by leaving interest rates low and buying up bonds - a policy known as quantitative easing (QE) - the U.S. Federal Reserve risks debasing the dollar, which could lead to a prolonged period of hyperinflation that would send prices skyrocketing.
After their most recent meeting on Sept. 21, Fed policymakers said low inflation warranted looser monetary policy. Minutes from the meeting said central bankers were prepared to ease policy to boost inflation expectations "before long."
The Fed is seeking ways to boost the U.S. economy after keeping interest rates at record lows and buying in $1.7 trillion of U.S. securities. The next move may be another round of quantitative easing that would expand the Fed's balance sheet even further.
But as it feeds more and more money into the financial system, the central bank may very well be sowing the seeds of hyperinflation.
By bailing out big banks with the $700 billion Troubled Asset Relief Program (TARP), pursuing a $787 stimulus program to boost the economy, and launching a near $1 trillion rescue of government backed housing authorities, the government has racked up about $12.7 trillion in debt guarantees and spending.
Without enough hard assets - like gold - in storage to back those guarantees, the only way the government can meet its debt obligations is to print more money.
Money Morning Contributing Editor Martin Hutchinson thinks there's a chance the government could swamp the economy with stimulus and spark a round of hyperinflation.
"With the Fed pumping all that cash into the system, deficits of $1.3 trillion and additional QE of $1 trillion on the table, the odds are getting greater all the time that a bout of hyperinflation could be in the cards," Hutchinson said in an interview.
Hyperinflation can be simply defined as very high inflation, a condition in which prices increase rapidly as a currency loses its value. It usually occurs when monetary and fiscal authorities of a nation issue large quantities of money to pay for a large stream of government expenditures.
In numbers, hyperinflation could mean anything from a 100% cumulative inflation rate over three years to inflation exceeding 50% a month. For example, an inflation rate of 100% a month would reduce the value of a $20 bill to $2.50 in four months.
Hyperinflation can also be viewed as a form of taxation. The most serious consequence of hyperinflation is the reallocation of wealth. It transfers wealth from the general public, which holds money, to the government, which issues money.
Hyperinflation has occurred on several occasions in history. The most commonly known examples are:
Germany or the Weimar Republic went through its worst inflation in 1923. The highest currency issued was a 100,000,000,000,000 Mark note, which was the equivalent of about 25 U.S. dollars. The rate of inflation peaked at 346% per month, meaning prices doubled every two days. The main cause is believed to be the "London ultimatum" in May 1921, which demanded reparations in gold or foreign currency to be paid in annual installments of 2 billion gold marks plus 26% of the value of Germany's exports.
On July 22, 2008, the value of the Zimbabwe dollar had fallen to approximately 688 billion per U.S. dollar. After the country's independence, inflation was stable until Robert Mugabe began a program of land reforms that primarily focused on taking land from white farmers and redistributing those properties and assets to black farmers. Rampant hyperinflation ensued when this policy sent food production and revenues from exports of food plummeting.
Hyperinflation in post World War II Hungary may be the highest on record. In April 1946, prices zoomed higher by 195% every day, meaning they doubled every 15.6 hours. The war caused enormous costs and, later, even higher losses to the relatively small and open Hungarian economy. The national bank was practically under government control. The government spent more than it could raise in taxes and the central bank printed more paper money to finance the deficit.
But even though our economy shows some of these same symptoms, it doesn't mean hyperinflation is a foregone conclusion. Hutchinson says the Fed may be able to balance interest rates to keep runaway inflation in check.
"If prices only go up say 3-4% over a course of a year, the Fed can probably keep it in check with a gradual increase in interest rates," Hutchinson says. "But the problem with inflation is it tends to take off very quickly. If you get a 20% bubble in prices in a few short months, the Fed would have a hard time reacting quickly enough."
Investors can identify hyperinflation before it arrives by watching for a few reliable signs:
Hoarding (people will try to get rid of cash before it is devalued, by hoarding food and other commodities creating shortages of the hoarded objects).
Distortion of relative prices.
People prefer to keep their wealth in non-monetary assets or in a relatively stable foreign currency.
People regard monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that foreign currency.
Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period.
So how do investors protect themselves from a bout of hyperinflation and the demise of their purchasing power?
Until government officials reverse their free-spending ways, Hutchinson says hard assets like commodities - such as gold, silver, and platinum - and the companies that mine them are the best bets. But seeking protection in those sectors can get tricky because even a bubble in hard assets will eventually burst.
"As hyperinflation becomes more and more apparent, prices for hard assets will also increase rapidly," Hutchinson says. "But investors will have to be especially nimble to avoid the ride back down. Even precious metals like gold and silver will eventually top out."
http://moneymorning.com/2010/10/25/hyperinflation-2/
Monetary Meltdown Monday
by: Philip Davis October 25, 2010
Last Friday, Geithner's message was "Do as I say, not as I do."
This weekend, Timmy took a big doo doo on the rest of the World as he pressed fellow Finance Ministers into (in theory) setting mechanisms to address trade balances (which means export countries need to strengthen their currencies against the dollar) while importing countries (like US) should not try to manipulate their own currency. Well, that sounds reasonable except, before the ink is even dry on the G20 release, Timmy flies off to China to get them to commit to revalue the Yuan, which is pegged to the Dollar and effectively DE-values the dollar in an entirely manipulative manner.
No, wE didn't manipulate the Dollar, China did. We only told them to manipulate their currency which is tied to the dollar, so it's not the same thing at all as us manipulating the dollar and —- oh my God Tim, how can you sleep at night???
So good morning, America, how are ya? I'll tell you how you are, you are 1% poorer than you were on Friday as the Yen rises to 80 to the Dollar and the Euro rises to $1.41 and the Pound hits $1.58. That drove oil back over $82.50 and gold back to $1,350 and copper hit $3.89, up from $3.75 on Friday - that's 3.5% inflation of a basic material over the weekend! That annualizes out to about 1,000% but let's be fair and say this only happens on weekends and call it 52 x 3.5% for 182% - hyperinflation accomplished! Of course, we don't need 182% increases in commodities to achieve hyperinflation, hyperinflation is anything over 26% and our Dollar is down 15% since May and that's 5 months so we're heading for 36% over 12 months already.
I've been invited to attend the Economists' Buttonwood Gathering in New York today where the agenda will be discussing the States' Fiscal Crises led by Robert Rubin and Josh Bolten over lunch followed by BOE Governor Mervyn King's speech on "International Reform in the Financial Sector" and then my favorite bond pimp, Mohamed El-Erian will be speaking about "Sovereign Risk and the Banks" followed after market hours by Vikram Pandit (Citigroup's CEO) and then Nassim Taleb (Black Swan) after which there'd better be drinks!
I usually can't be bothered with these things but this conference is likely to move the markets and I should, in theory, be able to chat with our Members live from the conference, so this should be fun. Tomorrow is currency day with the after-lunch meeting titled "Global Currency: Crisis of Confidence" with Joyce Chang (JPM) and Paul Volcker giving their views and the 3:30 lecture is titled "China: The Decade of the Dragon?" with the exiled Stephen Roach, Jim Chanos, Gene Ma and Xu Sitao, who is The Economist's China Director. So, lots of interesting stuff from interesting people and, while the gold bugs and the dollar doomsayers should be able to pull plenty of good quotes, I will be looking to get the mood of the attendees, who are themselves a veritable who's who of the investing World.
With this global gathering of market movers, I guess we'd better get a global perspective on the markets, right? Let's take a look at our global multi-chart and see how we are doing. The blue lines are our mid-points and the greens are the 10% lines and they reveal an interesting pattern:
click to enlarge
It's a tale of two economies with our net exporters following the path of copper (mirroring the collapsing Dollar) and up around those 20% lines. As we can see from the Baltic Dry Index, which is DOWN 10% - there is not any more demand for goods, they are simply more expensive when priced in a weak currency. Germany's currency is artificially held down by the weight of the rest of the EU while the UK gets less of a boost despite their oil and mining economy because the pound is not artificially tied down to the weaker EU nations. France is the World's 5th largest economy and on par with US performance as that country enjoys week two of national strikes.
As we discussed last week, the weak Dollar allows our markets to "ignore and soar" as 15% pullbacks in our currency are reported as 15% earnings beats to US investors while the MSM does nothing to educate its readers as to value. In Friday's Member chat, we compared the Dow, S&P and Nasdaq priced in Dollars, Euros and Yen to get a better picture of where our markets are now:
Priced in real currencies, our markets are DOWN 10-20% since May. That's not entirely a bad thing - it means we look like a bargain to global investors, providing they are as clueless as to exchange rates as their American counterparts. Unfortunately, I don't think foreigners are that stupid, which is one of the reasons I look forward to going to the conference today as I can actually quiz some of these famous foreign investors to see if they can pass the old "Jay Leno" test.
OK, that is just sad, isn't it? But not as sad as the MSM in this country cheerleading stocks and the market as if they are "en fuego" when they are, in fact, losing ground to the declining dollar. October alone has seen a 5% drop in the dollar and only the Russell has managed a 5% gain. This is interesting because small-cap, relatively local companies benefit the least from the declining dollar but we haven't gotten a lot of Russell earnings yet as the S&P had the floor last week so it will be interesting to see what holds up as the smaller companies begin reporting their earnings.
As I said to Members last week: "It looks like we could break out and up if the sentiment turns enough in favor of the US markets and we certainly look like a cheap laggard compared to EU or Asian investors local markets and that does mean a 10% upside is possble but, from our perspective - only if the Dollar stays here or goes down and foreign investors start to buy American. Not at all coincidentally - that's exactly what Timmy's asking for in South Korea this morning!"
Not counting our 10 new Dividend Plays, which are all bullish of course, we did manage to get a little more bearish than the prior week's 21:10 bull/bear ratio of trade ideas. Last week we cut it down to 16 bullish to 10 bearish trade ideas although, once again, the bear plays were mainly of the hit and run variety as we are still fundamentally bearish but technically bullish - which means we have to take a lot of trades we don't really believe in to play the game (although I favor not playing (cash!) into the election, but we service a large Membership and it is kind of dull not to trade at all, isn't it?).
Generally, we just want to make sure we make 2.5% a month to keep up with inflation but, other than that, the markets are a very scary place to be and, with Halloween approaching, you never know what horrors you are going to find when you pull that mask off.
We have a Datapalooza this week with Existing Home Sales at 10 today followed by the old Case-Shiller not adjusted for the declining dollar Home Price Index at 9 and Consumer Confidence (or lack thereof) at 10 along with the FHFA also not reflecting the declining dollar Home Price Index. Why is it that it's easy for us to understand that if the $1M Zimbabwe Dollars becomes $1Bn Zimbabwe Dollars a year later, that a man selling his home for $10M is a fool but we don't understand how 1 US Dollar, that is now $1.35 US Dollars to buy the same oil, gold, copper, silver, diamonds, corn, wheat, soybeans etc that it did last year means your "stable" home price is actually an additional 35% drop? Is it really that hard to see?
The same goes for the people selling cars and clothing and even beloved iPods - if you are collecting the same amount of money but getting paid in what is effectively Monopoly money - are you really doing well? Now, where was I? Oh yes, data! Wednesday we get to see if anyone applied for a Mortgage last week and at 8:30 we get Durable Goods Orders, which should be up as we sold the Saudis a bunch of WMDs in the form of fighter jets. At 10am we get New Home Sales and, of course, Oil Inventories at 10:30. Thursday another 450,000 pink slips will be handed to US workers but, more importantly, on Friday we get the Q3 GDP where bad news will be good news for those who pray for QE2. We also get the Chicago PMI and Michigan Sentiment on Friday and, of course, then we head into the election so fun, fun, fun!
It's going to be an exciting week and it's starting off with a bang as the Dollar tests new lows at the open. I think this is an excellent opportunity to cash in long positions and sit on that worthless cash through the election or at least to get very, very well-hedged. Seven banks were shut down on Friday, lifting the year's total to 139 banks that were in such bad shape that FDIC examiners had to storm in and confiscate everything over a weekend.
The Hillcrest Bank of Overland Park, Kan, had $1.6Bn in assets and we are just 1 more bank away from topping last year's mark of 140 bank closures, the most failures since the year after the first Bush left office in 1992 (just a coincidence, I'm sure).
Perhaps BAC will make the list one day as the are being hit with a Class Action Suit on behalf of homeowners seeking damages for alleged disregard of foreclosure process rules. The suit, filed Wednesday in federal court in Newark, N.J., accuses Bank of America and two subsidiaries, LaSalle Bank and BAC Home Loans Servicing, of "an undisciplined rush to seize homes" through "pervasive and willful disregard of knowledge, facts and statutes." The putative class in the suit, Beals v. Bank of America, N.A., 10-cv-05427, consists of all named defendants in pending New Jersey foreclosure actions initiated by Bank of America or its affiliates. The complaint includes counts of common-law fraud, breach of the covenant of good faith and fair dealing and violations of the New Jersey Fair Foreclosure Act and Consumer Fraud Act.
It continues to be all about the Dollar this week and we shall see how low it can go. I'll be talking to the luminaries all day at the conference and I'll keep you informed as to the mood, as well as the official spin from El Erian and company.
Be careful out there!
http://seekingalpha.com/article/231994-monetary-meltdown-monday?source=email_the_macro_view
Weighing the Week Ahead: It's All About the Dollar
by: Jeff Miller October 25, 2010
For mainstream media there is a daily need to "explain" what happened in the financial markets. Even if the daily change is modest, the world wants to know the cause. If you are a financial journalist, you are expected to come up with an answer.
Here we can take a more leisurely approach. In particular, we do not need to impose a theory of causation on some recent pattern of trading. This allows us to observe with a clear conscience:
It's all about the dollar.
The causal arguments come from all sides. For now, let us just observe the key relationship and work further on the causal model.
Background on "Weighing the Week Ahead"
There are many good services that do a complete list of every event for the upcoming week, so that is not my mission. Instead, I try to single out what will be most important in the coming week. If I am correct, my theme for the week is what we will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios.
In most of my articles I build a careful case for each point. My purpose here is different. This weekly piece emphasizes my opinions about what is really important and how to put the news in context.
Last Week's Data
As usual, there was plenty of discussion about last week's data. There was really nothing significant.
The Good
Market action. The market continues to react postively, even when economic news is weak. The assumption of Fed action remains in full force.
Early earnings reports have been excellent, including positive comments on the business environment. We are seeing an 83% "beat rate" and an increase in forward earnings forecasts. Despite some skepticism, the forward earnings forecasts have been very good in the last decade.
We are about to see the "Golden Cross" in the S&P 500. This means that the 50-day moving average moves above the 200-day average. It is a good read for those wanting to be on the side of the major trend.
Limits on the foreclosure problem. We'll eventually know if the predictions are correct. For now, the consensus opinion is that there is a limit to the impact from the "robo-signing" issue.
The Bad
The economic news was somewhat negative. The factors related to signficant improvement in employment where unimpressive.
Initial jobless claims moved slightly higher, but remain at levels that do not signal improvement in the overall employment picture.
There was plenty of spin on the housing data, but I emphasize a leading housing indicator -- building permits. This is a good series, since the permit requires a real commitment and it is a true leading indicator. Since building permits fell 5.6%, this is a negative despite the increase in housing starts.
The Beige Book was mostly irrelevant, but the anecdotal evidence indicated only a slight economic improvement.
It is difficult to label "good" and "bad" when the market is responding in a contrary fashion. For most of the last two weeks the focus has remained on the propects for aggressive quantitative easing by the Fed. For several weeks I have suggested that this is the topic to understand. Last week I showed you what to read. If you understand the QE2 arguments you will be ahead of most of the traders.
The Mysterious
Understanding recent market action has a bit of mystery. In one sense, the explanation is obvious. The stock market is moving inversely with the dollar.
They mystery is why. In the long run a strong dollar is good for US equities. In the short run, the correlation has been very negative. The same can be said for bonds.
I am working on an update to my article from last year, a favorite piece that showed both of these relationships. For the moment, let us just say that my daily observations suggest that nothing has changed.
The Week Ahead
The market has continued to improve in tone, but the reasons are troublesome. Daily gains still relate to a weaker dollar rather than economic strength. Economic weakness is excused as more evidence that the Fed will act aggressively.
Next week we will see updated sentiment data and the Chicago PMI. These will provide an idea about the October employment report.
We also will see an increased focus on the mid-term elections with plenty of polling data. I expect a tightening of the races. The outcome will still be a form of gridlock, but with a less Republican emphasis. It is a modest change in expectations.
Our Own Forecast
As we have been for most of the recent rally, we remain bullish. With few sectors in the penalty box, there are more attractive ETF choices in addition to many low P/E stocks with good yields. We continue our multi-week bullish posture in the weekly Ticker Sense Blogger Sentiment Poll. Here is what we see:
87% of our 55 ETF's have a positive rating, down from 91% last week.
16% of our 55 sectors are in our "penalty box," down from 35% last week. This means that there are many attractive sector and stock opportunities, and a reduced level of risk.
Our universe has a median strength of +28, down slightly from +43 last week.
For trading accounts, we had full exposure during the past week, continuing to catch the recent rally.
[For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly email list. You can also write personally to me with questions or comments, and I'll do my best to answer.]
Thinking Ahead
The relationship bewteen the dollar and equity prices is an interesting challenge. Your causal model could take many different forms, but here are the three principal choices:
A weak dollar increases corporate earnings and therefore stock prices;
Increasing stock prices drive the dollar lower; or
An unspecified factor is the real cause, pushing the dollar lower and stocks higher.
Answering the causation question correctly can help in making a solid investment decision.
Meanwhile, I see the inverse relationship as important for short-term trading, but not for long-term investing.
http://seekingalpha.com/article/231901-weighing-the-week-ahead-it-s-all-about-the-dollar?source=email_the_macro_view
The Tombstone Blues
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Unfortunately, Jim is "DEAD" on with this one.
Only 2 outcomes:
1) Meltdown of the financial system.
2) Or we completely throw away any pretext of being a nation of laws.
Heads they win tails we lose...
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The Tombstone Blues
By James Howard Kunstler
on October 25, 2010 2:50 AM
The latest version of Pretend - going on a couple of weeks now - is the nation whistling past the graveyard of mortgage documentation fraud while skeletons dance around everything connected with the money system. Halloween came early this year. The USA is getting to look like one big Masque of the Red Death, so I suppose it's convenient that our pop culture has been saturated with vampires, zombies, and werewolves for a decade, coincident with the self-cannibalizing of our economy. Something in the zeitgeist told us to get with the program of a twilight existence. We're well-schooled now in the ways of the undead, operating under cover of darkness, going for the neck at every opportunity, even eating our young - if you consider the debt orgy, both private and public, as a way to party like it's 1999 by consuming your children's' future.
The big banks leading the charge of the anthropophagi are making like it's no big deal that notes representing money lent have become mysteriously dissociated from the mortgages that secure them. In the good old days, these things traveled in pairs, like boy-and-girl, Laurel and Hardy, a horse and carriage. It made for straight-forward property transfers, where Person A could be confident he was buying something free and clear from Person B. What a quaint concept, free and clear!
Nowadays, these documents can hardly be located at all - not such a surprise, really, since they were ground out like e-coli infested bratwursts in strip-mall boiler rooms run by former used car salesmen, and pawned off wholesale (literally) on banks who served them up sliced-and-diced, sloppy Joe style, on CDO buns to credulous pension funds, cretinous insurance company yobs, double-digit IQ college endowment managers, and other such nitwits bethinking themselves the reincarnation of Bernard Baruch, not to mention foreign sovereign nations who bought this smallpox-blanket-grade investment paper by the container-ship-load and, finally, the innovative geniuses at the very banks who engineered the stuff and got stuck with tons of it themselves when, as they say, the music stopped.
The Big Picture looks even worse when you figure in the mischief of so-called synthetic CDOs that represent the multiple securitizations of single underlying mortgages - God knows how many times each - which mean, curiously, that a lot of real estate is everywhere and nowhere at the same time, plus the Ponzi universe of credit default swap black holes just sitting out there waiting to suck whole civilizations into oblivion. Ollie to Stan: Well, here's another fine mess you've gotten me into....
But I stray a little from my point, which is the massive systematic monkeyshines involving legal documents relating to American real estate. The bankers say, just bring a "lost note" letter to the closing. "The dog ate it." Signed, Mom. Like, that's an okay substitute for the rule of law. Oh, and, by the way, the dog ate the title, too. Congress even tried to get in on the act last week with a bill that would have essentially negated the significance of notarization - that is, of witnessing and attesting to the veracity of documents - in order to mitigate the fiasco of robo-signing, which was endemic in places like the mortgage mills of Nevada and Florida where due diligence went AWOL and Burger King-quality employees just threw some contracts in the trash out of sheer boredom. "Oh, the dog also ate my signature...." President Obama vetoed the damn thing, which was passed in the US Senate unanimously by the human dung-beetles who work that manure pile. The dog ate your financial system.
This is hardly to say that the people who bought property based on those improperly processed and/or scam-a-lama-ding-dong mortgages deserve to avoid foreclosure and get to keep and live in million dollar houses they never could have really afforded to buy in an economy run by grown-ups. But they might, because there are an awful lot of hungry lawyers out there who will demand that the agents of foreclosing parties produce the relevant documents. And some of these foreclosing parties may not have the nerve to hand over forged instruments in a court proceeding once everyone is going over them with scanning electron microscopes looking to find one molecule out-of-order.
Bottom line is that we've reached the point where nobody in that particular racket can get away with much anymore. That string is played. The banks are toast. Not only won't they be able to recover the collateral on a lot of loans, but the MBS related crap sitting in their own vaults goes to zero, not thirty cents on the dollar or some mark-to-fantasy number that has kept them in the zombie zone for two years, like cancer victims desperately eating apricot pits in hopes of a cure. And if the banks are toast then the Federal Reserve is toast, because the Fed has been acting as a dumpster for so much of the smallpox-blanket-grade securities off-loaded by the banks since TARP, with a balance sheet that must look like a suicide note, and if the Fed is toast then the dollar is toast because they are promissory notes issued by the Fed.
Anyway, the states themselves are temporarily shutting down foreclosures, and the upshot will be a paralyzed property sales industry. Who will want to buy property when there is any question about owning it free and clear? You can be sure the sickness will spread into commercial real estate, with its much shorter-term loans and its desperate rollover deadlines. Things begin to look a bit gruesome. But 'tis the season for it! The night of the Blood Beast comes Sunday, just in time for the All Souls Day open of the equity markets. That's the day when the costumes come off and we stop pretending. That's the day that the skeletons dance on the real estate destined to be our graves.
___________________________________
The sequel to my 2008 novel of post-oil America, World Made By Hand, is available at all booksellers now.
http://kunstler.com/blog/2010/10/the-tombstone-blues.html
All good points.
Something interesting that I heard was that the amount we spent on stimulous would have been enough to put 2 kW of solar panels on every residential property in the US.
I am not advocating any big government spending projects per se or this one specifically but how much better would that have been than the God knows what we got CF?
Lots'a people back to work. Make them be US supply so new high tech factories?
Plus the additional power generation for the next 20-30 years.
That is the type of thing we need not culverts in the country...
Economists see more jobs ahead
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I guess such predictions keep the track record of economists in-tack?
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Economists see more jobs ahead
Ben Rooney, staff reporter, On Monday October 25, 2010, 7:19 am EDT
The outlook for hiring is improving as U.S. businesses continue to report growing demand and increased profitability, according to a survey of leading economists.
In its October industry survey, the National Association of Business Economics said Monday that employment conditions improved in the third quarter to the highest level since the start of the 2008-2009 recession.
Looking ahead, expectations for hiring over the next 6 months rose to the highest level since 2006, according to the survey.
The survey, based on responses from 74 NABE members, also showed that industry demand, corporate profits, business costs and capital spending all strengthened in the third quarter from the second quarter and last year.
William Strauss, an economist at Federal Reserve Bank of Chicago, said in a statement that the survey "confirms that the U.S. recovery from the Great Recession continues, with business conditions improving."
Despite the positive developments, the recovery is still expected to be slow.
A little over half of the economists in the October survey expect gross domestic product, the broadest measure of activity, to expand by more than 2% this year, down from 67% in July.
While the overall employment picture appears to be getting better, the job market is expected to remain under pressure into next year.
Earlier this month, NABE economists forecast the unemployment rate to rise to 9.7% this year, and then fall to 9.2% by the end of 2011. Unemployment in the United States currently stands at 9.6%.
Still, the October survey showed the percent of respondents reporting a decline in employment fell to 12%, a large improvement from the 31% reporting declines a year earlier.
The survey also found that profits at U.S. companies are increasingly being driven by sales in overseas markets, suggesting the weak dollar continues to be a boon for exports.
According to the survey, more than half of respondents indicated that some portion of their firm's sales came from operations outside the United States, while 16% said that over half of their sales came from foreign sources.
Meanwhile, a majority of respondents believe current regulatory policies and federal taxes will be a drag on business next year. However, they also expect the Federal Reserve's move toward more easy monetary policy will support business in 2011.
The private sector is still struggling to adapt to changes in the regulatory landscape after President Obama signed a sweeping financial reform bill into law earlier this year. In addition, Congress has yet to decide the fate of tax cuts that are set to expire at the end of this year.
At the same time, the U.S. central bank is widely expected to announce additional stimulus measures next month. Fed officials, including chairman Ben Bernanke, have signaled recently that the bank is prepared to pump more money into the economy by purchasing Treasuries.
http://finance.yahoo.com/news/Economists-see-more-jobs-cnnm-426919330.html?x=0&sec=topStories&pos=8&asset=&ccode=
What Does the 'Foreclosure Crisis' Mean for You?
by The Wall Street Journal
Monday, October 25, 2010 provided by
By M.P. McQueen, Mary Pilon and Jessica Silver-Greenberg
The Recent Fracas May Not Hit You Where You Live— But the Fallout Could Affect You in Surprising Ways
For the vast majority of homeowners, new questions about the state of foreclosures appear to be irrelevant. Few people seem to have been wrongly thrown out of their homes, and those who have been are generally months or years behind on their mortgage payments.
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But the fallout from the crisis is beginning to be felt in real-estate markets across the country, particularly in places dominated by vacation homes and investment properties. Some of the worst-hit areas could be Western ski towns, because fall is the busiest time of the year for sales.
Real-estate salespeople in some of those places are worried. "September and October are usually the height of the selling-season for us," says Rich Armstrong, who owns the brokerage Rare Properties in Jackson Hole, Wyo. "Now we are seeing a number of what we call 'fence sitters,' people who would have leapt in even a month ago, but now are waiting on the sidelines."
The "foreclosure crisis" is a result of the frenzied real-estate boom and bust of the past decade. Banks made foolish loans, and borrowers signed up for them—only to default later, as the economy slumped. Banks rushed to reclaim properties, launching a record number of foreclosure proceedings.
In the past several weeks flaws have emerged in that complex process. Because of the high volume of foreclosures, the documentation supporting legal actions was prepared hastily, and some homes were seized improperly.
Yet the far bigger worry is what happens next. A frenzy of lawsuits and banks' examinations of their own practices could throw more of the millions of foreclosures of the past few years into legal jeopardy. Attorneys general in all 50 states are investigating, and plaintiffs' lawyers are working hard to perfect their legal strategies for suits on behalf of people who have been foreclosed on.
The suits might well fail. But just the threat that past foreclosure rulings might be overturned could result in collateral damage. In some places, banks are rushing foreclosed properties to market. In others, buyers are stepping back, refusing to buy foreclosed properties or "short sales"—homes sold by owners for less than the mortgage balance. In markets already beset with large inventories of foreclosed properties, the result could be a slower recovery.
By the Numbers:
• 27%: Percentage of total home sales in 2009 that were second homes.
• 30%: Percentage of total mortgage defaults attributable to second-home and investment properties.
• 4.57%: Percentage of mortgages in some state of the foreclosure process, June 2010.
• 9.4 Months: The average amount of time from default until foreclosure proceedings begin on a "jumbo" mortgage loan.
Coastal markets and ski areas are feeling the most anxiety. Some already are littered with foreclosures—in part because they're dominated by second-home and investment properties. Those owners are more willing to walk away from a house that isn't their primary residence.
Foreclosure tracker RealtyTrac estimates that, nationwide, 30% to 35% of properties in foreclosure are owned by investors or were second homes. In Aspen, Colo., the figure is about 60%, says Kim McKinley, owner of McKinley Sales Real Estate in Basalt and Aspen, Colo. If foreclosure proceedings slow from here, inventory could jump, leading to price weakness later.
"We're concerned that the phantom inventory buildup will cause a more rapid and drastic drop in prices in Aspen, which is just getting started in terms of foreclosures coming to the market," says Ms. McKinley.
The timing of the foreclosure mess is especially inconvenient for ski towns, given the fall selling season.
Property owners are growing nervous. In Park City, Utah, lenders are quickly unloading foreclosed homes ahead of what could be a long, stalled foreclosure process, says Joe Trabaccone, a real-estate agent there.
On Oct. 11, for example, J.P. Morgan Chase put up for sale an 8,000-square-foot home adjacent to a private gated golf course. Mr. Trabaccone initially recommended the property be listed for $1.6 million, but Chase opted for $1.26 million. "They are offering these homes far too low just to hurry up and sell them," Mr. Trabaccone says.
Even so, it hasn't worked. A buyer made an offer and signed a contract, but then backed out.
In South Lake Tahoe, Calif., on Thursday, Freddie Mac, the big government-sponsored guarantor of mortgages, put a foreclosed home that had just been listed for sale on hold, freezing the property until paperwork could be straightened out. The foreclosure mess "seems to be filtering down and it could be an impact," says Doug Rosner, the broker who had listed the home. Three other properties in town were also frozen, another real-estate agent says.
The "sand states" of Arizona, California, Florida and Nevada are being hit as well. These areas, too, have a lot of vacation and investment properties—and a lot of foreclosures.
Robin Speronis, a real-estate broker in Cape Coral, Fla., says business had been picking up recently, with several inquiries a day—until the latest foreclosure scandal broke. Since then, she says, inquiries have shriveled to just one in the past week.
Susan Weeks, 55 years old, and her husband, Eddie, aren't optimistic. The couple had expected to retire and downsize when they bought a condo in Clermont, Fla., near Orlando, in 2007 for $192,000. Their plan was to sell their primary residence 10 minutes away and live in the condo. The trouble: They can't sell their first home.
The Weeks paid $269,000 for their three-bedroom home in 2004. The house next door, a bit larger, is listed at $185,000, Ms. Weeks says.
The couple has decided to move back to their primary home and take a renter for the condo. But while that brings in $850 a month, the Weeks take a $450-a-month hit on the condo —on top of the $2,400 a month they pay every month on their primary home.
"We're just going to wait it out," she says.
The possible foreclosure wars to come loom so largely over Florida markets that Ms. Speronis is urging condo sellers to consider any offer they get, even if it is far below asking price or what is owed on the mortgage.
Dianne Cloutier, a records supervisor in Chelmsford, Mass., had been looking for a retirement property in Cape Coral, but decided to wait because of the foreclosure mess. "It's left us on hold until we are sure the banks have legitimately foreclosed on people and that nobody can come back on us to get their property back," she says.
Other Ways the 'Foreclosure Crisis' Could Sting Homeowners
The foreclosure mess could hurt homeowners in another way: The costs of buying a home and paying off the mortgage are likely to go up, say housing experts.
The rising costs will come both during the closing and throughout the life of the loan.
At the closing, the cost of title insurance, which protects a property buyer from claims of ownership made by other people, is likely to rise, industry officials say. Title insurance is one of those annoying costs that can sneak up on a buyer during a close; premiums average around $2,000 across states, says Tim Dwyer, CEO of insurer Entitle Direct Group.
The foreclosure mess has sent insurers scrambling. One of the largest, Old Republic Title Insurance, told its agents on Oct. 1 not to issue policies on homes that have been foreclosed by GMAC Mortgage or J.P. Morgan Chase. And on Wednesday, the nation's largest title insurer, Fidelity National Financial, said lenders must vouch for the accuracy of their paperwork before it will insure properties.
Just like homeowners-insurance rates rise after a hurricane, the rates for title insurance are expected to rise, to compensate for the added risk.
The turmoil will likely lead to pricey premiums for new homeowners, says McLean, Va.-based housing economist Tom Lawler. Adds Cameron Finlay, chief economist at mortgage lender Lending-Tree.com: "Any time there is uncertainty in the market or risk implied, it follows that costs go up."
Other costs could be felt during the life of the loan. Until the current mess, servicing loans was a low-margin, high-volume business. Servicers collect mortgage payments from borrowers and send them off to mortgage holders, and if the loan gets into trouble, they manage the foreclosure. Few doubt this process will get costlier now that it is under scrutiny from regulators and the courts. That higher cost likely will show up in higher interest rates for borrowers.
Both of these higher costs also would hit homeowners who refinance their loans.
How much the costs of buying a home will rise is unknown. Mortgage industry officials say it is too soon to tell. And no one believes the costs will significantly change the price of a home. But with the housing market still weak, the uncertainty is making the prospect of buying—or selling—a home that much dicier.
—Jessica Silver-Greenberg
Foreclosures aren't the only problem. Short sales are getting more difficult to pull off, too.
In Bend, Ore., agents say buyers are avoiding short sales or even backing out of contracts because they don't want to deal with paperwork hassles or the chance of a court challenge later.
"I have some people saying 'I don't want to mess with bank-owned properties or short sales,'" says Dianne Willis, principal broker with RE/MAX Sunset Realty in Sunriver, Ore. "They're reluctant because it can be a frustrating process, especially for those who are looking to make a big move."
The short sales "can be very frustrating," adds Becky Ozrelic, of with Steve Scott Realtors in Bend. "You just have buyers waiting and waiting."
For sellers, lining up a short sale was tough even before the latest foreclosure crisis. Banks and mortgage "servicers," the outfits that process payments, already had been scrambling to handle surging workloads.
Mike and Kim Schwarz of San Jose, Calif., are coming up on the one-year mark on their short-sale saga.
The couple had acquired several investment properties over the past few years, including one in Thousand Oaks, Calif., for $751,000. After the tenants stopped paying rent, the Schwarzes couldn't cover the payments and decided to sell, Mr. Schwarz says.
They lined up a buyer in November 2009, and started working with their loan servicer on the short sale. For lenders, short sales are ugly because they guarantee a loss, but they often are preferable to a foreclosure, in which the lender is saddled with a tough-to-sell house.
The servicer, Residential Credit Solutions, took six months to process the paperwork, the Schwarzes say. Faxes and emails were sent, but nothing happened, Mr. Schwarz says.
"We typically don't hear from borrowers about long delays," says Dennis Stowe, president of Residential Credit.
The buyer walked away from the deal in June. The couple found another buyer in August, and resubmitted the short-sale paperwork. Mr. Schwarz says he has sent paperwork to Residential Credit four times since.
On Friday, Mr. Schwarz says, Residential called to tell him the short-sale paperwork looked good and the sale should close in mid-November.
Says Mr. Schwarz: "They didn't make it easy."
Write to M.P. McQueen at Mari.McQueen@wsj.com, Mary Pilon at mary.pilon@wsj.com and Jessica Silver-Greenberg at Jessica.Silver-Greenberg@wsj.com
http://finance.yahoo.com/banking-budgeting/article/111111/what-does-the-foreclosure-crisis-mean-for-you?mod=bb-budgeting&sec=topStories&pos=4&asset=&ccode=
Dollar at Risk of Becoming 'Toxic Waste': Charts
On Monday October 25, 2010, 9:22 am EDT
The dollar's slump could get far worse if the dollar index takes out last year's low, Robin Griffiths, technical strategist at Cazenove Capital, told CNBC Monday.
"If the (dollar index) takes out the low that was made roughly a year ago I really think that will not only encourage more sales, it will cause a little bit of minor panic," Griffiths said. "A year ago it was deemed too cheap, if it goes any lower than that it's actually become toxic waste."
The dollar (New York Futures - CEC: .DXY) resumed its recent downtrend Monday in the wake of a meeting of finance ministers from the Group of 20 nations at the weekend. The meeting failed to yield a definitive agreement on currencies, putting selling pressure on the greenback.
"The dollar is being trashed, we've actually had effectively devaluation of about 14 percent in the last two months," Griffiths said.
His view is contrary to that of HSBC foreign exchange strategist David Bloom, who told CNBC that a continuation of the currencies war after the G20 might put pressure on risky assets, causing a flight to safety into the dollar.
The outlook for the stock markets is more positive and the major indexes could be set to benefit from the seasonal upswing that typically starts at this time of year, according to Griffiths.
"We are now at the very beginning, on an ordinary year, of the strong season of the year," he said.
"The fact that it didn't go super weak in the weakest season on the year doesn't mean the seasonality isn't there, it means it was overridden, this time of course by the printing press of the Fed," he added.
Typically the major stock markets see a seasonal decline in September, but this year the month saw the markets rise strongly.
The seasonal upswing should add to any positive momentum being generated by expectations of further monetary easing from the Federal Reserve, Griffiths said.
If the stock rally materializes, it will likely last until the end of the year and one of the best ways to take advantage of it is to buy good quality, large-cap stocks, according to Griffiths.
"The dividend yield on the first-class equities, the sort of things that dominate FTSE, are actually safer as a stream of income than many government bonds are," he said.
Griffiths recommends the top 16 stocks in the FTSE-100, which includes HSBC (London: HSBA-LN), BP (London: BP-LN) and Tesco (London: TSCO-LN). He also recommends the large exporting stocks in Germany's DAX index.
Both the FTSE (FTSE: GB;FTSE) and DAX (Frankfurt: DAX-XE) are likely to return to their longer-term positive trend, he predicts.
http://finance.yahoo.com/news/Dollar-at-Risk-of-Becoming-cnbc-4192530527.html?x=0&sec=topStories&pos=9&asset=&ccode=
Iceland's New Mortgage Crisis: Is the U.S. Far Behind?
by: Dian L. Chu October 24, 2010
The Icelandic financial crisis has been ongoing since 2008, when all three of the country's major commercial banks collapsed after they failed to refinancing their short-term debt and a run on deposits in the U.K.
In July, I talked about how Iceland is totally not a post-crisis miracle as Paul Krugman claims. But how are things now with Land of Fire and Ice?
Scary Economic Numbers
Some of the scary economic figures, courtesy primarily of the plunging Icelandic króna:
•Inflation has soared 41 percent from January 2007 through September this year (see screen print from Bloomberg)
•Real disposable incomes slumped 20.3 percent last year
•Real wages fell 10.1 percent from the beginning of 2007 through August this year
•63 percent of the nation's mortgage is underwater
•40 percent of homeowners are "technically insolvent"
$2 Billion Mortgage Write-off - Who Will Pay?
Bloomberg reported that Iceland's government proposed a debt relief bill last week, to write off up to 220 billion króna ($1.99 billion) in mortgage loans. This is after about 8,000 protesters gathered outside parliament demonstrating their anger over rising homeowner insolvencies.
Most of Iceland's mortgage debt is inflation-linked. So, what that means is that the principal has gone up 41% in three years, while everything from wage, income to real purchasing power has gone in the opposite direction.
This debt relief sounds all nice and dandy, but the problem is a write-down of almost $2 billion is equivalent to about 8 percent of total assets at Iceland's three biggest banks, their 2009 balance sheets show.
Moreover, Iceland's pension funds, which hold most of the bonds behind the nation's mortgage debt, said they will try to block proposals. If the banks are forced to take a flat write-off, the government most likely will need to cover the loss of pension funds, i.e. taking on more debt.
Iceland, Ireland & Japan - Default Inevitable?
Separately, a WSJ article noted that during a speech at the Value Investing Congress in New York, Kyle Bass, head of $900 million hedge fund firm Hayman Advisors, says,
Iceland had sovereign debt of roughly 35% of its GDP. However, the country's three largest banks amassed roughly $200 billion of assets -- 10 times the country's GDP. When the financial crisis hit and Iceland had to bail out its banks, the country's sovereign debt ballooned.
According to Bass, right now, in terms of the size of banking systems relative to GDP. Iceland and Ireland are top of the list, thus post the highest sovereign debt risk. Ireland's on balance-sheet obligations are about 85% of GDP, but the country's bank bailout program is another 50% of GDP.
Meanwhile, Bass also warned that Japan may default in coming years. He said From 1989 to 2009, government debt grew 137%. But since Japan's interest rate is close to zero (so is the United States), it will be getting more difficult to pile on debt without incurring higher interest payments, and increasingly will need to go abroad for financing.
Bass estimated Japan is currently paying about 9.5 trillion yen in interest. Every one percentage point increase in the interest rate increases Japan's interest payments by 10.5 trillion yen.
Currency Debase - No Solution to Debt
Since this season is all about currency war to prop up economies, there's an increasing chorus from Washington to famed economists believing that the U.S. will become more competitive, thus creating more jobs, through massive dollar devaluation (50%) or wage deflation (the two are one and the same, in my opinion).
Chart Source: Google Finance
Well, we may take a look at Iceland to test that theory.
Iceland's currency has devalued almost 60% since July 2006 (see chart), wages also fell, and aside from IMF's loan, Iceland's been held together mostly by "technical defaults" and capital control.
While the currency devaluation might have helped the nation's export (while forcing debtors taking haircuts), the domestic inflation, and asset devaluation, most likely will wipe out the entire middle class (hence the "Angry Icelandic 8,000").
United States Not Far Behind?
Due to its size, massive resources and different macroeconomic makeup, the United States, although inching closer to Iceland, Ireland and Japan, in terms of debt levels, housing, mortgage and banking bust, has not quite fallen into the similar trap yet.
Nevertheless, US Federal debt is around 94.27% of GDP as of October, 2010, up from 57% just ten years ago. CBO projected U.S. debt would reach 100% of GDP within a decade (the next five years seems more likely the way it's going).
Meanwhile, by observing crisis unravel in countries with fiscal situations not that different from the U.S. hopefully would serve as a warning and prophecy of things to come. Whether the prophecy will be fulfilled is yet to be seen.
http://seekingalpha.com/article/231798-iceland-s-new-mortgage-crisis-is-the-u-s-far-behind?source=email
An Economic Standoff to Save the Neighborhood
By The Mogambo Guru
10/21/10 Tampa, Florida – I was in the living room, happily reading as the kids quietly watched a show on TV that was even more insipid than their usual choice of mesmerizing mindless pap.
I was thinking to myself, “How pleasant! No noise! No strife! No arguing! No social workers telling me I have to do this for the kids, or do that for the kids, or stop doing this to the kids, or stop doing that to the kids!”
Of course, this makes me think of having police cars lighting up the whole neighborhood with their many blinking lights and their banging on my door to “investigate” reports of a deranged old man who has been disrupting the peace by yelling at his neighbors that they were stupid for not buying gold, silver and oil as a strategy of desperation against the raging inflation that is Super Freaking Guaranteed (SFG) because of the creations of massive amounts of money by the Federal Reserve to finance buying the of massive amounts of T-bonds that pay for massive amounts of federal government deficit-spending!
Parenthetically, if this police-action thing ever happens to you, then here’s an Invaluable Mogambo Tip (IMT): Don’t say anything. Say nothing. Wait for a lawyer.
Do not respond with the truth and say, “It’s true! The Federal Reserve is destroying the buying power of the dollar by simply creating so much of them, year after year, and the dollars are being jammed into the economy via astonishing, cataclysmic amounts of federal government deficit-spending, which means that ruinous, catastrophic, excruciatingly painful inflation in prices and economic collapse are 100% guaranteed, and thus it is true that anybody who doesn’t buy gold, silver and oil is doomed! Including my stupid neighbors!”
Looking back on the whole sorry episode with the advantage of 20/20 hindsight, I can see that my mistake was in continuing on, donating my Valuable Mogambo Time (VMT) trying to be helpful and educational to the police, who I thought would appreciate me going out of my way for them. Try to be a nice guy, and look what happens to you!
I say this because transcripts and recordings show, and thus I can prove, that I graciously and generously went on to patiently explain to them, “You stinking, police-state, goon squad storm-troopers are here to silence the Mogambo Voice Of Truth (MVOT) as it rings out – loud as a bastard! – the truth, as is implied in the unforgettable acronym MVOT, which is that We’re Freaking Doomed (WFD)!
“And we are doomed because of such massive, crushing debt, accumulated by people to buy massive amounts of final-user goods and consumption, and to foster a monstrous Frankenstein of an ever-inflating government-centric economy created by a calamitous continually deficit-spending federal government, a seemingly impossible feat made completely possible only by the calamitous, disastrous, treacherous Federal Reserve creating outrageous amounts of new money that will cause inflation in prices!”
The transcript doesn’t show it, but it is at this point where everyone for blocks around was gathered outside, chanting, “Shoot! Shoot! Shoot!” at the police, and I could hear the kids whispering, “Hear that, mom? They are going to shoot!” and how they wanted to go outside, too!
My wife whispers back, saying, “But what if they miss? We had better just hide in the kitchen!” which is where, I suddenly realize, the last piece of fried chicken was that I was saving for myself, and now somebody will eventually get the idea to look in the refrigerator, and they’ll see it, and they’ll decide to eat it, probably figuring that my bullet-riddled corpse would have no use for fried chicken, which, I have to agree, is impeccable logic. But still!
Anyway, the audio record shows that the crowd is now chanting, “Shoot to kill! Shoot to kill!” over and over while the cops are explaining that they can’t just shoot me because there are “hostages” in here with me, which surprised me, but I assume they mean the wife and kids hiding in the kitchen.
Meanwhile, I am clearly yelling through the door, “It is an insane, disgusting, bizarre, despicable display of monetary and fiscal incest that always produces a mutant economy and inflation in prices, a destructive arrangement which can only be maintained by more – always more and more! – deficit-spending and money creation to maintain a constantly rising inflation, year after year, yea unto hyperinflation and total ruination!”
I thought I had made a dramatic closing when I opened the door, stepped out into the bright, blinding glare of lights, threw my arms up and out in a grand gesture, and said, “And all of this is manifestly, indisputably true because that is Exactly The Way (ETW) that it has worked out every time – and I mean Every Freaking Time (EFT)! – in the last 4,500 freaking years of history, which is a sad, sickening story of one corrupt government after another borrowing and spending, and borrowing and spending, and borrowing and spending until it had borrowed more than it could repay, and always for the suicidal, live-for-today privilege of temporarily enjoying the growth of a twisted, bloated, dysfunctional, government-centric economy, which the recognition of, and problems of, seem to be the sole province of the Austrian school of economics, which you dumb cops would know if you had ever been to mises.org and gotten a nice, free, easy education in the One True Economic Theory (OTET), instead of harassing a misunderstood prophet of doom, who is just trying to save his ungrateful and stupid neighbors from the inflationary, catastrophic doom of a corrupt government and a filthy Federal Reserve that is going to befall this country and its people, including you dumb cops!”
Well, the police immediately settled down at the appearance of a seemingly incoherent, unarmed old man. And while they were hustling me away, you could hear me on the recording, my voice growing fainter and fainter, saying, “So buy gold, silver and oil to protect yourselves, you morons! Gold, silver and oil! And if you don’t, then you actually are dumb cops, and about whom I implied as much at the end of the previous paragraph!”
You can see that it is difficult to get the message out about buying gold, silver and oil as a defense against the government and Federal Reserve destroying us with overspending and over-creation of money, respectively.
But you will be happy to know that buying gold, silver and oil stocks is so easy that you will say, “Whee! This investing stuff is easy!”
The Mogambo Guru
http://dailyreckoning.com/an-economic-standoff-to-save-the-neighborhood/
It's Still All About Housing
by: The Housing Time Bomb October 22, 2010
This is the reality: It's impossible to turn around this economy without the housing market.
The reason I say this is because housing touches almost everything. Without a robust housing market the banks are toast and it doesn't stop there. There is a rippling effect which filters down throughout many industries.
Think about the different parties that are involved:
You have builders, realtors, and finance that are directly effected.
Then you have the indirects like every industry that fills our homes with luxuries whether it be furniture or technology who also suffer when housing sputters.
When you really drill it down, almost everything in our economy has some link back to housing.
This is the reason why the Fed has taken such unprecedented steps in supporting this area of the economy. They have basically put themselves "all in" on turning around housing.
They really had no choice when you think about it. Without housing the financial system is essentially toast. The size of the mortgage market is around $10 trillion according to the last figures I saw which is close to 100% of our annual GDP.
The steps they have taken to prop up housing are startling when you think about it. They have gotten mortgage rates under 4%, backstopped Fannie (FNMA.OB) and Freddie (FMCC.OB), and backstopped or bailed out half of Wall St.
So how is their bet working out? It's failed miserably when you look at the numbers:
The headlines of course will tell you a different story. They will say mortgage applications continue to rise and at first sight they are right (click to enlarge):
However, when you dig into the numbers, they aren't pretty because the majority of these applications are refi's (click to enlarge):
Applications for purchase (which is the only number that matters) continue to plummet (click to enlarge):
My Take:
Since the housing tax credit evaporated the housing market has basically collapsed. That bottom chart tells you all you need to know. As you can see, we are far below the levels of activity that were seen during the depths of the worst recession since the 1930's.
We are seeing this free fall despite the fact that interest rates are at ALL TIME LOWS.
What's scary here is I expect this number to get markedly worse moving forward because the foreclosure market has been shut down by the banks.
Can you imagine how fugly those numbers are going to look as the foreclosure moratorium gets more baked into the cake? These were the only houses that were really selling before the moratorium.
The Bottom Line
The numbers never lie. Housing was a bubble and it's popping like all bubbles do: Violently!
The Fed and the others can scream recovery all they want. The harsh reality is it's not happening despite what the stock market is telling you. This is not a new secular bull market that we have seen since since March of 2009.There will be no sustained tally in the market without the financials.
The Fed can spend trillions and goose the Dow up to 12,000 if it wants but I can tell you right now: It's not gonna hold. Not as long as housing looks like it does above.
The sad truth is without housing the banks collapse and without the banks we have no financial system.
The Fed knows this and it's the reason why they are using every trick they have in their book to reflate the housing bubble. Ben is on his hands and knees right now praying that you will buy a house.
Despite all of their efforts it "ain't happening". Housing prices are down 30-70% from the highs (depending on the market), interest rates are at all time lows, and Americans have reacted by doing absolutely NOTHING.
As long as people continue to sit on their hands this economy is going to go nowhere.
The Fed can keep rates at zero, throw the currency in the toilet, and QE all they want...It's not gonna matter.
Until the Fed realizes this was the wrong path to take there will be no recovery. Housing must be left alone and prices must correct down to levels where there is demand.
Spending our grandchildren's money trying to stop this inevitable correction is simply just plain silly and it puts our whole way of life at risk.
It's time to walk away Mr. Bernanke and let the market forces do their job.
http://seekingalpha.com/article/231621-it-s-still-all-about-housing?source=email
Thursday: Welcome to 'Flation Nation - Ben and Tim Are at It Again
by: Philip Davis October 21, 2010
Strong dollar? Hahahahahahahaha….
That is was the answer to a question I had this summer when I met with an unnamed Treasury official whose name might rhyme with Jimothy. The unnamed official nearly fell off his chair laughing when I said "So, does the US still have a strong dollar policy?" It was meant as a joke. I was sitting at Treasury with Yves Smith, John Lounsbury and a couple of other writers on August 16th, with the dollar at 82.5, down from 88.7 in May. I mentioned in my August 17th post that, based on my meeting at Treasury: "we’re certainly not going to be expecting a 'strong dollar' policy." At the time, I summed up the meeting for Members saying:
I would say that Geithner’s view of the economy is about the same as John Cleese’s view of the dead parrot: "This bird wouldn’t go "voom" if you put a million volts through it!" I agree, Krugman agrees, the Dallas Fed agrees, Bernanke agrees - this is a $15Tn, 300M person economy that is at a virtual standstill.
Unnamed Official makes the very good argument that we are like a business with debt but good cash flow and Global lenders are currently lining up to give us more cash (low TBill rates, low corporate borrowing cost, strong demand for bank capital raises). Why don’t we do what a normal business does and borrow money to expand?
Why indeed? And that is just what has been happening as the dollar has dropped another 7.8% in the 66 days since that meeting as we borrow our assets off while the Fed keeps things looking good by sucking up whatever junk the Treasury decides to print. Kudos to Doug Kass for taking my "Inflation Nation" concept to the next level and coining the very apt phrase "Screwflation," which he explains:
Screwflation, like its first cousin stagflation, is an expression of a period of slow and uneven economic growth, but, its potential inflationary consequences have an outsized impact on a specific group. The emergence of screwflation hurts just the group that you want to protect — namely, the middle class, a segment of the population that has already spent a decade experiencing an erosion in disposable income and a painful period (at least over the past several years) of lower stock and home prices. Importantly, quantitative easing is designed to lower real interest rates and, at the same time, raise inflation. A lower interest rate policy hurts the savings classes — both the middle class and the elderly. And inflation in the costs of food, energy and everything else consumed (without a concomitant increase in salaries) will screw the average American who doesn’t benefit from QE 2.
I know, I promised last week I would get off this topic after a week of posts on the subject but, despite my best efforts, I had enough brain cells remaining after the weekend to notice that yesterday’s 1% move up in the market was coming against a 2% drop in the Dollar. That’s why, and I kid you not, the S&P, priced in Euros yesterday, shows a 0.6% LOSS, not a 1% gain. This morning, the futures are on fire because Timmy (I can name him now) said (and now I am the one falling off my chair laughing) "the major currencies, which are roughly in alignment now." Alignment? If by alignment you mean in a straight line going up with the dollar crushed at the bottom - bullseye Mr. Secretary! John Snow laughs at your BS…
Despite the improvements in the Fed’s own Beige Book this week and, of course, despite all logic and all that is holy - please have mercy on us you friggin’ Bankster’s tool - Chairman Bernanke is determined to shove our nation right off the cliff by restating, over and over and over "There would appear — all else being equal — to be a case for further action." This is something that our friends at Zero Hedge are now calling "The Wrath of Bernanke" and Ice Cap Management notes what a disaster this policy has been and continues to be with charts like this one:
Arrrrrrrrrrrrrrrrgh! I am so frustrated by all this BS! How is this not obvious to people? How do we let them keep doing this? I’m going to say this one time, very slowly, so even the people in the hats with the tea bags stapled to the brim can understand it. If the Fed pumps $1.25Tn into a $15Tn economy, that INFLATES prices by about 10%. Why? Because more money is chasing the same amount of goods and services in Timmy’s "dead parrot" economy.
OK, now comes the part that the middle class conservatives simply do not get. When the Fed bails out the Banksters and pumps money into the economy from the top down, rather than, say, the evil government spending $1.25Tn to create jobs and push money through from the bottom up - then there is no demand for MORE goods (because no new people are employed) but there is more money at the top to outbid you for the same goods (I illustrated this last week too).
That, then, DECREASES the purchasing power of EVERY DOLLAR YOU HAVE by 10%. Not just the dollars in your wallet, not just the dollars you earn this year - EVERY DOLLAR you have worked your entire life to accumulate is being TAXED by Ben Bernanke to the tune of 10%. If you had 10 years' worth of savings for retirement then the effective tax rate on you was 100% this year in order to support those Big Businesses you love so much.
The markets are NOT going up in value, corporations are NOT making more sales, your home is NOT holding its value and YOU got a 10% pay cut because your boss is paying you the same amount of dollars he paid you last year (and probably the same as 2005 for most people!) but those dollars now buy 10% less stuff. Yet the Chairman of the Federal Reserve, who supposedly functions under a dual mandate to maintain full employment and control inflation (oops, fell off my chair laughing again) IS GOING TO DO IT TO YOU AGAIN!
Harmlessly passing your time in the grassland away;
Only dimly aware of a certain unease in the air.
You’d better watch out!
There may be dogs about
I looked over Jordan, and I’ve seen
Things are not what they seem.
That’s what you get for pretending the danger’s not real.
Meek and obedient you follow the leader
Down well trodden corridors into the valley of steel.
"Sheep" - Pink Floyd
Anyway, believe what you will, we’re shorting this nonsense!
http://seekingalpha.com/article/231354-thursday-welcome-to-flation-nation-ben-and-tim-are-at-it-again?source=email
Jobless Claims Scream Double Dip
by: Michael Shulman October 21, 2010
Jobless claim data released this morning show the number of workers filing new unemployment claims fell to 452,00 last week, but when revisions to the prior weeks are added in there has essentially been no change and new claims numbers are now as high as they were last October. More importantly, the four week moving average is still very high – 458,000. At the current rate of decline will take the moving average a year to 15 months to hit the level of jobless claims we see in modest growth economy.
Ignore pundits, gurus and most guys like me talking up bullish nonsense about a jobless recovery – if there ain’t no job growth, there ain’t no recovery. And given how recently revised GDP data shows the economy is quite weak right now, this means a double dip is here or around the corner. The key, as always, is housing – the US economy, since World War II, has ended every recession y the Fed lowering rates and people buying houses. Not happening this time with housing starts more than two thirds below peak sales just a few years ago and more than 40% of job growth in the middle of the past decade was directly tied to residential construction.
The market does not care – right now. All it cares about is Dr. Bernanke’s printing press. But a double dip means flattening or lessening of corporate profits. And the market cannot escape its relationship to corporate profits forever. The trade? I am not a market timer, I just know the S+P is going to take a hit when the Street sees no more money coming off the printing press and lower corporate profits for as far as the eye can see.
Disclosure: None
http://seekingalpha.com/article/231358-jobless-claims-scream-double-dip?source=email
Recession Redux?
by: Sold At The Top October 21, 2010
With much of the econ-finance talk these days still centered around the possibility of a looming “double-dip” let’s take a closer look at two particularly sensitive and accurate leading indicators of our economic health to see if we can tease out the future trends.
First, the Federal Reserve Bank of New York is known to use the yield curve (or more specifically the spread between the 10 year and the 3 month treasury yields) to calculate a probability of recession.
This method appears to have been spearheaded by Professor Arturo Estrella of the Rensselaer Polytechnic Institute and Professor Frederic Mishkin of the Columbia Business School as outlined in the June 1996 issue of Current Issues in Economic and Finance, a journal published by the Federal Reserve Bank of New York.
The yield curve probability method is said to have a nearly perfect track record at predicting recessions some two to six quarters ahead with only one false positive, a period in 1967 that many economists, most notably the late Milton Friedman, considered to have been a credit crunch/mini-recession even though the NBER does not officially recognize it as such.
Another important leading indicator with a solid track record is the Economic Cycle Research Institutes (ECRI) weekly leading indicator (WLI).
When the growth component of the WLI turns strongly negative (< -6) it generally means a notable slowdown or recession is in the offing.
So what are these two important indicators saying about our current economic situation?
As of the latest release of each measure, we are seeing a very unusual scenario of strongly mixed signals.
The yield curve spread indicator is indicating that the probability of recession is nearly zero while the ECRI leading index is showing a very pronounced pullback since a peak set in October 2009 with the growth component currently at a strongly negative level of -6.9.
Looking at the chart you can see that in the past, when both of these measures moved strongly in opposite directions, recession was a certainty.
Today though, the interpretation is not so simple.
Could the Feds work on both short (ZIRP) and long (QE1 and soon QE2) rates have rendered the yield curve method ineffective at the moment?
Is the WLI just over-correcting coming off of an epically pronounced bounce back in leading activity seen from the deeply recessed levels of March of 2009?
We will have to wait to see but clearly we are in a very unusual and tricky environment.
click for full-screen super dynamic version
http://seekingalpha.com/article/231481-recession-redux?source=email
Germany Defies Keynesian Stimulus and Recovers
by: Econophile October 22, 2010
Back in August 2009 I made a bet that Germany would recover before the US because they were doing far less stimulus than were we. In fact Germany's Chancellor Angela Merkel said:
“The crisis did not take place because we were spending too little but because we were spending too much to create growth that was not sustainable. It isn’t just that the banks took over too many risks. Governments allowed them to do so by neglecting to set the necessary [financial market] rules and, for instance in the US, by increasing the money supply too much.”
[Mrs. Merkel] is robustly unapologetic when discussing the origin of the global financial meltdown. The fault, she says, ultimately lies with misguided efforts in the US, both by the government and the Federal Reserve, to re-start artificially the economy after September 11 by pumping ever-cheaper money into the financial system. “We must look at the causes of this crisis. It happened because we were living beyond our means. After the Asian crisis [of 1997] and after 9/11, governments encouraged risk-taking in order to boost growth. We cannot repeat this mistake. We must anchor growth on firmer ground.”
In that article I noted:
According to the IMF Germany’s stimulus amounted to 1.5% of GDP and France’s .07% of GDP. The article claimed that the U.S.’s stimulus amounted to 2% of our GDP but that is quite inaccurate. If you look at total commitments to spend, the U.S. pledged about $11.6 trillion (about equal to GDP) and had committed about $3.8 trillion at the time of the G20 meeting. So, if my math is correct, and assuming our GDP will be in the $13 trillion range in 2009, our stimulus was about 25% to 29% of GDP.
I may have been off on our stimulus commitments, but it is far more than 2%. The numbers are still coming in. But the cool thing about Merkel's comments is that they were in response to the March 2009 G20 conference when Treasury Secretary Tim Geithner and Presidential Economic Advisor Larry Summers admonished the Europeans to engage in much larger fiscal stimulus efforts like the U.S. to synchronize a worldwide recovery. She was under a lot of pressure from the Social Democrats at home to do more stimulus.
In October 2009, Merkel's party, the Christian Democratic Union (CDU), a center-right party, with its political ally, the Free Democratic Party (FDP) and another Bavarian party, won the Bundestag (lower house) elections. The FDP are my kind of people, and they came in on a platform of lower taxes and cutting government spending.
With regard to the election, I wrote:
Germany is my lab experiment for the failure of Keynesian fiscal policies. If Germany recovers first as I think it will, then I suggest we fire Larry Summers and Tim Geithner and hire Mr. Solms to implement the German model instead of following Japan down the drain.
She suggested that the prevailing economic theory on stimulus—that increased deficit spending promotes growth— doesn’t apply in Germany.
In the June G20 meeting this summer, Merkel was again pressured by President Obama to not withdraw stimulus for fear that things would continue to sink worldwide. Merkel was unimpressed:
Continuing to run big deficits could backfire here, she said, because of Germans’ angst over their aging society and rising public debt. Fear that the German welfare state could run out of money leads individuals to save their income as a precaution, she said. If Germany cuts its budget deficit instead, “then the citizen is more willing to spend money,” she said, “because he knows that he can count on the pension, health and elderly-care systems.”
Germany is the world’s fourth largest economy, they are successful manufacturers and exporters, and their government’s deficit as a percentage of GDP in 2010 is expected to be about 5.5% versus about 10.1% in the U.S. Their fiscal stimulus was largely in the form of tax cuts rather than government spending.
Read it and weep all you Keynesians (from yesterday's WSJ):
Germany's economy is set to grow 3.4% this year as its recovery continues across almost all sectors, the government said Thursday in its updated forecast for this year. The growth forecast for 2011 is a more modest 1.8%.
The government's previous forecast in April predicted 1.4% growth this year, before Europe's largest economy posted a blistering 9% annualized rate of growth in the second quarter and other indicators, such as unemployment rates and business confidence, continued to suggest a more rapid rate of recovery.
"After a period in the on-ramp, our economy is now driving in the fast lane," Economics Minister Rainer Brüderle said. ...
Mr. Brüderle said the recovery is being led by demand for German products abroad—particularly from China and India—as well as more recent signs of improved domestic demand. "The recovery has reached nearly all sectors of the economy and is gaining force," Mr. Brüderle said. He added that Germany will likely grow at around 2% annually over the next five years. ...
Unemployment, in turn, is dropping. The government projects that 3.2 million Germans will be out of work at the end of this year, with the total falling to 2.9 million next year. Mr. Brüderle said the total could fall below three million by the end of 2010.
Disclosure: No positions
http://seekingalpha.com/article/231578-germany-defies-keynesian-stimulus-and-recovers?source=email
Japan: A Curious Conundrum
by: David Urban October 22, 2010
The move by the Bank of Japan to cut interest rates and enact a new quantitative easing program along with the lack of moves by Indonesia and Australia coupled with the immediate rally in equity markets looks increasingly like a coordinated global intervention to push up equity prices to help Japan.
Looking at other Asian markets there is a flood of hot money roaring through these markets like a tsunami. For someone who was and still is bullish on the equity markets I have to take pause here. The Thai Bhat has rallied down below a crucial support level at 30 and there are calls from the business community to help stem the appreciation in the Bhat as this is hurting FDI and exporters just as the political climate is showing signs of stabilization.
This is more than a short-term issue and this flood of money will cause unintended consequences in 2011 as the Asian growth machine continues to lead the world out of the recession.
Strong growth across Asia, ex-Japan, is fueling inflationary worries as increased purchasing power is driving demand in local markets. The increased demand for products is beginning to fuel the flames of inflation.
But there is a thorn in the side of the central banks as they attempt to stomp out inflation before it takes root and that is Japan.
Continued slow economic growth in Japan is hampering efforts by other Asian central banks to stem the flow of hot money into their capital markets.
A rise in interest rates by Asian central banks would risk creating an enormous carry trade between Japan and the other Asian countries possibly adding further to flows of hot money into Asian equity markets.
But what has me most concerned was a simple picture a few weeks ago of a young Japanese woman putting up a poster extolling the virtues of investing in JGB's. My concern here is twofold. First, as Japan enters into an environment where their aging population must increasingly redeem their JGB's and foreign capital markets are unlikely to chase yield in Japan the only pool left to tap is the younger generation. By doing so this pulls money that would go into consumption or the Japanese equity markets.
If the younger generation decides to follow in the path of their parents and buy JGB's it is unlikely that local participation in the equity markets will rise and create a new bull market in Japanese equities. Just as well, consumption figures will remain low and if consumption does not increase then it is likely that deflation will continue well into the future.
Disclosure: No positions
http://seekingalpha.com/article/231588-japan-a-curious-conundrum?source=email
Can China and India Save the World?
by: Chris Mack October 22, 2010
A pillar in all bullish arguments for the global economy is that China and India will carry the weight of industrialized nations due to their insatiable demand for a better way of life. While they will certainly try, the risk of both nations hitting a wall is increasing as that insatiable demand consumes increasingly more resources.
Ignoring the rest of the world, The US, China and India are expected to increase their daily consumption of oil by almost 10 million barrels per day by 2025. Economic advancement over the last 150 years has been highly correlated with the consumption of oil and other fossil fuels. Without this increase in consumption of oil at low prices, the world will experience no growth. With such large populations, and leverage to energy consumption it is unclear if China and India can live up to their high hopes of leading the world out of the current global economic slump.
click to enlarge
Global crude oil production peaked in 2005 and has plateaued at 74 million barrels per day. Global consumption took a small dip in the wake of the 2008 financial crises, however now that economies are recovering consumption levels are back on the rise. The result will be an inevitable rise in oil prices.
A $100 increase in the price of oil would cost an additional $3 trillion in direct consumption expenses globally - effectively reducing global GDP by 5.1 percent. While some of this wealth may be transferred to oil exporting nations, this is not a zero sum game. If oil shale or deep water drilling is used to replace current low cost supplies than oil producers will be spending nearly $100 in additional productions costs and realizing none of the financial gains to offset the losses from consuming nations.
Most developing nations that are driving global economic growth are highly dependent on energy consumption. Although The US, EU, and Japan consume large amounts of energy, these nations have less leverage to the price of oil in relation to their GDP. If the price of oil were to rise by $100, China would suffer from a direct 6 percent hit to their economy, and India would suffer from an 8 percent hit to their economy.
Another important consideration for countries is their foreign dependency on oil. While Russia has a high level of leverage in oil consumption, it is also a net exporter. As a result, Russian oil supplies are relatively secure. The two most vulnerable nations in the world to an oil shock are Japan and South Korea as they import more than 97 and 98 percent of their oil respectively. Both nations are also highly urbanized with very little arable land. These nations would not survive a halt in global oil trade. The EU, China and India are also highly dependent on oil imports.
Argentina and Brazil are in a unique position of being self sufficient in oil production and consumption. They also have vast amounts of arable land. As a result, they would be least affected by an oil shock.
Capacity of arable land is a strong indicator of potential for economic prosperity if energy prices spike because the arable land supports farming and food production.
Conclusion:
Japan is probably the most economically vulnerable nation in the world. Now that the US, and Europe, are also financially insolvent energy consumers, the world is turning to nations such as India and China to drive global growth. However, their large population and leverage to the price of energy create a situation of great risk. If peak oil is realized within the next five years, then growth prospects in India and China will be reduced drastically. The result will be negative global GDP growth and a reduced standard of living for virtually all nations.
South and Central American nations including Brazil and Argentina may have the best chances of coming out ahead as they are energy independent, have lower populations than Asia, and the most unused arable land.
Disclosure: No positions
http://seekingalpha.com/article/231589-can-china-and-india-save-the-world?source=email
We're Still Jobless
by: Karl Denninger October 22, 2010
From the DOL:
In the week ending Oct. 16, the advance figure for seasonally adjusted initial claims was 452,000, a decrease of 23,000 from the previous week's revised figure of 475,000. The 4-week moving average was 458,000, a decrease of 4,250 from the previous week's revised average of 462,250.
Still right around that 450,000 area - 150,000 more than the level required to generate net job increases when adjusted for population changes (that is, improvements in the employment rate.) Oh, and isn't that revision nice?
The market can't figure out what to think about this - it first spiked a bit, and is now bleeding off on the promise of "more Fed Heroin to come."
But the junkie may be having trouble crawling to the needle..... a few weeks ago this sort of number would have been good for 10 handles on the S&P 500 futures within seconds. Yesterday, it actually was good for -3. Hmmm...
The EUC numbers in fact improved (more people getting) by 152,000. Nonetheless the trend is about 750,000 a month "rolling off" - so there's no joy to be found here.....
http://seekingalpha.com/article/231593-we-re-still-jobless?source=email
Big Ben's Brilliant Bluff: To QE or Not to QE?
by: David Roskoph October 22, 2010
Although the consensus agrees that Quantitative Easing (QE2) is merely a matter of degree, I disagree and see it only as an effort to remain relevant after two years in a zero-rate world. It's a bluff and will not be done in any meaningful way. Even though the Fed blusters like the Mighty Wizard of Oz, it understands the terra incognita upon which it now treads.
QE1 was essential to stem the deflationary spiral about to wrap up into an unstoppable vortex. It mattered not what the programs were called as long as they "judiciously" reflated the falling assets - and they did so magnificently. We were indeed on the precipice and they pulled us back. We are now far, far from that abyss and launching the QE2 would potentially unleash a malevolent Genie ostensibly aimed to combat a phantom menace. The threat of deflation has passed. Risking the unintended consequence of Stagflation or Hyperinflation is simply not warranted at this stage of the recovery.
Buying longer-term Treasuries will do nothing to stimulate growth and threatens to recreate the Stagflation of the early 70's. The cost of money is not holding back its velocity. As a small business owner, I would love a vault full of this cheap money but it's not available to me. A major bank quotes me a fixed 5-year loan for 6.5% when the equivalent Treasury's yielding a bit over 1%! Banks can buy money for next to nothing, are enjoying tremendous markups but still have little interest in making loans. This begs the question of why they are not in the business of lending, to very credit-worthy businesses, other than at loan shark rates?
Why take the risk when you can make "free money"? Banks can funnel their deposits to Treasuries and make a handsome profit. An uglier way to look at is that, through extending federally-controlled low rates, banks are essentially being nationalized while still remaining private. The government insures the low-cost of deposits and also the guaranteed profit. Nationalizing private banks, without consuming their public shares, dooms not only this recovery, but capitalism itself - if not halted soon. Banks must be weaned off their government-subsidized existence by cutting off their free money.
Functional American capitalism deftly dances between the extremes of deflation - that deadliest of conditions, and inflation - the necessary evil of stability. The Federal Reserve has made great progress in creating inflation to promote price & employment stability since its inception in 1913. That has largely been done through interest rate cuts and monetary injections. In the wake of the housing bubble's deflation (Modern Depression) we are in a new and unknown chapter of economic history. The headline battle continues to convince many that the recovery is not genuine, to the point of forcing the hand of the Feds - or is it?
I believe the Federal Reserve knows the potential (unintended) damage if the Genie of high inflation is loosed into an already stagnant environment. That is an ugly conundrum known as Stagflation. Further, when and if banks are forced to go back to the business of making loans, the growth will demand an aggressive rise in the Federal Funds rate. That will flatten the yield curve, crimp bank profit and threaten another recession. These conclusions are not rocket science.
The good news is that I believe Big Ben knows this better than I do. "Moral suasion", a tool once reserved for member banks, is now being directed to a public audience. Ben originally sought to distance himself from the obfuscating Greeenspeak of his predecessor, but the uniqueness of the situation has apparently modified that. Bernanke has already begun the process of equivocation in his appearance last Friday. While reiterating the efficacy of this nuclear measure known as QE2, he also alluded to the potential for unintended consequences of such action. In other words, he created an escape clause. As the numbers confirm the recovery, the purchases will diminish. They will simply make the case that it isn't necessary. Goal achieved.
A swift kick - After years of expecting my dog to come home with a mortgage tucked into his collar, I now struggle for no tangible reason, to refinance my home. The programs enacted by the Feds (QE1) staunched the deflationary bleeding but the peculiar and dysfunctional banking system born of that intervention has too little incentive to allow growth to resume. The banking system needs a swift kick in the pants through raising the Discount /Federal Funds rate. The Federal Reserve, ostensibly the adult in the playground, needs to remind the banks that they are private institutions in the business of lending money - and not just to the largest companies. The best way to accomplish that is to raise the discount rate. Doing so will also serve to reestablish a functional yield curve and subsequent organic growth cycle.
We are recovering, albeit by scrabbling up a wall of terror this time. Controlling both ends of the yield curve (QE2) is inappropriate and far too dangerous for an economy clearly recovering, even if from a Modern Depression. Although the Fed will buy a bit of bonds to make good on their stated policy it will not keep interest rates down. Interest rates will rise and that is a very good thing for both the economy and its barometer, the market.
PS - An unpleasant thought: If Bernanke is indeed disingenuous in his threat to buy longer-term bonds, one might view the ploy as a nefarious tool. With interest rates at historic lows, and the lure of free money from "front running" the Fed, the government will gets lots of eager buyers to finance thier debt at the lows. Good for us collectively, yes, but then you'd have to wonder about the veracity of every institution.
Disclosure: Leveraged buyer of US equities, leveraged seller of Japanese equities, leveraged seller of bonds.
http://seekingalpha.com/article/231594-big-ben-s-brilliant-bluff-to-qe-or-not-to-qe?source=email
Dick,
You must have me confused with someone else.
I've opposed excessive government spending all of my adult life.
Take care.
Don
I'd agree it started at least in the 1970's.
The new bubble is government spending and when that collapses the whole world will shake.
Who in thier right mind would invest in US manufacturing at the moment? There are mulitple better run economies to chose from...shame on us.
Sales tax slashed in Romania by mistake
from: SF Chronicle: World News
(10-20) 05:41 PDT BUCHAREST, Romania (AP) -- Legislators in Romania's governing
party have mistakenly voted to reduce a sales tax on food to one-fifth its
previous level. Tuesday night's unanimous vote in parliament...
Read story on:
http://www.buzzbox.com/jmayson/MyBuzzBox/2010-10-20/romania:sales-tax/?clusterId\=2201410&s=1404
---
We'd have to be responsible for our own circumstances.
Our problems would be our problems to deal with...
Local communities would have to figure out how to pay for things..
Dogs would sleep with cats...
...and the world (or at least the one of disfunction and co-dependancy) would come to an end.
Bitter Feud at ECB over Monetary Policy; BOE to Expand Stimulus; Japan's Great Deflation; Will the US Follow?
Although there is a huge debate amongst Fed members regarding US monetary policy, especially the merits of Quantitative Easing, that debate can easily be described as relatively friendly discussion.
Things are quite different in the EU where there is a bitter feud between ECB president Jean-Claude Trichet and Trichet's rumored replacement, Bundesbank President Axel Weber.
Trichet Chastises Weber Regarding Who is the President
In a public display of animosity, Trichet has let Weber know who is in charge. Please consider ECB’s Trichet Rejects Weber’s Call to End Bond Purchase Program
European Central Bank President Jean-Claude Trichet rejected Bundesbank President Axel Weber’s call to end the bond purchase program that has provided a lifeline for European governments and banks trying to shore up their finances.
“This is not the position of the Governing Council, with an overwhelming majority,” Trichet said when asked to respond to Weber’s Oct. 13 call for an end to the program, according to the a transcript of an interview published yesterday in Italian newspaper La Stampa.
Weber, who also sits on the ECB’s 22-member decision-making council, said the risk of “exiting too late” from the emergency measures was greater than pulling out too soon.
“Trichet is sending a clear signal to Weber,” said Carsten Brzeski, an economist at ING Group NV in Brussels. “The majority seems to favor a safety belt option for the moment and isn’t comfortable with sending conflicting signals to the markets.”
Trichet also backed the possibility of extending in some form the European Union’s temporary financial backstop for financially stressed nations. “This non-standard measure, like all other such measures, was designed to help restore a more normal functioning of our monetary policy transmission mechanism,” Trichet said, according to the la Stampa interview.
Trichet also said that as ECB president he is the only one who speaks on behalf of the Governing Council. Weber, who opposed the bond purchases since their inception in May, is regarded by economists as a frontrunner to succeed Trichet when his non-renewable eight-year term expires in just over a year.
“There is only one single currency; there is one Governing Council, only one monetary policy decision, and one president, who is also the porte-parole of the Governing Council,” he told La Stampa.
“Trichet’s comments highlight that he is not pleased with the ongoing public criticism of some council members regarding the securities market program,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London. “Trichet’s comments highlight that the program will continue.”
Trichet a Monetarist Pussycat
It is interesting to see Trichet continuing as the dove just as Bernanke is at the Fed. Trichet had an undeserved reputation as a central bank hawk.
The reality is quite different as discussed earlier this year in Trichet, a Monetarist Pussycat at Heart, Throws ECB Rulebook Out the Window
Currency Implications
Unlike Bernanke, Trichet is due to step down October 2011.
Weber had widely been viewed as the leading candidate to replace Trichet. I wonder if that is still the case after this open feud.
Implications regarding the valuation of the US dollar vs. the Euro are at stake.
CEBR says Bank of England Will Expand Stimulus
According to the Centre for Economics and Business Research, the Bank of England will join the Fed's currency debasement strategy. Please consider BOE Will Expand Stimulus by 100 Billion Pounds, CEBR Predicts
The Bank of England will expand its stimulus program by 100 billion pounds ($160 billion) to aid the economic recovery, the Centre for Economics and Business Research said.
The central bank will also keep its benchmark interest rate at a record low of 0.5 percent until at least “late” 2012, the London-based group said in an e-mailed statement yesterday. The bank kept its stimulus plan at 200 billion pounds this month.
Britain faces the largest public spending cuts since World War II as the government tackles the record budget deficit. The British Chambers of Commerce earlier this month backed a call by policy maker Adam Posen for the central bank to expand its bond stimulus plan as recent data indicate the recovery has slowed.
“We expect the authorities to push the monetary policy levers hard in the opposite direction to the fiscal policy levers,” the CEBR said in the statement.
The CEBR’s forecast for economic growth in the first three months of 2011 is 0.1 percent, which implies there is almost a 50 percent chance the economy will contract during the quarter, according to the report.
Japan's Great Deflation
The New York Times reports Japan Goes From Dynamic to Disheartened. Here is a somewhat lengthy snip, but the article is a full 3 pages long.
Few nations in recent history have seen such a striking reversal of economic fortune as Japan.
But the bubbles popped in the late 1980s and early 1990s, and Japan fell into a slow but relentless decline that neither enormous budget deficits nor a flood of easy money has reversed. For nearly a generation now, the nation has been trapped in low growth and a corrosive downward spiral of prices, known as deflation, in the process shriveling from an economic Godzilla to little more than an afterthought in the global economy.
The downsizing of Japan’s ambitions can be seen on the streets of Tokyo, where concrete “microhouses” have become popular among younger Japanese who cannot afford even the famously cramped housing of their parents, or lack the job security to take out a traditional multidecade loan.
These matchbox-size homes stand on plots of land barely large enough to park a sport utility vehicle, yet have three stories of closet-size bedrooms, suitcase-size closets and a tiny kitchen that properly belongs on a submarine.
In 1991, economists were predicting that Japan would overtake the United States as the world’s largest economy by 2010. In fact, Japan’s economy remains the same size it was then: a gross domestic product of $5.7 trillion at current exchange rates. During the same period, the United States economy doubled in size to $14.7 trillion, and this year China overtook Japan to become the world’s No. 2 economy.
But perhaps the most noticeable impact here has been Japan’s crisis of confidence. Just two decades ago, this was a vibrant nation filled with energy and ambition, proud to the point of arrogance and eager to create a new economic order in Asia based on the yen. Today, those high-flying ambitions have been shelved, replaced by weariness and fear of the future, and an almost stifling air of resignation. Japan seems to have pulled into a shell, content to accept its slow fade from the global stage.
As living standards in this still wealthy nation slowly erode, a new frugality is apparent among a generation of young Japanese, who have known nothing but economic stagnation and deflation. They refuse to buy big-ticket items like cars or televisions, and fewer choose to study abroad in America.
“A new common sense appears, in which consumers see it as irrational or even foolish to buy or borrow,” said Kazuhisa Takemura, a professor at Waseda University in Tokyo who has studied the psychology of deflation.
Demographic Pendulum in Motion
“We’re not Japan,” said Robert E. Hall, a professor of economics at Stanford. “In America, the bet is still that we will somehow find ways to get people spending and investing again.”
Robert Hall, like most others, does not understand the deflationary impacts of the entire gamut of changing socioeconomic trends and attitudes.
After 20+ years of deflation fighting tactics, Japan has nothing to show for its deflation fighting efforts but massive public debt.
To be sure, one can point out that US demographics are more favorable than Japan's. However, US consumers have a much bigger and much more deflationary pile of leveraged debt on their balance sheets than do most Japanese families.
Inflation Targeting Madness
Not only has Japan's two decades of failure shown the futility of fighting consumer attitudes, common sense alone would suggest that it is futile to fight changing social trends with monetary policy.
Unfortunately that has not stopped the Fed with reckless proposals on top of reckless proposals.
Please see Inflation Targeting Proposal an Exercise in Blazing Stupidity; Fed Fools Itself for further discussion.
Will the US Follow?
As I stated in June of 2008, we are now on the back side of peak consumption and Peak Credit.
Regardless of what Bernanke of the Fed does, the demographic pendulum is in motion. There is no going back. Once attitudes hit extreme then reverse, there is nothing the Fed or anyone else can do about it.
Thus, the question is not whether the US will follow the footsteps of Japan, the question is whether the US or Japan blows up first from misguided central banks fighting a battle that cannot be won.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
welcome back...eom.
That depends (about cutting spending)- what is the cause of our current economic troubles?
The key is to get spending under control.
Until that happens more taxes will just result in more money down the black hole.
How the Middle Class Is Shrinking
Rick Newman, On Friday October 15, 2010, 10:19 am EDT
Woodstock. The moon landing. The escalating war in Vietnam. The year 1969 was momentous enough, yet in retrospect it seems to have represented one additional pivot point in U.S. history: the high-water mark for the middle class.
[See 12 ways to stop America's decline.]
As America limps to the end of the first decade of the 21st century, the middle class that once formed its core strength seems to be in tatters. The manufacturing jobs that once helped millions get ahead have been in sharp decline for a decade, and now number one-third less than they did in 2000, despite a growing population. Wages have fallen as jobs have migrated overseas, with the typical family's income, after inflation, down 5 percent since 2000. News headlines warn that the middle class is becoming "extinct" or being "wiped out of existence." Elizabeth Warren, the head of the government's new financial watchdog agency, has been warning of a middle-class meltdown for a decade, and said recently that "the system is broken and it's crushing families all across this country."
The rhetoric may be overheated, but the latest data confirms that the middle class is in a rut, to say the least. The total number of middle-income families has stayed relatively steady over the last several years, but with population growth, there are proportionately fewer middle earners today than there were 10 years ago. Compared to the year 2000, the middle-income bracket is about 4 percent smaller than it might otherwise be, after adjusting for population growth and inflation. And the low-income bracket is about 7 percent bigger. Still, incomes typically fall during a recession, and it's oversimplistic to say that everybody leaving the middle class is permanently consigned to something worse. Plus, many longer-term gains in living standards are still in place. So while the middle class is clearly under stress, millions of Americans are still much better off than they were 20 or 30 years ago.
The first challenge when evaluating the fate of the middle class is to figure out what the term means in the first place. There's no set definition, and most economists agree that it includes intangibles such as financial stability, aspirations to get ahead, and various comforts. Since those are hard to quantify, the most definitive way to measure the health of the middle class is by income, and the percentage of all earners who fall between the highest and lowest earners--the "middle."
[See how to fall out of the middle class.]
With help from economist Heidi Shierholz of the Economic Policy Institute, I analyzed Census Bureau data that breaks down household income into nine brackets, going back to 1967, and is adjusted for inflation, which allows apple-to-apple comparisons from year to year. To represent the middle class, I chose three middle brackets that include household income ranging from $35,000 to $99,999. The latest data, from 2009, shows that households with income in that range account for 43.7 percent of all households. That percentage has been shrinking over time. Here's the percentage of all households that middle group, adjusted for inflation, has represented in various years:
2009: 43.7 percent
2000: 45.6 percent
1990: 47.9 percent
1980: 49.3 percent
1969: 53 percent
I listed the figure for 1969 rather than 1970 because that year represented the peak percentage for the middle-income brackets. If you defined the middle class more broadly, and lowered or raised the income threshold (or did both), the peak year would change, but only by a few years. In general, the middle brackets were fattest in the late '60s and early '70s.
[See three myths about disappearing prosperity.]
People tend to measure their well-being based on short-term changes, not long-term ones, so it makes sense to compare today's incomes with those in 2000. If income breakdowns today were the same as they were in 2000, here's what would be different:
There would be about 7 million fewer people living in households with incomes below $35,000.
There would be an additional 5.8 million people living in middle-income households.
There would be an additional 1.5 million people living in households with incomes over $100,000. (The numbers don't balance out perfectly because of rounding.)
So compared to 2000 levels, the low-income bracket has swelled, the middle bracket has shrunk, and the upper bracket has shrunk too, though by less. People constantly move up and down on the income scale, and everybody who left the middle bracket didn't automatically fall into the lower bracket. But the numbers make it clear that proportionately fewer people are in the middle bracket, and more people are in the lower bracket.
[See how unemployment will swing the elections.]
It's important to point out that the latest numbers come at the end of a recession, so comparing them with figures from 2000--the tail end of a boom--may exaggerate the gloom. And looking at longer-term changes shows some other important trends that might be more encouraging. Here's the percentage of income represented by the lowest group, the one earning less than $35,000:
2009: 36 percent
2000: 33.7 percent
1990: 37 percent
1980: 40.3 percent
1969: 39.5 percent
So while the low-income group has been getting bigger in recent years, it's still lower today than it was every year between 1967 and 1998. If you put the lower- and middle-income data together, it might seem puzzling: Compared to the '70s and '80, the middle income group today is smaller, but so is the lower-income group. So if people have been leaving both groups, where have they been going?
Upward, that's where. Here's the percentage of households with incomes over $100,000, again, adjusted for inflation:
2009: 20.1 percent
2000: 20.6 percent
1990: 15 percent
1980: 10.4 percent
1969: 7.6 percent
The biggest income change since the late '60s, in fact, hasn't been in the low- and middle-income groups. It's been a huge jump in both the percentage and the number of high-income households. In one sense, that's great news, because the people joining that group have been coming from the lower brackets. That's because the growing U.S. economy has created vast amounts of new wealth over the last 40 years and propelled millions of Americans into high-income households.
[See why the rich need the poor.]
The bad news is that the vibrant growth has fizzled, for the time being at least, and fewer Americans seem to be benefiting from what growth there is. Plus, much of the added wealth over the last couple of decades came from women working more, which raised household incomes but also masked problems like fewer jobs and falling pay for manufacturing workers. There's also a much bigger gap between middle and high earners today than there was in the '60s and '70s, which means the wealthy are capturing a larger and perhaps unfair share of the nation's wealth. "The middle class is a lot farther away from the very top than they were 40 years ago," says Shierholz. "So even if typical households were gaining ground in absolute terms, they'd be losing out relative to households at the top."
A middle-class revival depends on two things: A healthy and growing economy that creates more wealth for everybody, and middle earners able to capture a share of the new wealth that's at least proportionate to their size as a group. It might seem improbable, but if America's middle class is as durable as we'd like to believe, then it may already be mounting its own comeback.
http://finance.yahoo.com/news/How-the-Middle-Class-Is-usnews-368315621.html?x=0